Having looked at the proposed Child Trust Fund and some current tax-effective savings and investment opportunities for children over the last two weeks, I would like now to turn my attention to the other new savings proposal in the Government's consultation document. Greatest publicity seems to have been given to the Child Trust Fund but a Saving Gateway has also been proposed.
Before looking at this and what, if any, opportunities it opens up for IFAs, it is important to say that, especially given the target market for this plan, there is the very real risk that confusion may be the most likely outcome of this proposal.
Now, I do not mean to jump on the all-too-familiar bandwagon of journalistic criticism of any financial proposals made by the Government but, given the well documented existing confusion over savings choices in general and tax-privileged or Government-approved opportunities in particular, this seems a very real concern.
However, one cannot deny the merit of at least trying to encourage the accumulation of wealth by a much wider section of the population.
Various proposals have been made in various jurisdictions for governmental funding of a “wealth kickstart”. The UK Government's proposals for a Saving Gateway is the current UK incarnation of this idea.
What is the Saving Gateway? Like the Catmarked Isa and stakeholder, it is aimed primarily, if not exclusively, at encouraging lower-income earners to save. While the stick of compulsion remains over pension plans, the Government has adopted the carrot for the Saving Gateway by offering to match savings with additional contributions paid by the state.
This seems like just another way of giving tax relief or incentives but in a much more direct and obvious way. In effect, it amounts to an asset as opposed to an income distribution. No doubt the Government believes the perception will outweigh the reality.
In its consultation document, the Government recognises that more needs to be done to extend the benefit of saving to lower-income earners. Forty-six per cent of those on household weekly incomes of less than £200 and 43 per cent of those on less than £300 have no financial savings (excluding housing and pensions but including current accounts). This, I think you will agree, is a stunning statistic.
Perhaps as important is that it would seem tax relief alone has not been successful in encouraging those on lower incomes to save. It is this sentiment that has resulted in the announcement of consultation on a new type of saving scheme for those on low incomes.
This scheme is designed to act as a kickstart to bring these people into the habit of saving. The Saving Gateway account, which will be available only to those on lower incomes, will offer to match every pound saved with a direct contribution from the state. It will run for a fixed period of time, after which savers will have the opportunity to transfer their saved assets into an existing vehicle, such as an Isa, stakeholder pension or the Child Trust Fund. The proposal will also provide the financial education, information and advice needed to help people make the right financial choices.
The Saving Gateway will act as a catalyst towards starting those on lower incomes on the road to greater financial independence by giving them the financial assets and information necessary to take advantage of existing measures such as Isas and stakeholder.
The Government has given some examples of how the Saving Gateway might work. A 2.5 per cent real rate of return has been assumed in the illustration. It has also been assumed that the Saving Gateway:
Will be open to families or individuals earning at or below a set threshold.
Will last three years from the time an individual opens it.
Will provide for the state to match every pound put into the account on a 1:1 basis up to a monthly maximum of £50.
If an individual who earns less than the threshold for eligibility opens a Saving Gateway account and saves £25 a month for the full three years of the scheme, then, when the account matures, the value will be £1,870 in real terms, adjusting for future inflation. This will comprise:
£900 of the investor's own regular contributions.
£900 of matching funds contributed by the state.
£70 interest which, for the purposes of this illustration, has been calculated on a monthly basis.
Given the target market and limited or non-existent scope for earning either commission or fees for advice, it is unlikely that many, if any, IFAs will be involved in implementing Saving Gateways. However, it is an area that advisers need to know about, if only to be in a position to give guidance and information to those of their clients who may (probably mistakenly) feel this could be accessed by them.
It may well be that the possibility of accessing the opportunity offered by the Child Trust Fund can be discussed.