Back to the Future: Queen’s Speech plans to boost savings among low-paid and younger people
by Inline Policy on 18 May 2016
One of the Government’s themes for the Queen’s Speech for the 2016-17 Parliamentary session is improving life chances for the British people. Through the measures on the digital economy, transport and infrastructure, the Government’s intention is to make long-term social and economic reforms the focus of the remainder of this Parliament. Whether in practice that will happen with the aftermath of the European Referendum likely to hang over UK politics for several years, and darkening economic stormclouds gathering over the economy in terms of weaker performance on growth, exports, the current account deficit and productivity, remains to be seen.
With the savings ratio at fifty year lows, wage growth spluttering into reverse after the gains of 2015, and the Bank of England concerned about levels of household indebtedness, it is timely that the focus of policymakers shifts to how households can build up greater asset security for the future. Many households on low and middle incomes are so stretched financially that they are just a broken domestic appliance away from falling into debt, and ONS data this week showed that between 2011 and 2014, 3.9m UK households had experienced persistent poverty for two-thirds of that period.
The Liftetime Savings Bill in the Queen’s Speech has two aims: firstly, to introduce the new Lifetime Individual Savings Accounts, designed to help people under 40 either with retirement savings or onto the housing ladder by providing fiscal incentives to save for a deposit, or potentially both. The second aim is to restore greater fiscal support for saving among people on low incomes, which the current Chancellor abolished in his first Budget in June 2010.
Taking each measure in turn, firstly, the Lifetime Individual Savings Account (ISA) is intended to provide a savings vehicle for young people seeking to raise capital for a deposit on a first home purchase. The accounts will see the Government match annual deposits up to £4,000 by savers under the age of 40 at the rate of 25% up to a maximum of £1,000 per annum. Funds can be withdrawn free of charges in two ways – either to fund a deposit for a first home purchase on a property worth up to £450,000, or alternatively (perhaps additionally), from when the account holder reaches the age of 60. Together with an increase in the tax-free ISA allowance to £20,000 per annum, the cost to the Treasury of these new savings incentives are projected to be £170m from next April, rising to £330m in 2018-19, £590m in 2019-20, and £850m in 2020-21. Whereas the policy will permit people to purchase houses in most parts of the country, with the most recent 13% rise in London house prices, the average cost of a London property has risen to £552,000 – beyond the scope of the rules for drawing down funds for a deposit from the Lifetime ISA. Furthermore, although Barclays and others are again offering near 100% mortgages with parental support, the ability of most younger savers to generate sufficient funds for deposit saving as well as pension savings are limited. Recent research shows savers are choosing to invest in one at the expense of the other, with retirement savings some 15% less among younger people saving to get on the property ladder.
Second, Help to Save appears to be a reintroduction of the abandoned Saving Gateway with less generous eligibility criteria, principally excluding those on out of work and disability benefits who would have been eligible to take part in the Saving Gateway. Under the Saving Gateway, introduced through a Bill in the Queen’s Speech eight years ago, deposits in qualifying savings accounts held in credit unions, banks or building societies would have been matched at the rate of 50% by the Government, up to a maximum of £300 over a two year period. With Help to Save, likely to be launched in April 2018, up to 3.5m people would be to eligible to participate, including all current working tax credit claimants or future universal credit claimants earning at least the equivalent of sixteen hours per week at the National Living Wage rates, ie. around at least £6,300 per annum in the 2017/18 fiscal year. Savers depositing £50 a month will see their savings matched by the Government at the rate of 50% up to a maximum of £600 over two years, with the opportunity to extend this under the same incentives for a further two years. Treasury costings at the time of the Emergency Budget in June 2010 found that the Saving Gateway would cost £115m per year by 2014, whereas the Budget 2016 documents score the costs of Help to Save to the Treasury at much reduced levels of £20m in 2019-20 and £70m in 2020-21.
It is important to recall though that while the plans may seem familiar, the overall policy context supporting low income people is very different from 2010 – at that point, the personal income tax allowance was £6,500, VAT was at 17.5%, working and child tax credits were substantially higher in real terms. Since 2010, there been an increase in the personal income tax allowance to £11,500, VAT is now at the higher rate of 20%, there has been a substantial paring back of tax credit support for working families and children, balanced by the introduction of the national living wage at the rate of £7.20 an hour for over 25s, and child benefit is now means tested for higher earners. The Saving Gateway was also conceived to fit around the now scrapped Child Trust Funds too, with fiscal savings incentives in that scheme at around £500m per annum, to ensure that young adults would have access to more assets at the age of 18 to help with further/higher education, job commencement or training costs.
The financial services community will seek to engage with the Treasury on the shape of the new account products that will follow this legislation – both Lifetime ISAs and the Help to Save accounts. At a time that savings rates are under pressure with real wage growth on the slide, any additional fiscal incentives for savings are welcome, but there will be many who will question whether the scope of the Bill will meet the ambitions for enhanced access to assets and stronger life chances set out in the Queens Speech.
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