Pound-for-pound

By DAILY MAIL REPORTER
Updated: 19:00 EST, 31 July 2002

A SAVINGS account paying a massive 123% interest is to be launched today in a desperate attempt to encourage the low-paid to save for retirement.

Up to 2,000 people will be able to open Government-backed Saving Gateway accounts, where every £1 paid in would be matched pound for pound by the state. If this pilot scheme succeeds, then the scheme will be launched nationwide, potentially reaching millions of lower-income people.

Family households earning less than £15,000 a year and individuals with income less than £11,000 have been targeted as part of an 18-month programme in four poverty-stricken locations around the country.

But so far anyone just outside those income brackets will remain subjected to pitiful rates of interest paid by the High Street banks and building societies - particularly the Government's own savings bank, National Savings.

National Savings, a favourite with the elderly, has slashed the rates it pays to pensioners. Savers could lose 2.5% a year in income if they want to reinvest their savings with the Government-owned bank. For example the five-year Pensioners Bond Series 26, pays 4.5% before tax, but this is 2.5% below the Series 3 issue which is now maturing. It has also cut the rate it pays on fixed rate bonds by between 0.35% and 0.6%.

Unfortunately Saving Gateway excludes anyone aged over 65, because it's meant to encourage those in work to save some of their salary. Halifax bank has been nominated to run the savings accounts in Gorton in East Manchester, Tower Hamlets in East London and parts of Cumbria and Cambridgeshire.

The pilot scheme is part of Labour's programme to encourage more people to save for themselves rather than rely on state benefits.

Since Labour came to power in 1997, it has failed to raise the level of savings, especially among poorer members of society. Official figures show that nearly half of those on household incomes of less than £200 a week and 43% of those on less than £300 have almost no savings.

And a massive £27bn savings gap has been identified - the difference between what people put by for retirement and what will give them a comfortable pension.

The Government was pinning its hopes on stakeholder pensions, originally aimed at lower to middle income earners, but this retirement plan has flopped.

The simple Saving Gateway accounts will allow individuals to save up to £25 per month with £375 the maximum investment for the 18-month period.

The Government top-up comes at the end of the pilot, forcing people to stay the pace to reap the cash reward. If you managed to put away £20.83 a

month you would accumulate £375 and could expect the Government to match that £375. That works out as a return of 123% over just 18 months - and it is free from tax.

This is a return that the rest of us could only dream about: particularly as there is absolutely no risk involved. In comparison, the best High Street regular savings account is Halifax, which pays 4.8% gross - 3.84% net - on £5 a month.

Withdrawing money from the Government scheme will forfeit the cash boost, but money can be paid back in subject to the £25 contribution limit.

• The Mavrou family, from Gorton in Manchester, are the ideal candidates for the Saving Gateway initiative. They have no savings for retirement but would be interested in starting to get into the habit with the aid of a cash top-up from the Government.

Diane, 32, has a household income just under the £15,000 restriction on the Saving Gateway account. She says: 'At the moment we have a Halifax Cardcash account, but we would like to start saving more for a rainy day or just get into the savings habit.'