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John Andrews of the Low Incomes Tax Reform Group ( http://www.litrg.org.uk/ ) raises concerns that the proposed government initiative designed to encourage savings and investment by peole on low incomes, will be stifled by excessive beauracracy.

Introduction

In 2010 a new government initiative is due to come on stream to encourage those on low incomes to save. The Savings Gateway will provide a cash savings account for regular savings. If you save, then the government will add to your contributions.

LITRG welcomes such an initiative in principle, but we do have concerns about how the processes  will work, especially as much reliance is to be placed upon the databases of HM Revenue & Customs (HMRC) and the Department for Work & Pensions (DWP).  The scheme looks to be complex to administer.

Savings in the UK have been falling and the government believes that is important for their poverty strategies to work, that there should be more saving amongst those on the lowest incomes. They felt there needed to be an incentive to save and so came up with the concept of a Savings Gateway.

The consultation document refers to the success of the administration of the Child Trust Fund (CTF) but as we pointed out, when it comes to dealing with linkages to entitlement geared to tax credits data, that Fund is also having its troubles. The CTF only requires simple linkages within one government department, but as we shall see, the linkages envisaged by the Savings Gateway are far more complex.

The Scheme in outline

Eligible people (see below) will be sent a voucher or unique number by the government which will entitle a person to open a Savings Gateway account. This account will be in existence for two years and during that time participants will be encouraged to save on a monthly basis. If they do, the government will match savings of (probably) up to £25 a month by a factor which could be as high as £ for £. The government match will be paid at the end of the two year savings period.

The accounts will be with the usual banks/building societies/credit unions and will attract interest. Savers are able to withdraw their own funds, although that may reduce the government contribution.

Eligible people

The scheme eligibility is based upon participants qualifying for certain State Benefits:

• Working tax credit
• Child tax credit paid at the maximum rate
• Income support
• Incapacity benefit or employment and support allowance
• Severe disablement allowance
• Jobseeker’s allowance

If a benefit, such as tax credits, is paid to a couple, then each person in that couple will be eligible to save using the Savings Gateway.

The time of receipt of the benefit is the critical time for eligibility, so someone on Jobseeker’s now, who subsequently gets a job, is still able to save for the whole two years.

The paper trail

It is intended that HMRC will write to participants to tell them of their eligibility and give them a limited time to open the account. It is at this point that things seem to get horribly complicated.

We have the following questions which we have addressed to the Treasury:

1. There are different ways of qualifying for some of the benefits announced by the government, for example, by paying contributions. Will all the different ways of qualifying lead to eligibility? If not, there is another layer of explanation needed. Indeed, there is no consistency between the eligibility criteria for the different benefits to be covered.

2. An individual may have several tax credit awards during a year, due to changes in circumstances. Will the tax credits computer be able to recognise when it is appropriate to issue an eligibility notice? As the tax credits award may be based on the claimant’s current year income or that of the previous year will it matter which is relevant?

3. An individual may be in receipt of several of the eligible benefits in the course of the year. Will the HMRC and DWP computers be able to recognise that an individual already has been sent eligibility notifications? Will HMRC be notified in time by savings providers to suppress further eligibility notices?

4. For one reason or another, tax credit payments are sometimes made outside the system by manual intervention. Will procedures be able to pick up the eligibility of such people?

5. People trying to save may have to close accounts. This will then trigger new eligibility. Will the savings provider notifications be sufficiently prompt to ensure that individuals receive new eligibility notices?

6. Many people in receipt of benefits will not be taxpayers at the point of time of opening an account. Will the government introduce an efficient system to prevent tax being withheld at 20% when the individual is only due to pay tax at 10% or not at all? To force people to make tax repayment claims would not be a good incentive.
 
7. Someone who gets eligibility when on Jobseeker’s allowance is unlikely to be a taxpayer; as soon as he/she gets a job they are likely to become a taxpayer. This will change their tax status for receiving interest tax free. Are savers expected to identify this change of status and enter into more form-filling?

8. Additional savings can deprive an individual from eligibility to receive some means-tested benefits, or indeed reduce the amount they receive. Will savings in Savings Gateway accounts be ignored for this purpose?

9. Benefit awards of various sorts are prone to official error and delays in getting into payment. How are deprived savers going to be compensated? Savers close to retirement will have to understand the likely impact upon Pension Credit of the savings regime they are adopting.

We are concerned that a scheme with obvious good intentions will founder due to the inherent complexity of eligibility and the bureaucracy imposed to manage risk. This will affect those with chaotic lives the most and it is they that need to save the most. Those whose lives are more straightforward will find that they receive another easily claimed government bonus; but then they are not the target.

Wider issues

But then we have other questions. Who will advise such people which institution is right for them to invest in (we can see the voluntary sector being good distributors of marketing material, but that is a different activity)? What levels of charges will be applied to such accounts? Will the rates of interest have minimum guarantees? Could not the government make the choice easy by setting up a National Savings account with a good rate of interest, low charges and tax free status?

We hope that our fears are groundless and that this level of detail has been thought through. We will undoubtedly be commenting further as the scheme is developed.