Britain's painful savings revolution
- 19 March 2015
- From the section Business
Imagine this: you have just left university. You have a debt of £27,000 on your tuition fees.
You owe another £12,000 from your living costs for the last three years.
Your rent is £750 a month - never mind clothing, food, transport and the odd night out.
And then someone suggests you ought to be putting money away for a rainy day.
Perhaps it's not surprising the country is still a long way from becoming a nation of savers.
Since the financial crisis we have tried to save. The number of people taking out new ISAs - tax free savings accounts - rose steadily from 2006 to 2012.
But ironically as wages and employment have picked up we seem to have lost the saving habit. The amount we are putting into ISAs is now falling.
A genuine savings culture still seems a long way off.
But has Wednesday's Budget changed any of that?
Certainly there has been a move to put power back into the hands of savers - it started with what the pensions expert and campaigner Dr Ros Altmann calls the Pension Revolution last year, allowing pensioners to avoid and now even to drop out of annuities, pensions that guarantee a lifetime income.
Now, she says, we could be about to have a Savers' Revolution - for those, usually middle aged and older, who can afford to save.
George Osborne said he wanted to change the UK from "a country built on debt, to a country built on savings and investment."
His headline change means savers will not have to pay tax on the first £1,000 interest they make on their savings.
Mr Osborne clearly thinks it's important. If he is still chancellor after the general election he will be spending some £3bn a year on it - the second biggest giveaway in the Budget.
The proposal takes 95% of savers out of paying tax on their savings income. That is about 17 million people, and it may put savers off using that old tax-free savings warhorse, the ISA.
Martin Lewis of moneysavingexpert.com said: "At current top rates of 3% .... that means you could save £33,000 and pay no tax on the interest, which negates the need for a cash ISA for most people...for the vast majority of savers in the country you will get your interest and you won't pay any tax on it."
However the savings are not huge - £200 a year at most, and however high interest rates go and however good a return you get, it will never be more than the tax on £1,000, ie £200. That's not true of an ISA.
Dr Altmann argues that ordinary savings ought to enjoy some of the benefits reserved for pension savings.
Why not, she argues, link Help-to-Buy ISAs (another one of the chancellor's proposals) into auto-enrolment platforms run by companies, so that employers contribute not to your pension savings, but to your start on the housing ladder.
"Society should not be distinguishing between good and bad savings. If you think there is an over-riding reason for an employer to help with a pension, why should they not contribute to other social benefits such as housing."
Mr Lewis is more sceptical and his fears are based on the effect of what the changes might do to the housing market itself.
He says: "I was already worried about Help to Buy [the government's mortgage guarantee scheme]. Now we're going to artificially help more and more people to buy a house, but will they be able to afford the repayments and keep them up?"
And this is where the question of individual responsibility elbows its way into the concept of having a nation of savers. As Mr Lewis puts it: "with freedom comes great responsibility."
His fear is not that pensioners faced with the ability now to draw down their annuities, will blow it on a Porsche. It is the very opposite.
He says: "Unless you know when you are going to die, you don't know how much you can spend, so my genuine concern is that people will live their lives in penury, while they have their pension pot there, [but be] too scared to spend it.
"Because [they think] what will happen if I continue to age? That's what happened when they did this in Australia."
The issue then is we may be being offered a freedom we don't as a society have the sophistication or understanding to use.
The missing link in this chain is education for savers who are at the moment woefully ignorant of financial products and how best to use what resources they have.
Dr Altmann blames it on a serious shortage of educators. "It's not just a shortage of people with the knowledge," she says, "it's a shortage of people who can explain it well. I have sat in talks given by very bright people who think they are explaining things clearly and I have watched people's eyes literally glaze over as they talked."
Mr Lewis agrees: "You need some decent education out there, and I simply don't think the country's ready for this."