Tomorrow’s Budget will confirm further details of the government’s new Help to Save scheme, which will boost the savings of low paid workers.
The prime minister committed in January to help lower income households save for a “rainy day fund”. Open to households on working tax credits (or working an equivalent level under Universal Credit), the new scheme is expected to incorporate a 50p bonus for every £1 saved, payable after two years. Savers who put away £50 a month will be eligible for a £600 bonus after the two years.
In principle the scheme has two pluses in its favour:
- Lower income households really do need a rainy day fund. We know that families are struggling with unexpected costs, particularly when it comes to their housing costs. Moving costs can place huge demands on budgets as can unexpected costs for white goods or bills. Without savings, families can be forced to turn to debt, which is expensive and can be difficult to clear on a low income. The debt charity Stepchange estimates that 50,000 people would avoid problem debt if every household had £1,000 savings.
- This proposal would help to balance the scales in favour of the less well off, after last year’s Budget announced a Help to Buy ISA for people saving to buy their first home – which was another bonus for better off savers that many people would never get to benefit from.
Under the Help to Buy ISA, first time buyers get a 25% bonus on their savings, getting a handy £3,000 maximum from the government if they save £12,000 towards a property. Unsurprisingly this offer of free money has been very popular – over 250,000 accounts have been opened. But it’s likely that any saver who goes on to buy and claim the bonus would have been able to do so without the £3,000 gift from the government. In policy teams it’s pure deadweight, helping people who were going to buy…to buy. If the government is in the business of topping up savings accounts it’s nice to see a scheme aimed at those who will really benefit – which is hopefully what the scheme to be announced tomorrow will do.
But there are reasons to be cautious and consider the bigger picture too.
Firstly, while the need for an emergency buffer is strong, people’s ability to put savings aside is weak. The Resolution Foundation estimates that over two in five low to middle income households would like to save £10 a month but cannot afford to do so. We know that private renters – who pay the highest proportion of their income on housing costs –particularly struggle to save. Nearly half of private renters told us they cannot afford to save anything a month.
Secondly, the amounts of money that people need are often high. We know from the people we help that a house move, often prompted by the unexpected loss of a tenancy, is a big cost pressure on households. Private renters have to stump up rent in advance, a new deposit and frequently letting agency fees – all before they’ve got their deposit back on their previous home. Other costs can quickly mount up to; we found renters spend an average of £100 if hiring a van, £300 to replace furniture and £200 if needing storage. For many the total will be considerably more than any savings they have. This is why we’ve worked with employers to offer low income workers an interest free loan to help with deposits. We’d love to see the Chancellor backing this initiative.
Thirdly, we can’t help but notice that the emphasis on households putting away funds follows the withdrawal of central government support for unexpected expenses. The fact is, if you’re on a low income it’s always going to be hard to save for those unexpected costs, so the Social Fund used to provide some support for households facing sudden costs. However, schemes were localised in 2013 and local authorities have been responsible for helping families smooth over the cracks. In the context of severe pressure on council budgets, provision has inevitably been patchy and some councils have reduced or even stopped the schemes because they cannot afford to run them.
Helping low income families to save is a goal we would all support, but it is not a panacea for the ways in which the broken housing market is forcing unexpected costs on people, and the safety net is ill-equipped to cope with irregular pressures. A focus on these broader points would be welcome.