Updated 03 December 2020
Since it was launched in September 2018, over 80,000 people have signed up for the government’s Help to Save scheme. But with millions more potentially qualifying for the low-income scheme, Brits are missing out on billions worth of potential bonuses. Article by Nick Green.
Following reports that around a third of families have no savings, the government has launched a scheme to encourage saving among people on low incomes. The Help to Save scheme works in a similar way to the more highly publicised Help to Buy and Lifetime ISAs, by adding a government bonus to every deposit made in the account. However, the Help to Save bonus is more generous still, in that it provides a 50 per cent bonus – that is, 50p extra for every £1 the saver deposits. The bonus is paid in a lump sum after the first two years, and again in another two years when the account closes (Help to Save accounts can be held for a maximum of four years).
Although savers won’t earn interest, this 50 per cent bonus is hugely bigger than even the maximum rate offered on any savings account, so there is a real incentive for lower earners to take advantage of the scheme. In principle a saver could achieve a total bonus of £1,200 (which is absolutely free money) by depositing the maximum of £2,400 over the four-year period, taking their total savings up to £3,600. This would involve saving fifty pounds a month – perhaps not easy for someone on a low income, but still achievable for many. Even if savers can only manage a tenth of that – £5 saved every month – this would still mean £120 of free money.
Despite this incentive, it’s estimated that only 2 per cent of those potentially eligible have opened an account since its launch. Offered to people receiving Working Tax Credit, Child Tax Credits or Universal Credit of at least £542.88 in their last assessment period, an approximated 3.5 million Brits are entitled to a Help to Save account. However, with only 80,810 signed up so far, around 3,419,190 people could be missing out – leaving potentially £4bn worth of bonuses unclaimed.
Economic secretary to the Treasury John Glen has promoted the new scheme as being ‘designed to make saving possible for every hardworking person in the country’. Perhaps inevitably, the reality is proving somewhat more complex than that. Despite the fact that the scheme makes saving hugely more rewarding for those who are able to put money aside, this is where it runs into a catch-22.
As Becky O’Connor, personal finance specialist for Royal London, put it: ‘In theory it’s a good idea, as people on low incomes would benefit a lot from a small savings fund, as it could help them avoid costly payday loans and other forms of high cost credit. However in practice, if you are on a low income, the problem is that you have very little, if anything, to set aside, in the first place.’
Debt is another problematic issue. The Money Advice Service generally advises people to pay off their debts before building up savings, since usually the interest on debts will far exceed anything they can earn on savings. However, with the sizable bonus available through Help to Save, it is possible that in some (though by no means all) instances the scheme will still leave people better off. Savers should however take great care to check the interest rates on their debts, and see whether this will exceed the 50 per cent bonus. A rate of 10 per cent APR is roughly equal to the bonus over four years – anything more than this will exceed it.
The Office for National Statistics reveals that 2017 was the first time in 30 years that the average UK household saw its annual outgoings surpass its income. Consequently an estimated 8.3 million people in the UK are currently unable to pay off their household debts – a number that is likely to overlap significantly (if not entirely) with the 3.5 million people who qualify for Help to Save. It may then be that the government has offered an incentive to the segment of the population that is least able to take advantage of it.
Nevertheless, given the uptake by 80,000 low-income savers it is still probable that there are plenty more who would benefit from the scheme, if made aware of it.
Whether or not you qualify for this scheme, check out our best saving tips.