Citizenship and economic and social development

For the horizontal axis of our two-dimensional framework we use Prabhakar’s distinction of the analysis of asset-based welfare policies between ‘citizenship’ and ‘social policy’ (Prabhakar, Reference Prabhakar2008). Prabhakar characterises ‘citizenship’ as (ibid: p.21) rights-based claims to a share of national capital through a variety of proposed mechanisms, such as capital grants (Ackerman and Alstott, Reference Ackerman and Alstott1999; Le Grand and Nissan, Reference Le Grand and Nissan2000; Ackerman et al., Reference Ackerman, Alstott and van Parijs2005), or as sabbatical accounts (Offe, Reference Offe2000; Supiot, Reference Supiot2001), and, primarily, although not necessarily exclusively, on a universal basis. These could also include, for example, supporting the principle of seeking to provide more equal starts in life (Prabhakar, Reference Prabhakar2008: 10) or may aid development of ‘individual character and responsibility’ (Prabhakar, Reference Prabhakar2008: 3) – the so-called ’asset-effect’ (Sherraden, Reference Sherraden1991). The sentiment of the latter was expressed by the former Labour Home Secretary, David Blunkett, as a means of giving individuals a ‘material stake in society… to care about what happens in the community around them’ (Blunkett, Reference Blunkett2001: 34). Such schemes have been proposed in various places around the world: including, for example, in Australia in the form of Matched Savings Accounts by the Leader of the Opposition Mark Latham (Latham, Reference Latham, Kober and Paxton2002).

In contrast, ‘social policy’ is characterised by Prabhakar in terms of policies designed to expressly ‘connect asset-ownership to economic and social development’ (Prabhakar, Reference Prabhakar2008: 1) to smooth future (sometimes very specific) consumption, reducing future reliance on the state in the process. Prabhakar argues that use-limitations built into such schemes may aid political engagement and public support for such saving strategies (Prabhakar, Reference Prabhakar2008: 18) but are in direct contrast to the universalist principles of citizenship motivated schemes.

We therefore treat this normative motivation as an alternative dimension to citizenship in our framework and title it ‘economic and social development’ (ESD). This clarifies a distinction in motive, between a pragmatic universalism and a more value-based universalism. ESD also avoids potential confusion with the more general and everyday use of ‘social policy’.

An example of an ESD scheme outside of the UK is the US Individual Development Accounts (IDAs) proposed by Sherraden (Reference Sherraden1991, Reference Sherraden2002, Reference Sherraden2017) which were provided in various forms to support specific development goals of government (e.g. enhancing access to non-compulsory education, starting a business or saving to put a deposit on a home) (Rohe et al., Reference Rohe, Key, Grinstein-Weiss, Schreiner and Sherraden2017). Similar schemes have been proposed in other countries such as in New Zealand under Prime Minister Helen Clark – in this case related to home ownership saving and tertiary education (Clark, Reference Clark2005). We treat these as ESD rather ‘citizenship’ schemes because of their use-restrictions, though in some respects they may represent a hybrid combination of both citizenship and ESD.

Positioning specific savings schemes mid-point between these extremes indicates the degree to which a policy may contain elements of both of these traits.

Distributive impact

The vertical axis in our framework maps the extent to which a savings scheme provides relative benefit to those on higher or lower incomes. Our criteria used for this purpose focuses on the economic characteristics of proposed beneficiaries. Specifically, it enables us to highlight the degree to which specific saving schemes can be said to be targeted at those on lower incomes – or where they may more benefit those on higher incomes who can save more.

Combining these dimensions produces a six-section framework as outlined in Figure 1 that we can use to classify specific saving schemes. These can be differentiated horizontally by either the dominant normative purpose being citizenship or economic and social development (in the leftmost and rightmost thirds of the framework) or by an apparent mix of purposes (in the middle third). It is to be noted that horizontal positioning is only into one of these three purposes – this axis is not constructed on a continuum basis.

Figure 1. Comparative Saving Scheme Framework.

The framework is vertically differentiated by likely distributive impact, with positioning on the vertical axis representing a continuum from the top, indicating the very wealthiest are most favoured by a saving scheme, to the bottom, indicating those on the lowest incomes being the primary beneficiaries.

In the next sections we use this framework to analyse recent and current UK personal savings schemes. This will also highlight areas where no schemes currently exist. We then consider whether these gaps need to be addressed by a more balanced saving policy coverage.

