How will 'Help to Save' help people to save?

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A NEW scheme will give low earners who are able to make regular savings a state-funded bonus worth up to £1,200, the Government have said.

To qualify for the Help to Save initiative, people must be in work and in receipt of Universal Credit or Working Tax Credits.

Those who manage to save up to £50 a month will receive a 50% bonus after two years - which for those who can save the full amount will equate to £600.

Continuing to save for another two years will earn people another 50% bonus.

Around 3.5 million people will be eligible for the scheme, though few may be able to take advantage of it.

No savings

The Government are worried that too few of us have savings - which is true.

Research carried out by the University of Bristol's Personal Finance Research Centre shows that 50% of people have no formal savings or investments - or even what they call an "informal savings habit".

However, as critics have been quick to point out, the major flaw with Help to Save is that it requires people to have money available to save in the first place.

Estimates suggest that there are some 13 million people in Britain who wouldn't be able to cover emergency costs of £200 to £300 without having to borrow somehow.

And last month, the Joseph Rowntree Foundation reported that 11.6 million households don't have enough money for an acceptable standard of living - more than there were during the recession.

There are several interlinked reasons for this.

One is that the cost of buying a house is now 11.1 times the average salary and increasingly seen as an unattainable goal.

Barring moving back in with the parents, this usually forces people into more expensive rental accommodation.

The problem here is that rent is also increasing - and at an annual rate of 2.5%, it's rising faster than our incomes, which are only going up by 1.9% annually; tenants are getting relatively poorer every year.

The outlook for working people will continue to be grim for some time, partly because of the rise in the number of low paid jobs and zero hours contracts.

Curbing benefits

Meanwhile, the Government are committed to reducing the welfare budget, and last year announced they planned to save £12 billion through a series of cuts.

These include the benefits cap, which has limited the amount in benefits a family can receive in one year to £26,000 - and from autumn this year will reduce it to £23,000 for families in London and £20,000 elsewhere.

As shadow work and pensions secretary Owen Smith points out: "The cuts will mean families are going to struggle to have enough money to make it to the end of the week, let alone save for the future."

The situation is likely to get worse for some of the poorest households, as the Government also intend to freeze Child Tax Credits, Working Tax Credits and Job Seekers' Allowance until 2020.

The Children's Society estimate that as a result, families could lose up to 12% of the real value of their benefits over the next four years.

That coincides with the further expansion of Universal Credit, which merges six benefits into one monthly payment.

Though touted as being more generous and adaptable than the current system, many households will be worse off.

For example, the Institute of Fiscal Studies (IFS) say that around 2.1 million families will lose an average £1,600 a year, largely because of the way that Universal Credit is reduced once people's earnings rise above certain thresholds.

Help to save what?

The notable thing here is that the claimants most likely to be negatively affected are precisely those that the Government are trying to encourage to save with the Help to Save scheme.

For many, the idea of the trying to save £50 - or even £5 - a week seems somewhat ludicrous.

To take an example from the IFS, when the work allowance is introduced next month, working single parents stand to lose an average £83 a week in benefits.

With little wiggle room available to many, there are concerns that even more households will have to turn to expensive lines of credit to make up the shortfall.

Reducing debt

The number of families spending more than a quarter of their total monthly income on unsecured debt repayments has increased by more than a quarter since 2012, according to the TUC and Unison.

Although fewer of us are dealing with very large debts, more people are dealing with multiple smaller debts, making them more vulnerable to problem debt as they attempt to spread the costs of their commitments.

That's led StepChange to make repeated calls for the introduction of Government backed low- and no cost borrowing for the neediest.

Such state-sponsored lending would be far more of an "assault on poverty" than the Help to Save scheme, which will provide the poorest working people with little benefit.

Another suggestion - this time from the Financial Inclusion Commission - is that the Government should fund lifelong financial education, from primary school through to retirement.

This, they say, would help us with the fundamental basics of personal finance and money management.

Helping us develop skills such as these would be more likely to help everyone - including those on lower incomes - make the money they have work better for them, rather than promising rewards for behaviour we can't hope to achieve.

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