The government should introduce an auto-enrolment savings scheme to help low-paid workers build up their financial resilience post-Covid, a report has suggested.
In its latest report, published on October 18, think tank The Social Market Foundation urged the government to create a workplace savings scheme, where an emergency savings pot is linked with an auto-enrolment pension.
Through this model, employees could save for their retirement while also building up a rainy day fund so that they are financially covered when the unexpected hits.
Government-backed workplace scheme Nest has been testing out a side-car savings model since 2018 but this is based on an opt-in rather than opt-out model.
The report warned however, that additional measures would need to be introduced to make an AE savings model work for everyone as low earning workers might feel as though they do not have enough money to contribute to savings as well as their pension each month.
For example, employers could contribute to the savings account, much like they do with workplace pensions.
The Social Market Foundation believes creating tax incentives for low-paid workers would not come at a cost to the Treasury as the government could reform the current savings system which, it said, was “poorly targeted” and “unfairly skewed” to those on higher wages.
The £3.3bn tax relief given to Isa savers for instance could be used to support savings for low-paid workers.
HM Revenue and Customs data showed that Isa investors aged 65 and over hold an average of £49,161 in tax-free accounts, compared to just £5,629 for people under the age of 25.
The think tank suggested the government could partially match savings after they have been held in the sidecar savings account for a specific period of time.
The level of match funding could also be capped at a certain level of income to ensure it benefits those most in need.
Scott Corfe, research director at the Social Market Foundation, said: “Current savings policies mean spending significant sums of public money rewarding saving by people on higher incomes who have large sums of cash to invest, at a time when many of low-paid workers face pay cuts and job losses and have little or no savings to fall back on”
“Rewarding older, richer people while letting poorer, younger people suffer is unfair and unsustainable.”
He warned the ongoing Covid-19 pandemic could badly affect intergenerational wealth fairness as the young “bear the brunt of job and income losses”.
He added: “Eliminating a tax relief that benefits older savers more, to bolster financial resilience among the young, would be a modest and fair measure.”
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