- In the case of each child who is first an eligible child by virtue of section 2(1)(a) and was born on or before 31st August 2002 a responsible person may apply to the Inland Revenue, in a manner prescribed by regulations, to open a child trust fund account.
- Upon receipt of an application, the Inland Revenue must give the responsible person concerned written authorisation to open a child trust fund account.
- A responsible person may, by giving the written authorisation to an account provider, apply to open for the child with the account provider a child trust fund of any description provided by the account provider.
- On receipt of the authorisation the account provider must—
- open, in accordance with regulations, a child trust fund of that description for the child and
- inform the Inland Revenue in accordance with regulations.'.—[Mr. George Osborne.]
§ Brought up, and read the First time.
§ 3 pm
Madam Deputy Speaker
With this it will be convenient to discuss the following: New clause 8—Uprating of Inland Revenue contributions in line with inflation—New clause 9—Determination of initial contributions for children born before 1st April 2005—
- The amount of Inland Revenue contributions under sections 8 to 10 other than—
- original contributions, or
- initial contributions the amount of which is determined in accordance with the provisions of section [determination of initial contributions for children born before 1st April 2005],
shall be determined in accordance with the provisions of this section.
- The amount of a contribution to which this section applies shall be increased from the previous applicable amount with effect from 1st April in every calendar year by such amount as the Treasury determines is required to maintain the value of the amount in real terms.'.
Amendment No. 1, in page 1, line 13 [Clause 2], leave out '2002' and insert '1988'.
- This section applies for the purpose of determining the amount of initial contributions for eligible children born during the period beginning with 1st September 2002 and ending with 31st March 2005.
- The amount of the initial contribution for eligible children born during the period beginning with 1st September 2004 and ending with 31st March 2005 shall be 107 pen cent. of the amount prescribed by regulations under section 8(1A).
- The amount of the initial contribution for eligible children born during the period beginning with 1st September 2003 and ending with 31st August 2004 shall be 107 per cent. of the amount determined in accordance with the provisions of subsection (2).
- The amount of the initial contribution for eligible children born during the period beginning with 1st September 2002 and ending with 31st August 2003 shall be 107 per cent. of the amount determined in accordance with the provisions of subsection (3).'.
Amendment No. 2, in page 2, line 26 [Clause 2], leave out subsection (7).
Amendment No. 8, in page 3, line 29 [Clause 5], at end insert'and was born after 31st August 2002'.
Amendment No. 62, in page 4, line 31 [Clause 8], after 'regulations', insert'under subsection (1A) or determined in accordance with the provisions of sections [uprating of Inland Revenue contributions in line with inflation] or [determination of initial contributions for children born before 1st April 2005]'.
Amendment No. 11, in page 4, line 34 [Clause 8], at end insert—'(1A) Regulations under subsection (1) must prescribe an initial contribution of nil in respect of any child trust fund held by a child born on or before 31st August 2002.'.
Amendment No. 63, in page 4, line 34 [Clause 8], at end insert—'(1A) Regulations under this subsection shall prescribe the amount of the initial contribution in respect of children born during the period beginning with 1st April 2005 and ending with 31st March 2006 ("the original contribution").'.
Amendment No. 64, in page 5 [Clause 9], leave out line 3 and insert'determined in accordance with subsection (2A) or with the provisions of section [uprating of Inland Revenue contributions in line with inflation]'.
Amendment No. 12, in page 5, line 3 [Clause 9], at end insert—'(2A) Regulations under subsection (2) may prescribe a supplementary contribution of nil or a lower rate of supplementary contribution in respect of any child trust fund held by a child born on or before 31st August 2002.'.
Amendment No. 65, in page 5, line 3 [Clause 9], at end insert—'(2A) The original contribution payable under subsection (2) shall be twice the amount prescribed by regulations under section 8(1A) or determined in accordance with the provisions of section [determination of initial contributions for children born before 1st April 2005].'.
Amendment No. 66, in page 6, line 9 [Clause 10], leave out from 'Revenue' to first 'of' in line 10.
Amendment No. 67, in page 6, line 14 [Clause 10], leave out from 'by' to end of line and insert'regulations under subsection (2) or determined in accordance with the provisions of section [uprating of Inland Revenue contributions in line with inflation]'.
Amendment No. 13, in page 6, line 14 [Clause 10], at end insert—'(1A) Regulations under subsection (1) may prescribe a further contribution of nil in respect of any child trust fund held by a child born on or before 31st August 2002.'.
