April 28, 2010

Savings schemes the Irish Government could look at

Posted in Your Ideas ·
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I have posted this before in the general blog entries but never in the Your Idea submissions:

David, I wrote this letter to Brian Cowen in june 2007 and have just resent it to Brian Lenihan – what do you think of the idea: I have just resent it to Brian Lenihan with the cover note at the end of this note, they never really responded to the idea in 2007. Pity. Brendan quinn, .

Letter sent to Brian Cowen in June 2007

Dear Brian:

You may recall I copied a letter to you last February outlining a Lifetime Savings Scheme which I had sent to the minister of State for Children, Brian Lenihan. I am sending you the main text of this letter again — as now the dust has settled post election, it might be an idea you want to consider for your Autumn budget. By copy to one of my local FF TDs, Jimmy Devins, I am asking Jimmy to lobby you on the idea.

It is an idea which I really believe is something worth looking at. I only wish the idea had been around and implemented when I was a child.

I was in the UK recently staying with some friends who like me and my wife have a young family. They were telling me about the Child Trust Fund scheme which the UK Government introduced in September 2002.

You may well be aware of this savings scheme which has been supported by the UK Government with a “kick start” voucher which parents/guardians can use to
invest in an approved investment vehicle. If your child was born on or after 1
September 2002 and is eligible for Child Benefit, you get a £250 voucher from the government (£500 if your income is no more than the limit for Child Tax
Credit) to set up a Child Trust Fund. Once you have set the fund up anybody can add up to a maximum of £1,200 a year to it. There is no tax on any interest or gains within the fund.

The Child Trust Fund (CTF) is a long-term savings and investment account and the money cannot be withdrawn until the child is 18.

As we have two small children aged 2 and 4 I think this is a great savings
scheme and wish we had something like it here. It would make a great post SSIA
product, and by the way, I don’t work in financial services so have no interest in promoting such a scheme.

It would be a great vehicle to incentivise parents to save for college and for that start in life which so many youngsters need. In fact I think the idea could be improved further. Whilst we all want to be given free money (see the success of SSIAs for that idea) — I think the idea in the UK to get people to start these schemes by giving them a small “kick-start” would be a great way of attracting savers to the market for such a product, and creating the life-time savings ethos.

It is recognised that there is a great social need to expand the number of people saving for retirement and life time events. The SSIA certainly helped the savings habit here in Ireland — but perhaps one of its fall backs is the fact the money is all being released into the economy at the same time. With the plan I propose money would be released into the economy at stages throughout the savings scheme, reducing any inflationary pressure.

With current demographics I think my children could be working to the age of 80. I think it would be a good idea if there was a financial product, supported by the state, which encouraged savings for lifetime milestones with the appropriate incentives for people to invest in them which are usually of course tax breaks — in the case of the UK child trust fund it is the immediate kick start the government gives the fund plus tax free savings.

I don’t mean pensions! Although this scheme will benefit the pension
shortfall. I propose a Lifetime Milestones Saving Scheme which starts from
day one of birth and would implant in peoples minds that from day one saving and financial indepence is a worthy goal. It would generate the idea of responsible saving from an early age, it would allow parents, God parents, grandparents, friends and extended families to make contributions to a childs long term welfare and financial well being. It would allow parents to work with their teenage children about how important it is to save for life, for example, a parent might say to a teenage child — if you commit to put €50 a month into this scheme from your parttime job we will add a €100 a month bonus. It would be a great vehicle for cementing financial responsibility of teenagers for themselves along with their parents.

To incentivise savers it need to be a DIRT tax free savings scheme, with caps on allowable investment which would come from net income, and have very specific breaks on it for example like a pension fund when you can withdraw lump sums tax free at specific times. This I think would be critical for the “Lifetime Milestone fund”. With regard to contribution limits I think a fairly limited contribution of say €2,000 per person per fund per annum could be allowed with the allowance of say a single one off contribution during the life of the fund
in the event of inheritance for example — with the rise in property prices there are going to be huge sums of money inherited in the next 50 years, encouraging some of this inherited money to go back into investment funds like this would be very prudent planning. Allowing a fairly limited investment in the fund of say around €2,000 a year at a growth rate of 6% per annum – a reasonable growth rate to expect with all income reinvested, such a savings schem would provide some life changing sums of money for people to use throughout their lives for milestones and make big inroads into solving the retirement fund conundrum.

