Help to Save risks encouraging people to save before they have paid off debts, experts warn

Martin Lewis said that many people make the mistake of trying to save when they are in debt

Camilla, Duchess of Cornwall, speaks with money saving expert Martin Lewis during her reception to mark International Credit Union Day at Clarence House (Getty)

Experts have warned that a Government scheme designed to encourage low earners to save could tempt those in debt to try and put money aside instead of paying off their loans, making them worse off in the long term.

Under the Government's Help To Save scheme, anyone in work and in receipt of Universal Credit or Working Tax Credit will get a 50 per cent bonus if they save up to £50 a month, worth up to £600. Account holders can then choose to keep the savings scheme going for another two years and get another £600 bonus.

While savers can choose to take their money out at any time, they only get their bonus after two years, squeezing the incomes of those who already rely on Government benefits to get by.

Martin Lewis, founder of Moneysavingexpert.com, said that Help to Save must come with Government guidance about who should and shouldn't do it.

“My worry with ‘Help to Save’ – especially because of the long delay before people get the bonus – is that people may start to think that everyone should put aside money each month, when the truth is for many with expensive debts, especially payday loans, that’s a bad idea," he said.

Lewis said that many people make the mistake of trying to save when they are in debt, even though for most the cost of debt outweighs the gain of saving.

For example, a £1,000 debt on a credit card can cost 30 per cent interest a year. Paying that debt off with savings that earn less than 1 per cent interest is better than accruing more interest to pay on the debt, Lewis said. If an emergency happens in the meantime, the money can be borrowed back off the credit card, leaving the borrower no worse off than they were in the first place.

"In a perfect world, everyone would have savings for at least six months’ worth of bills put aside in case of emergency – but we don’t live in a perfect world," Lewis said.

Owen Smith MP, Labour’s shadow work and pensions secretary said the scheme was “like stealing someone’s car and offering them a lift to the bus stop” because it comes at a time when the Conservative Government are making huge cuts to benefits for the lowest earners.

Smith said that Universal Credit will take £1,600 a year from over 2 million low-income families, with some families up to £3,000 a year worse off, meaning many will struggle more to get by, let alone have the money to save.

“These cuts will mean families are going to struggle to have enough money to make it to the end of the week, let alone save for the future. If the Tories were serious about supporting low and middle paid workers in the Budget they would listen to Labour’s calls to fully reverse the Universal Credit cuts,” he said.