§ 6.7 p.m.
§ Baroness O'Cathain rose to call attention to the implications for personal savings of the proposed replacement of PEPs and TESSAs with individual savings accounts; and to move for Papers.
§ The noble Baroness said: My Lords, my first duty this evening is to thank all noble Lords who will be taking part in this debate. I am aware that the subject has been done to death in the financial pages of the press, but still feel that to debate the issue in your Lordships' House may bring it into sharper focus and, as I am for ever hopeful, may encourage Her Majesty's Government to reconsider some of the less attractive aspects of the proposals.1188
§ I am fully aware that we are in the throes of the consultation period and there has been consultation. A great deal of material has been submitted to the Inland Revenue. As an aside, and speaking as the daughter of that most unloved breed of people, a senior civil servant in the Inland Revenue, an inspector of taxes, I cannot but express sympathy for the current plight of that arm of the Civil Service. It has been up to its eyes in the introduction of self-assessment. A great deal of effort has been expended in sending out reminders to recalcitrant taxpayers (and even to those whose forms were sent in long before the September deadline—but I blame the computer for that, not the unloved tax inspectors). And now they have to deal with consulting widely on the new individual savings account—and getting even more unloved in the process. Perhaps I should encourage the Government to be more considerate towards them. Change for the sake of change is never a good thing.
§ I believe that this is a timely debate. In just over four weeks we shall know what the Government will decide about the future of a significant part of the savings sector. The financial services industry has had the chance to make its views known and we now have the chance to make our views known. I am sure that in the normal mode of the noble Lord the Minister he will listen carefully to all the contributions with an open mind, consider them and add them to the mountain of views already expressed on the consultation document.
§ I wish this debate to be constructive, to help in the consultation process, to give credit where credit is due and to be critical only in a constructive way. The first grant of credit where credit is due relates to the actual consultative document of December 1997. The content may not be to the general liking of those who are both current holders of PEPs and TESSAs but at least it is readable, and beautifully produced.
We read in the document that the Government,
wishes to build on the experience of TESSAs and PEPs to encourage people, through tax reliefs to raise the level of their long-term savings"—
an admirable objective and one with which I concur wholeheartedly. Through such encouragement personal reliance is encouraged and this, in turn, will alleviate the burden on the state of an ever-increasing ageing population. Surveys have shown that over half the current holders of PEPs and TESSAs have invested in the instrument as a saving for their retirement and that one in three of those with TESSAs are aged 60 or over. Actually, it seems rather strange that, although these instruments are so linked with provision for retirement, they are being dealt with outside the pensions' review, when presumably such a review will include examination of pension tax relief.
§ Saving for retirement is acknowledged as being essential. Indeed, the necessity for it was underlined only this week when the Chancellor of the Exchequer was reported as saying, "The welfare state isn't working". All of us have to take more responsibility for our old age, and saving is the best way. Perhaps the new slogan should be, "Those who can, should save: those who cannot, should be supported". The two major criteria for people who are saving for their retirement 1189 are that such savings must be both simple and secure. I fear that the Government's proposals can be viewed as meeting neither of those criteria.
§ When PEPs were introduced there was a slow take-up of the product. The concept was new; it was different; and as such was viewed with a certain amount of scepticism by many. Because of the stringency, quite rightly, of the regulations regarding the selling of financial and saving products. the advertisements and other marketing tools used for the promotion of PEPs and TESSAs were pretty dull. One has only to look at the back pages of the weekend papers to see that one has to read an awful lot of turgid words before getting to the basic facts about these products. A "switch on" they are not. Just assess the attractiveness of the advertisements compared with those for new cars, coffee or cosmetics. However, looking around the Chamber, I realise that there are probably not too many of your Lordships who are familiar with advertisements for cosmetics.
§ It has taken a long time for PEPs and TESSAs to be accepted as more than alphabet soup. But they have been very successful. As we see from the Government's own figures, some 6.5 million people currently have either PEPs or TESSAs—some 3 million in the case of the former and 4.5 million in the case of the latter, with some people of course having both. My first question to the Minister is: why abandon what is a successful concept, one that has become both understandable and attractive to those whom the Government wish to encourage to save?
I am aware that that is probably a fairly stupid question as we have been told that the objective of replacing PEPs and TESSAs with ISAs is to encourage, and I quote once more from the consultation document,
investors on more modest incomes",
to save. However, investors on "more modest incomes" are already saving through PEPs. Work done by the financial services industry shows that over half the current investors in PEPs are basic rate or lower rate taxpayers. Surely what one does not want to do is to discourage saving by these people by, first, breaking faith with them and, secondly, replacing a comprehensible and attractive product with a complex one, which will entail getting to grips with yet more small print and convoluted regulations.
§ I have no evidence to support the view that Members of your Lordships' House are probably reasonably financially literate. I am sure that you are. However, do we really need to have to go through more rigmarole when we consider that we are happy with the current situation?
Before I proceed, I feel I must state why I think the Government's proposals are breaking faith. Rightly or wrongly, there is a general acceptance of an unwritten contract between savers and the Government which says that savings schemes launched and entered into in good faith today will not be undone tomorrow. It is a contract that exists for good reason. Without it, financial planning would become a game of chance and few
would bother saving. Age Concern expresses this anxiety in another way:
the Government should consider whether it is reasonable for people who have based their plans on current policy to lose tax relief".
§ I am sure I am not alone in having saved for many years in Post Office savings accounts, National Savings and even Premium Bonds, always secure in the knowledge that my money was "as safe as the Bank of England", as we used to say. The Government had set the rules and the Government would not change those rules or break faith. When PEPs and TESSAs were introduced I felt that, although the risk was different and, to use those words at the end of every commercial for savings products, "the value of the investment could go up or down", as the Government had set the rules the rules would not change. But the rules will be changed if the proposals in the consultation document are implemented.
§ If the Government do not like PEPs and TESSAs, they should simply stop issuing new ones and cap the total amount that can be accumulated within them. But the Government are not proposing to take that step. They are considering forcing people to shut down PEPs and TESSAs and breaking the deal. The result will threaten the nation's's saving habit by disturbing it. It will also cause administrative chaos, a point I shall return to later.
