§ 5.54 p.m.
§ Lord BANKS rose to ask Her Majesty's Government whether they are now prepared to extend the option mortgage scheme to include elderly non-taxpayers wishing to raise a loan on mortgage for the purpose of buying an annuity income for life. The noble Lord said: My Lords, I must begin by declaring an interest because I am by profession a life and pensions broker and the schemes for helping the elderly to which I wish to draw your Lordships' attention are offered by some leading life offices. Of course, the fact that I am a life broker means that I have practical experience of the working of these schemes.
§ Your Lordships will be aware that mortgage interest on mortgages effected for house purchase and certain other purposes secures tax relief. In 1967 the option mortgage scheme was introduced which provided an alternative; the intending purchaser could choose between the type of mortgage I have described, where he would get tax relief on the interest, and another scheme where he would forgo the tax relief on the interest but would instead pay a rate of interest which was reduced by a Government subsidy. The option mortgage scheme is in operation now and if, for example, somebody taking out a mortgage were paying interest at the normal current rate of 8.5 per cent.—if 8.5 per cent. were the rate of interest on the particular mortgage—if he had chosen the option mortgage his mortgage would be subsidised so that he paid only 5.6 per cent. In other words, this is a scheme which was introduced to help those people who would not be assisted by tax relief because they did not pay tax at all or who would not be assisted to the full extent by tax relief because they would not have paid tax on the whole of the amount of the interest.
§ I come to schemes offered by a number of leading life offices, which are called by various names but which I propose to call home income plans. These are designed to help people over 65 years of age who own their own houses but have little income. The elderly person takes out a mortgage and with the proceeds purchases an annuity. The annuity, after paying the fixed rate of interest on the mortgage, provides a valuable addition to 1227 the elderly person's income, and on death the mortgage is repaid out of the proceeds of the sale of the house.
Where one of these plans is effected, the elderly person continues to live in the house, continues to own the house and enjoys an increased income, and I know from personal experience that this sort of scheme is of great value to many elderly people, particularly elderly women living alone, many of them widows, who have inherited a house but very little income to go with it. They are perfectly capable of living in the community on their own, yet if they sell their house because they can no longer afford to live there, where can they go? Many of these people have no near relatives and do not need to worry about the size of their eventual estate; their problem is to live now. As the Daily Mail said not long ago:
These annuity-linked mortgage schemes for pensioners, particularly those in their seventies, have filled an enormous social need.
§ The Government have recognised the role of these schemes by allowing the normal tax relief on the mortgage interest, and that is very important. However, the poorest of those likely to be assisted by these schemes do not of course benefit from tax relief because they are not taxpayers. Take the case of a woman aged 78 who has a house worth £15,000. She raises a mortgage of £10,000, purchases an annuity in the way I have described, and if she is a standard rate taxpayer her spendable income would be increased by £737 per annum. But if she is not a standard rate taxpayer, she pays no tax, then it is increased by only £555 per annum; the non-taxpayer has nearly £200 less.
§ My Question asks the Government whether, having allowed mortgage interest tax relief on these home income plans, they will extend the option mortgage scheme, which I have described, to cover these schemes. Non-tax paying elderly people would then he able to secure a comparable additional benefit to that now available to elderly people paying tax at the standard rate. What is required to achieve this is an amendment of the Housing Subsidies Act 1967 so as to extend the scope of the option mortgage scheme. This proposal is supported not only by the Life Offices Association but also, significantly, by Help the Aged as well.1228
It may be argued that to do this would be to extend the scope of the option mortgage scheme beyond matters pertaining purely to housing—beyond housing. I would dispute this. These schemes enable elderly people to remain in the houses where they are and not become an additional burden on the housing resources of the community or in regard to the provision of residential care. The Government's Green Paper on Housing published in June 1977 states:
The Government policy is to enable elderly people to remain in the community as long as possible and to go on living full and independent lives.".
These schemes that I have described help to bring this about, and I submit that it is a housing matter. Even if it were not, that would be no reason for not introducing this reform. It would smack of bureaucracy at its worst if a valuable reform could not be carried through because officialdom could not find a category to put it in.
§ It may be argued that every tax relief does not have a matching subsidy. I would not dispute that for a minute but some tax reliefs do, and mortgage interest tax relief on mortgages effected for house purchase does. Therefore it is not a question of principle; it is a question of the merits of each case. It may be argued that elderly owner-occupiers are not a class deserving assistance. For the reasons I have given earlier I would dispute this strongly. But there is no need for me to do so since the Government, by allowing mortgage interest tax relief on home income plans, have conceded that they are worthy of assistance. Surely the Government cannot then deny equivalent help to the neediest within this class. It may be argued by some that the introduction of a tax credit scheme would solve the problem and that we should wait for that. We on these Benches are fully committed to the introduction of a tax credit scheme. In fact, the Liberal Party was the first Party to be so committed. But people need help now.