Amendment No. 68, in page 6, line 15 [Clause 10], leave out subsection (2) and insert—'(2) Regulations under this subsection shall prescribe the initial amounts of contributions payable under subsection (1), which shall be expressed as amounts payable to children reaching a 669 specified age during any period beginning with 1st April and ending with 31st March of the following calendar year ("the original contributions").'.
§ Mr. Osborne
I thank the Minister for her remarks about new clause 1 and her commitment to looking again at the terminal illness clause. I join my hon. Friend the Member for Witney (Mr. Cameron) in his remarks about considering the scheme for parents with disabled children.
New clauses 3, 8 and 9 and the consequential amendments would allow the responsible person to open a child trust fund for a child born before 1 September 2002 but without the initial Government contribution or any top-up at age seven—so my proposal should not add significantly to the burden on the taxpayer; I would not have secured the support of my right hon. and hon. Friends in the Treasury team otherwise.
Parents could set up a child trust fund account for an older child for savings of up to £1,200 a year, with a tax-free sum for the child when he or she turns 18. Amendments Nos. 8, 11, 12 and 13 make it clear that there would not be a Government contribution. In Committee, I restricted that arrangement to children born since 1992, who are not now teenagers. That arrangement drew some criticism—particularly from the hon. Member for Hastings and Rye (Mr. Foster), who commented:I support the principles that the hon. Member for Tatton displays in wishing to extend the benefits of this excellent scheme, which I wholly support. However, he is too modest in seeking…to extend it only to those born after 1992. If we want to benefit all children, we should extend it to all children. For that reason, I shall not support an amendment that simply creates a divide different from that which already exists."—[Official Report, Standing Committee A, 6 January 2004; c. 25.]I was happy to heed the hon. Gentleman, so the proposed amendments broaden the scope of the scheme, opening it up to all children born after 1988. By the time the scheme is introduced, it will be open to all children under the age of 18. The hon. Member for Hastings and Rye is not in his place but I look forward to his support when he reads my comments in Hansard tomorrow.
The benefits of extending trust funds to all children are obvious. The Government want to encourage children to save, and parents to save for their children, which is wholly admirable—but why restrict that ambition to newborn children? Why not give parents the opportunity—not force them—to open trust funds for older children who were not lucky enough to be born when the scheme was up and running? That would help people such as the Minister and myself, who will have children who qualify and children who do not. We may find it difficult to explain, when our children reach 18, why one has a child trust fund and another does not.
The Minister and the hon. Member for Yeovil (Mr. Laws) have made the point that other savings vehicles are available, but as my hon. Friend the Member for Witney said, that argument could be deployed against the entire concept of a child trust fund—the beauty of which is their simplicity and the fact that all children could have one. Such funds allow parents to tell their children, "You're all getting the same, except the initial 670 contribution." Parents with older children might be encouraged to save because that would piggyback on the Government's publicity campaign that the Financial Secretary is planning to coincide with the launch of child trust funds. My proposal would also remove the potential disincentive for parents such as myself, who may not want to single out one child for special treatment, and could be discouraged if they have some children who qualify and some who do not.
My proposal has widespread cross-party support, such as that of the Treasury Sub-Committee, whose excellent report concluded:We consider that the natural reaction of parents with children born on either side of the cut-off date will be to try to see that they are treated equally. This may mean that those parents with sufficient financial resources will make additional provision for children who do not qualify for a Child Trust Fund account. We believe they would be encouraged to do this if Child Trust Fund accounts, identical in all respects save the absence of a Government endowment, were available for their other children…In light of the evidence that the costs of the Treasury of the extra tax relief afforded by Child Trust Funds is negligible, we recommend that consideration be given to extending the availability of Child Trust Fund accounts but without Government endowments, to children before 1 September 2002.Both Labour Members who spoke on Second Reading also supported my proposal. I must say that as this is Government flagship policy, the Labour Whips did poorly in fielding only two speakers—and half the Labour Members in the Chamber at the moment are Whips.
In Committee, the proposed change was supported by the hon. Member for Dumbarton (Mr. McFall), the Chairman of the Treasury Select Committee, and by the hon. Member for Hastings and Rye—and I have overcome his objection that my amendment was not ambitious enough. The initial objections of the Financial Secretary were difficult to understand—that is a polite way of putting it. They were not made on the grounds of cost because the hon. Lady had already told the Sub-Committee:We had to make a costing assumption for the purposes of the Red Book and we came up with the conclusion that the cost of the extra tax relief"—for the entire scheme—would be negligible.The cost of extending the scheme to older children would also be negligible.
