Press Story

Only a fraction of the 800,000 children who would have had Child Trust Funds opened for them last year have benefited from the replacement Junior ISAs scheme, according to a new report from the think tank IPPR. Just 71,000 were opened in the first five months after they were launched and, at this rate, just 170,000 will be opened in the first year of their operation.

The report raises concern that, while there are no official figures yet on who is opening Junior ISAs, it is likely that take up has been especially low among people with below median incomes. The report concludes that Junior ISAs, like their adult counterparts, are turning out to be "a regressive tax break for the relatively well-off".

As well as parental saving for children, the report analyses savings habits of young people, aged under 30 on less-than-median incomes. It shows that 71 per cent of these young people do not have enough 'rainy day' savings in the bank in case of a financial emergency such as a sudden loss of income or redundancy. The report says this is particularly a problem for young people from low-income backgrounds, who cannot rely on "the Bank of Mum and Dad".

Young people blame recent rises in living costs as the main reason why they don't save. They also cite the 'spend, spend, spend' culture in combination with low returns on savings accounts factors that discouraged them from saving, with 62 per cent saying the main reason they do not save is because they can't afford to. Although young people expressed a desire to save more for a 'rainy day', IPPR found that they tended to consider saving only if they have money left over at the end of the month, rather than aiming to save from the outset.

Tony Dolphin, IPPR Chief Economist, said:

"Politicians need to do more to improve young people's financial resilience. Saving habits are ingrained early, and today's young people are unlikely to fulfil their aspirations of home-ownership and financial independence without actively prioritising saving. Children should be given practical and effective lessons in managing their finances from a young age.

"The Child Trust Fund was successful in encouraging families from all income backgrounds to save for and with their children. The Junior ISA offers a regressive incentive to save, like adult ISAs, and are unlikely to be effective in encouraging low-earning families and those who most need savings to put money aside for a rainy day. The government should seed a Junior ISAs with at least £500 for children from low-income families. The money to do this could be found by cutting back tax breaks on savings for the wealthy."

In order to encourage young people to prioritise long-term saving, IPPR recommends:

Asset-based welfare policies - The Child Trust Fund was seeded by government funds and only cost £500 million each year. The government should seed the Junior ISAs with cash, at least for children from low-income families. In the longer-term and more generally, it should try to build public support for asset-based welfare.

New kinds of savings accounts - There is appetite for a new type of savings account among both young people on lower incomes and financial service providers. Such a savings account would offer easy access, particularly when making deposits (for example at supermarket tills); a 'kite-mark' on the account as a government guarantee and to avoid the need for excessive paperwork when opening the account; and the incentive of partial matching of savings (rather than a tax break) by the government.

Changing the culture around saving - Financial education should be taught much more effectively in schools and colleges so that no young person enters the labour market without a working knowledge of types of financial products, the benefits of saving, and budgeting skills. Additionally, the Money Advice Service should spearhead a campaign to encourage people to save more. And financial providers should take a more proactive approach to encouraging saving by young people.

Reforming the Social Fund - For those young people facing a real emergency and with no possible source of funds to fall back on, the Social Fund can be a vital lifeline. When responsibility for disbursing crisis loans is transferred to local authorities next year, they should be required to ensure than levels of provision do not fall. But they should require young people getting a loan to participate in coaching that will reduce the risk of them needing similar help again in the future.

Notes to Editors:

IPPR's new report - Young People and Saving - will be available to download on Monday 12 November 2012 from: http://bit.ly/IPPR9849

IPPR's report, Young people and savings: Polling results, is available to download from http://ippr.org/publication/55/8650/young-people-and-savings-polling-results

Contact:

Richard Darlington, 07525 481 602 r.darlington@ippr.org