Press Story

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.

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

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. The 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 (ie a maximum of £100)
On the second £1,000 = £1 for every £20 (ie a maximum of £50)
On the third £1,000 = £1 for every £30 (ie 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.

Nick Pearce, IPPR Director, said:

'Our research shows that people on low-to-middle incomes want simple savings accounts with few terms and conditions, little in the way of small print and paying an easily understandable reward.
'The current tax relief given to higher-income earners could be withdrawn without reducing their propensity to save.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.'

Notes to editors

IPPR's work on designing a savings account for low and middle income families was supported by the Friends Provident Foundation.

ISAs replaced TESSAs in 1999.

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 £1.6 billion 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 in the UK, but between 1995 and 2008 it declined steadily from 10.3 per cent to just 2 per cent. In the final quarter of 2010 it was back up to 5.4 per cent.

IPPR conducted four deliberative workshops, held with a total of 67 people on low-to-middle incomes, to gauge their attitudes to saving and to draw out the features that make savings products attractive to them. As part of the workshops, participants were asked to design their own life-course savings accounts.

Contacts

Richard Darlington: 07525 481 602 / r.darlington@ippr.org

Tim Finch: 07595 920899 / t.finch@ippr.org