The Financial Secretary deployed a curious argument to do with the administrative burdens on financial providers. She said on Second Reading:We have looked at that"—that is, the proposed extension of the scheme—extremely carefully, and I am disappointed to tell the House that the administrative burden on providers of allowing all children from previous cohorts to benefit from an identical tax-free vehicle is disproportionate to the benefits that would be offered.The hon. Member for Hastings and Rye intervened to ask:Is that not a problem anyway? As time goes on, greater numbers will apply, so in 18 years' time people would have to deal with that volume of applications in any event.The Financial Secretary had to concede that the hon. Gentleman was right and that 671a greater number of children will have such accounts over time, but providers have made it quite clear that the scheme needs to be phased in."—[Official Report, 15 December 2003; Vol. 415, c. 1394.]I do not know which financial providers the Minister had spoken to, but all the financial providers and trade organisation representatives to whom I spoke were in favour of extending child trust funds to elder children.
The Minister's argument on Second Reading was comprehensively knocked down by the chief executive of Children's Mutual, David White, who wrote to all members of Standing Committee A:The Minister in her remarks at Second Reading argued that one reason for not extending the Child Trust Fund to ineligible children is that it would impose a burden on providers. We would be happy to work with the Government on how any administrative burden could be overcome, something we believe to be possible.Thankfully, the Minister listened to the arguments advanced in Committee with the help of some of the more vocal Labour Members, and said:Having heard the strength of feeling on the matter, I am perfectly willing to talk to providers to see whether they think that there would be a gap that needed addressing.'
She continued:I undertake to ask providers whether they believe that such unmet demand exists or is likely to exist so that we can review the situation in the future."—[Official Report, Standing Committee A, 6 January 2004; c. 30.]
The Minister was true to her word. I happened to bump into David White in the Commons about two days later. He said, "Thanks very much for what's going on in Committee, because the Inland Revenue has already been in touch with Children's Mutual, and no doubt others, and is working up a scheme." He confirms those comments in the briefing that his company has provided to all Members for this debate, which says:We are delighted that the Government has agreed to consider opening up the Child Trust Fund wrapper to families of children born before September 2002 and look forward to continuing discussions on this development.
I have tabled the new clause and the amendments so that we can discuss these matters now, on Report. I confess that they are much less elegant than the amendments that I tabled in Committee, but I was told that I had to come up with a different device so that we could discuss the same subject on Report. I have come up with a slightly less elegant version of what we did in Committee, but it is really only a device for getting some assurances from the Minister that discussions are ongoing, that she is talking to the providers, and that she is prepared to identify the regulatory changes that are needed, if any. She has indicated that none may be necessary. She may be right about that, but will she give me some specific assurances? That is the reason for all these amendments. If some regulatory changes are required, will she give an undertaking to make them?
§ Mr. Laws
I shall not deal with the issues that have just been covered by the hon. Member for Tatton (Mr. Osborne). As we pointed out in Committee, we are not in favour of the Bill or the child trust fund accounts, so we do not seek their extension to any other cohorts of children.
I shall speak to new clauses 8 and 9 and amendments Nos. 63 to 68, which would lay down in a little more detail the basis on which the inland Revenue 672 contributions will be calculated over time. At present, most of those issues seem to be left entirely to the discretion of the Chancellor and the Treasury, so new clause 8 would index some of the contribution levels to the rate of inflation, while some of the amendments would fix the relationship between particular levels of contribution. For example, amendment No. 65 fixes the supplementary contribution at twice the initial contribution.
I seek clarification from the Financial Secretary on an issue on which I thought we had made some progress in Committee: in essence, how much compensation will be paid by the Treasury because people entitled to child trust fund accounts from 1 September 2002 onwards will not receive the moneys until April 2005? I was expecting to tease the Financial Secretary by indicating that I thought that she would offer compensation at the rate that she anticipated the accounts would yield—that is, the 7 per cent. that the Government said would be yielded over time, which is an 8 per cent. rate of growth minus a 1 per cent. assumed level of charge.
In Committee, to my surprise, the Financial Secretary said:The hon. Member for Yeovil queried the assumption of a 7 per cent. nominal rate of growth. I assure him that it is the rate recommended by the FSA in its "conduct of business" handbook as a fairly cautious estimate of future growth. We are aware that children born after the qualifying date of 1 September 2002 but before April 2005, when the first payments are to be made, will lose out on the potential growth of the fund over that time.However, she went on to say:I intend to make up for the difference in the regulations, and I can announce that the value of the endowments will reflect a 7 per cent. growth of the fund in nominal terms for each cohort or financial year in that period, but the exact figures will be laid down in regulations."—[Official Report, Standing Committee A, 13 January 2004; c. 120.]As we have finally been given the regulations, we can see that paragraph 7, on page 7, which deals with Government contributions, indicates how they are to be uprated to account for the fact that people will not actually get their hands on the money until April 2005.