Saving Schemes likely to benefit more those on higher incomes

In the UK, since their introduction in 1999, the key form of personal saving scheme provision has been so called Individual Savings Accounts (ISAs). ISAs exist in various forms as ‘wrappers’ to hold cash or shares within, but all have the common feature that they are provided with tax incentives in the form of tax-free returns earned on funds saved. A tax-free return benefits most those with most to save – as the achieved tax-saving rises, so too do both the quantum of the return and the level of tax saved that would have been paid by the saver. In practice therefore, ISAs are likely to mostly benefit those on the highest incomes with the highest marginal rate of tax, as the tax-free status saves them the most. People on the lowest incomes (i.e. below the personal income tax allowance level) will receive no benefit at all as they would have had no tax to pay on these returns anyway.

Figure 2 confirms this proposition. Approximately ninety per cent of those on the highest incomes hold ISAs, compared to less than twenty per cent of those on the lowest incomes. It also confirms that, in terms of the average savings value of total ISA holdings, approximately fifty per cent of those on the highest incomes hold more than £50,000 in these tax free forms; whereas a similar percentage of those on the lowest incomes hold less than £2,500 in total. In 2017-18, 10.8 million ISA schemes were subscribed to and £69 billion was invested into these schemes (HMRC, 2019c).

Figure 2. ISA holdings by income band and average ISA savings value, 2016-17.

Source: HMRC (2019c). Crown copyright.

Adding funds into such accounts is typically easy to do, by automated bank transfer or in branch. However, they do not lend themselves to micro payments and as such are again likely to be more favoured by those with larger sums to contribute. They also have rewards that are often only paid infrequently (sometimes only annually); and they significantly favour those who leave money saved for longer periods, because rewards are computed on sums held each day. Dipping into funds saved (which until 6 April 2016 could then not be replaced) directly affects returns that accrue – a policy that benefits those who can keep sums saved for longer periods.

Taken together, these features of an ISA suggest that, while all have access to these funds in principle, and some at least use them across all income levels (see Figure 2), those who can save longer term and with higher sums are more likely to be motivated most to use such funds (Hilber, Reference Hilber2015).

As such we therefore place ISAs above the mid-point on our vertical axis to illustrate the main beneficiaries of these accounts are those on higher incomes, although not only those on the very highest incomes (see Figure 3).

Figure 3. Relative positioning of ISA schemes, Child Trust Funds and Help to Save scheme using the Saving Scheme Comparative Framework.

In terms of placing ISAs into one of our three normative purposes categories, in their pure form, they have no restrictions on how the savings can be spent. There appears no intention that ISA saving should be regarded as a means of rolling back the welfare state, or as an implied duty to save in these accounts to become independent of the state. As such standard ISA schemes do not fall primarily under our economic and social development category. Yet it also, in practice, represents a political economy that systemically favours wealthier individuals and operates a de facto hierarchy of citizenship-rights; we therefore place ISAs at the centre of our horizontal axis, reflecting an ambiguous normative orientation.

This, however, is not the case for more recent and specialised ISA products. In November 2015, Help-to-Buy ISAs (HtB ISA) were introduced to support first-time buyers’ savings to buy a property. From their launch to September 2019, these schemes have paid out just over 370,000 bonuses (payable when a house purchase completes) with an average bonus value of £966 (HMRC, 2020). A further form of ISAs, called a Lifetime Savings ISA (LISA), was introduced in 2017 for eighteen to forty year olds to help save towards a home or to use to create an asset to draw on in retirement. In 2017, 166,000 LISAs were created receiving £517 million in funds (i.e. creating average pots of £3,114) (HMRC, 2019c).

As these schemes have very specific controls on usage, they exemplify our economic and social development classification of saving schemes and should therefore be placed in the right hand boxes in the framework (see Figure 3).

In terms of vertical placement in our framework, both schemes are clearly targeted at those on middle and higher incomes. Given their very limited eligible use purposes, they are less likely to be accessible to those on lower incomes. However, as they impose age or first-time buyer status limitations, they are likely to be rarely usable by those on the very highest incomes, who are likely to be older and already have held property assets. As such, we can place the HtB ISA and the LISA lower than unrestricted ISAs but suggest they may be comparably vertically placed, given likely similar audiences they will appeal to in similar financial positions.