§ The Government are proposing to replace PEPs and TESSAs with the ISA, the new Individual Savings Account. Before I deal with the merits of the ISA—and there are some—I think it would be worth while to ask the Minister a second question. In the event of ISAs being introduced in April 1999, will the "unwritten contract", to which I have already referred, be replaced by a written contract to the effect that ISA reliefs will not be withdrawn at a later date, in contrast to the proposed changed treatment of PEPs and TESSAs?
§ In the spirit of giving credit where credit is due, I believe that the ISA has some good points. The ISA is proposed to have an annual investment limit of £5,000 and can involve investment in cash, stocks and shares (including unit trusts), life insurance and National Savings. The good point is that cash is now included in the option of saving through an ISA. I think that this is an admirable proposal. I am not so enthusiastic about the proposal that life insurance should be included as an option. Life insurance is a highly specialised subject. It is something one does not lightly take on without good advice. That advice does not come cheap. In fact, it is generally recognised that the insurance companies often take up the first two years' premiums in fees. How would this affect the investor in an ISA?
§ The whole subject of fee structure cannot be glossed over. Financial advisers have to earn their salaries like everyone else. We rely on them to give us the best advice for our particular circumstances. In order to be able to supply that advice, they have had to do an immense amount of analysis, carry out investigations into competing products and tailor-make products to the needs of individual customers. All of this takes time and dedication, for which they have to be paid. They are paid out of the commission structure which in the case of life insurance is often covered by the first two years' premiums. I find it hard to believe that the adviser will be willing to spend a great deal of time and effort on 1191 the insurance portion of an ISA, particularly when the maximum investment in the life insurance element is £1,000.
§ The ISA proposals allow withdrawals from the account at any time, but savers must be made aware of the risks of early encashment of life insurance or equity-based products. I look for assurance from the Minister that this would be highlighted in all the literature published and in all the discussions held with potential savers. Perhaps I have missed something, and in the spirit of being constructive I should like some assurance from the Minister that my conclusions are not justified.
§ The proposed ISA is more flexible than the current PEPs or TESSAs—and that is good. My suggestion is that the current PEPs and/or TESSAs could be modified to incorporate more flexibility. This would obviate the need for the introduction of a totally new savings instrument and would not jeopardise the established savings pattern of 6.5 million people.
§ Throughout my business career I have always looked for opportunities and not focused on problems. I frequently irritated colleagues by stating, "There are no such things as problems—only opportunities" and "A problem is an opportunity waiting to happen". The development of the proposal to introduce the ISA could well be in the category of a problem being an opportunity waiting to happen if the Government decided to adjust the current savings instruments to encompass the widening of these instruments and included the better parts of the ISA concept.
§ If, however, the Government persist in introducing the ISA they could be on the horns of a dilemma. Due to the differing statutory requirements for the selling of each type of savings product the ISA could become an administrative nightmare. The cooling off period, whereby the investor has time to change his or her mind, is different in the case of equities and insurance policies. I do not need to take up time explaining what could happen to the hapless investor if he or she decided to split the investments in the ISA in all four categories proposed. A problem—but an opportunity; the job creation possibilities would increase for postmen, envelope manufacturers and forestry workers, with all that paper, to mention but three. Somehow I do not think that that is what the Government have in mind.
§ I would like to turn to the proposals concerning the current holders of PEPs and TESSAs. Having already mentioned the "breaking faith" issue I do not need to dwell on it again—doubtless other contributors in this debate will do so, and probably in a more comprehensive way.
The Government seem to be opposed to PEPs and TESSAs, despite the statement from the now Prime Minister before the election when he said on ITN on 3rd April,
We want to extend the scope of PEPs and TESSAs, so the idea that the Labour Party is going to take action against those is completely absurd".
§ I would like to ask the Minister to confirm whether the opinion of the Government has changed since they took office.1192
§ If the opinion has changed, I would like to make a proposal which has a precedent in the previous change of heart in matters financial; namely, when the rules of insurance companies were changed in 1984. To remind your Lordships, any policy taken out before the rules were changed continued to be governed by the old rules; any policy taken out after the rules changed was subject to the new rules. In this way, the current holders of PEPs and TESSAs would be able to freeze their accounts and start their new savings in April 1999 with an ISA. This would avoid the horrendous administrative tangle, which is inevitable in the transfer of existing PEPs and TESSAs to the new savings instrument.
§ I believe that the Government's proposals have engendered more concern about this administration point than about any other. Of course, anger has been expressed about the lifetime limit, but I am sure that sense will prevail and that the submissions on this point will be heeded. Of course, anger has been expressed about the Treasury take, and I would like to believe that there is no hidden agenda by the Treasury to the effect that it felt too much tax relief was being given. But the genuine concern about the size of the administrative task which would be generated if the current proposals went through without modification—on a pretty massive scale, too—is significant.
§ It is several years since I first mentioned the millennium bug problem in your Lordships' House. I was told that the problem was under control. 1 hope; I hope. The widespread realisation of the problem has resulted in a huge demand for IT staff. Cobol writers are being paid more per hour than the daily subsistence allowance in this House! Most large organisations in the financial services industry aim to be millennium compliant by the end of September 1998. At that stage, and only at that stage, will the systems people be able to turn their attention to the production of new systems to facilitate the transfer of PEPs and TESSAs to ISAs.
§ The complexity of such systems work should not be underestimated. In order to ensure that the systems are foolproof in April 1999, they must be ready for final testing in December 1998. This allows just three months to devise completely new systems for a completely new savings product, with the additional complexity of being able to effect the transfer of some millions of accounts currently held in PEPs and TESSAs.
§ I ask the Minister whether he is confident that such a mammoth task can be accomplished in such a short timescale. I know that he is fully aware of the ramifications of the IT problems I describe and I would be greatly heartened if he could give me that assurance. Perhaps I should brush up on my 30-plus years old knowledge of Cobol and offer him my assistance. But where would I save the earnings I could command for such work?
§ I am greatly looking forward to all the contributions in this debate this evening and I am sure that we will learn a great deal. I hope that my contribution will be accepted by the Minister as a well-meaning contribution to the consultative process on what is an important subject. My Lords, I beg to move for Papers.1193
§ 6.23 p.m.
§ Lord Barnett
My Lords, it is my pleasure to congratulate the noble Baroness on an excellent speech. That is not surprising. I know the noble Baroness very well and I knew that she would make an excellent speech. I even found myself agreeing with some of it, as will be clear in a moment.
