Government cash incentive for lower-earning savers

A new scheme to encourage lower-income earners to build up savings through banks and post offices is to be rolled out nationally, the pre-Budget Report has confirmed – but wealthier savers using offshore banks may no longer have their cash protected by the UK government.

The Savings Gateway, a savings scheme for people claiming tax credits or benefits, will launch in 2010 with the government adding 50p to every £1 saved. According to the Treasury, the new accounts – which run for two years and be offered by banks, building societies, credit unions and posit offices - will provide around 8 million people on lower incomes with an additional incentive to save. Anyone receiving Working Tax Credits, Child Tax Credits (at the maximum rate), Income Support, Jobseeker’s Allowance or Incapacity Benefit will be automatically eligible for the scheme.

Details of the maximum monthly contributions allowed are expected next week, when the government publishes its response to a consultation document on previous pilot schemes. In the pilots, run by Halifax between 2002 and 2005, contribution limits of £25 and £50 were tested, and 22,000 people built up more than £15m in savings.

Other building societies now plan to participate. “We’ll look at consultation response and consider it further, but we’re supportive of anything that encourages people to save more,” said a spokeswoman for Nationwide.

But the government has also launched a consultation that could end put an end to its guarantee for UK residents with deposits in offshore banks. In his speech yesterday, the chancellor said the British taxpayer could not the “guarantor of last resort” for depositors in Crown dependencies that attract banking customers with lower tax rates, but don’t contribute to UK tax revenues.

His comments follow the collapse of several foreign-based banks in the Channel Islands and Isle of Man, which appealed to the UK government for support when local deposit protection schemes proved inadequate.

Tax experts said offshore savers would probably review their strategies if the UK government removed any back-up compensation safety net. “Security is your first priority,” said Richard Proctor, partner with Grant Thornton. “A high return is attractive, but not if your capital is at risk.”