§ The option mortgage principle is already established and it would be a simple matter to extend it, and I see no reason at all why this should in any way prejudice the eventual introduction of a tax credit system. After all, the option mortgage scheme is, in effect, a limited application of the tax credit principle, a principle to which we on these Benches are com- 1229 mitted, to which the Conservative Opposition are committed and which, although they are not committed to it, the Government are putting into practice with regard to child benefit.
§ Finally, it may be argued that the extension of the option mortgage scheme would be too expensive, and of course expense is an important factor these days, but perhaps not quite so important a factor this winter as last. We hear rumours of considerable tax reliefs in the pipeline. We are dealing here with a limited number of people, mainly single and over 70, and since so far only 2,500 taxpayers and non-taxpayers have availed themselves of this particular scheme we might well assume it is unlikely that more than four times that number would be brought within the scope of the scheme if it were extended in the way I have suggested. If that in fact happened the cost of the scheme would be somewhere about £2 million. I very much hope that, in view of all I have said, this proposition, which would be of great assistance to hard-pressed elderly people, will commend itself to the House, and that when the noble Baroness comes to reply on behalf of the Government she will return an encouraging Answer to my Question.
§ 6.5 p.m.
§ Lord CULLEN of ASHBOURNE
My Lords, the noble Lord, Lord Banks, has presented a moving case for extending the mortgage option scheme to elderly non-taxpayers who wish to raise a loan on mortgage in order to buy an annuity. I am sure that all of us will share with the noble Lord the wish to assist people who have been described by Hambro Provident Assurance, who have been strenuously trying to promote this idea, as being in dire straits. For instance, there must be many elderly widows on low incomes whose one valuable asset is the ownership of a house on which the mortgage has been paid off during the husbands' working life, but owing to inflation their income may be woefully inadequate while the value of their house will have greatly appreciated.
However, at present the home income plan is of little or no use to such people since the option of paying interest after deducting the standard rate of tax is only permitted on mortgages for house purchase and improvements, but not for 1230 the purpose of buying an annuity. So the non-tax paying widow would have to pay the full rate of interest without being able to offset it against taxable income. The effect of this is that there is generally little difference between the mortgage interest paid and the annuity receivable. Accordingly, I am persuaded that we should try to do something to help these people, and the proposed scheme seems logical.
However, to my mind, it has two disadvantages. First, it positively reverses the patient and prudent years during which the mortgage was paid off and full ownership of the house was secured. Though we are not unaccustomed to Government using capital as income, it is scarcely an example which others should be encouraged to follow. Secondly, elderly non-taxpayers who do not own their homes would think it unfair if special assistance were given to the apparently more fortunate few who are property owners unless they received some comparable benefit. Who could blame them for thinking that all retired people should share equally whatever funds are available?
I am told that only a very limited number of people would be concerned. As the noble Lord, Lord Banks, has told us, only 2,500 people have taken up this home income plan, so we are talking about a small minority out of what I believe to be 5½ million pensioner families. I think we should look at some other way of alleviating the lot of these people. As the noble Lord, Lord Banks, said, the Conservative Party is also committed to the introduction of a tax credit scheme, and under such a scheme mortgage interest would be paid net of tax in the same way as life assurance premiums are currently proposed to be paid as from next April. Though completion of the scheme would take several years, pensioners who get the benefit of age relief would have a high priority. The Liberal Party are also in favour of a tax credit and I would suggest to the noble Lord, Lord Banks, that in such time as is available to him he should try with his right honourable friend Mr. Pardoe to influence the Government in this direction. I think he will agree that such a scheme would provide the benefit he is seeking to obtain.
In conclusion, the Conservative Party has a solution to this problem, but until such time as we can put it into operation 1231 it is for the Government to deal with the matter. It is no solace to a 75-year-old to be told that he or she can sell the house and move to an old people's home. That is just what they want to avoid; and, though it goes against the grain to sell a mortgage-free house to provide income, needs must when the devil of inflation drives. I shall await the views of the Government with interest. This is the sort of problem for which a bipartisan approach is needed, and I believe that agreement by all Parties on the adoption of tax credits could solve not only the problems that we are discussing today but many others.
§ 6.11 p.m.
§ Baroness BIRK
My Lords, I have listened with great attention to what both noble Lords have had to say. The noble Lord, Lord Banks, who has put this Question to the Government, has, as he himself said, had long experience in the field of pensions and insurance. What he did was to bring his knowledge and authority to the House today in, if I may say so, a very clear and simple manner, so that even the non-expert could understand it quite easily. The noble Lord, Lord Cullen, although taking a rather different view, has similarly used his experience to help to enlighten us on what is a really complicated matter.
