Savings (Government Contributions) Bill (First sitting)
Debate between Eilidh Whiteford and Huw Merriman(7 years, 6 months ago)
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Dr Whiteford
Q Could you say a bit more about the sort of incentives that you think might actually help?
Tom McPhail: There was a lot of work done last year around the idea of a flat-rate incentive—breaking the link between pension incentives and the tax system altogether. There was quite a lot of support across the industry for that concept, with talk of around a 30% top-up as an alternative to tax relief. All contributions would be made out of net income, and when you made a contribution to a pension you would get a flat-rate top-up. I think there was quite a lot of traction for that idea.
I think we can go further, and it would be quite desirable to weight those incentives particularly towards younger savers. You could get the benefit of compounding. If the incentive were progressively reduced the older you got, it would provide a behavioural incentive, because with every year that passed, you would lose out. That is a very powerful message that the industry and the Government could harness: to say to people, “If you wait another year, your incentive will drop a little bit.” We have been working through some ideas on how we could develop that as an alternative incentive. Either way, you are taking it away from the current messy, unfair, lumpy, illogical tax-relief system that continues to operate today.
David Wren: I think complexity is definitely the enemy of success in getting people to save. There are lots of subdivisions of pensions and savings. Helping people to find the right place within that for their needs is really challenging. The risk of complexity is not just that people go into the wrong product for them at the start, but that they are put off by the whole experience. To give an analogy, it is very similar to internet sign-up processes: each additional question you add to an internet sign-up process puts off a disproportionate number of people from continuing through that process. Having a dozen different products out there with different features does not necessarily push people to the wrong one; it encourages inertia, where you simply cannot decide and therefore do not invest in any of them.
Huw Merriman
Q You keep touching on the complexity of this product. I have read the blurb in the overview of the Bill and I understand the eligibility criteria—I am too old—and the withdrawal terms. I am inviting you to bamboozle me, as it were. What is so complicated about this product that I am missing?
Tom McPhail: To the credit of the Treasury team that worked on this, they listened to feedback from the industry and were really good at working to create as simple a product as possible. My answer to you is that it is a lot simpler than it might have been.
When you ring us up, we will still have to walk you through the circumstances in which you will be eligible to take the money out without a penalty, and the circumstances in which you will be able to take money out but would have to pay a penalty, so there is still a customer engagement process that will have to be undertaken at the front end. I think I made the point in the brief written submission I sent in ahead of this session that the problem is not the product itself. The product itself is reasonably simple—there are simpler products, such as the cash ISA; that is really simple—but you have dropped a moderately simple product into a complicated landscape, and you have just made it more complicated.
That is exactly what happened when we launched stakeholder pensions getting on for 20 years ago. Stakeholder was simple, but it was dropped into a complicated landscape, and—guess what?—it made life more complicated. This is analogous to that.
David Wren: That is what will really cause the challenge. When someone tries to open one of these products, the first question is going to be, “What are you saving for? Is it a home or a pension?” If it is neither of those, this is probably not the right product for you. If you pick house purchase, you have to decide between the lifetime ISA and, at least in the short term, help to buy. People have said that the lifetime ISA looks better, because you are getting the Government top-up and earning growth on that, but you cannot have the money back without a Government penalty. The help to buy ISA does not have that, so if you need flexibility, help to buy might be better for you. If you go down the pensions route, we need to ask about whether you have maxed out auto-enrolment and taken full advantage of employer contributions, and whether a different pension route might be better for you, again recognising that there are different features as to whether you benefit or not.
It is worth adding that I have been involved in this since it was announced in March—my work has a tax background—and it is not immediately obvious to me whether I would be better off topping up my pension or putting money into a lifetime ISA. The reason for that is that I would need to know what tax rate I would pay on that money when I retire, and I do not know that. It is far from simple in any one of those particular places to work out which is the right thing for you. It requires value judgments about a number of the elements. The risk is that complexity leads to inertia and dissuades people from saving at all. There is not just the risk of going into the wrong product.
Just one final thing, which the previous panel touched on: because of the Government penalty on withdrawals—you lose not only the bonus, but 6.25% of your contributions, because of the way the numbers work—there is no easy exit route from a lifetime ISA. If you make a mistake and a month down the road you say, “Gosh, I’ve made a terrible mistake. I should have gone into a different product,” you will lose some of your money in getting that money back out and into another product. Again, we have real concerns about that and what it will mean for customers.
