View more on these topics

Clarity begins at home

The Government wants more people to benefit from saving. New policies aimed at ensuring that all people, including those on low-incomes can build a financial asset have been proposed. This is to be welcomed but, as any financial adviser knows, savings decisions need to be placed in a broad context.

The Government has recognised the need for strong incentives for low-income people. But so far, insufficient emphasis has been placed on the disincentives to save. There are important disincentives that public policy creates, which need addressing.

There are good reasons for wanting people to accumulate financial assets. It will help to provide for themselves in times of need and provides access to other capital, such as physical capital. Research has also suggested that holding an asset in early adulthood will lead to positive welfare outcomes later in life. This, it is argued, is because financial assets produce a psychological comfort zone allowing long-term thinking and a sense of security.

The Government has recognised this and has a keen desire to increase the levels of saving among low-income groups. This has taken concrete form in the development of new progressive asset-based welfare policies.

The saving gateway will be a new savings account for low-income adults with strong incentives to save. Individual deposits will attract a mat-ched Government deposit, probably at a rate of one to one. It is likely that only individuals who are in receipt of a tax credit will be able to open such an account.

More fundamentally, the proposed child trust fund is designed to provide all young adults with a pot of money to invest. An initial Government endowment will be paid to all newborn children. Additional contributions from the Government, the child and their families will enable the fund to grow until the child has access to the funds at 18.

Policymakers have recognised that people on low-incomes do not benefit from the traditional tax-based incentives to save. The Government has rightly proposed policies which provide new ways of incentivising saving.

The match provided by the saving gateway is particularly noteworthy. However, the flipside of this coin – disincentives to save – has not been addressed. There are dangers that a contradictory policy will be implemented – encouraging saving by low-income groups on the one hand, while penalising saving on the other.

There are, of course important issues about disincentives to save for retirement. However, the priority for the people we are discussing here is for short-term or rainy day saving.

Consequently, the important disincentives are not related to structure of state pension provision. Instead the main culprits for potentially undermining new savings incentives are capital limits in the benefit system.

Receipt of a number of benefits and services is means-tested according to income but also according to the capital that a claimant has. If an individual has capital over a certain limit then they must support themselves.

The current structure of capital limits is restricting and incoherent. A person on a low income deciding whether to save faces a confused situation. There is no coherent rationale for the treatment of capital across different policy areas. For the social fund, the eligibility limit for a person under 60 is £500, for receipt of income support the lower limit is £3,000 and the upper limit is £8,000, the limits for different parts of the legal aid system vary from £1,000 to £8,000.Different rates are set within specific departments and while from the perspective of spec-ific policy areas this might make sense, from the indiv-idual saver&#39s perspective the outcome is confusing.

What clarity there is for low-income savers is of a negative nature. The perception that capital limits give is that saving will not be worth it.

Research from the US suggests that the perception that the benefits&#39 system will penalise saving does affect behaviour. The specific asset-based welfare policies are important breakthroughs but if a culture of saving is to be fostered among low-income groups then a consistent message needs to be provided by the Government, including a reform of capital limits.

There are some signs of change. The proposed pension credit will relax the current capital rules. There are similar moves for the new wave of tax credits designed as the successors to the working families tax credit. In line with the tax system, they will merely account for any income derived from capital that people hold.

This should be welcomed and encouraged. Those in receipt of tax credit, more than any other, could be caught in the contradictory grip of concurrent Govern-ment incentives and disincentives. More needs to be done though. A coherent understanding of when public policy should require people to save and when it should force people to run down any assets and provide for themselves needs to be found.

The advent of new savings policies such as the Saving Gateway should serve as a catalyst for thinking more coherently about incentives and disincentives to save for people on low-incomes.

If IFAs are to advise the people targeted by the Government to save, then greater attention needs to be paid to the disincentives created by public policy.


NDF reaches 10th plan

NDF Administration has unveiled the ninth tranche of its extra income and growth plan, which is linked to the performance of the Eurostoxx 50 index over a term of three years and two months.This guaranteed equity bond offers investors an annual income of 10.25 per cent a year, quarterly income of 2.35 per cent or […]

Dresdner RCM reflects gilt trip

Dresdner RCM has introduced the gilt-to-equity Isa, which offers two ways to invest. Investors can initially go into Dresdner RCM gilt yield unit trust, then make a phased switch into the Dresdner RCM UK equity income unit trust or the Dresdner RCM UK equity fund, an Oeic. The switching occurs in three stages on predetermined […]

&#39Equitable regulator&#39 Roberts on the move to new FSA job

The regulator most closely linked to the Equitable Life debacle, Martin Roberts, is moving to a part-time position advising the FSA on the international aspects of insurance regulation.FSA insurance firms division director Roberts will be replaced by Lloyd&#39s of London director of regulation David Gittings. Roberts, 55, is one of the few constants in the […]

Norwich & Peterborough fixed Spanish mortgage

Norwich & Peterborough fixed rate on Spanish properties Type: Fixed rate, for Spanish propertiesRate: 5.04 per cent for two years, 5.99 per cent for five yearsUnderlying rate: Income multiples: Three times single applicant salary; three times main salary plus second applicant’s salary; two times joint salaryMinimum loan: £40,000Maximum loan: Negotiable, repayable over 20 yearsConditions: Mortgage […]

Martin Foden discusses how convenience is affecting the construction of fixed income portfolios

In this short video, Martin Foden, head of credit research at Royal London Asset Management, discusses how convenience is affecting the construction of fixed income portfolios. Watch the video in full The value of investments and the income from them is not guaranteed and may go down as well as up and investors may not […]


News and expert analysis straight to your inbox

Sign up


    Leave a comment


    Why register with Money Marketing ?

    Providing trusted insight for professional advisers.  Since 1985 Money Marketing has helped promote and analyse the financial adviser community in the UK and continues to be the trusted industry brand for independent insight and advice.

    News & analysis delivered directly to your inbox
    Register today to receive our range of news alerts including daily and weekly briefings

    Money Marketing Events
    Be the first to hear about our industry leading conferences, awards, roundtables and more.

    Research and insight
    Take part in and see the results of Money Marketing's flagship investigations into industry trends.

    Have your say
    Only registered users can post comments. As the voice of the adviser community, our content generates robust debate. Sign up today and make your voice heard.

    Register now

    Having problems?

    Contact us on +44 (0)20 7292 3712

    Lines are open Monday to Friday 9:00am -5.00pm