Misselling risk of Cameron’s help-to-save plan warns Webb

David-Cameron-700x450.jpgUp to 3.5 million low income individuals will be eligible for a government-backed bonus on their savings as part of a drive to improve the life chances of the disadvantaged, Prime Minister David Cameron announces today.

Under the scheme anyone in work and in receipt of Universal Credit or Working Tax Credits will be able to save up to £50 a month and receive a 50 per cent bonus after 2 years, worth up to £600.

Account holders can then choose to continue saving under the scheme for a further 2 years and receive another £600 bonus.

This will see them earn a savings pot worth up to £3,600 after the full 4 years of the scheme – with £1,200 coming from the government.

But former pensions minister Steve Webb has said the Prime Minister’s ‘help to save’ 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’.

Webb, now Royal London director of policy, has highlighted the fact that with a contribution to a pension employees often get a matching contribution from their employer, often on a pound-for-pound basis, compared with the 50p per pound top-up under the government scheme after two years.  He adds that pension contributions attract tax relief, saving 20p in the pound for a standard rate taxpayer, as well as the 25 per cent tax-free lump sum, while there is no indication of tax relief on contributions into ‘help to save’, although pots would not be taxed at all on withdrawal.

He says pension savings are also more suitable for some older workers because Universal Credit is boosted as disposable income is taken to have fallen. Webb says it is not yet clear if contributions into ‘help to save’ will boost Universal Credit.

Speaking ahead of the Budget on Wednesday, Cameron said: “I’ve made it the mission of this government to transform life chances across the country. That means giving hard-working people the extra support they need to fulfil their potential. And that’s what these new measures will achieve – helping someone start a savings fund to get them through difficult times, giving people on low incomes a pay rise and making sure teenagers have the experience and networks to succeed.

Chancellor George Osborne said: “This government is determined to improve the life chances of the poorest in our society and our new Help to Save scheme will mean millions of low income savers across the country could now receive a government bonus of up to £1,200 to help them build up their savings.”

Webb says: “It is welcome that the Government is looking to encourage people to save, but it needs to be careful that people are not incentivised to make the wrong choice with their money.  Money put into a pension often attracts a matching contribution from an employer plus a tax relief contribution from the government and can entitle you to higher tax credits.

“While both short-term and long-term savings are important, low-paid workers with spare cash should think very carefully before assuming that the ‘help to save’ scheme is the best deal for their money.   It would be unfortunate if this initiative turned into a new mis-selling scandal, with workers discovering they could have got a better deal from a pension.

“Whilst it is true that pension savings are ‘locked up’, whilst ‘help to save’ cash is accessible, older workers can access their capital from the age of 55 so may want to think particularly carefully whether ‘help to save’ would be the best option for them.”