A former pensions minister has has warned that the government’s ‘help to save’ scheme could be the wrong choice for low-paid workers compared with saving through a workplace pension and could lead to accusations of mis-selling.
Steve Webb, the former Liberal Democrat MP who was pensions minister during the recent coalition government, is now Royal London’s director of policy. He pointed out that with a contribution to a pension you may get a matching contribution from your employer, often on a pound-for-pound basis; this compares with the 50p per pound top-up under the government scheme after two years; many large employers offer to match pension contributions made by their workers.
You also get tax relief on pension contributions, saving 20p in the pound for a standard rate taxpayer; there is no indication of tax relief on contributions into ‘help to save’. Pension saving eventually leads to a 25% tax free lump sum, unlike other forms of saving;
In addition, your Universal Credit is boosted when you increase your pension saving (because your disposable income has fallen); it is not clear yet if contributions into ‘help to save’ will boost Universal Credit.
Webb pointed out that while it is true that pension savings are ‘locked up’, whilst ‘help to save’ cash is accessible, older workers can access their capital from the age of 55 so may want to think particularly carefully whether ‘help to save’ would be the best option for them.
Webb said: “It is welcome that the government is looking to encourage people to save, but it needs to be careful that people are not incentivised to make the wrong choice with their money. Money put into a pension often attracts a matching contribution from an employer plus a tax relief contribution from the government and can entitle you to higher tax credits.
“While both short-term and long-term savings are important, low-paid workers with spare cash should think very carefully before assuming that the ‘help to save’ scheme is the best deal for their money. It would be unfortunate if this initiative turned into a new mis-selling scandal, with workers discovering they could have got a better deal from a pension.”