The main objective, to which the noble Baroness rightly referred—and it is the Government's objective—is to increase real, long-term savings. There are two real questions. First, what will ISAs do to the savings of middle income earners; and, secondly, what will they do to the savings of low income earners?
Critics have argued that ISAs will discourage middle income earners from saving. The National Institute is a body for which I have great respect. Its January review contains an article by James Sefton and Martin Weale. They talk about the replacement of PEPs and TESSAs by ISAs. They say that it,is likely to result in a reduction in the overall level of national wealth by about 4% of GDP".They base that on a model survey they did. The model will take a long time to be put into effect and, frankly, like most models, it arouses scepticism. I am glad to see my noble friend Lord Currie nodding. I may not be Euro-sceptical, but I am sceptical about such models. They go on to say that the,extra taxation on the incomes of the wealthy discourages savings and this change is unlikely to be compensated by increased savings of poorer people".I shall come back to that in a moment. I take first the point about the effect on middle income earners. The critics argue that they would be discouraged from saving. That is the projection of the National Institute in its review. Frankly, I am bound to tell the institute and your Lordships that that is not true, for one simple reason. I declare an interest. I have PEPs. And who would not? One might as well take advantage of the tax savings. I am happy to avoid taxation in that legitimate way.
I say that it is not true because it does not discourage my saving or that, I imagine, of many middle and higher income groups. The reason is that we are not talking about savings. It is tax relief on investments. In my case, if PEPs were abolished altogether and ISAs were not introduced, that would not affect my investments at all. I would pay more tax and so would most middle and higher income groups. One could live with that, as, I am sure, could my noble friend, even on his modest salary.
Much more important than the lack of effect on middle income earners is whether ISAs will increase real savings of the less well off, namely, the poor. My honourable friend the Paymaster General made a speech on 27th January. I even agree with him occasionally as well as the noble Baroness. My honourable friend said:The stakeholder pension involves a commitment to lock money away in retirement"—I shall come back to that in a moment—while the ISA gives greater access to their money".That is the point. And that is why ISAs, or PEPs for that matter—unlike TESSAs, which have to be held for five years—will not substantially increase real net savings 1194 because access will be available and it will be used. So the net savings will be minimal and the marginal improvement from ISAs, even if they are sold in supermarkets like Tesco or others—I do not know whether the noble Baroness knows of them—such as Sainsbury's, will be very little.
I declare an interest as a tiny shareholder in the Prudential. I have not done too well of late. Its criticism has been the other way around. It believes that ISAs will be hugely successful, but for low income groups. The Prudential believes that that will be at the expense of pension savings. Not unnaturally the Prudential wants ISAs to be moved into pensions without penalty.
I have great regard for the Institute of Fiscal Studies. It also wants reform explicitly linked to pensions. Keeping in mind the main objective with which I started, I agree with the Pm, the IFS and, indeed, with the Government that what they have in mind with regard to the stakeholder pension scheme—at least, what I think they have in mind or, as I see my noble friend Lord Haskel shaking his head, what I hope they have in mind—is that it is possible to kill two birds with one reform. One could have more real savings if one linked them with pensions. I should emphasise that I am not suggesting that everyone should invest in the Pru with their pensions. I do not. I am happy to tell it so.
I accept entirely the point made by the noble Baroness about the inevitable costs of insurance schemes. I hope that the Government will take account of that. If they are trying to encourage more long-term savings through pensions and annuities, I hope that they will look at those costs. However, as the noble Baroness rightly said, the costs represent something which cannot and does not come cheaply. If subsidies are to go anywhere, it might be sensible for the Government to look in that direction, although perhaps not at the firm of the noble Lord, Lord St. John of Bletso—I am referring to Merrill Lynch—because it can do that cheaply.
The plain fact is that the best way to increase long-term savings would be by linking ISAs into annuities or pensions with some tax relief for low-income earners. In that way the Government would meet their objectives while achieving the crucial increase in retirement income through a second pension. I hope that my noble friend the Deputy Chief Whip, who should be a Minister, can assure us that that is the way in which the Government's plan is intended to move.
§ 6.31 p.m.
§ Viscount Runciman of Doxford
My Lords, this is the first time that I have addressed your Lordships in my capacity as deputy chairman of the Financial Services Authority. In that capacity, I should like to say, first, that whatever reservations any of us may have about the present Government's ability to turn the rhetoric of effective opposition into the practice of efficient administration, the decision to introduce an immediate and wide-ranging reform of the whole system of financial regulation was to us on the board of the SIB, as we then were, as welcome as it was unexpected. I have sometimes been asked what it felt like, to which I have answered that it was a bit like being a small boy who 1195 has been unsuccessfully begging the neighbouring farmer for a hag of apples and is then overnight presented by the farmer's successor with a whole blooming orchard.
The difficulties of combining the protection of investors—or should we say "savers"—with the maintenance of flexible and competitive markets for investment products will inevitably remain, even after the now manifest deficiencies of the 1986 Act have been remedied, as I trust that they will be, by the new legislation which is beginning to go through Parliament.
Whoever the innovator may be, innovations will always need to be carefully scrutinised for their potential hazards no less than for their potential benefits to the prospective investor, particularly when the investor or saver may have little or no personal experience of such matters.
It is therefore a little troubling that ISAs should appear to have been so proudly laid out before the investing public with so little thought having been given, as far as I at least can see, to regulatory matters. It is not even clear whether ISAs were first conceived of simply in terms of tax relief, in which case there would be no need for regulatory wrapping at all, or whether, as now seems apparent, they should have been seen from the start as a product of the kind for which an advice requirement is not only appropriate but necessary. That would be so even if the constituents of ISAs were to be deposit products only. Once there is a life assurance element—I have considerable sympathy with those who argue that there ought not to be, or not unless we are talking about single premiums only—a quite considerable advice requirement (and quite a burdensome one) will be inescapable.
Here, I should like to echo some of the points on which the noble Baroness touched in her opening speech. We shall then be into suitability, actuarial projections, polarisation between tied and independent advisers, exit charges, illiquidity and, above all, surrender penalties for early encashment of the kind which, as I am sure I do not need to remind any of your Lordships, can be seriously damaging to investors' financial health.
There are also issues which do not yet seem to have been addressed, although I trust that we shall be assured that they soon will be. I refer to matters such as administration, custody, client money rules on interest, the handling of consumer complaints, marketing costs, possible investment in overseas jurisdictions and the need for proper authorisation of retail outlets.