Perhaps it is just me—I do not know whether my brain is not working properly today—but those amounts seem lower than I would have expected from the application of a 7 per cent. yield, compared with the amounts that would be expected by children who would otherwise have received them from September 2002 onwards. I had assumed that the Minister would be generous—or, to put it another way, fair—in her calculation of the amounts, but the amounts set out in paragraph 7(ii) on page 7 of the regulations are somewhat mean in the application of the 7 per cent. yield, compared with the amounts that would be received by individuals in their child trust fund accounts.
For example, sub-paragraph (ii) indicates that children born between 6 April 2003 and 5 April 2004 would receive £268. That seems to reflect an uprating factor of roughly 7 per cent., so anyone born during that period will receive a 7 per cent. uprate. However, children born at the beginning of the period, who would not otherwise receive their money until April 2005, could forgo two years of yields at 7 per cent. I have been 673 unable to work out the method of calculation under subparagraph (iii), which applies to children born between 6 April 2004 and the day preceding the appointed day—I assume that will be the end of March or the beginning of April 2005. The amount specified to be received by that cohort is only about £256, which seems to be a yield of only 2.5 per cent.
There seems to be a gap between what we might have expected those cohorts to receive, with the full application of the 7 per cent. yield, and the amount that they will actually receive. I seek clarification from the Minister about how those amounts were calculated. Does she consider that the calculation is fair, especially to people born at the beginning of the periods in question? For example, a child born on or just after 6 April 2003 might have expected to receive 7 per cent. compounded for two years. There appears to be a gap between what the Financial Secretary is delivering and the undertaking that was made in Committee, so it would be helpful to have clarification on that point.
§ Ruth Kelly
We have already held a significant debate in Committee about whether siblings should qualify for a look-alike child trust fund without Government contributions. It is a shame, but I have to say that the hon. Member for Tatton (Mr. Osborne) rather misrepresented my position on Second Reading. In fact, I argued that if we allocated accounts to all siblings of children who qualify for a child trust fund account, there would be 10 million shell accounts, which would be an unwarranted burden for providers. They would not welcome that additional burden at this time.
However, I recognised in Committee, as I recognise now, that there could be—indeed, would be—many parents who wanted to open similar accounts for older children and add their own endowment to the fund on a voluntary basis. That is a completely different proposition, with a much reduced impact and burden on providers. I continued to argue in Committee that if there was a demand for such a product, there was no reason why the market should not provide—and, indeed, market—a look-alike product for older siblings when marketing the child trust fund for younger siblings. It would be open to providers to offer a similar account; they could offer a charge cap which matched that on their child trust fund product, or they could offer a lifestyling facility which matched that on the child trust fund. The main difference between the accounts would be their tax treatment.
I argued, however, that the child's income from savings would not be enough to incur tax in most cases. Children have the same personal allowance as adults—currently £4,615—and the parent is taxed only when a gift from a parent produces more than £100 gross income a year. I said that I was sure that the industry would provide a look-alike product without a Government endowment if there were sufficient demand in the marketplace for such a product. However, I did commit to consult providers on whether they thought that there would be a gap in the marketplace if the Government did not step in to offer a product identical to the child trust fund for older siblings.
The Inland Revenue and I have undertaken some informal consultations with those in the industry, which has confirmed that of course, an identical product would 674 make life easier for them. However, they have also said that they would undoubtedly step into the market to provide a look-alike product on the day of the launch and that they would see that as opportunity to market a savings vehicle for older siblings, as well as the child trust fund to younger siblings.
If we were to offer an identical child trust fund product—without the Government endowment, of course—to older siblings, it could not be up and running by 2005, which is the launch date of the child trust fund. Given that providers think that the market seems to exist and that they intend to fill that gap, we should monitor the situation to find out whether, after the launch of child trust fund products, parents feel that their demands have not been properly met, or providers feel that they have not had the opportunity to fill a gap in the marketplace. That issue will have real resonance for parents, but it will be fulfilled and taken up by the market place.
§ Mr. George Osborne
What regulatory changes does the Financial Secretary think would be required to provide an identical product? What is the main regulatory problem? What would have to be changed?
§ Ruth Kelly
As the hon. Gentleman correctly identified, we have been working up proposals so that we would be able to meet any unfilled gap in the market, if such a gap were identified. However, he will know that we are still at a very early stage of any plan, and I will continue to consider whether any change in regulation is required. If we find evidence of a gap in the marketplace and regulation is required to fill it, that is clearly something that we would consider.