Savings (Government Contributions) Bill (Second sitting)
Debate between Eilidh Whiteford and Huw Merriman(7 years, 6 months ago)
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Dr Eilidh Whiteford (Banff and Buchan) (SNP)
Q Some of the evidence we have taken this morning has already been more about long-term savings. In the evidence you presented just now, you emphasised the issue of accessibility and the need for people to be able to access their savings quickly to deal with external shocks. What kind of products do you think would be beneficial for people on low and average incomes for longer-term saving?
Ed Boyd: On the flexibility point in terms of accessibility of savings, there is a question. We produced a short paper on Help to Save off the back of a round table of experts in this area. One of the questions that kept coming up was whether there should be some friction for people taking out the money. For example, if someone starts to save for two years with the best intentions to make sure they get their Government bonus, but has one day of giving up on that plan, it would completely undermine it and they would not get the Government bonus. Potential frictions can be put in such as a 24-hour delay in taking out the money. I think that would be completely reasonable.
Where appropriate, someone could name a third party—a family member, husband, wife, carer or whoever—and when they say, “I want to bring it down in 24 hours”, that person is texted to make sure that there is enough friction to ensure that when the money is drawn down as a rainy-day fund, it is used for rainy-day activities and things that they really need the money for, rather than just for general expenditure. This would encourage people to save and make sure the money is used to help stop them getting into problem debt.
Joseph Surtees: I think there are two interesting points here, one of which is on Help to Save. There is a system in the UK that has proved very good at encouraging low-income people to save over a long period, and that is pensions auto-enrolment. So far, the opt-out rate for that is far lower than anticipated. It is only 10% when it was anticipated to be a quarter. People who are enrolled and have not opted out are those just above the enrolment limits.
That sort of approach is incredibly useful in this area, particularly for low-income people. When you look at products such as Help to Save, such as LISA, perhaps, if you can look at how to incorporate an auto-enrolment element into that—with Help to Save, you can in particular do it through the universal credit system. Universal credit has personal budgeting support which helps you to do that. Those sorts of little behavioural incentives will help to make it appeal and work better for these lower-income individuals.
Huw Merriman (Bexhill and Battle) (Con)
Q I am conscious that half of UK adults have less than £500 set aside for emergencies. Do you believe that the financial services market has done enough to attract and incentivise savers who are perhaps struggling with income? Do you think that the Help to Save initiative will help to plug that gap?
Joseph Surtees: In answer to the first question, I do not think the financial services sector has done enough to attract these customers and offer them a service. I will give two examples.
You may have heard of a product called prize-linked savings, which has proved to be incredibly successful in the United States. I can send you some information later, if that would be useful. It is incredibly successful at appealing to low-income families. For many years, people have talked about introducing such a system into the UK—a sort of slightly better premium bond offered via commercial providers. This was introduced in the UK by a bank, but only for people who already had £5,000 saved. To me that says that they were not really thinking about lower-income consumers.
The second example is Help to Save itself. One of the suggestions was that it would be offered by commercial high-street providers. Without giving anything away, my understanding is that most commercial providers displayed absolutely no interest in offering this product, but did display interest in taking on these customers once they had £2,000 saved at the end of two years.
Ed Boyd: There is a big problem here, which is that people are getting stuck in problem debt. It is a growing problem. I will check my stats on this—30 million people in the UK lack savings to keep up with essential bills for just one month if their income dropped by a quarter. Within the confines of that, rather than saying, “Do I think it is the financial services’ fault that we have not done enough, or the Government’s, or someone else’s?”, there is a real opportunity with products such as Help to Save for everyone to pull together and do what they need to do to help solve the problem together.
There is an opportunity for credit unions and community development financial institutions to play a big role, as well as mainstream financial institutions, not just in helping people to save but in helping to ensure that they are financially included. You have wider debates around issues such as the poverty premium—that is, the fact that people who have insecure incomes end up paying far more because they cannot do direct debits.
I do not think it is as simple as saying, “It’s just the financial services sector that needs to deal with this and help more.” I think there is a contribution needed from Government, from the private sector and from the voluntary sector as well to work together to help increase people’s ability to budget, to increase people’s incentives and ability to save and to ensure that people are financially included as they go on that journey.
Joseph Surtees: On that point, I always think about the famous Morecambe and Wise sketch: all the right notes, but not necessarily in the right order. Actually, out there you have lots of the products and approaches such as Help to Save, LISA and auto-enrolment and there are banks—and especially credit unions—that do very innovative things in these areas, but I think it is important to bring these things together so that people have access at the time they need it and can see the products laid out in front of them and make the right choices.