All in all, the changes likely to be required in the existing regulatory framework will be far from straightforward—and that is even without regard to the obligations which may be imposed by European directives. Paragraph 14 of the Government's proposals for ISAs states that the Government will consider the appropriate regulatory environment and, if necessary, propose changes. I very much hope that that does not mean that the design of this new and potentially controversial product will be settled before the regulatory issues have been properly addressed. I hope to hear an assurance to that effect before the end of the debate.
§ 6.35 p.m.
The Earl of Buckinghamshire
My Lords, before I launch into my speech, perhaps I should bring to your Lordships' attention once again that fact that I am a partner in Watson Wyatt Partners, which gives financial advice to individuals. I hasten to add that that is not something that I do because I refuse to take any more exams!
Although this debate has been called to discuss the replacement of TESSAs and PEPs with Individual Savings Accounts, I intend widening the debate to consider some of the broader issues of savings and taxation in this country. There has, I believe, been a growing realisation that "savings" should be looked at in the round and not in isolated pockets. Unfortunately, the Government have not yet grasped the importance of that.
I turn first to Individual Savings Accounts. The noble Lord, Lord Barnett, mentioned that ISAs are intended primarily for long-term savings. However, I believe that it is the first time that a savings product being promoted by the Government (with tax breaks costing the Treasury revenue loss) has been introduced which also has some short-term savings objectives. I wonder how easily that will sit with the need to encourage long-term savings for our retirement and for our healthcare in retirement, where the costs are ever-increasing. It will be an interesting development and we shall await with interest its impact on savings ratios.
I have also read with interest the introductory comments on the product made by the Minister, Mr. Geoffrey Robinson, who said that it has been introduced for simplicity, flexibility, accessibility and fairness—a somewhat pious hope which I suspect that only a Treasury Minister could utter.
As my noble friend Lady O'Cathain mentioned, a number of administrative issues will prove difficult. I shall mention but one. It relates to the £50,000 limit. I believe that that refers to the market value and, if so, it will be almost impossible to police. If that limit of £50,000 is to stay—I would prefer not to have such a low limit—it seems to me that some form of contribution or book-cost method for determining that £50,000 should be adopted.
I turn now to the transitional arrangements for personal equity plans. I believe that the original proposals on which the Government are seeking consultation are somewhat defective. I hope that the article in the Independent on 5th February will prove to be correct and that the Budget on 17th March will include relaxation in that area. If it does not, there may be many who took out personal equity plans to secure long-term savings, such as mortgages, who will be aggrieved at the Government's proposals and would want another health warning to appear on the product which is being launched.
Having mentioned the Budget, it may be appropriate for me to turn to some taxation issues. The Green Budget produced by the Institute for Fiscal Studies argued that the reform of tax concessions for savings should be implicitly or explicitly linked to pension reform. A number of leaks in the press have suggested 1197 that the Government intend to embark on yet another series of taxation reforms of pension schemes, one of which relates to the removal of tax on higher rate payers. There are some 2 million of these individuals in the country who pay higher rate tax, many on relatively modest incomes. The peculiar position we face is that possibly a higher rate taxpayer will receive tax relief at a lower rate but will pay a higher rate when he retires. I do not believe that that is what the Government intend.
There has also been speculation that the Chancellor may introduce capital gains tax on occupational pension schemes. I note that that is something from which ISAs will be exempt. Linked with last year's Budget changes on dividend tax reclamation, one may ask oneself whether the Government really are in the business of promoting long-term savings. One of the outcomes not anticipated by the Government last July in their £4 billion raid on pension funds was the impact on personal pensions. They found that financial advisers throughout the country advised their clients to contract back into SERPS when faced with the removal of the ability to reclaim tax on dividends. In those circumstances the Government asked the Government Actuary to reflect on the loss. Having reflected upon it, the Government Actuary advised that the removal of ACT did have an adverse impact. I find that to be an interesting opinion given the Government's previously held view that their tax changes would have no adverse impact.
The Prudential in its written submission, and the noble Lord, Lord Barnett, this evening, have said that ISAs should be linked to pensions. That is an interesting structural comment but one that will certainly add to the complexity of ISAs and conflict with the Minister's view that simplicity is part of their attraction.
The noble Viscount, Lord Runciman, clearly outlined some of the regulatory issues surrounding such a move. One imagines that it will have an impact on life assurance unless the Government change the regulations. I fear that if we go down that road the regulatory system will make it very difficult to continue with these new products.
I make no apologies for widening the discussion this evening. We need to understand the close link between taxation policy and savings policy in this country. While ISAs, if improved following consultation, may encourage additional savings, the cost of long-term savings for retirement in this country is possibly very much higher than anyone outside our business appreciates. For example, if one is a 30 year-old and wants to retire at age 55 on a reasonable income of half salary one must start saving at a rate of 30 per cent. of salary per annum. If one bears in mind that this country is likely to enter EMU in future, with long-term gilt rates falling, that figure will increase to about 40 per cent. We already have an inefficient annuity market which I suggest the Government should also look at in their policy on savings.
I am about to overrun my time. However, I should like to turn shortly to the question of financial education. The new savings products and the realisation that the state will not provide for us in our old age mean that 1198 the level of financial information and knowledge must be significantly improved. Even if these new products are supposed to be simple, I believe that the whole area of savings in this country is so complex that thorough education is required. That should start in schools.
Finally, I am sorry to say that I believe the Government have missed a golden opportunity to reform the whole of the savings and taxation system in this country. While they may say that that is a Herculean task for them, I remind them that they have had 18 years to think about it.
§ 6.45 p.m.
§ Lord Sainsbury of Turville
My Lords, before I begin I should like to declare an interest as chairman of Sainsbury's Bank and chairman of J. Sainsbury plc, both businesses which may become involved in the distribution of the new Individual Savings Accounts. I feel that my noble friend Lord Barnett has already declared my interest for me.
I do not think that anyone would disagree with the proposition that for economic and social reasons we should encourage as wide a group as possible to save, yet as a nation we save less than ever. The proportion of income saved in Britain has fallen in the 1990s. Here are a few of the more unpalatable facts. First, more than half the adult population has savings of less than £500, far too little at a time when people are living longer. Secondly, 26 per cent. of adults have no savings or investments. Thirdly, 40 per cent. of working adults contribute so little towards a pension that it is likely to pay out less than 40 per cent. of their final salary. Finally, a quarter of employees fail to make any pension provision at all.