On new clause 8, the hon. Member for Yeovil (Mr. Laws) asked us to commit to raising the Government contributions in line with inflation. It is only fair to say that it is much more sensible for the Government to keep the structure and level of the endowments under review, in the light of the progress and future evaluations of the child trust fund. I know that he is sceptical about the merits of the child trust fund, but surely he would agree that it is sensible to take into account how it develops before committing ourselves to stating in the Bill how that endowment will be increased in the future. The regulation-making powers that we are taking will enable us to develop the child trust fund further to achieve policy objectives if the evaluation of the policy suggests that that is a good idea.
New clause 9 and the related amendments suggest what the retrospective payments to children born between September 2002 and April 2005 should be. As the hon. Gentleman suggested, those extra payments were set out in the draft regulations, published on 2 February 2004. All children born between September 2002 and April 2003 will receive £277, with those entitled to the higher amount getting an additional £266. Those born between April 2003 and April 2004 will get £268, with those entitled to the higher amount getting an additional £258, and those born between April 2004 and April 2005 will get £506. The hon. Gentleman suggests that that is somehow not generous and fair. In fact, I believe that it is both generous and fair. For example, 675 those figures do not include any allowance for the administrative cost to the Government, whereas, as he rightly points out, the illustrative figures in the projections included an amount for the charge cap.
§ Mr. Laws
I wonder whether the Financial Secretary is taking this opportunity to trim back on her earlier commitment. Will she acknowledge that anyone born between 6 April 2003 and 5 April 2004 will essentially get the same compensation as though they had been born on the latter date? People born at the beginning of the period, who should get a 14 per cent. uprating, will get only 7 per cent. Why are the Government short-changing people in that way?
§ Ruth Kelly
I am sure that the hon. Gentleman will accept that we are not short-changing people. For the initial payment, we calculate growth at the middle of each band, so there will be some winners and, undoubtedly, some losers. However, for administrative simplicity, we have averaged over the bands. For the supplement, we took April at the end of each band, which is when the supplement would be given to the family in the usual course of events. Given that the child tax credit has to be claimed, the hon. Gentleman will understand that the second payment is normally made after the first payment. In no sense have we short-changed families. In fact, we have been both generous and fair—while, of course, ensuring value for money for the Government. The figures were calculated using a 7 per cent. nominal rate of return in accordance with FSA guidelines, as the hon. Gentleman suggests. Given that we have fulfilled his requirements, I ask him to reconsider his new clauses.
§ Mr. Laws
I thank the Financial Secretary for giving way one more time. I remain dissatisfied about the way in which the Government will compensate people, but what does she expect to be the total cost of delivering all the amounts that it is now anticipated will be delivered in one go, in the 2004–05 fiscal year?
§ Ruth Kelly
I do not have figures to hand on the total cost of the changes. I think that I gave them to the hon. Gentleman in Committee, but if I did not, I apologise. I will certainly write to him with those figures, but I can assure him that the amounts are fair, and no one is being short-changed. Given the hon. Gentleman's consideration of those factors, I hope that he will not press any of the new clauses to a Division.
§ Mr. Osborne
I pretty much welcome what the Minister said about new clause 3, although the hon. Member for Yeovil (Mr. Laws) made it pretty clear what he thinks of what she said about his new clauses. My brief experience of politics shows me that when there are winners and losers, the winners do not thank people, but the losers complain. We shall see what happens with people born between 1 September 2002 and the date of the implementation of child trust funds.
I turn to new clause 3, which I moved. I am sorry if I misrepresented what the Financial Secretary said on Second Reading, but that was an understandably easy mistake given that my thoughts were shared by the hon. Member for Hastings and Rye (Mr. Foster) and by Children's Mutual. I am sure that what she said was 676 clear. She was right to point out that there are other savings vehicles—she regularly points that out—but as my hon. Friend the Member for Witney (Mr. Cameron) said at the start of our consideration on Report, that argument could be deployed against the entire Bill. She said that during her informal consultation, the providers said that an identical product would help them—I think that those were her words. She has given a commitment to monitor the situation so that if she finds a gap because of unmet demand that requires regulatory change, she will consider doing taking action.
Although I shall not press new clause 3 to a Division, I send a message from the Dispatch Box to financial providers. If they become aware of unmet demands, believe that it would significantly help their marketing if they were able offer child trust funds to older children, and think that would encourage savings and help the child trust fund scheme to work from its launch, I urge them to make representations not only to me, but to the Financial Secretary, so that she will get on with making any regulatory changes that might be necessary. With that, I beg to ask leave to withdraw the motion.
§ Motion and clause, by leave, withdrawn.