There has been little joy for savers since the financial crisis. Interest rates were already stuck at historically low levels before Bank of England policymakers responded to the EU referendum result by lowering them further. Many consumer savings products adjusted accordingly, reducing already meagre returns on the money that people had put away. Last week it was the turn of National Savings & Investments to react, announcing that the number of high-value Premium Bond prizes would be cut. This environment makes it harder for the government to address the UK’s chronically weak savings performance. But it needs to think carefully about the consequences of its ideas for solutions.
There has been a lot of new policy to encourage saving in recent years. Employers now have to provide and automatically enrol their employees into a workplace pension scheme. There has been a massive increase in the tax-free generosity of ISAs. Products that shield peer-to-peer lending income from tax and that boost the deposits of first-time homebuyers were launched. A “market leading” savings bond for those over the age of 16 will soon be available.
Specific age-cohorts have also been recognised. The over-65s were offered so-called “pensioner bonds” at attractive interest rates. The soon-to-be launched Lifetime ISA will see the government topping up the savings of the under-40s to support either a home purchase or a retirement income.
On an individual basis, these interventions are part sensible policy and part political sweetener. But there are legitimate concerns about how they interact to change savings behaviour. For instance, it has been suggested that some may use the Lifetime ISA for retirement saving instead of their workplace pension, missing out on employer pension contributions in the process. More generally, there are fears that the volume of changes to the savings system has resulted in low awareness of new products and poor knowledge of how best to use them.
One way to make sure that different savings options and incentives are understood is for them to be consistently available over time. For example, over the decades that they have been available Premium Bonds have achieved massive levels of popularity and use. Should the government want to look further at enhancing incentives to save, expanding the Premium Bond model of prize-linked savings would be a better bet than adding further confusing changes to the ISA system.
Prize-linked savings offer something different. They provide the opportunity for a person to both set money aside for the future and have a chance of grow their pot through a lottery-type mechanism. It is a system that appeals to those who prefer a small chance of winning big against seeing their savings grow incrementally by a rate of interest. It also makes saving a bit more fun, something recognised when Premium Bonds launched in 1956 with the supporting slogan, “savings with a thrill”.
Premium Bonds are held by one-fifth of UK households. This means that they are widely used, but that there is an opportunity to grow the concept. The government could look at introducing a new generation of prize-linked savings through other institutions to widen their appeal, such as through credit unions as happens in the United States, or through the Post Office. It could also look at varying the prizes that are on offer. In some other countries a mixture of cash and consumer goods can be won. For example, FirstBank in Nigeria offered TV sets and even Olympic tickets alongside cash rewards.
There are many options for how to do it. The point is that if the government is serious about getting people to save more when interest rates are low then a more ambitious prize-linked savings scheme could be the way to do it.