Clearly, people are not saving enough. The previous government hoped to turn the tide by introducing TESSAs and PEPs. They cost the Exchequer in excess of £1.3 billion a year in lost revenue and it is not by any means clear that they have been successful. The evidence indicates that these tax-free schemes do not promote savings as such; rather, they subsidise individuals and families who would save anyway. I would have found the arguments of the noble Baroness more persuasive had she shown that PEPs and TESSAs had increased the level of savings. Those who need to save most on the whole have not taken advantage of the schemes. According to the Institute for Fiscal Studies, the 6.5 million TESSA and PEP holders are older and richer than non-holders. They are to be congratulated on their prudence and foresight, but there remains a vast group of people who still need to be encouraged to save more.
The current tax system is riddled with distortions in its treatment of different forms of saving. The system not only hinders the lower income investor; its lack of neutrality aids the higher income investor at the taxpayers' expense. Savings held in bank and building society accounts and direct investments in equities are treated less favourably by the tax system than pensions and housing. This penalises people who hold liquid assets as a precautionary balance against unforeseen changes in their circumstances.
1199 Any government would have had to cap the escalating charge of TESSAs and PEPs, which is forecast to cost the Exchequer in excess of £1.7 billion per annum by the year 2000. The new Individual Savings Account does this and more. I welcome it for two major reasons. First, it is a move towards neutrality in the tax treatment of savings by exempting interest income from bank and building society accounts. Secondly, it is an attempt to help the less well-off, many of whom save nothing at all at present and need to be encouraged to start.
However, I have a few technical reservations about the Individual Savings Account proposals as they stand. Since they are still at a consultative stage this may be a good opportunity to suggest a few alterations to the policy. First, the cash and equity elements of the ISA should be separated. There should be different limits for each, not sub-limits, making regulation easier. This will enable the cash product to be widely available without the necessity of offering equities, thus reducing the potential for advice being sought. Secondly, since one of the aims of the ISAs is to promote saving among those who currently save the least, it makes sense for the cash contribution of £1,000 a year to be substantially increased. Those who save by cash are typically those on the bottom rung of the savings ladder. To limit their cash investment to £1,000, while allowing an extra £4,000 a year in equities, life insurance and assorted other financial contributions, seems unduly limiting. The ceiling also seems slightly regressive since the TESSA cash limit was £1,800 a year.
Finally, a cash product with a limit of £1,000 is unlikely to be economically viable for financial institutions and will not, therefore, be made widely available. I think that a figure of £2,000 would be fairer and more effective.
Those reservations aside, I believe that the new ISA has the capacity to achieve its aim of improving saving levels among low income groups for a number of reasons. First, the most important feature of the ISA is the absence of a minimum holding period, making it attractive to low income savers with variable consumption needs. That is in stark contrast to the lock-in requirements of PEPs and TESSAs which appealed to those with greater financial security. Secondly, the lack of a minimum investment will provide an attractive savings product to many first time or low-income savers. Thirdly, the broad range of assets that can be held as part of an ISA makes it flexible for changing household needs and an attractive prospect to potential savers with less financial and employment security. Finally, ease of access in depositing funds should have a beneficial effect on the frequency, and hence levels, of savings.
Needless to say, all those features will be equally as attractive to high income investors as they are to middle and low income investors. Attractive and simple financial packages can increase savings. In this context I would mention the save as you earn share scheme option operated successfully by many companies across the country. My company has maintained such a scheme since 1974, and currently employees are saving at a rate 1200 of over £25 million per year. I believe that that scheme by virtue of its accessibility and incentives has increased the number of people who save.
To conclude, despite the few reservations I mentioned earlier, I welcome the introduction of the new Individual Savings Account. Any incoming government who wished to show financial prudence would have had to reform the escalating cost of TESSAs and PEPs. I believe that the new Individual Saving Accounts have the potential to redirect the tax system to help individuals on lower incomes without unduly harming the interests of current savers.
§ 6.52 p.m.
§ Lord Naseby
My Lords, I declare an interest as a non-executive director of the Tunbridge Wells Equitable Friendly Society. The stated intentions,to encourage saving by persons who currently do not do so".is a laudable aim. It follows that if it is to be successful the saver will want an investment that can be bought with total confidence and little risk. However, as one looks at the present design of the ISA, that is unlikely to happen. I shall put forward five reasons why difficulty might arise. First, the ISA product itself is a complex one. It has a whole mix of vehicles. That, in itself, will be difficult for someone who has not previously saved.
Secondly, there is a failure, as several noble Lords have said, to distinguish between short-term and long-term saving. Thirdly, and I believe this fervently, if someone is going to save, that person needs advice, because it is precious money for the family. Advice is needed on where that money should go. Fourthly, we in this Chamber should all be aware that there is at the moment no maximum charge prescribed for this savings vehicle. We have only to look at some of the charges in the market to understand the need for some degree of control and regulation.
Finally—this is a crucial point—for existing non-savers, the product must be integrated with the tax and benefits system. If it is not, there will be enormous repercussions for that group in society. As one noble Lord said earlier, there are enormous regulatory matters that are of concern. There are consumer concerns about the suitability, the prioritisation and the appropriate levels of contribution.
I do not wish to cross swords with those from the supermarket world, but one has to say that while new routes are being talked about for savings, and supermarkets can easily collect cash and distribute it, one wonders how they can provide advice. Provision is, and will have to be, a specialist function. It requires expertise. The regulators rightly state that they are worried about the quality of advice. They would be even more concerned were ISAs to be introduced without stringent controls on providers. That is something about which we should think long and hard.
We need also to think about priorities, particularly for this social group. Such people cannot afford to buy all the protection and savings that they would wish. So they have to choose. They must think about pensions, long-term care, life assurance and sickness benefit. In 1201 addition, they must think about savings. They need appropriate advice. That cannot be done just through a little brochure. They need regulated sales through a trained market of authorised providers who can meet the professional standards laid down by the regulators.
I turn to the potential problem, which I see as a large one, of tax and benefits. The middle classes, as your Lordships will know only too well, are not main users of benefits. Those who do not save at the moment use the benefit system. The question that has to be asked is: if savers acquire an ISA will they deprive themselves of other benefits to which they could be entitled but for acquiring that new government-inspired asset? If an ISA counts as an asset, the objective of increasing saving among the less well-off will be restricted severely.
