4Saving for a rainy day
82.Many of those submitting evidence to this inquiry made the point that a relatively modest pool of readily accessible precautionary savings can make a decisive difference to the stability of a household’s finances, and help it avoid getting into an unsustainable debt spiral. The debt charity StepChange told the Committee if every household in the UK had at least £1,000 in accessible savings, the number of households in problem debt could be reduced by 500,000.87
83.While estimates vary, it appears that millions of UK households do not have this level of savings, or any savings at all. StepChange estimates that over 7 million households (25 per cent) have savings below £1,000. Meanwhile, the Open University Centre for Public Understanding of Finance (PUFin) cited data showing that a third of households have no savings at all. StepChange’s research indicates that low incomes, living in rented accommodation, having dependent children and being younger, were are all risk factors for having a low level of precautionary savings.88
84.In written evidence, the Money Advice Service (MAS) said that “there is an urgent need to help people build up savings buffers… alongside focused attempt to tackle… problem debt”. However, it also acknowledged “there is increasing recognition that there are some groups… for whom building any sort of meaningful buffer is an unrealistic expectation”.89
85.There is widespread evidence that many households are lacking in “rainy day” savings buffers, and that helping households to build precautionary savings could have a significant impact on levels of problem debt. Clearly, that will not be a practical possibility for all households, and does not detract from the need to address problem debt by easing repayment burdens, making more credit available at a more reasonable cost and regulating problematic debt products.
Incentivising cash saving
86.The principal savings incentive provided by the Government takes the form of tax relief on interest, primarily through ISAs. In 2016/17, the cost of tax relief on ISAs was £2.75bn, a figure that is forecast to rise to £2.9bn in 2017/18.90 The generosity of tax relief on cash ISAs increased markedly in 2014, when the amount that could be saved annually rose from less than £6,000 to £15,000. Recent years have also seen increases in the ‘Starting Rate for Savings’, and the introduction of the Personal Saving Allowance (PSA), which offers tax relief on all cash saving on gross interest up to £1,000 and £500 for basic and higher rate tax payers respectively.91 In 2016/17, the PSA added £0.4bn to the tax relief bill.92
87.However, in submissions to this inquiry, there was widespread scepticism that tax relief is an effective way of encouraging potentially vulnerable households to save for a rainy day. StepChange said that tax relief “is less of an incentive for lower-income savers”, while Open University PUFin said that “there is a lack of evidence on whether fiscal incentives… increase saving relative to the level that would have occurred in their absence”. It also commented “In 2014, the National Audit Office found that HMRC does not routinely evaluate whether tax reliefs designed to change behaviour are effective.”93
88.There is also a recognition that tax relief is not targeted at low-income families. In oral evidence, Torsten Bell, the Director of the Resolution Foundation, told the Committee:
If you are really rich, we are doing a really good job of tax-relieving all of your savings in very large ISAs and rollover PEPs [Personal Equity Plan]. If you tried really hard, you could have got to £1 million in the tax-relieved savings pot. It is not clear to me that is a good use of Government funds …
We are doing a moderately awful job of encouraging those in lower income families to save. That is because the first suggestion of direct matching for those groups, which evidence does show has some effect, was in 2001. Direct matching has more effect than other forms of incentives, although it is still not as strong as some of us would like and you may be better just to give them the money.94
89.In 2016, the Government announced a new scheme rolling out from 2018 called Help to Save, which is open to those entitled to Working Tax Credit or claiming Universal Credit with a monthly private income of at least £542.88. Participants can save up to £50 and receive a bonus of 50 per cent of the highest balance achieved after two and four years. The maximum bonus is therefore £1,200.95
90.Among submissions to this inquiry, there was more enthusiasm, albeit cautious, for Help to Save than for ISAs. For some witnesses, it goes some way to restoring a gap left when another saving bonus scheme, the Savings Gateway, was abolished before it began in 2010.96 Mr Bell told the Committee “You can imagine policies like Help to Save working [to encourage people to get into the habit of saving], and I would not quibble much with the detail… except that it is more targeted on higher earning families and slightly less generous than Saving Gateway.” Ashwin Kumar, chief economist at the Joseph Rowntree Foundation, said that the bonuses in Help to Save could be more effective than tax relief but warned “the cost of Help to Save will be £70 million by 2021… it is dwarfed by the increases in costs for additional ISA allowances.”97
91.In written evidence, Toynbee Hall praised Help to Save for not predefining the purpose of saving or setting high targets, which its evidence shows can be off-putting to lower income households, but it called for the eligibility criteria to be widened.98 The MAS said:
We welcome Help to Save, which recognises the need for more targeted incentives to promote saving among particular groups, in this case low-income families. There is a lack of evidence that policy interventions aimed at encouraging saving behaviour manage to get consumers who weren’t previously saving to start… Explicitly targeting groups that are known to have issues with saving is one potential way in which to address this… This might include considering widening eligibility for Help to Save, pending learning from roll out and evaluation …99
92.John Glen, the Economic Secretary to the Treasury, told the Committee that “10 thousand people have signed up to [the Help to Save trial, and] we anticipate that 350,000 will use it”. He also said that he was not aware of a Treasury commitment to provide an annual progress statement on Help to Save, but that “it would be entirely appropriate for you to bring me here to account for the progress”.100 Even if met, the 350,000 forecast would amount to around 10 per cent of the 3.5 million people who are eligible for the scheme.101
93.There is little evidence that tax relief is an effective way to stimulate household saving, especially among lower-income households. There is, however, more evidence that cash bonuses and direct matching can stimulate saving and have the potential to help people build a precautionary savings buffer. The Treasury and HMRC should study the impact that recent increases in the opportunities for tax relief on savings has had on the scale and distribution of household saving. Any future changes should be justified in terms of the expected outcomes for the level and distribution of saving.
