Debt-to-savings plan worth banking on

YOU may have heard that there’s a pensions crisis in the UK. Too few people saving or not saving enough, life expectancy rising, the state pension increasingly insufficient and employers scaling back their pension schemes … that sort of thing.

Most alarming, however, is the fact that for all the efforts to improve matters, things are only going to get worse. A lot worse. And it’s no-one’s fault necessarily. The pensions “brand” has been badly tarnished in recent years for all sorts of reasons, from individual and government apathy to industry irresponsibility, economic turbulence and demographics.

But what are the main obstacles to saving? Among younger generations in particular, it is debt and/or a lack of disposable income. With university fees rising sharply that isn’t going to get any better.

Almost four in ten students see debt as a “normal” part of university life, Credit Action revealed this week, while two thirds said they were worried they might struggle to cope with money and finances while at university. That will be exacerbated by rising tuition fees and a shortage of job opportunities to help students finance their studies.

The implications for long-term savings are obvious, which is why we desperately need far more innovation and flexibility in savings and pensions. This is where the debt-to-savings model comes in. This was originally set out around two years ago by Aegon. The Edinburgh-based insurer’s former chief executive, Otto Thoresen, raised it again last week, this time in his role as the head of the Association of British Insurers (although I’m not sure how his former colleagues feel about him appropriating their idea).

The plan tackles the biggest objections to pension savings – debt and affordability. In short, the idea is that employees with debts such as student loans can use their own and their employer’s pension contributions to repay them. Once the debt is cleared, those contributions begin to build up pension savings. The employee is obliged to continue paying in for a minimum period, even if they move employer, and the model can be adapted to personal pensions.

There are potential sticking points to be ironed out, of course, but with debts already a major obstacle towards savings, the logic is compelling.

It is particularly pertinent as we approach the beginning of automatic enrolment in October, under which employers will be obliged to process workers into their own pension scheme or a new government alternative.

Barring a dramatic and inconceivable economic rebound over the coming months, the squeeze on disposable incomes will result in far more people opting out of the scheme than originally predicted.

Allowing workers to first use those contributions to repay their debts – at a lower cost than high-street borrowing, and especially payday loans – would provide the incentive needed for many people to stick with the scheme.

That the head of the ABI is raising this is hugely encouraging, even if he is cheekily taking the credit for ideas developed in Edinburgh.

Beware sting in credit card tail

CREDIT cards with zero per cent balance transfer deals have proved especially popular this month, thanks largely to the Christmas spending splurge. Some of the longest balance transfer periods on record are currently available, with Barclaycard, HSBC and Bank of Scotland all launching cards with interest-free periods of 20 months or more (although Barclaycard’s 24-month deal will disappear on Wednesday).

However there is, predictably, an expensive sting in the tail, with the costs of moving to balance transfer cards reaching a four-year high, according to Moneyfacts.

All the more reason to tread carefully; these offers are counterproductive unless you take the fees into account and always pay off the debt on the card before the term expires.