I give a classic example from the friendly society movement. There used to be millions of sickness and accident insurance contracts. Once government provided that facility, those contracts were terminated. That was a natural shift in attitude by the market. What about "appropriateness"? What is the relative appropriateness of an ISA product versus alternatives with different tax regimes—pensions, national savings, unit and investment trusts? Will the result be a reduction in the purchasing of those products? Do the Government understand that if an ISA is to be endorsed by the Government the first-time saver might say to himself or herself, "Yes, this is preferential to anything else that I should buy?"
I return to the concept of encouraging saving by persons who currently do not do so. I had believed that the concept of the ISA offered the opportunity for a linkage between fiscal policy and welfare reform. Surely the ISA contract can be constructed so that rather than allowing the big financial institutions to cherry pick, and, in effect, just protect the citizens from the risk of tax, it could become the basis of welfare reform. To achieve that, the Chancellor must construct the ISA contract so that it benefits the "mutual" organisations such as the small building societies, the friendly societies, and the credit unions. I fear that if he does not these laudable groups will be swamped by the big boys. A few nights ago, we in this Chamber learnt all about differential pricing, loss leaders and the like.
It seems to me that there are two elements of the ISA; first, the life assurance element of the £1,000 premium level and, secondly, the savings vehicle. A few years ago, your Lordships and Members of another place passed the Friendly Societies Act which modernised the movement. I believe that with the ISA there is an opportunity to use that movement, the small mutual building societies and the credit unions. All offer a vehicle based on mutuality to the benefit of those who do not save. If that were done we could have the first building block to create a framework for approved welfare providers. To that could be added the provision for long-term care of sickness and perhaps pensions provision. But that is another debate.
§ 7 p.m.
§ Lord Desai
My Lords, I thank the noble Baroness, Lady O'Cathain, for what has already proved to be a good debate. I hope that my remarks will be additional to, and not repeat, what has already been said.
I was greatly worried about the regulatory aspects of the ISAs and I am glad that the noble Viscount, Lord Runciman, has expressed his views. I can do no better. People do not save because they do not have enough money to save. Those who have money save; those who do not have money do not save. As my noble friend Lord Barnett said, later those who can save can have a variety of products to invest in depending on the tax concessions which they receive.
An appropriate reform would be to have an expenditure tax and not an income tax: then many of the fiddles would not be required. Why my right honourable friend is not taking that bold step early in what will no doubt be a 15-year reign as Chancellor of the Exchequer I cannot understand. It would break through the log jam of the many distortions which exist in the savings market and which confuse rather than help.
I am sorry to say that I am not a great fan of the financial services industry. As regards the small saver or small pension buyer, the experience of pensions misselling has been such that I should be frightened to advise anyone. With great respect to my noble friend Lord Sainsbury, the image of people in supermarkets with children and a large shopping trolley swiping in ISAs and buying equities from around the world is unrealistic. Hang on, let us get a realistic picture of what it is like to shop in a supermarket! For those who shop—and that is women—it is not as portrayed in the TV commercials; it is a much more hassled operation. I seriously advise the Government to rethink the trendy business of saving while you are shopping.
Similar misselling has occurred in respect of endowment mortgages and annuities. Women get a rougher deal with annuities than men. The financial services industry is not good to women and I hope that any such bias will be removed from ISAs.
Furthermore, equity buying is not easy, especially equities around the world. People do not understand equities and are surprised when Asian markets decline and billions of pounds are wiped out. A lot of advice will be needed. I hope that whatever products are on offer will be cheap, with few costs and penalties for withdrawal. I also hope that they will be easy to understand, like unit trusts.
I wish to conclude with an odd thought which may amount to nothing. Moslems are taking objection to the title of the Mecca shops. "Isa" is the Moslem word for Jesus. I want to point out to my noble friend that that might cause trouble. I hope that it is not so, but we should not bandy around such words.
§ 7.5 p.m.
The Earl of Clanwilliam
My Lords, I thank my noble friend Lady O'Cathain for a brilliant introduction which covered the whole range of the subject. It is difficult to discuss the troublesome problem in relation 1203 to ISAs, PEPs and TESSAs without examining the whole savings scheme, as has been done by several noble Lords. It is a wide and vital activity which divides into three. The most important is long-term pension savings for retirement. Secondly, there are savings for the intermediate term for mortgage cover and future debts for those who are prudent enough to have the money. Thirdly, there are short-term savings for holidays, the Christmas fund, next year's sales or to spend in the shops of the noble Lord, Lord Sainsbury.
We must analyse how those activities are provided for through the existing system. Primarily, and in the interests of government and taxpayers, the need is for long-term savings to provide retirement pensions. There are a range of existing plans which will be left in place. The noble Lord, Lord Barnett, indicated how ISAs can be attracted into them and I support that good idea. The PEP and the TESSA fulfil to a large extent the intermediate term savings from taxed income. I accept that the TESSA has had its day, being a short-term product, and that the savings from the loss of tax from the TESSA will be used to support the ISA. I wonder why we should not also support National Saving Certificates. I believe that a great deal of grief would be spared if we used this simple route of giving a tax rebate to saving certificates. They offer guaranteed security with immediate accessibility and an alternative to investing in the gilt market. Additionally, the local post office would benefit, a point which I made in a previous debate.
In particular, the sale of savings certificates would not require intervention on the part of the noble Viscount, Lord Runciman. The PEP plan should be left to wither on the vine with the additional political advantage that it would keep faith with the saving public by avoiding retrospective legislation. The saver will not save unless he has confidence in the probity of the Government and that is not encouraged when the new Chancellor starts off by raiding their accumulated funds and commits the "sin" of retrospective legislation.
The small saver is by nature a short-term saver and inherent in existing plans is the need to ensure some semblance of permanence to warrant the privilege of tax relief. That resolved itself in previous incarnations into the imposition of a minimum term before the seller benefited from tax relief. It also had the advantage that the cost of very small contributions could be written off over the term of the savings plan. Costs do not seem to figure largely in the consultative document, except for a rather airy reference to the use of swipe cards in supermarket tills, as already pointed out with skill by the noble Lord, Lord Desai. Perhaps we could hear more about that from the Minister when he winds up.
