A springboard for saving: meet the new green shield stamps

Lost amid the sound and fury surrounding VAT cuts and tax rises last week was the unveiling of Gateway – a government incentive scheme designed to encourage low-income groups to make more financial provision for themselves. Julian Knight reports
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The pre-Budget report was a return to the politics of the rich and poor, the haves and the have nots, with Chancellor Alistair Darling putting himself firmly on the side of the less well off.

Personal allowance rises were announced to benefit basic-rate taxpayers – many of whom were stung by the earlier scrapping of the 10p tax band by the Government – and VAT was cut by 2.5 per cent, although only temporarily. Meanwhile, the other side of Mr Darling's Robin Hood act was pulled off through the introduction of a new 45p rate of tax for high earners, to be introduced in 2010.

But another, little commented upon plank of the government scheme to shore up the finances of the less well off was the confirmation that the long-heralded Saving Gateway will start in 2010.

The idea behind the Gateway is simple: the Government will top up the savings accounts of low-income Britons to the tune of 50p for each pound saved, to a maximum of £300 a year. Therefore, save £600 in the account and you will receive an additional £300 top-up. Gateway accounts will be available through post offices, credit unions and participating banks and building societies.

However, the accounts will only run for two years, so the maximum cash the individual will receive in terms of a top-up is £600. That said, the accounts will pay interest, so savers will be earning on what they pay in as well as on the government top-up. Once the two years are up, savers should be able to roll their pot into a tax-free cash individual savings account (ISA).

The new accounts will be open to savers who are in receipt of any of the following: working tax credits, child tax credits paid at the maximum rate, income support, incapacity benefit and jobseekers allowance. An estimated eight million Britons will be entitled to open a Gateway deal.

The Government says it wants to get low-income Britons into the habit of saving, and considering its estimate that 12 million people aren't putting by anywhere near enough money for their retirement, it's a move not before time.

"Low-income households want to save but they need the framework in which to do it," says Mark Lyonette, chief executive of the Association of British Credit Unions. "Saving Gateway will allow payroll deduction and will be easy to pay into. Research shows that if you get someone into the habit of saving, they stay with it for the long term. It's getting that initial entry point which is the challenge.

"A generation or so ago, low-income people had locally sold savings plans and green shield stamps – that was their entry point. Now we'll have Saving Gateway."

Mr Lyonette adds that the money saved is likely to be used as a cushion against unexpected expenses. "Having a rainy-day fund – however small – can be a massive confidence boost. You have something behind you. What if the washing machine breaks or you get an unexpectedly high bill? Savings are vital."

Debt charities and consumer groups hope that if Saving Gateway catches on, it will squeeze some of the doorstep loan providers out of economically deprived estates, where they can charge interest rates in excess of 100 per cent a year.

And it isn't just the traditional low-income groups that may benefit from the Gateway. People who are currently employed but subsequently made redundant in the coming recession should be able to sign up for the scheme and receive the savings top-up. "Those who find themselves out of work and in receipt of jobseekers allowance will be able to join the Gateway for two years. They will remain a member of the Gateway even if they find a job soon after being in receipt of jobseekers allowance," says Robin Williamson, technical director at the Low Incomes Tax Reform Group.

But outside the Gateway initiative, the pre-Budget report was greeted with a mixture of disappointment and even open hostility as far as encouraging savings was concerned. The annual ISA limit, for instance, was kept at £7,200, which drew critics' fire: "This was an appalling Budget for savers," says Erfan Hussain from the Association of British Insurers. "We have got into this economic mess because of too much debt and not enough saving, and what does the Government do? Leave the main savings vehicle where it is," he added. The ABI had called for the ISA limit to be raised to £10,800 a year to boost saving.

In addition, the Chancellor chose to keep in place the anomaly that allows people to transfer funds from a mini cash ISA into a stocks and shares ISA but not vice-versa. In these volatile times for investors, this has left many experts scratching their heads. "Why does the Government persist with this rule?" asks Colin Jackson, director of independent financial advice firm Baronworth. "If they would allow people to move their money freely between cash and shares and back again, it would do a huge amount to underpin small investor confidence.

"I know many of my clients would welcome the idea of being free to move their money between cash and shares but able as well to preserve the ISA's tax-free status," he adds.

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