The Saving Gateway
73. The Saving Gateway is a cash saving account for
those on lower incomes which provides a financial incentive to
save through "matching", whereby the Government makes
a specified contribution for each pound saved by the account holder
up to a certain limit.[267]
The Saving Gateway was first proposed by the Government in April
2001. An initial pilot project ran for 18 months from August 2002.
In the 2004 Pre-Budget Report, the then Chancellor of the Exchequer
announced that there would be a second pilot project beginning
in 2005, which ran with six variant forms between February 2005
and March 2007 in five pilot areas. In January 2005, our predecessors
looked forward to "the Government moving as quickly as possible
… to national availability of the Saving Gateway scheme".[268]
We have considered the Saving Gateway twice in the present Parliament,[269]
concluding that "the introduction of a national Saving Gateway
would be the most important single step towards achieving the
aim of increasing the level of saving among low-income individuals
and households".[270]
In the 2008 Budget statement, the Chancellor of the Exchequer
announced that the Saving Gateway would be launched nationally,
with the first accounts available from 2010.[271]
He told us that "the idea of the Saving Gateway is a very
important one where we help people who historically have not saved
get into the savings habit".[272]
When we asked him why the scheme would not be ready for national
implementation prior to 2010, he identified issues both of practical
implementation—stressing the potential difficulties arising
from quick implementation—and affordability—"I
have to make sure I have the money to pay for it".[273]
74. The overall costs of the scheme will depend crucially
upon the final decision on the level of matching. The Government's
consultation document accompanying the Budget indicated that the
Government had yet to come to a view on this matter.[274]
The first Saving Gateway pilot project was based on the simple
proposition that, for each pound invested by an individual up
to £25 per month over the 18-month period of the account,
the Government would itself pay a pound into that account. However,
the final evaluation of the second pilot project suggested that
"the ideal match rate was thought to be around 50p for each
£1 of matchable contribution, although the majority of participants
accepted that a lower rate would be more appropriate for reasons
of affordability".[275]
Last year, we accepted that, on grounds of affordability as well
as other grounds, a national Saving Gateway could be based on
a level of matching lower than pound-for-pound, and that a lower
level of matching might be effective in encouraging saving among
low-income individuals and households. However, we noted that
certain forms of saving by the highest income groups obtain subsidy
through tax relief at an effective rate of 40%, and we consider
that the level of subsidy in percentage terms for those on the
lowest incomes ought to be higher. On grounds of simplicity, we
suggested that this argued for a rate of matching of 50 pence
for every pound invested by the individual, although we also saw
merit in the proposal that a pound-for-pound match rate might
be set for saving in the initial two months of an account to encourage
participation.[276]
We continue to believe that
there is a strong case for matching under the Saving Gateway at
the level of 50 pence for every pound invested by the individual,
possibly with support for the opening months at the pound-for-pound
level. We recommend that, in advance of a final decision on matching
rates, the Government publish estimates of the cost of implementation
based on different levels of matching and associated estimates
of take-up
rates.
75. The cost estimates that we have just recommended
be prepared could be based in the first instance on the Government's
proposals for eligibility. The Government envisages that eligibility
for the national Saving Gateway scheme "will be 'passported'
from qualifying benefits and tax credits".[277]
With the exception of Incapacity Benefit, all the relevant benefits
are means-tested.[278]
One of the lessons that the Government drew from the evaluation
of the second pilot project was that a concentration on "people
on lower incomes—up to around £15,000 household income
as used in the first pilot—is about the right level".
If eligibility were extended up the income scale, savings would
start to be reallocated from existing savings schemes into the
Saving Gateway, creating significant "deadweight" in
terms of the Government subsidy.[279]
The Government confirmed that the Saving Gateway was targeted
on the working population:
People who are retired will not be eligible as other
forms of support are in place for those who are retired and on
low incomes, such as the Pension Credit and the winter fuel allowance.
Students are able to access financial support through student
loans and maintenance grants.[280]
76. However, even with regard to the working population,
the use of "passporting", while administratively convenient,[281]
excludes from eligibility significant numbers of individuals on
low incomes.[282] The
Treasury enumerated such individuals, as follows:
- 0.5 million in the category
of "those on low incomes, in work, aged 18-25 who do not
qualify for [Working Tax Credit]";
- 0.7 million in the category of those working
16 to 30 hours a week not eligible for Working Tax Credit; and
- 2.7 million in the category of those "eligible
for a qualifying benefit but [who] do not take it up".[283]
The Government stated that:
to bring these groups into eligibility for the scheme
it would be necessary to set a separate income and asset test
for those who do not qualify through 'passporting' but think they
have income and assets low enough to qualify … A separate
income and asset test would detract from the simplicity of 'passporting'
and may act as a further barrier to helping individuals on low
incomes to save. It would also not be possible to put the necessary
computer systems in place to do this in time for the introduction
of the scheme in 2010.[284]
The Chancellor of the Exchequer did not rule out
the possible extension of the Saving Gateway.[285]
We believe
that, should the Saving Gateway be extended in future, the first
priority should be to extend eligibility to those who would qualify
initially in terms of income, but are not in receipt of a qualifying
benefit or tax credit. The initial availability of the Saving
Gateway only to those claiming qualifying benefits and tax credits
reinforces the importance of Government efforts to increase take-up
of tax credits to which we referred earlier. We recommend accordingly
that the Government consider measures to link promotion of the
Saving Gateway with the wider promotion of the availability of
tax credits.
77. Mr Chote raised the concern that the Saving Gateway
might not attract net new saving among the target group if financial
providers offered to lend people money to invest in a Saving Gateway
account:
There is obviously this issue that they have to deal
with in terms of rolling this out in that how do they stop people
effectively borrowing, they go along to a financial provider who
says, 'Fine, we will lend you the money and you can then go and
get the match for this and you can pay us back, you are better
off and we are better off', but that is not achieving what the
Government wants to.[286]
We recommend that the Government
set out, in its response to our Report, its proposed methods for
ensuring that Saving Gateway does not operate so as to provide
incentives for financial providers, particularly unregulated financial
providers, to lend money at high interest rates to encourage those
eligible simply to borrow in order to save in Saving Gateway accounts.
78. The Government proposes that providers of Saving
Gateway accounts should pay a return on balances held by savers.
This return will generally be in the form of interest, although
credit unions offering Saving Gateway accounts may pay a dividend
unless our recommendation that credit unions be able to pay interest
has been implemented by 2010.[287]
Treasury officials confirmed that it was currently envisaged that
interest payments would be taxable, while pointing out that many
of those eligible would be below the tax threshold.[288]
The Chancellor of the Exchequer indicated that he would keep the
taxation of interest on Saving Gateway accounts under review,
while pointing out that the Government would be supporting those
accounts through matching.[289]
Although
we accept that many of those with Saving Gateway accounts will
not required to pay tax on the interest earned, we believe that
both the simplicity of operation and the appeal of the Saving
Gateway would be assisted if it were offered on a tax-free basis.
To assist the public debate on this matter, we recommend that,
alongside the cost estimates that we have previously called for,
the Government set out its forecasts of the total tax receipts
from interest on Saving Gateway accounts.
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