Chaos and confusion – or free money to help saving?

Two new savings schemes have been magicked up this week by the government, both involving free money.  Will they get more young people saving?

The former pensions minister Steve Webb is worried that the first, Help to Save, for low earners on in-work benefits, may prompt a “mis-selling scandal”, while the second, the Lifetime Isa aimed partially at first-time buyers, will cause “mass confusion”.

Webb, who  worked alongside George Osborne in five years of coalition government, is now policy director at mutual insurer Royal London, which is of course a pensions company.

So even if his responses have nothing at all to do with politics, they are perhaps a little over-egged.

Employees who receive in-work benefits, such as universal credit or working tax credits, who save £50 a month over two years into Help to Save will receive a bonus of 50% of the value, up to £600.  Savings can continue for a further two years and trigger another bonus up to £600 – save £2,400 and get £1,200. It will be introduced within two years, after consultation, and 3.5m workers will be eligible.

The plan isn’t perfect. Debt charity Stepchange says that if every household in the UK had £1,000 in rainy day savings, 500,000 would be protected from falling into problem. It says: “Matching contributions which have been shown to encourage savings and the flexibility provided to savers on accessing the funds are positive. We are concerned that having to wait two years before getting any bonus is too long.  Such a wait may see families overtaken by events as they access the funds for emergencies, therefore concern at losing the bonus could simply act as a disincentive to save in the first place.”

Hargreaves Lansdown says: “Savings incentives clearly work, however the potential beneficiaries of these schemes will be the most hard pressed to get off the mark. Instilling the savings habit is not just about attractive products with low minimum contributions, there needs to be an education programmes alongside to promote the benefits of saving – a great habit where oak trees from acorns grow.”

Steve Webb however says the scheme could be “the wrong choice for low-paid workers compared with saving through a workplace pension and could lead to accusations of mis-selling”.

It seems to me that the lowest-paid are not the first to be thinking about pensions, while the least savvy are probably not going to opt out of being in an auto-enrolled scheme – or into a savings scheme – either.

The Lifetime Isa has its flaws as an alternative to a pension.  But as an upgrade to the Help to Buy Isa, aimed purely at young people saving for a deposit, it will surely be popular.   You can save up to £4000 a year and get £1000 from the government, compared with the £2400 a year and £600 under Help to Buy.

But for Webb, his former colleague’s initiative could “undermine the huge progress which has just been made in ensuring young workers have savings for retirement”.

I’m tempted to wonder what he might say if the previous government had thought of it first.

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