The idea really merges the idea of the UK Child Trust Fund and the other tax free savings schemes in the UK, like the ISA, but makes it a long term, life time fund in a single vehicle.

I also think it would be very important to have statutory low management costs — to avoid the kind of scandals their have been in the past about consumers being ripped off by too high costs

Take a look at the two attached examples I have created, one shows how such a fund could be used if the maximum €2000 euro a year was invested with a one off single investment of €20,000 and the other shows a lower level of investment in which a saver only makes contributions of €520 a year (ie €10 a week) which still provides for sizeable chunks of money to be released for lifetime milestones.

In the example in the “college years” the rules would allow a withdrawal
each year of up to 20% of the fund on the 18/19/20/21 birthday. Whilst 18 may
be when the state recognises young people are adults — I don’t think there would be any harm in only allowing the fund to be released in phased stages for the “college years”. Following these “release windows” then maybe a scheme could only allow three more tax free withdrawals of 33% of the fund up until the 50th birthday, and if the fund is still up and running at age 50 allow the whole fund to be transferred to a pension fund at that time as a one off
pensions top up. The reward for the restrictions on withdrawal is no DIRT.
If the fund is closed DIRT will be liable on all growth earned for the entire fund life, this would make people hold the money in the fund and keep the fund running

The idea behind the three windows to make controlled withdrawals the fund would be to allow for life events such as Deposit for a house, to fund new business ideas by young people, to allow people to take career breaks etc. The whole way through the twenties, thirties and forties there are lifetime issues and expenses which need to be met — Encouraging saving in a “Lifetime Milestone Fund” would help people to manage these situations and decrease their level of personal debt at critical milestones. Look at the two simple examples I have created to show how this could be used by people.

The idea is to create a savings mentality whereby people always know they are creating a savings fund which they can dip into on a limited basis at times of need and allowing them to build a security in their lives. I also think it would be important in post property boom Ireland, to encourage investment in the markets and stocks — investment in areas of commerce where things happen and
jobs are created and not just houses. The rules of the fund could be that say
30% must be invested in the Irish market — just think how much capital this would inject into investment in irish based companies, what could that do for the post Celtic Tiger economy?

A saving scheme like this might catch the imagination, and maybe have more meaning for people than the dreaded P word (P=pensions). I think quite often people avoid pension investment because in their psyche as young people retirement truly is a long way off, but knowing you are creating a wealth fund which can be used at critical times in your life, as well as maybe forming part of the pension plan could (I think would) be a more motivating savings vehicle, if not then I certainly think copying the idea of the Child Trust Fund from the UK would be of great benefit for parents and their families as well as considering the ISA type account they have in the UK.

It is just an idea — I hope you might consider it. I think it would be a great wealth generator for the country and for individuals and would be a creative investment vehicle which young people and parents would support.

My apologies for the length of the letter, I found myself expanding the idea in probably too much detail.

Yours sincerely

Brendan Quinn

Letter sent ot Brian Lenihan today September 11th

September 11th 2009

Dear Brian:

I am enclosing a letter I sent to Brian Cowen in June 2007. Reading it again it again it made me think — this is an idea that still has merits despite the huge changes we have seen in the past two years in terms of economic well being.

We met briefly in 2006 when you were Minister of Children and you came to Enniscrone to turn the sod on the Community Childcare Centre in Enniscrone — you will be glad to know that project has now been up and running and open for business since January 2008. A very fruitful project from the Celtic Tiger!

Brian I know it is difficult to come up with any good news for us punters these days — but I do think my idea for a Lifetime Milestone Investment Fund — with a kick start from the Government for every child in the country would be a marvelous legacy for any finance minister. The truth is Brian, Government has to lead the way on forcing the lifetime savings habit on all of us. Please do give my idea some serious consideration.

This idea could also be a softener for any reductions in childcare allowances — either direct reductions or taxation of said benefits.

My letter of 2007 was written in different economic times — but the idea still has merit.

Do try and consider it!

Brendan Quinn