Lifetime ISA and Help to Save applicants need guidance, Martin tells MPs

The MoneySavingExpert.com founder was appearing before a committee of MPs to give evidence on the Savings (Government Contributions) Bill currently going through Parliament.

The bill will introduce two new Government-backed savings products: the Help to Save account and the Lifetime ISA.

Martin said he welcomed both products when they were targeted at the right people, but cautioned MPs: "There are certain dangers of mis-prioritising your finances.

"With the Lifetime ISA it's wrongly opting out of auto-enrolment pensions and putting your money into a Lifetime ISA instead. With Help to Save it's not paying off your expensive debts and saving, when you should be paying them off."

He told the committee only basic-rate self-employed taxpayers would be better off using a Lifetime ISA instead of a pension, and urged that those applying for Lifetime ISAs be asked whether they are an employee with access to an auto-enrolment pension.

Applicants could then be given information about how pensions are generally better than Lifetime ISAs, he suggested.

And Martin also said those applying for a Help to Save account should be asked about whether they have expensive debts such as payday loans. Those with such debts should be advised that it's generally better to pay them off before they begin saving, he added.

"That's my biggest caution to you today," he told MPs. "Just make sure people know when it's not right for them."

During the session Martin also spoke about transitional arrangements for people with Help to Buy ISAs who want to transfer them to a Lifetime ISA when the latter scheme opens next year.

He pointed out that while those with Help to Buy ISAs can access their money at any time, Lifetime ISAs are effectively locked for the first year. This could mean those transferring from one to the other could find their ideal home shortly afterwards, only to discover they can't access their money to buy it.

To address this problem, he suggested that the "trigger point" for accessing Lifetime ISA funds be calculated from the date when the original Help to Buy ISA was opened, so that the first-year restriction is bypassed.

He also called for a "pre-arranged one-year review where minor terms can be tweaked to make it a better product" to address unintended consequences such as this, and others yet to be discovered.

However he condemned members of the investments industry who'd attacked the new products for being too complex, labelling their argument "a complete load of palpable balderdash".

Speaking more generally about the savings landscape, Martin said: "Savings in the UK are in a crisis that we have never seen before. The honest truth is [these products] will encourage some, but not many. There are big issues in the savings market but this won't fix them. This will help some people."

What is Help to Save?

Help to Save is a Government scheme aimed at encouraging low earners to save. It will open by April 2018.

Eligible savers will be able to open a Help to Save account with an approved provider and save up to £50 a month for two years. The state then tops this up with a 50% bonus of up to £600.

When the two-year period is up, account holders can commit to another two years of saving and claim an additional bonus of up to £600 – meaning they get a total of £1,200 in free cash.

Who can open a Help to Save account?

To open one of these accounts, you'll need to either:

• Be in receipt of universal credit and have a household income equivalent to working at least 16 hours a week at the national minimum wage (currently £7.20). This equates to earning at least £6,365 in 2017/18.

• OR be in receipt of working tax credits.

What's the Lifetime ISA?

Launching in April 2017, this is another new savings scheme introduced by the Government. You'll be able to save up to £4,000 a year into the Lifetime ISA (LISA), either as a lump sum or by putting in cash when you can.

The state will add a 25% bonus on top every year (up to a maximum of £1,000/year) until you reach 50.

The money can be used either towards a first home worth under £450,000, or – once you're over 60 – towards retirement. Withdraw it for any other reason and you'll pay a 25% penalty on the amount withdrawn.

For more information on how it works and who benefits, see our LISA guide.

Who can open a LISA?

This one's simple – you must be at least 18 but under 40 when you open one. However, those with the account will be able to continue saving and earning the 25% bonus until the age of 50. Unlike Help to Save accounts, LISAs aren't means-tested.