jonathan.rawle.org

I wanted to write something about the collapse of the Farepak Christmas savings scheme, which left thousands of mainly low-income households without extra money to spend at Christmas.

However, I came across an excellent article in the Sunday Times by Merryn Somerset Webb, the editor of Money Week, which says most of the things I wanted to say about such schemes. So please read Merryn on Money: Christmas is cancelled first.

As I had suspected, these schemes are not good value for money. The goods savers receive can be worth far less than the money they put in, so the whole scheme is a rip-off, or as Merryn puts it, “Little more than legalised theft”.

The chairman of a rival Christmas savings company, Peter Johnson, claims in an interview that the interest earned on a £10 per week investment would be £1.50 a year. What sort of account do you put your savings into, Mr Johnson? To receive such a low return, the interest rate would have to be about 0.5%. In fact, from a simple online interest calculator, we can see that at the current Bank of England base rate of 5%, the interest earned would be £11 a year, giving the savers more than a week’s extra money – welcome if they are so badly off. And as for tax, are these people on supposedly low incomes really using their £3000 per year tax-free ISA allowances? Of course, the worst thing is that, as the goods received by Farepak investors are lower in value than the money paid out, the interest rate is effectively negative. How many people would use a high street bank advertising that on its glossy posters?

Not only are banks and building societies better value for money, they are also much lower-risk. There’s something unusual: a lower-risk investment with better returns! If money is invested with National Savings & Investments (NS&I), it’s 100% secure. With commercial banks, if they collapsed, investors would still recover the first £2000 of their savings (and 90% of any remainder) under the Financial Services Compensation Scheme.

So why do people still use such schemes if they are such bad value for money? I know people are forced into using doorstep loan sharks because reputable lenders will not touch people on low incomes. However, the same doesn’t apply when it comes to savings. I’m sure the banks and building societies would welcome an extra £40 million invested in their accounts. There seem to be a number of reasons including: lack of education, particularly when it comes to financial matters; lack of self-discipline – as Mr Johnson points out, people can’t get at their money early, so can’t be tempted to withdraw it; and social factors – people’s parents used to use Farepak, or the local collector is their neighbour.

So what can be done? People need to be better educated about financial matters. Perhaps financial advice sessions could be compulsory under certain circumstances. Now let me make it clear, if people are on a low income because their job is low-paid, they’ve earned their money and are entitled to do what they want with it. However, if someone is receiving state benefits, why should the “legalised thieves” be able to take tax-payers’ money?

As for the question of self-discipline, I’m sure there are already regular saver accounts where money can’t be accessed for a certain period. NS&I could help improve the situation by introducing a specific Christmas Saver account, which might also help to convince people who use savings schemes because it’s “what they have always done”.

Finally, the government could tightly regulate, or preferably ban the likes of Farepak altogether. Sometimes the only way to protect people who know no better is for the government to remove the bad choice so that they can no longer take it. It doesn’t remove people’s freedom to choose as there are still plenty of ways to save money. It would simply ensure no form of theft was legal.

As for Mr Johnson, his company might seem generous, donating £1 million to the “Farepak fund”, but let’s face it, he needs to do everything he can to restore confidence in Christmas schemes, or else his company is going to have a hard time next year. Hopefully the Farepak episode will wake people up to all the things that are wrong with such schemes, and prompt them to move into the 21st century and choose a more modern way of saving for Christmas.