However Royal London Director of Policy, Steve Webb, has warned that the scheme could be the wrong choice for low-paid workers compared with saving through a workplace pension and could lead to accusations of ‘mis-selling’.
Steve Webb pointed out that with a contribution to a pension, savers get a matching contribution from their employer.
Additionally, tax relief on pension contributions is available, saving 20p in the pound for a standard rate taxpayer - yet there is no indication of tax relief on contributions into Help to Save.
Finally, Universal Credit is boosted when pension saving is increased (because disposable income has fallen) and again, it is not clear whether contributions into Help to Save will boost Universal Credit.
Steve Webb said:
“It is welcome that the Government is looking to encourage people to save, but it needs to be careful that people are not incentivised to make the wrong choice with their money. Money put into a pension often attracts a matching contribution from an employer plus a tax relief contribution from the government and can entitle you to higher tax credits.
“While both short-term and long-term savings are important, low-paid workers with spare cash should think very carefully before assuming that the Help to Save scheme is the best deal for their money. It would be unfortunate if this initiative turned into a new mis-selling scandal, with workers discovering they could have got a better deal from a pension.”
Additionally, Aegon has asked whether Help to Save will disrupt automatic enrolment, causing workers to opt-out of pension saving in return for more flexible, but short-term savings.
Kate Smith, Head of Pensions at Aegon, commented:
People have a finite amount of cash they can afford to save, and they will need to balance their long-term plans against more short-term considerations.
Saving in an employer’s pension scheme will still be the best deal around, as employees not only benefit from a government top-up on their own contributions, but also the employer’s contribution, every time they pay in. So currently every £50 an individual saves under automatic enrolment immediately becomes £112.50. The employer’s pension contribution is far more valuable than any government bonus allowing workers to build up savings at a faster pace than the new Help to Save scheme.”
Kevin Caley, Founder and Chairman of ThinCats, added:
“The Chancellor is rearranging the deck chairs on the Titanic instead of addressing the economic icebergs. Yes it’s important to encourage saving, but this scheme will only help the very small minority of employees on benefit who can actually afford to put aside £50 a month. Savers have been dealing with seven years of record low interest rates and are still paying a heavy tax for the economic crisis we remain stuck in. Unfortunately there is little prospect of that changing for several more years. Until savers can once again earn interest at above the rate of inflation they will continue to redirect their money toward alternative investments and the booming peer-to-peer sector.”