In 2011 the Coalition Government, introduced another form of ISA account made available only to people under the age of eighteen (operated by adults on their behalf) entitled Junior ISAs (JISA). In 2017-18 607,000 JISAs schemes were subscribed to, receiving £902million between them (HMRC, 2019c).

JISA funds must be held to a maturity date when the account owner reaches eighteen. No initial Government stake is provided into a JISA and as such the citizenship aspect of this scheme was less significant than that of the scheme it replaced (the Child Trust Fund – explored further below), where such a stake had been provided. This scheme is in principle open to anyone under eighteen, but in reality it is not being universally used (there are currently approximately 14 million people in the UK under the age of eighteen, ONS, 2019, so less than five per cent of eligible people hold these accounts) given no initial stake support or other special treatment beyond its tax free growth status, common to all ISAs, and the fact any sums saved cannot be accessed until the saver reaches eighteen. As such, again, a JISA is of value primarily to those on higher incomes who can provide funds for their children that can be tied up, to a limit of eighteen years. Given this long access limit duration compared to instantly accessible savings in a generic ISA, it can therefore be placed vertically higher than generic ISAs: it is only likely to be used by parents already making use of their ISA cap and able to save for their child with surplus income.

Where the JISA differs in principle from HtB ISAs and LISAs, but shares with more generic ISAs, is that we may regard it as an unconditional stake-holding for the child, as it has no use-restrictions, and thus can be said to sit further to the left on our horizontal axis than HtB and LISAs, alongside the similar positioning of ISAs as a mixed purposed saving scheme.

Having explored the upper half of the framework and having discovered that a number of saving schemes appear to favour most those on higher incomes, we can now look at the lower half of the framework: to explore policies designed to focus support on those with lower incomes to establish and grow savings.

Saving schemes likely to benefit more those on lower incomes

The Child Trust Fund (CTF) was an exemplar of a scheme with an explicit citizenship motivation. This savings scheme was announced in 2001, launched in January 2005 and remained open to new accounts until 2011 (Ben-Galim, Reference Ben-Galim2011). The CTF was a universal scheme (with a targeted top-up for lower-income households so included some degree of progressivity): it built an asset for children to own at the age of eighteen, without the need for parents to actively also contribute if they did not choose to so do. Where such contributions were made, however, these funds could grow in the scheme, alongside the initial Government stake, with no tax due (this was unlike savings made by parents for children in the UK at that time, which were subject to tax at the parent’s marginal rate).

No restriction was placed on how sums saved in CTFs were to be spent (and in fact the scheme was criticised for this on its introduction; see Ben-Galim, Reference Ben-Galim2011). On this basis, this scheme can be positioned in our framework in the citizenship column, as it can almost entirely be said to be motivated by universally sharing of national assets, without spend limitations explicitly trying to achieve express economic or social development goals. In this crucial respect the CTF is also different from the standard ISA, which we have argued in practice favours predominately those on higher incomes – so cannot be classed as a predominately citizenship-motivated scheme.

In terms of its vertical positioning in our framework, in this scheme children from families on low incomes were given double the initial endowment (£500 rather than £250) compared to those from higher incomes families, with a further top-up also when the child reached age seven. However, given there is compensation for not benefiting from this larger stake for those who have further contributions made on their behalf (by parents better able to so do), we place the scheme at the just below the mid-point of our framework; see Figure 3.

This section highlights the fact that all current saving schemes (until very recently) were likely to be most benefiting those on higher incomes and entirely economic or social development motivated, or with a mix of motivation to include some citizenship elements. Citizenship does not feature as a predominate motivation for current UK saving schemes since the CTF ceased, and its replacement (JISAs) reverted to a less citizenship focused apparent motivation. In the next section we review the details of the latest saving scheme to be launched in the UK – Help to Save – to explore the extent to which this redresses this very significant imbalance.

Basis of the HtS scheme

HtS was announced in March 2016 following the creation of a majority Conservative Government in May 2015 – a scheme that looks remarkably like the discarded (Labour party) Saving Gateway of just a few years before (Kempson et al., Reference Kempson, McKay and Collard2005; Harvey et al., Reference Harvey, Pettigrew, Madden, Emmerson, Tetlow and Wakefield2007). The scheme was piloted during early 2018 and then launched in September 2018 as a matched saving scheme, targeted at low-income, working, households. The scheme allows for contributions of £1 – £50 per month. Bonuses paid on this scheme are at the generous rate of 50p per £1 contributed, and are payable after two years and then again at the end of year four. This upper contribution cap ensures a limited exposure to costs of paying bonuses to £300 per year per account (i.e. £1,200 over the four-year life of any account).

