How the election could improve the nation’s financial resilience

• 12.2 million households don’t have enough pension savings for a moderate living standard.
• There are 7.3 million households who don’t have enough savings.
• Of the 14 million households with children, over half (57%) don’t have enough life insurance.
• There are 1.8 million households in arrears.

Figures from the special edition of the HL Savings & Resilience Barometer on efficient use of money: Efficient Money Use report | April 2024 | HL 

Sarah Coles, head of personal finance, Hargreaves Lansdown:

“Politicians will be under pressure to come up with solutions to all life’s ills in the next few weeks, as they hit the campaign trail. But when it comes to financial resilience, there are some straightforward steps they could take to make huge strides in improving people’s financial lives.

There are gaps to close when it comes to borrowing, saving, investing, buying insurance, and building pension pots. Building a financial system designed to encourage people to do the right thing, can help tackle them all.

And because it will help us prepare for our own financial future, it will protect any government too – because they won’t end up picking up the bill in years to come when millions of people find themselves falling horribly short.

7 steps that could lead to major strides forward

1. Ensure tax incentives are designed to generate the right behaviours

You shouldn’t need a Masters degree in finance to be able to work out the best way to save and invest for the future. Neither should you feel you need to pay a tax expert to help you understand how the money you’re saving today will be treated when you draw it in retirement. The political parties are keen to talk about guarantees for the state pension, but have little else to say about the treatment of the further savings we make through our working lives. It’s vital that incentives to save and invest are transparent and straightforward, so they’re effective in encouraging people to do the right thing. Any review of the rules needs to keep this firmly in mind.

Whoever wins the election also needs to ensure the tax system supports the behaviours that make the most sense for individuals. The dramatic cuts in the capital gains tax and dividend tax allowances over the past two years, for example, did not sit well with the stated aim of getting more people investing.

2. Continue the great work done so far on the advice/guidance boundary, to bring it to a conclusion

Currently financial advice is well regulated, but it’s costly and so is only used by a small proportion of people. Firms can provide guidance, but can’t currently personalise it, or use it to drive people towards specific outcomes, without it being classified as advice. So far, in the review of the boundary between guidance and advice, the FCA and Treasury proposed a new category of targeted support, so providers could make recommendations based on what ‘people like you’ should do. This would make the information more useful, without crossing the line into advice. A new government has the opportunity to accelerate this process to a conclusion.

3. Make saving as easy as paying into a workplace pension

The success of auto-enrolment into pensions demonstrates the power of making preparing for the future simple and frictionless. By the same token, automatically putting money into savings could make building emergency savings part of daily life. Whoever is elected should look at removing legislative barriers to allow payroll saving by default, so everyone has the best possible chance to build up the savings they may need in an emergency, without really trying.”

Helen Morrissey, head of retirement analysis, Hargreaves Lansdown:

4. Lifetime pension and smaller pots

“The advent of auto-enrolment has been good news for the nation’s retirement prospects, with over 10 million more people now saving for retirement. However, it also creates the issue of lost and small pots. As people move jobs, they accumulate pensions and over time they risk losing track of them. With the lost pension problem costing an estimated £26 billion, this is a major issue that needs to be addressed if people are to make the most of their retirement. The Lifetime Pension has the potential to transform people’s retirement planning by enabling them to choose the provider where their contributions are paid. This helps them keep track of what they have, which should lead to better retirement decision making. It will also lead to a more competitive market as individuals take more control of their pensions.

5. Self-employed and LISA

For years we’ve been wracking our brains as to how to help the self-employed better prepare for their retirement. They aren’t covered by auto-enrolment and variable earning patterns make them less likely to tie their money up into a pension. The Lifetime ISA could help solve these issues.

The 25% bonus on contributions up to £4,000 per year to a LISA acts in a very similar way to basic rate tax relief in a pension and any income taken is tax free. Money can be accessed early from a LISA in times of need, subject to a 25% early access penalty, but the downside is that this not only removes the effect of the government bonus but also a chunk of the member’s hard-earned savings.

We have long called for a reduction in this penalty to 20% for self-employed people so they only lose the government bonus. We would also like to see the age up until which you can open a LISA increased from 40 to 55 to enable those who become self-employed later in life to make use of this valuable product.

These reforms could significantly boost the retirement resilience of the self-employed. Recent findings from the HL Savings and Resilience Barometer show expanding access to the Lifetime ISA for households aged between 40 and 55 could affect 680,000 households with a self-employed worker who pays the basic rate of tax. In addition, the removal of the penalty could benefit 540,000 households aged between 18 and 39with a self-employed worker who pays the basic rate of tax. 

6. Better pensions tax clarity

Labour and the Conservatives have both signed up to the triple lock and the Conservatives have committed to keep the state pension out of income tax. However beyond that, there’s far less agreement. No sooner had the Conservatives said they would abolish the Lifetime Allowance than Labour said they would reintroduce it should they win the election. As yet, there’s little detail as to how this would happen – a carve out for certain professions was one idea, while a straight reintroduction at either the same or a higher level is also a possibility. However, speculation about these changes undermines the predictability people need to make long-term retirement decisions. We need a tax system that delivers certainty, so we are calling on the next government to implement an overarching review of the pension tax system to ensure people are incentivised to save without fear of undue complexity.

7. Threshold for non-earners change

The ability to contribute to a non-earner’s pension is a real lifeline for those who may be out of the workforce for a period of time, for instance to look after children or elderly relatives. It means they can keep building their pension, so they don’t have to make up massive gaps later. It’s a popular allowance, with recent data showing over 3,700 HL clients took advantage of it in the first two weeks of the tax year, but it hasn’t been increased from its current £3,600 level for many years. Boosting this allowance would help many thousands of people to further build their retirement resilience and not fall foul of the dreaded gender pension gap.”