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Willetts or won&#39t it?

While IDS struggles to dispell his “old school” image, his party are pitching plans to encourage people to be more conservative with their money and start saving.

Hot on the heels of Theresa May&#39s leopard-print shoes at the Tory party conference came Shadow Work and Pensions Secretary David Willetts. He unveiled the Conservative&#39s new strategy for encouraging more people on lower incomes to save – the Lifetime Savings Account.

With just £3.75 saved per £100 of household income, the UK saving ratio is at its lowest ebb since 1963. Consumer spending has continued to escalate even while equity markets are crashing.

The Conservatives are pushing the LSA as a more flexible alternative to Chancellor Gordon Brown&#39s Isa. It will act as a wrapper in which other financial products can be incorporated and will be available to all ages. The Government would contribute to the fund at a level yet to be established. The cash saved will be instantly accessible.

The difference is that, if withdrawals are made, the Government contributions are not permanently lost but retained by the Government in an “escrow” account which can be accessed later when the savings are replaced.

Speaking at the conference, Willetts said: “The savings account will be a new framework. At the moment, you get tax relief if you save for your pension but that means you cannot get your money until you reach retirement. It is a one-way street into the fund. If you save in an Isa, you can withdraw that money freely but, once you have done that, it cannot be replaced so it is a one-way street out.”

Willetts says the Government has created an either/or choice when the best answer is both.

The Conservatives maintain the LSA will allow people to save without having to pledge not to touch their money until the pot has matured. But Liberal Democrat Shadow Work and Pensions Secretary Steve Webb disagrees. He does not believe that offering quick-fix “free money” deals will plug the savings gap or convince a generation of credit card-happy consumers to use their cash more conservatively.

Webb says: “This plan defeats the whole object of saving. The temptation would be there to launder money through the account. People would simply move cash from their current accounts into the savings account to gain the &#39free money&#39 and then transfer it straight out again.”

Webb says the plan would reward people who save anyway and not encourage new savers or long-term saving. “Where are they going to find the billion pounds it will take to fund the scheme?” he asks.

Webb is particularly scathing of Willetts&#39 example of an average saver, 20-year-old Jenny who starts saving £60 a month increasing at 5 per cent a year in order to borrow £5,000 for a deposit on a house when she reaches 25. If she takes out £5,000 from her LSA, then the Government contribution is also removed and placed in an escrow account. Once she repays the £5,000, the Government contribution is returned.

Webb says: “We have to tackle the problems of debt for young people. This example totally disregards the fact that most young people are graduating with £10,000 or more of debt and cannot afford to start saving.”

The LibDems say their priority is retirement rather than “free money” deals. Webb says: “We would be concerned that people are not saving enough for old age and are in favour of mandatory employer contributions into a pension.”

Providers like the sound of increasing incentives to save. Nationwide and Abbey National are supportive of the LSA and any scheme that encourages growth in the ailing savings market.

Although details of the plan, including the level of Government contributions, have not been announced, it is widely thought that the LSA and the LibDems&#39 initiatives would bring more trade into the industry. Providers would probably be asked to tender competitively for the LSA. Another option is managing it on a licensed provider basis.

Labour&#39s savings gateway plan is being piloted by Halifax. Spokeswoman Joanne Gill says: “The LSA is an interesting idea and we definitely want to support any initiative that encourages more people to think about their savings and provide for their futures.”

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