Low-paid workers who put money away in a new savings scheme will be rewarded with a bonus of up to £1,200, Prime Minister David Cameron has announced.
The Help to Save accounts will be open within two years to around 3.5 million workers who receive working tax credits or 'universal credit', the umbrella term for five other benefits.
The scheme will see those eligible able to save up to £50 a month and receive a bonus of 50% – a maximum of £600 – after two years. Savers can continue to use the scheme for a further two years and earn up to another £600.
It will be introduced no later than April 2018.
Chancellor George Osborne says: "This government is determined to improve the life chances of the poorest in our society and our new Help to Save scheme will mean millions of low income savers across the country could now receive a government bonus of up to £1,200 to help them build up their savings."
Minimum wage hike
Nearly 500,000 young workers are also to be given a pay hike of around £450 on average under changes to the national minimum wage. This comes as part of measures to boost the life chances of the poorest.
The minimum wage is rising by 25p an hour for 21- to 24-year-olds, taking the rate to £6.95, and by the same amount for 18- to 20-year-olds, putting their pay at £5.55 an hour. The rate will increase from £3.87 to £4 an hour for under-18s and apprentices will be given a 10p hourly rise, taking them to £3.40.
'Help to Save must be accompanied by strong guidance'
Martin Lewis, founder of MoneySavingExpert.com, says: "Encouraging people to save is a good thing, however there is a risk 'Help to Save' could substantially mis-prioritize people's finances.
"Already, many people make the mistake of trying to save when they are in debt, and yet the cost of debt for most usually vastly outweighs the gain of saving. 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.
"If you've £1,000 on a credit card, which can be up to 30% interest a year, paying it off with your savings that earn you less than 1% is very beneficial, but people often try to do both. In fact, the right move is to pay back the credit card with your savings and only then try to save. If an emergency happens in the meantime, in the worst case you borrow back from the credit card, leaving you no worse off than where you started.
"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. So, 'Help to Save' must be accompanied by strong guidance of who should and shouldn't do it – rather than a blanket encouragement."
How much can you save?
You can save up to £50 a month for two years and the Government will offer a 50% bonus, up to a £600 maximum. Account holders can then choose to continue saving under the scheme for another two years and receive another £600 bonus. In total you can save £3,600 in four years, with up to £1,200 coming from the government bonus.
It's not clear at this stage whether you'll need to save in a special Help to Save account or whether you'll be able to do so in a standard savings account. We'll update this story once we have a definitive answer.
What is the minimum earnings requirement to qualify?
You must either be in receipt of working tax credits or 'universal credit', with a household income equivalent to working at least 16 hours a week at the national minimum wage of £7.20 (from April 2016). This equates to at least £6,365 for 2017/18.
'Universal credit' is a single benefit, being rolled out in stages, which will replace six existing benefits: jobseeker's allowance, housing benefit, working tax credit, child tax credit, employment and support allowance, and income support.
What if my circumstances change?
If you qualify initially but then get a new job during the period, which means you no longer qualify, you are still allowed to complete the whole scheme, save the maximum amount and get the maximum government contribution.
Will I be able to access the savings?
Yes, the Government has confirmed that people will be able to make withdrawals if they have money in the account that is urgently required, and there will be no restrictions over how Help to Save funds can be used.
'Extra support for hard-working people'
Mr Cameron says: "I've made it the mission of this government to transform life chances across the country.
"That means giving hard-working people the extra support they need to fulfil their potential.
"And that's what these new measures will achieve – helping someone start a savings fund to get them through difficult times, giving people on low incomes a pay rise and making sure teenagers have the experience and networks to succeed."
However, shadow work and pensions secretary Owen Smith dismissed the savings scheme, claiming that benefits cuts will mean families will struggle to make ends meet. He said: "This is like stealing someone's car and offering them a lift to the bus stop."
Additional reporting by the Press Association.