The subject to which the Question asked by the noble Lord, Lord Banks, refers, is of great interest to many people, although it is true to say that relatively few retired people have mortgaged their house to take out life annuities in order to increase their incomes. One leading company in the field estimates that there have been perhaps 2,500 such cases since 1972. This was the figure to which the noble Lord, Lord Cullen, referred, and I know of no reason to dispute it. As we are both agreed on it, that is an even better reason for accepting it. But, if present numbers are small, the potential market is large. It is estimated that over 4 million people over retirement age are owner-occupiers, and, of these, perhaps as many as 1¼ million do not have incomes large enough to pay tax. The Question which the noble Lord has asked is one which has been put to the Government from a number of quarters recently, and I can assure the House that, as I think 1232 the noble Lord is aware, it has been given very careful consideration.
Perhaps I may deal first with the option mortgage aspect. As noble Lords will know, and as the noble Lord, Lord Banks, explained, the option mortgage scheme was introduced in 1968 to give a subsidy for people who are buying or improving their homes and whose taxable earnings are insufficient to allow them the full benefit of tax relief on mortgage interest payments. I think there is nothing between us on those facts. This is a valuable way of helping less well-off people to become home owners. We estimate that there are now about three-quarters of a million option mortgagors. The rate of option mortgage subsidy, which lenders deduct from their interest charges and reclaim from the Government, is roughly equivalent to the basic rate of income tax.
Option mortgages are available only on loans taken out for house purchase or improvement. The noble Lord proposes—and he set it out very clearly—that the scheme should be extended to cover mortgages taken out in order to buy life annuities by people who already own their own house. As he himself readily admitted, this would need new legislation. Perhaps I can just underline that and make it quite clear, in case there are any doubts harboured by other noble Lords, that there is no question that this could be accomplished by administrative arrangements.
As the noble Lord explained, this type of life annuity is to increase the income of retired people by converting the "frozen value" of their house; it has nothing to do with house purchase or improvement. Therefore, at that point there is a basic difference between what the noble Lord is proposing and the existing option mortgage scheme. I think that the noble Lord, Lord Cullen, pointed that out. The present option mortgage scheme, however, is a housing subsidy which costs about £150 million a year, which is paid out of the Housing Vote and is specifically designed to help people into home ownership. So there is not really a complete analogy here.
What is proposed is therefore not really a housing matter at all. It is a means of boosting the income of one group of the elderly. After looking at this closely, the Government have decided that it would not be appropriate to use the option mortgage scheme in this way. This is 1233 not because we are relying on any bureaucratic sleights to knock it down, nor because (and I shall show this) we are not as concerned about the living conditions of the elderly as is the noble Lord and as, I think, are most other noble Lords present tonight. But we believe that the correct approach lies in policies for meeting the income needs of all the elderly, and not just those of the home-owners. Nor do we believe that the measure that the noble Lord, Lord Banks, has proposed—and, to be fair, he did not himself justify it on these grounds—can be justified simply as a matter of consistency in taxation.
§ Lord BANKS
My Lords, I wonder whether the noble Baroness would allow me to interrupt her? I am very grateful to her for doing so. I wonder whether she would explain, in that case, why the Government extend the income tax relief to mortgage interest in the case of home income plans? Why are some people who effect this scheme assisted by the Government while there is a refusal to help the others?
§ Baroness BIRK
My Lords, if I may continue with what I was saying, I think the noble Lord will find that I deal with that in my speech. If I do not, I shall come back to it at the end, but perhaps I may continue on the tax point at the moment. It is not automatic for a tax relief to be matched by a subsidy for non-taxpayers. Before 1969, as the noble Lord pointed out, tax relief was generally available for the interest paid on all loans. In 1969 it was restricted to loans for certain qualifying purposes, the main ones being the purchase or improvement of houses. The restrictions were lifted in 1972 but were reimposed in 1974. This time, we agreed to include life annuity schemes as one of the qualifying purposes. The question of an alternative subsidy for non-taxpayers was not considered either by the Opposition or by the Government. This was still reserved to people within the taxpaying brackets.
It is suggested that, because tax relief is available to one group of elderly owner-occupiers, an equivalent subsidy should be available for those who pay no tax. The noble Lord, Lord Banks, did not put it in that way. In fact, I think I am right in saying that he said he would not put this forward as a general proposition, but 1234 that he was putting it forward in this particular case. But the comparison is still selective. It is right to talk about fairness and justice, but at the same time, while I readily agree that his scheme has certain social attractions, the trouble is that it is, as I said, selective; and when we ask, "Fair for whom?" we find ourselves in the position of having to say that we feel we have to consider all elderly people and not just two groups who happen to be owner-occupiers. If this were done, it might not automatically be the people in the greatest need who would benefit from it, and I think this point was underlined by the noble Lord, Lord Cullen.
