The Savings Bill will introduce the Lifetime ISA to help people save flexibly for the long-term and the Help to Save for people on low incomes who are saving up for a ‘rainy day’. This is a summary of the second sitting at Committee stage, where MPs heard from experts. Often the witnesses spoke about the two measures together.
Joseph Surtees is senior public policy advocate for the StepChange debt charity. On LISA, people earning about £80,000 are twice as likely to have an ISA as people earning the average income, which is £26,000. The savings crisis is among the very low earners. When products come forward in tandem, like LISA and Help to Save, it is important to ensure that they both have equal weight and an equal offer, and that they both appeal to the right markets. He is disappointed that potential eligibility for Help to Save was 3.5 million, but the impact assessment says that it will probably only reach about 500,000. He referred to ‘hyperbolic discounting’ when stating that enabling people to access Help to Save and LISA sooner, will appeal and widen the eligibility. He was critical of the financial services’ lack of effort to help people on low incomes, and said most commercial providers displayed absolutely no interest in offering Help to Save, but did display interest in taking on these customers once they had £2,000 saved at the end of two years. There is one issue emerging from Help to Save that people and the Treasury may want to look at going forward, he said, a very technical issue about financial advice and how debt advice providers and financial advisers can recommend products and whether they will be able to recommend things like Help to Save. Surtees makes a number of suggestions on Help to Save, such as moving the bonus to getting it every six months, allowing people to pay in an average of £50 a month rather than a maximum of £50 a month and looking at the issue of under 25-year-olds being excluded from Help to Save by the benefits rules concerning working tax credits. The Government should look at whether the bonus, or even all the money in the account, should be protected if somebody begins to go insolvent, or is threatened by insolvency or their creditors. Surtees said all the evidence shows that Help to Save is overwhelmingly a great incentive and a much better incentive for low income groups, rather than interest rates or tax deductions or tax relief.
Ed Boyd is managing director of the Centre for Social Justice think tank. Boyd said Help to Save is a ‘great thing to add to the armoury’ but that potential ‘frictions’ should be put in place such as a 24-hour delay in taking out the money to encourage people to be regular savers. He suggests that there should be third party involvement in the process of making withdrawals.
Bryn Davies, director of Union Pension Services, said both schemes are relatively minor and unco-ordinated, especially the LISA which is ‘too little and too early’. Davies wanted a continuation of the Pensions Commission in one form or another to tackle the specific issue of tax relief. He said there are problems with the LISA, particularly in the context of the roll-out of automatic enrolment which is ‘a major concern in the trade union movement’. LISA should be put off, to disentangle it from auto-enrolment, especially the chance of moving people to the maximum eight per cent contribution. Worryingly, he said that employers may choose to contribute to the LISA as well, if they see it as a way of avoiding the legislation. On Help to Save, he said a better way of helping families that are truly under pressure - who do not have, and will not be attracted to, a rainy-day fund - is to look at the way in which the ‘social fund’, helps families in poverty. He said LISA is ‘a sort of bait-and-switch for a change in pension taxation, because its finances are unsustainable’.
Calum Bennie, communications manager at Scottish Friendly, said: “We are supportive of the LISA because what it could do is attract people who are currently put off saving for life after work. They are not enamoured of pensions—they have been put off pensions for whatever reason, be it a bad experience of their own or bad experiences that their families have had.” Bennie is ‘pretty certain’ that LISA will work because of the success of the child trust fund and junior ISA. When asked about the impact of Help to Save, Bennie said the company’s disposable income index survey made it ‘quite clear that particularly the 18 to 25 group are really struggling financially’. He explained his view that people consider pensions to be ‘broke’. He said: “For many people, pensions are broke. The reasons could be manifold. People I talk to have experienced problems, and their parents have had problems with pensions. They were saving in a pension and whatever has happened to it—maybe the company has gone bust, or something like that—they have not got the pension that they thought they would get. For many, final salary schemes have disappeared. The pension age has gone up. Women have perhaps been affected by the age going up quite recently, which they had not expected. It could be all those issues. Pensions have been tinkered with for quite a long time. The amount you could save and the lifetime limit had gone up, and now it has come down.” He said that LISA represents an alternative to people who do not want a pension, but it is good to have both.
Martin Lewis, founder and executive chair of MoneySavingExpert.com, said his ‘great concern’ on LISA and Help to Save is ‘certain dangers in misprioritising your finances. He said: “The danger is in wrongly opting out of auto-enrolment and putting your money into a lifetime ISA. In Help to Save, it is not paying off your expensive debts, and saving when you should be paying off the expensive debts.” He said good advice will be essential to stop bad decisions, so that ‘you signpost [negative impact] it once, you signpost it again, and then you signpost it a third time’. He suggested a transitional arrangement to ensure that the ‘trigger-point’, if you transfer a help to buy ISA into a LISA, is the start-point of the help to buy ISA, not the start-point of the lifetime ISA, so you would have had your ISA for a year. He wants to see a pre-arranged one-year review of both new savings schemes, ‘where minor terms can be tweaked’.
Jonquil Lowe is a senior lecturer in economics and personal finance at the Open University, and part of the policy advisory group for the Women’s Budget Group. Lowe said the lifetime ISA is less regressive than the existing system of pension tax reliefs, in that it gives a flat-rate 25 per cent bonus to everybody, but it ‘throws up complex decisions’. She said the lifetime ISA legislation allows the Government to consider early withdrawals without penalty for reasons other than house purchase but not when it is first introduced. She unflatteringly compared it to the Dutch life-course savings scheme abandoned in 2012. She said: “The idea was that employees could build up some savings, tax-free, through deductions from their salary, and that those savings could be withdrawn to pay for periods caring for a frail relative, for example, or for the cost of childcare. Again, that is absolutely fine if you can afford to save, but if you cannot, that form of welfare is not helpful and excludes a lot of people. The evaluation of that Dutch scheme found that, as you might expect, fewer women and part-time workers took part. The amount saved went up dramatically with earnings, and the vast majority of people said that they were doing it because it was tax-free and would allow them to retire early. That scheme did not really address the aims that had been set out and was, again, a very regressive form of welfare.”
Blog by Hamant Verma, External Relations Officer at the Chartered Institute of Taxation HVerma [at] ciot.org.uk