Only those receiving Universal Credit or Working Tax Credit are eligible to create an HtS account (approximately 3.5 million people). Further, applicants must be working and earning (within their household) at least £529.22 per month to be eligible to open an account (these circumstances do not need to apply throughout the four years but must apply at the point of opening of the account). Those on very low incomes, even if working, therefore cannot benefit from this scheme. As such this scheme can be positioned on our saving policy analytical framework below the horizontal but not at the very lowest level (see Figure 3).

The HtS scheme is mediated through a web or a (smart) mobile phone interface. Physical barriers to take-up have therefore been largely designed out, attempting to make this an easy-to-use proposition for its target audience (who are already required to make use of similar tools as part of their benefit management process); although it may be possible that there are some digital inclusion barriers in select cases. With minimum payments of only £1 allowed, this enables those with only very limited means to be able to participate where such small payments may not typically be welcomed into more traditional savings products. The scheme is therefore very easy to access and use for its target audience, in principle. There are no withdrawal penalties.

Significantly, the design of rewards associated with this scheme marks a key change of approach to traditional market-based savings products – recognising expressly the market failure in this area and the need for different product design to suit lower income savers. Unlike the usual approaches applied to determine the return on savings, as shown to be the case for ISAs above, a bonus for the first two years is paid on the highest amount recorded in the account at any point since the account was opened, not on the daily sums held. Therefore, HtS allows individuals to withdraw previously saved funds without sacrificing the bonus on the amount withdrawn – a feature that supports those on lower incomes who typically may need to draw on their savings more frequently than those on higher incomes may need to. This is likely to mitigate the exclusion potential of a requirement for long-term lock-in of funds, which is likely to be a significant disincentive for many lower-incomes individuals as outlined for usage ISAs above.

Take-up of HtS and auto-enrolment considerations

By February 2020, approximately 163,000 people had opened HtS accounts (Figure 4). Of these live accounts 123,000 had actively been contributed to, saving £51 million between them (i.e. an average of £414 each), representing a value deposited in the month of January of just over £4m, following a pre-Christmas dip in sums saved, and with a rising number of accounts being actively contributed to each month (Figure 4 – HMRC, 2020b).

Figure 4. Total number of open Help to save accounts, monthly accounts receiving a deposit, and value of monthly deposits.

Source: HMRC (2020b). Crown copyright.

Initial take up of the scheme is therefore relatively low – less than five per cent of the 3.5 million eligible participants over the first year, despite a fairly extensive marketing campaign targeted at the eligible audience (HMRC, 2019b). This raises the question of why this scheme has not been more popular, although it seems likely for this target group that one explanation is that they may have very little spare cash to save – even with the generous match to encourage them to do so (Money Advice Service, 2015, 2016; NEST, 2019).

One way of boosting take-up might be to use auto enrolment: as the Centre for Policy Studies (CPS) had previously proposed, citing a rate of eighty-five per cent of the population who are ‘passive savers’, if they save at all (Johnson, Reference Johnson2014: 9). In contrast, the IPPR had not been in favour of auto-enrolment, based on the additional costs and complexity for providers, and the concern that people might regard it as ‘forced saving’ and inappropriate, except in the context of pension provision (Dolphin, Reference Dolphin2011: 20). Another way of boosting take-up might also have been to seed the accounts with initial funds (as with the CTF). However, this would have significantly added to the costs for the government.

A more fundamental issue, of course, is that those on low incomes have very little, if any, spare cash to put into savings, a point made in March 2016 (when HtS was initially announced) by Owen Smith, the shadow work and pensions secretary. Smith used the analogy of stealing someone’s car and then offering them a ride. ^{Footnote 1}

Underlying policy motivation for HtS

The introduction of HtS represented a shift in recent Government policy direction in terms of its targeting of a saving scheme support for those on lower incomes. Our analysis confirms a point made in previous literature (Prabhakar, Reference Prabhakar2008: 18; Johnson, Reference Johnson2014), that it can be a challenge to design a scheme with flexibility for saver use of their accumulated funds (i.e. a citizenship-led motivation for schemes), and perceptions of legitimacy of the use of Government resources to deliver specific economic or societal development goals (i.e. the need for explicit ESD motivations). However, such a challenge is usually only identified when discussing schemes that benefit those on lower incomes. There are rarely any suggestions that funds in standard ISA schemes should be restricted in use.