In the present ISA proposal, there is no time limit on the savings plan and there is no firm understanding of how the costs of those small sums are to be covered. It follows that there is likely to be no long-term effect on the savings of the population at which the Government are particularly aiming; that is, that part of the population which is particularly a target of the stakeholder pension plan. Does the Minister not agree that compulsion will form an essential part of the 1204 success of that plan? Where, then, will there be any spare money for the ISA unless the plan of the noble Lord, Lord Barnett, is incorporated into it?
I have spoken on several occasions in your Lordships' House on the subject of PEPs. It seems to me that the accumulated pension fund should be used specifically for providing retirement income at the expense, if necessary, of that old friend—the tax-free capital sum. Then the advantage should be left to the PEP or ISA saver if they are allowed to amass sufficient sums to pay off the mortgage and other accumulated debts. The PEP mortgage has become popular following the less attractive performance of with-profits endowment policies. It will be a sad day when the PEP is stopped. However, were ISAs to be a more attractive proposition with tax benefits, that would be all to the good. But surely the PEP should have the same advantage.
There is great merit in the principle that savers should have encouragement from the outset towards an intention to keep on saving. To that extent, the ISA does encourage that with partial tax relief from the proceeds.
There is certainly a case to be made for term assurance to be made through the ISA but it would seem to be more logical to attach life assurance to the pension plan, because that would augment the total pay-out in the event of death before retirement. The range of investment vehicles adds to complexity in reporting and referring between providers. I suggest that the Government should take a hand and appoint the regulator—it will be the noble Viscount, Lord Runciman—to prepare a schedule of OEICs, open-ended-investment-whatever-they-ares, showing the performance of the underlying funds over 20, 10 and five years which should be published regularly in the press and available on request by the investing public. It will then be possible to have a simple, single product allowing sums of up to £500 to be invested with a range of recommended single funds. That would make life much simpler.
The performance of shares over deposits has been demonstrated clearly since 1920 in the BZW analysis of shares with income reinvested. That would provide a guide for the investor, who, in my plan, could equally invest in gilts through savings certificates, granted a tax rebate on them. The OEIC would be available for immediate investment of sums up to £500 for the small saver.
There is perhaps one misunderstanding which I hope the Minister can clear up about the £50,000 limit. Will the Minister confirm that it refers to the premiums and not to the accumulated fund derived from the investment. If it refers to the premiums, then it is a paltry little thing which will be no good to anybody. Therefore, there is a great deal of work to be done before the ISA surfaces in all its glory. The insurance industry is not alone in adopting the acronym KISS—keep it simple, stupid.
§ 7.10 p.m.
§ Lord Spens
My Lords, I congratulate the noble Baroness, Lady O'Cathain. I remember many years ago driving to work at the unfashionably early hour of six 1205 o'clock in the morning—unfashionable in those days—and regularly hearing her voice on the radio lecturing farmers in Oxford every time I switched on the radio. Her clarity then was brilliant; her clarity today was equally brilliant.
I must declare an interest. I believe that I am probably the only Peer in this House who is a practising chartered accountant who actually deals with individuals who come to me with problems of what to do about ISAs, PEPs and everything else. I subject people who come to me to a gruelling ordeal which lasts about an hour and I extract from them all the financial facts I can, including some, I suspect, which they do not declare to the Inland Revenue. I get a picture. I believe that that is best advice as designed by the SIB—and I am registered with the noble Viscount as an investment business adviser. I subject them to something called the Spens formula. I put all the facts into a computer, give it a kick and out come my answers.
It is very simple. I divide the people who come to me into two categories. I call category A the "haves". They have individually or combined as a couple a spendable income after tax and other deductions, like maintenance, of £18,000 per year. That is not very much. It is still in the lower levels of the tax regions. Category B is for people who have less than £18,000 per year, and they are the "have-nots".
I deal first with the "have-nots". My best advice, which I am required to give under the rules, is that they do not touch any of those products. They put their savings, if they have any, into their house. It is the single best investment that any individual can make today. I cite as an example my own house which I bought 30 years ago for £15,000; I had it revalued last year at £450,000. That is a multiple of 30 in 30 years. There is no other savings medium that does that, or can do that. Therefore, for anyone with less than £18,000 per year I tell them not to touch any of those products. I tell them to put their money into their house and to buy the best and largest house that they can afford.
I hope that members of the Treasury are listening to this because £18,000 per year is divisible by 12. It is £1,500 per month. After paying for a £50,000 mortgage, which costs, on interest terms, roughly £330 per month, they will have roughly £1,100 or £1,200 to spend. They will probably have to pay a redemption mortgage, which brings down the figure to about £1,000 per month to spend. That is roughly what a Peer in this House would receive for 14 days work if he claims for a secretary as well as his personal expenses. It is not very much. There is very little room for saving for any family on £1,000 per month.
To those who do wish to save and feel that they are able to do so, I advise them to put their money in a friendly society—where you get £25 per month subscription tax free—or a bank or building society. There is no point in putting the money anywhere else. Indeed, one attraction of the ISA, if there is one, may be the use of the cash investment option at Sainsbury's, or anywhere else where people can put that money, provided the operating costs do not kill it.
1206 Roughly £50 billion is invested in PEPs. Of those 40 per cent. are £6,000 PEPs, so that 40 per cent. are minimum subscription PEPs—roughly £50 per month or £1,000 per year. That is very clearly a vehicle for the rich and the people who have. It is not for anyone else.
I established with the M & G group that the cost of running a PEP is £22 per year. The minimum investment of £50 per month amounts to £600 per year. The income on £600 per year invested in a PEP is probably less than 3 per cent. Let us say that it is 3 per cent.—£18. That £18 comes nowhere near the £22 a year, even if you take into account the tax advantages, which produce another £3. It still comes to less than the £22 that it costs to run a PEP. Therefore, at the lower end of the market there is no advantage in a PEP. There is none whatever.
That takes me back to many dinners that I used to have with the Treasury years ago when we tried to fathom their minds. I learnt something which I called the Spens principle. The Treasury likes to do business only if it can complicate it. It has forgotten the basic business principle: the KISS principle—keep it simple, stupid. That is basically what the present PEPs do, but not, I am afraid, for youngsters or people who do not have £18,000 per year.
I turn to the complications which have been introduced by the Treasury. The annual limit of £6,000 has been reduced to £5,000. For goodness sake, that is not even divisible by 12. It is extraordinary. If you wanted to do a monthly subscription on that basis, it would cost £416.66.66 recurring pence. It does not even come out as a real number. Indeed, the Treasury must be out of its mind to introduce such a thing. Nevertheless, £4,800 does work.
