The prime minister’s new Help to Save plan has been attacked by pension providers as potentially interfering with auto-enrolment and looking like the next mis-selling scandal.
David Cameron announced up to 3.5 million people will be eligible for a government-backed bonus, in which 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 two years – worth up to £600.
Account holders can then choose to continue saving under the scheme for a further two years and receive another £600 bonus.
This will see them earn a savings pot worth up to £3,600 after the full four years of the scheme – with £1,200 coming from the government. The accounts will come into effect in April 2018.
Royal London’s director of policy Steve Webb warned 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’.
He pointed out with a contribution to a pension, employees may get a matching contribution from their employer, along with tax relief on pension contributions, saving 20p in the pound for a standard rate taxpayer.
Pension saving eventually leads to a 25 per cent tax free lump sum, unlike other forms of saving and an individual’s universal credit is boosted when they increase pension saving, while it is not clear yet if contributions into ‘Help to Save’ will boost universal credit.
Mr Webb said the government needs to be careful that people are not incentivised to make the wrong choice with their money.
“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.”
Kate Smith, head of pensions at Aegon, said she will be watching to see whether Help to Save will disrupt automatic enrolment by causing workers to opt-out of pension saving in return for the more flexible, but short-term savings.
“People have a finite amount of cash they can afford to save and they will need to balance their long-term plans against more short-term considerations.
“Saving in an employer’s pension scheme will still be the best deal around, as employees not only benefit from a government top-up on their own contributions, but also the employer’s contribution, every time they pay in.
“So currently every £50 an individual saves under automatic enrolment immediately becomes £112.50. The employer’s pension contribution is far more valuable than any government bonus allowing workers to build up savings at a faster pace than the new Help to Save scheme.”
peter.walker@ft.com
