Tuesday, 15 July 2008

Incentives to save

Today Scottish Widows has put out a report on savings. Amongst its recommendations are the need for 'incentives to save'. For once this isn't a financial services company calling for the Government to pay people to take out their products, instead they suggest a disregard of savings in respect of means-tested benefits.

A good thing too. Plenty of stuff I have read suggests that financial incentives to save simply don't do the job. For example here's what a PPI report issued in 2004 said:

There is no evidence that tax incentives increase the overall level of saving.

Incentives may change the way in which people save, diverting savings into pension funds. But tax incentives have not been effective in generating enough pension saving for future pensioners.

There is no evidence that tax incentives increase total saving Saving is generally seen as ‘a good thing’ and policies are often proposed or implemented to increase the amount that people save1. These policies are often targeted at groups who do not have large savings, and in particular lower income groups. This could be to encourage people to be more secure financially, or to spread their income more evenly over a lifetime. Saving is also encouraged as a way of reducing state expenditure.

However, there is no evidence to suggest that tax incentives increase the overall level of saving 3. Explanations put forward for this generally fall into one of three areas:

• Tax incentives are complex, making them difficult to understand.
• Tax incentives often do not appeal to their target group. Low to middle income groups (who are traditionally low savers) pay lower rates of tax, and so gain less from reduced tax liabilities.
• The amount that people want to save is determined by a range of factors not linked to tax relief or rates of return, such as income and affordability.

And the Sandler review:

[T]here is little evidence to suggest that tax incentives have a significant impact on overall savings levels, especially amongst the lower-income groups for whom increasing saving should be a priority. What is more, it is evident that such incentives generally increase the complexity of the regime as a whole, and that this complexity leads to higher costs.

No comments: