Pensions minister Guy Opperman has promised that there will be a ‘substantial’ parliamentary bill in next year’s Queen’s Speech, that will act as a ‘roadmap’ for the long- term future of private pensions. However, at VitalityInvest, we believe that the immediate priority is incentivising people to save and stay invested over the long-term.
The pace of change in pension legislation and regulation impacting long-term savers over the past few years has been non-stop. Some measures have been well received, for example, the introduction of the pension freedoms in 2015, which provides long-term savers greater flexibility and choice. Yet the current key incentive for people to save, tax relief on pension contributions, seems to come under increasing threat at each budget. This uncertainty does not help people’s efforts to plan for long-term savings outcomes.
Reducing the savings gap
The pension freedoms provide a more flexible approach and allow a gradual transition from work into retirement, which is particularly welcome as people face a longer, more active retirement. However, fundamentally saving levels are still inadequate.
The Government’s 2017 review of auto-enrolment found that less than 14% of people who have contributed to a retirement savings scheme read or understood their annual pension statements. So rather than engaging people in building their long-term savings, people become disengaged and unaware of the rate at which they need to save, potentially failing to make adequate provision for their retirement as a result.
Other initiatives, that are not Government-dependent, are needed to help people understand what they need to save and the importance of future savings in providing for an adequate income in retirement.
At Vitality, we believe our Shared Value model can play a powerful role in solving our savings problem in the UK, with the help of financial advice. This is an approach that we have honed in other sectors of financial services and have tailored it to solve the investment problems encountered by advisers and their clients. Crucially, clients can derive benefit from VitalityInvest's unique features without the requirement of holding a Vitality Life or Vitality Health product.
In particular, VitalityInvest’s Investment Booster is an initiative that uses behavioural economics to incentivise savers. The unique approach means that people who save for longer and stay invested in our funds see their savings given a guaranteed boost on top of any investment return, thus improving the value they get from their investment.
How the Investment Booster works
Customers who invest in the VitalityInvest Stocks and Shares ISA, Junior ISA or Retirement Plan receive a boost to their savings in accumulation, applied every five years. This increases the value of their savings over and above any investment returns and the longer they invest, the greater the boost to their investment. The boost could be up to 15% to their savings over 25 years - an incentive that encourages better long-term saving habits.
Mark Dennison of LightBlue UK commented: “Vitality's approach of encouraging saving for longer periods through its Investment Booster rewards clients who are serious about their long-term saving. The longer they remain invested, the greater their savings will add up and this could be significant over time.”
For example, the boost in the first five years is a guaranteed 2% uplift on the money invested in Vitality funds over that five-year period. The amount of the five-yearly boost increases with time, as shown in the table. The compounded cumulative effect over longer periods is appreciable.
So, for someone investing £30,000 for retirement, which at 4% per annum grows to £79,900 after 25 years, the Investment Booster means that they could receive an extra £12,700 over those 25 years. Another way of looking at this is that the impact of the boost is equivalent to offsetting most or all of the product or fund charge. For example, the 2% uplift after five year equates to a 0.4% spread over the previous five years.*
Vitality’s fund range offers a range of options to investors, catering for a broad spectrum of risk profiles. It includes high conviction funds, actively managed by Investec and designed to outperform their benchmark. And at lower cost, there are multi-asset risk-targeted funds that use Vanguard index-tracking components to optimise returns based on each fund’s level of investment risk.
If an adviser’s client also has a qualifying** Vitality Life or VitalityHealth planthis could mean that in addition to the Investment Boost, they are also eligible for the Healthy Living Discount, where they could get up to 100% off their product charge when they take steps to look after their health.
Do advisers believe incentivising long-term savings works?
Michael Englefield at Drewberry Wealth thinks so. ”VitalityInvest is an innovative and intriguing way of encouraging saving and is to be welcomed in a world where a fifth of UK workers have no pension. Without new ways to encourage people to boost long-term savings, many will face a bleak retirement.”
It’s early days but feedback from advisers does show that the Investment Booster is a possible game changer, by creating the right savings behaviour and encouraging stronger long-term savings habits for more people. Vitality will continue to help advisers and their clients while we wait to see what the Government proposes to do.
* Product charge start at 0.5% pa and reduce depending on the value of the funds invested; The fund charge for actively managed funds ranges from 0.88% - 1.05% pa. The fund charge on the risk-targeted fund range is 0.4% pa. Projections assume growth net of all fees and charges of 4% pa.
**Qualifying plan - by holding one of these plans, your client will be a member of our healthy living programme: 1) VitalityHealth: Personal, Business or Corporate Healthcare plans with Vitality Plus 2) VitalityLife: Plans with Vitality Plus, excluding Vitality Core and Vitality Lite.
For Investment Professionals only.
VitalityInvest is a trading name of Vitality Corporate Services Limited. Vitality Corporate Services Limited is authorised and regulated by the Financial Conduct Authority.