Examination of withdrawal restrictions is an indicator of the Government’s motivations for this particular scheme, as it moved through its design and implementation phases. Initially the HtS proposal suggested that bonuses would be paid in a similar way to more traditional saving schemes – on the basis of average savings at any point – indicating the dominating motivation may be to encourage prudential behaviour and longer-term planning. This would support placing of HtS in the ESD section of our framework, given this express access limitation (an economic development objective) and behaviour adjustment (social development) desire. However, the version of the HtS scheme implemented allowed for withdrawals at any time; and, in particular, payment of the bonus is now based on the maximum account total at any point, even if those sums were only briefly held in the account. As such HtS, as a live scheme, appears to have included a more explicit citizenship motivation (i.e. where returns are less obviously linked to specific ESD goals) than was initially proposed.

This ‘mixed motivation’ placing of the scheme in our framework (see Figure 3) is supported further by statements made at its launch by John Glen MP, the Economic Secretary to the Treasury. Glen framed HtS in these terms: ‘Whether you’re saving up to take the family on a much-needed holiday, or to take the next step in life, Help to Save is designed to make saving possible for every hardworking person in this country’ (GOV.UK, 2018). This suggests, at that point, key figures in Government expressly overseeing this scheme were happy to present it in at least partial citizenship terms, not just as an ESD motivated scheme.

This feature of the scheme, as being provided without an explicitly defined use motivation, is further illustrated by recent changes to the online HtS tool for managing savers’ accounts. The changes have enabled savers to freely set their own personal savings goals, as specific saving motivators. However, in examining the most recent online materials and adverts for the scheme (for example, HMRC, 2020c) there remains evidence of some express motivation for this scheme of an economic and social development basis, including references to helping savers to create a ‘rainy day fund’ (HMRC, 2020c). We therefore position the HtS scheme as a mixed motivated scheme, having no clearly primary motivation in its design or application – akin therefore to ISAs and JISAs.

In terms of distributional impact, HtS is targeted only at those eligible for in-work benefits. While it therefore does fit into the lower half of the framework, the only current UK personal saving scheme that sits within this half of our framework, it should not be placed at the lowest point on the vertical axis, as it excludes those not in paid work. It also likely favours low-income households with more secure work and stable expenses, as no stake is provided.

Developing Help to Save further

The analysis above suggests a number of questions to ask of the HtS scheme. Firstly, it is not available to those on the lowest income: perhaps because the generous return might encourage people to save rather than spend on necessities, or perhaps to prioritise paying off debts (Lymer, Reference Lymer2020). But this approach reduces the choices (of people on the lowest incomes) and the possibility of benefitting (from this scheme, even if they so wished). The need to limit this scheme to working low income savers is perhaps therefore hard to justify and likely could be changed with little cost to the Government, given the overall low cost of this scheme: HtS is expected to cost the government only £70m over its first two tax years, and only £70m per year by 2020-21 – just 1.4 per cent of the cost of ISAs (Gregory et al., Reference Gregory, Rowlingson and Lymer2017).

There are also issues for this scheme, related to its take-up, that prior studies and practical experience of previous saving policy implementations have demonstrated (Kempson et al., Reference Kempson, McKay and Collard2005 in the case of the UK and Schreiner et al., Reference Schreiner, Sherraden, Clancy, Johnson, Curley, Zhan, Beverly and Grinstein-Weiss2005 in the case of IDAs in the USA); HtS appears to have failed to resolve these, to date (HMRC, 2018, 2020b). All participants need to open their HtS account online. This is an important consideration for some, and ongoing concerns about digital inclusion should not be dismissed (Citizens Advice, 2016; Bulman, Reference Bulman2018). While this has to then be balanced with the desire to allow for small contribution sums to be enabled in both cost and practically effective ways, suggesting automated payment mechanisms will need to be used in at least those circumstances, the ability to open an account other than online may be desirable to grow usage; and it is not clear why, for larger monthly payments, these could not be made in other ways other than only electronically.

This section has outlined the valuable contribution made by the HtS scheme’s introduction in creating a targeted saving scheme for some in the UK on lower incomes – a very important gap in its saving policy portfolio at that point. However, we have sought to highlight several areas of change we suggest would be likely to be achievable to make this scheme better able to support more of those on lower incomes, to establish and grow savings.