94.The Help to Save scheme is a promising approach towards helping lower-income households build precautionary saving. However, at this stage its ambition is limited. The Treasury should make regular written reports to Parliament on the usage of the scheme and its efforts to increase take-up. It should give consideration to widening the eligibility criteria in future.
“Sidecar” savings
95.In 2017, the NEST pension scheme, together with the MAS, announced a trial of “sidecar savings”, a hybrid product which would allow people to put part of their pension savings into a rainy-day fund, which could be accessed in emergencies. Potentially, sidecar savings could be brought into the pensions auto-enrolment system. Previously, the Treasury had concluded that this approach should not be pursued, following a call for evidence in 2011.102
96.The evidence received by this inquiry was mixed on the prospects for a wider rollout of sidecar savings. Matt Upton, Head of Policy for Consumer and Public Services at Citizens Advice, told the Committee that “we would encourage the principle, but not anything that ebbs away at your pension”, while John Montague, Managing Director of the Big Issue Group, said “The whole point of auto-enrolment was to try to build something… To rob it now really is Peter and Paul.” However, Phil Andrew, Chief Executive of StepChange, was more positive:
We think there is a place for this, if it is properly policed and done for extremely specific purposes for a small portion of your overall pot. If it is a small, short-term bridging element, we are okay with that.103
97.In oral evidence, the former pensions ministers, Baroness Ros Altmann and Sir Steve Webb, thought that sidecar savings could be suitable, with proper limits. Sir Steve suggested that the limit could be set at the amount eligible for the 25 per cent tax free lump sum.104
98.The evidence on the merits of sidecar savings schemes is mixed. The Government should examine the results of NEST’s trial of sidecar savings, and, if it is a success, assist with a wider trial and rollout, including any necessary legislative changes.
87 Evidence submitted by StepChange (HHF0009)
88 Ibid, and Evidence submitted by the Open University PUFin (HHF0030). Evidence submitted by Citizens Advice (HHF0039), and Evidence submitted by the Money Advice Service (HHF0020) cited differing but broadly similar figures for the number of households with low precautionary savings.
90 Evidence submitted by John Glen (HHF0052) and HMRC, Estimated Costs of Tax Reliefs, 23 January 2018
91 gov.uk, Tax on savings interest, accessed 6 July 2018
92 HMRC, Estimated Costs of Tax Reliefs, 23 January 2018
93 Evidence submitted by StepChange (HHF0009) Evidence submitted by the Open University PUFin (HHF0030).
94 Oral evidence taken on 14 November 2017, Household finances: income, saving & debt, HC 600, Q7
95 HMRC, The Help to Save Scheme, updated 21 June 2018, accessed 3 July 2018
96 BBC news, Budget: Saving Gateway scheme is scrapped, 22 June 2010
97 Oral evidence taken on 14 November 2017, Household finances: income, saving & debt, HC 600, Q60, Q63
98 Evidence submitted by Toynbee Hall (HHF0044)
100 Oral evidence taken on 8 May 2018, Household finances: income, saving & debt, HC 600, Q316
101 See Evidence submitted by Toynbee Hall (HHF0044)
102 NEST Insight, Liquidity and sidecar savings, 2017
103 Oral evidence taken on 28 February 2018, Household finances: income, savings and debt, HC 565, Q75–76
104 Oral evidence taken on 13 March 2018, Household finances: income, savings and debt, HC 565, Q237
Published: 26 July 2018