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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.

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