I do not want to go too deeply or seriously into a numbers game over the question of take-up of money. One can throw figures about; but one knows—and I am sure that the noble Lord, Lord Banks, is aware of it from his experience—that one can do a projection for something which is not happening at the time and that when it comes to fruition it can be quite different. If, on the basis of the figures on which I am sure we roughly agree—of some 1¼ million eligible house-owners—there were a 10 per cent. take up, that would cost £20 million and not £5 million. So it is not necessarily cheap and it is also open-ended. But it is not on the question of cost that I am making a stand: although I think I must point out—and this came up strongly in the debate yesterday on the use of North Sea oil resources—the great problem we have as a Government, a problem which any Government has—and particularly a Labour Government who put so much into the social side of public expenditure—of trying to ensure, as far as one can when one has choices before one, that the money one is spending does the greatest possible good. It is on these criteria that one has to look at the case put forward for any particular benefit.
We believe that any really fair proposal to use public expenditure to augment the incomes of the elderly should also help those who are not home owners. Special help is already available for the elderly who need extra income, whatever their housing tenure. There are rate rebates, the supplementary pensions scheme and also rent rebates. The noble Lord, Lord Banks, knows that supplementary pensions are available to help the elderly meet essential needs over and above what their 1235 retirement pensions and other income can be expected to meet. For owner-occupiers, they can cover the cost of rates, insurance, essential maintenance and emergency repairs. A life annuity income is not directly related to an elderly home owner's specific expenditure. It cannot, and rightly should not, be earmarked; so the question of whether it should be used for the maintenance or upkeep of the house is something which would be entirely up to the person who received it. I think that this is right in a free society.
We are concerned about all elderly people who find their household expenses a burden, and I am sure that it is fairer to devote resources to needs-related benefits than to concentrate special help on those fortunate enough to have a home to mortgage. I am thinking of old people who live in rented accommodation—they may be in a council house which they do not own and on which they pay rent; they may be living with the family; but they would give anything to have their own roof over their heads even if it were not in as good a condition as they would like.
My Lords, at present, perhaps only 300,000 elderly owner-occupiers receive supplementary pensions. On average, they get about £5.50 per week each, which is about £280 a year. Since it has been suggested that the value of a special life annuity subsidy might be worth about £200 a year, I may say that the supplementary pension is, on average, already worth more than this. The noble Lord, Lord Banks, did not himself mention this point but I think that I must do so. One of the things that he might have said (and it probably is said) in favour of this or other similar schemes is that people do not like to take up these benefits due to them; they consider it a charity rather than a right. I think that it is very important that all of us—and this would apply even where we disagree on this particular scheme—should do all that we can to encourage people to take up what is their right and is not charity. It is their right as much as any other scheme where there is any form of tax allowance or rebate. It is no less a right than the claiming of allowances when paying tax.
The noble Lord asked me the reason for the 1974 tax concession and why, at the 1236 moment, we do that but will not agree to his proposal. That was to safeguard the existing life annuity commitments, but it was never suggested that the scheme should be widened in the way the noble Lord has proposed. It was not then suggested that the benefit should be extended to the non-taxpayer by an equivalent subsidy, and there does not seem to be any added reason why it should be better to do this now rather than to use any money that we have for social purposes right across the board. In that way the elderly people can choose how they want to use it.
The noble Lord, Lord Cullen of Ashbourne, proposed rather than this scheme, the tax credit scheme which is supported by the Opposition. On that, we cannot know until we see the details whether it would help in the case of life annuities. The Government certainly, at present, do not intend to introduce tax credits. We think that this would be a very expensive way to deal with this problem. Again, we think there are better ways of helping those in need.
My Lords, the Government are aware of and sympathetic to the problems of the elderly. There is nothing between us on that. We are always ready to look for ways of improving our provision for old people and of trying to stretch resources in order to do so. The Department of Health and Social Security is currently carrying out a review of the needs of the elderly and a consultation document will be published in the spring.
At this stage, I think I must point out that the Government have already done a great deal to improve their living standards. We have increased the real value of pensions: between October 1973 and November 1977 pensions went up by 126 per cent. Prices went up by 95 per cent. in the same period. We have increased tax allowances; we have improved arrangements for concessionary travel fares; we have encouraged the provision of special housing in the public and private sectors. Therefore, I think it is clear that we differ from the noble Lord, Lord Banks, on this question only as to which are the best means to achieve ends which are both fair and compassionate. While he believes that an extension of the option mortgage scheme is the way, we, I am afraid, do not.