Low-cost savings 'doomed to fail'

New savings schemes lack industry support

A range of government-inspired low-cost savings products, meant to plug the gap in UK retirement provision are likely to fail, a report has said.

Market analyst Datamonitor said the range of simplified stakeholder products, not yet launched, would not appeal to people on low incomes.

The group came to its conclusion after quizzing independent financial advisers (IFAs), life insurers and banks.

Many concluded that the products would not boost their business or UK savings.

Embrace

The government is relying on IFAs and financial institutions to promote a range of low-cost savings products.

Many providers feel it will be too expensive to market (stakeholder savings products) to those on low incomes as they are unlikely to invest enough to allow them to turn a profit Jannette Weir, Datamonitor

The products, the brainchild of former Lloyd's of London chief Ron Sandler, are meant to encourage people on low and middle incomes to save more for their retirement.

The stakeholder products will allow savers to invest in deposit accounts and stockmarket funds at a low cost.

However, six out of 10 IFAs, nearly half of banks and a third of life insurers told Datamonitor they thought the products would not be a success.

"IFAs might not be expected to fully embrace the new set of products, of more concern is the lack of enthusiasm from larger insurers, banks and building societies that are expected to be the core manufacturers and distributors," said Janette Weir, the report's author.

In particular, industry insiders are concerned that the products would not produce enough profit for them to be worthwhile marketing to the public.

Two stools

Recently, the government, responding to industry pressure, announced that it would allow providers of the low cost savings products to charge an annual fee of up to 1.5% on investments.

Originally, the government had looked to cap charges at 1%.

According to Datamonitor the government's approach to the new range of products is now in danger of falling between two stools.

"The new charging structure doesn't excite the industry, we estimate it will still take 10-15 years into the life of the savings product for the provider to break even," Ms Weir told BBC News Online

"Many providers feel it will be too expensive to market to those on low incomes as they are unlikely to invest enough to allow them to turn a profit"