Lifetime ISA's should be scrapped and households given help with mounting debt, say MPs

Report also highlights growing concerns about self-employed people who have not been brought into workplace pension saving

Vicky Shaw
Thursday 26 July 2018 00:03 BST
Rachel Reeves, chair of the Commons business committee called on the City watchdog to investigate the payday lender
Rachel Reeves, chair of the Commons business committee called on the City watchdog to investigate the payday lender

Hard-pressed households need stronger action to help them deal with debts and save for a rainy day and a pension, MPs have urged.

The Treasury Committee also called for the Lifetime ISA to be scrapped due to its “perverse incentives and complexity”.

Lifetime ISAs allow people to save for their first home or their pension in one pot. But concerns have previously been raised that if people are saving for later life into a Lifetime ISA, it could discourage them from saving into a workplace pension, where they get the benefit of employer contributions into their pot.

Critics have also argued that a home and a pension are two very different savings goals.

The committee said: “This inquiry has received strong criticism of the Lifetime ISA over its complexity, its perverse incentives, its lack of complementarity with the pensions saving landscape and its apparent lack of popularity with the industry and pension savers.

“The Government should abolish it.”

The committee's wide-ranging report said UK households are facing a series of challenges “that are putting the health and sustainability of their finances under pressure”, including pressures from weak income growth, the growth of the gig economy and self-employment and an ageing population.

It said the Government's principal savings incentive takes the form of tax relief on interest, mainly through ISAs.

The committee continued: “Yet there is little evidence that tax relief is an effective way of encouraging potentially vulnerable households to save for a rainy day.

“There is, however, more evidence that cash bonuses and direct matching schemes, such as the Help to Save scheme, are better at helping people build a precautionary savings buffer.

“The Government should update Parliament on the usage of such schemes and its efforts to increase take-up. It should also consider widening the eligibility criteria.”

Looking at people's debt burdens, it said the debt collection practices of public authorities have been described as “worst in class”, with debts often pursued over-zealously and with routine recourse to bailiffs.

It said: “This approach risks driving the most financially vulnerable people into further difficulty.

“The public sector should raise its standards to the level of industry best practice.”

Looking at pension saving, the committee highlighted a previous review which found there are still 12 million people in the UK who are not saving enough for their retirement. This is creating a “looming crisis”, it said.

It also highlighted growing concerns about self-employed people who have not been brought into workplace pension saving under automatic enrolment.

The committee said: “There is, therefore, an urgent need to bring the self-employed into the auto-enrolment system, but the Government has no clear strategy or timetable for doing so.

“The Government should consider making use of self-assessment and national insurance contributions to auto-enrol the self-employed.”

In the next Budget, the Treasury should report on the state of household finances, identify the key risks to the financial resilience of households, and set out its strategy for tackling them, the committee said.

Nicky Morgan, who chairs the Treasury Committee, said: “Many households are facing challenges that are putting pressure on the health and sustainability of their finances.

“Over-indebtedness, lack of rainy day savings and insufficient pension savings are some of the weaknesses in the household balance sheet identified in this inquiry.

“The committee's report makes a series of recommendations for the Government to consider that would help households ensure that their finances are as resilient as possible.

“Whilst financial service regulators and guidance bodies have important roles to play, the Government should not pass the buck to them.”

Phil Andrew, chief executive of StepChange Debt Charity, who gave oral evidence to the Committee as part of its enquiry, said: “The Committee’s report shows a clear understanding of the debt landscape, a keen awareness of where problems lie, and a robust identification of who has the power to solve them. In many cases, it is the government who needs to take action.

"We agree wholeheartedly with the conclusion that the breathing space scheme should include non-credit arrears and with the Committee’s incisive comments on how the over-zealous approach to enforcing government debt, including the routine recourse to bailiffs, should be addressed.

"We look forward to working constructively with policymakers to help them address the problems set out so cogently in the report.”

Labour to propose cap on credit card interest to protect Britons trapped in debt spiral

Citizens Advice said it has seen a more than 25 per cent rise in bailiff problems since 2014 and helped 42,000 people with 98,000 issues last year.

Chief executive Gillian Guy said: “The Government must now show it's taking the issue seriously.”

Helen Morrissey, pension specialist at Royal London said: “We have been concerned about the impact the Lifetime ISA could have on pension savings.

“There is a temptation that people would opt out of their workplace pension altogether as they prioritise saving for a house deposit in a [Lifetime ISA].”

A Treasury spokesperson said: “People deserve choice and freedom in how they save, and the Lifetime ISA does just that. It is an effective way to help people get on the housing ladder or save towards their retirement.

“For every £100 saved, we give a generous £25 bonus, and so far, around £130m worth of bonuses have been paid to 170,000 investors.”

A Local Government Association spokesman said: “Before councils use bailiffs, which should only ever be used as a last resort, people will have been encouraged to apply for monetary support and efforts will have been made to either attach the debt to a salary or arrange new payment plans.”


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