Press Story

New 'junior ISAs' (Individual Saving Accounts for under 18s) can be opened from tomorrow (Tues 1 Nov) but the think tank that first recommended Child Trust Funds is questioning whether they will be effective in getting families to build assets for children of low-to-middle income earners.

A new IPPR report, published today, analyses why the Child Trust Fund and Savings Gateway were so easy for the Coalition Government to abolish within weeks of taking office last year. It says Labour failed to popularise its 'asset-based welfare agenda' and was too timid in using savings vehicles to reform the welfare state or boost the savings ratio. The report also argues that key elements of the Child Trust Fund are absent in the Junior ISAs that are now replacing them and that without better savings vehicles too many low-to-middle income earners may continue to have inadequate savings.

IPPR analysis of official statistics shows that over half of households in the UK have inadequate savings and that half of low-to-middle earner families have less than one month's gross income in savings. Since 1970 the UK's saving ratio has averaged 7.5 per cent, but between 1995 and 2007 it declined to 'just 2.6 per cent. In the second quarter of 2011 it was back up to 7.4 per cent.

With the Office for Budget Responsibility forecasting a decline in household saving, IPPR argues that now is the time to create a new 'Lifetime Bonus Savings Account' that will boost saving by low-to-middle income earners.

Nick Pearce, IPPR Director, said:

"Child Trust Funds were a bold attempt to ensure that all young people, whatever their background, could start adult life with nest egg. But Labour failed to make Child Trust Funds popular or to persuade the public that they should be a permanent fixture in Britain, even in times of austerity. Only time will tell whether the new Junior ISAs are going to work, but because the Government will not provide an initial voucher to kick start the account, many low-to-middle earner families may not feel they can afford to open one.

"Evidence shows that the current tax relief given to higher income earners could be withdrawn without reducing their propensity to save. Instead, these funds could be used to increase saving by low-to-middle income families and boost aggregate saving to improve the UK's saving ratio at no extra cost to the Government. With the OBR predicting a rise in household debt, now is the time to introduce bold plans for helping people save and build assets for their families and future generations."

Notes to Editors

IPPR's new report - Asset stripping: Child Trust Funds and the demise of the assets agenda - is available in advance on request from the IPPR press office and will be available to down load from http://bit.ly/IPPR8135

IPPR's previously published report - Designing a Life-Course Savings Account: How to help low-to-middle income families save more - is available from:

http://www.ippr.org/publications/55/1839/designing-a-life-course-savings-account-how-to-help-low-to-middle-income-families-save-more

From tomorrow (Tues 1 Nov) a Junior ISA can only be opened for children (UK residents) who weren't eligible for a Child Trust Fund account:

Children born on or after 03 January 2011
Under 18's born before 01 September 2002 (with no Child Trust Fund)
Children born between 1 September 2002 and 2 January 2011 who missed out on a Child Trust Fund

There will be a total yearly limit of £3,600 for all payments into Junior ISAs. There is a £10,680 annual ISA investment limit.

Child Trust Funds gave every child £250 at birth and a further £250 at the age of seven (£500 for the poorest families and disabled children), costing the Government just £500m a year. Up to £1,200 a year could be invested tax free.

ISAs replaced TESSAs in 1999.

IPPR used workshops with low-to-middle income earners to design the optimum universal deposit account which would feature a Government kite-mark and a full Government guarantee. IPPR's report argues that the Government should work with supermarkets to encourage them to offer accounts so that deposits can be made at supermarket tills.

IPPR recommends that the Government pay an annual 'bonus' into accounts on a sliding scale, dependent on the average balance held in the account over the preceding three years, up to a maximum of £183.33:

On the first £1,000 = £1 for every £10 (i.e. a maximum of £100)
On the second £1,000 = £1 for every £20 (i.e. a maximum of £50)
On the third £1,000 = £1 for every £30 (i.e. a maximum of £33.33)
Amounts above £3,000 = Nothing

Thus, an account with an average balance of £3,000 (or more) would receive a bonus of £183.33. But IPPR argues that only four withdrawals a year should be allowed before this bonus is lost, to encourage people not just to save but also to retain savings in their account. Savings in the account should be exempt when it comes to asset tests for welfare benefits, including the proposed Universal Credit, with a cap on the size of the account at £10,000.

If 15 million people open Lifetime Bonus Savings Accounts (roughly the number of people opening ISAs at present) and they all have a balance of £3,000 or more, the total cost to the government would be about £2.75 billion. Tax relief on ISAs costs the Treasury an estimated £1.6bn in 2009-10.

Some financial advisers recommend households build up a store of readily-available savings equivalent to at least three months of income before they consider other forms of investment. On this basis, over half of households in the UK have inadequate savings.

Latest figures, from the Family Resources Survey, show that only 31 per cent of families with a weekly income below £600 have an ISA and only 37 per cent have any other bank or building society account. For families with a weekly income below £400, these figures drop to 27 and 33 per cent, and for those with a weekly income below £200 they are 24 and 31 per cent. Almost half (44 per cent )of families with a weekly income below £200 have no savings at all, while another 16 per cent have savings of less than £1,500. Comparable figures for those households with a weekly income of between £200 and £400 are 39 per cent and 18 per cent. Two in five families with an annual income below £20,000 have no savings and another one in five have savings of less than £1,500.

More than half (52 per cent) of low-to-middle earner families (people of working age with below median incomes who receive less than one-fifth of their gross household income in the form of means-tested benefits) have savings equivalent to less than one month's gross income and a further 15 per cent have savings equivalent to between one and two months' gross income.

The Government has said that it would like to see a higher savings ratio as part of the rebalancing of the economy away from debt-financed consumer and government spending and towards exports and business investment. But the Office for Budget Responsibility forecasts, published alongside the recent budget, show a decline in saving over the next few years, so that the saving ratio falls to 3.4 per cent.

The saving ratio is calculated as the difference between household income and household spending, expressed as a proportion of income. Since 1970 the UK's saving ratio has averaged 7.5 per cent, but between 1995 and 2007 it declined to 'just 2.6 per cent. In the second quarter of 2011 it was back up to 7.4 per cent.

Contacts

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

Tim Finch, 07595 920899, t.finch@ippr.org