The lifetime limit is very costly. We have been through that. Who is going to police it? The software would have to be created, and to the year 2000 problem I add that of the euro, which will come into circulation at roughly the same time. There are far too many unnecessary products. As for insurance policies, I have not recommended one of them for over five years—that is next week's scandal which is coming your way. Insurance policies are not transparent; they are not accountable; and they are costly.
M & G tells me that it would cost £8 a year, in addition to the £22, to make the scheme work for that group at the lower end of the market. That means £30 a year costs would have to be covered from income. The group will not get it because there is no method that I know of which makes investing in a PEP under £18.000 a year work. However, I shall say very quickly that the concept of the ISA with a cash element, provided that it can be taken from PAYE before it gets into the wives' hands, is one that will work. I hope that that will continue.
§ 7.20 p.m.
§ Viscount Brentford
My Lords, I, too, am most grateful to my noble friend for introducing tonight's debate and for doing so fully and effectively. The debate follows both the December consultative document and also our debate on savings for retirement last October. I applaud the Government for encouraging savings by those with more modest incomes through being able to 1207 make payments to their ISA from many outlets, including supermarkets, shopping centres, garages and also by deduction by their employers from their pay. I was certainly requesting the noble Lord, Lord McIntosh, to examine this issue when I said in our debate on 22nd October (col. 746 of Hansard) that I wondered whether ISAs could be sold as widely as lottery tickets are sold today among those with regular pay packets. I am grateful to the noble Lord for carrying through that procedure.
I should like to ask the Minister a question on the components of ISAs; namely, cash, stocks and shares, life insurance and National Savings. I do not quite understand what my noble friend Lord Clanwilliam was saying about National Savings, as all are included that are not otherwise exempt from tax, such as National Savings certificates. Therefore, they must be outside the ISA. However, I am not clear why gilts are not included in that list. Perhaps the noble Lord will be able to tell me the reason. While they are free of CGT and interest can now be paid gross, the income outside an ISA would count towards personal allowances for income tax purposes. I should have thought that many investors, especially those with a more modest income, would feel happier to invest in a safe haven like a gilt, which can give quite a high income, rather than in stocks and shares.
I also have a question for the Minister about putting TESSA and PEP investments into ISAs—a question which many other noble Lords have mentioned. On page 10 of the consultative document, the Government say that they want,the great majority of those people who have invested in these schemes to be able to retain the benefit of tax-free savings in the ISA tip to the overall investment limit".I wonder why they do not want all previous investors to retain the tax-free savings. Who are the minority to whom they do not want to carry through the tax-free benefit? I suggest that all funds should be able to remain tax free.
As far as concerns the £50,000 overall limit, can the Minister say why the Government will not consider increasing the amount to £100,000? I agree that there should be a limit, but I wonder whether the sum of £50,000 is too low. I give the Minister four reasons. First, as regards anyone investing up to the annual limit of £5,000 or even, if that was increased, £6,000, to facilitate the arithmetic of the noble Lord, Lord Spensfor 10 years of his working life, why should that person not be able to save in the system for longer?
Secondly, the value of an annuity purchased with an ISA on retirement would be very much more meaningful if that person were able to make the purchase with £100,000 rather than £50,000. It seems to me that that would be a great help on his retirement. Thirdly, it is an active disincentive for those who have already made substantial savings through TESSAs and PEPs that they should not go on saving. That is a great pity.
My fourth point has already been mentioned by noble Lords. My suggestion would help those institutions providing ISAs to balance their books and not make a loss because of the difficulty of dealing with small sums 1208 for short periods of time. Indeed, it would help them financially. Incidentally, I hope very much that the Government will keep their monitoring and compliance procedures as simple as they can, having due regard to the necessity of security. In that way management costs will be kept low.
I have one final question and answer to put forward. In their document the Government ask whether prize draws will lead more people to save. I believe that the answer is no. However, perhaps I may ask the Government a question. Will there be one entry per individual who invests in ISAs? On the other hand, if it was one entry per £1,000 invested in an ISA, so that a person with a £2,000 investment would have twice the chance of the person with £1,000, I believe that such a scheme would encourage investors to save more. I wish the scheme well, but I believe that there are a number of points which still need to be ironed out.
§ 7.27 p.m.
§ Lord Currie of Marylebone
My Lords, I start by thanking the noble Baroness, Lady O'Cathain, for introducing this stimulating and timely debate. We have had a wide-ranging debate and I believe that the points that have been made will be extremely helpful to the Government in thinking through the details of the scheme that they propose. We should also thank my right honourable friend the Chancellor of the Exchequer for allowing us to debate this set of questions before the scheme is put in place. Without this clear and innovative commitment to consultation on a scheme which is clearly important for the future of savings in this country, we would not have been able to have such an informed debate and allow it to feed in to government thinking. Certainly it was not the practice under the previous government, but I hope that it continues to be the practice of this one. Indeed, it allows us to draw on wide expertise and it is an innovation that I warmly applaud.
Perhaps I may put the debate in a slightly wider context as regards the question of savings in the economy as a whole, and make a few broader points. If one is thinking about savings in the British economy, the major influence is not the sort of subject that we are debating tonight—that is, the details of tax, and so on, important though that is—but rather the fluctuations in the economy as a whole. I have in mind the boom-and-bust and the surges in inflation that we have seen in the past. For example, the personal sector savings ratio is driven very much by that—it was 13 per cent. at the beginning of the 1980s and halved by 1988 with the boom. It then went back up to 13 per cent. by 1992 and has been coming down a little ever since. That has nothing to do with the tax scheme and everything to do with the cyclicality of the British economy. The lesson I draw from that is that the surest way to maintain stable savings behaviour is to ensure a stable economy. That is why the decision to give the Bank of England independence—we shall consider that matter when we discuss the Second Reading of the Bank of England Bill on Friday—and the unpopular, but I 1209 think necessary, decision on interest rates are all part of creating an environment in which stable savings behaviour will occur.
There is also much evidence that tax treatment of savings does an enormous amount to move savings from one instrument into another but achieves rather little overall in promoting savings for the economy as a whole. Important though it is, it rather determines the form of savings and not the overall level. Indeed, one might think that tax breaks even have a perverse effect. For each person who is encouraged to save more through a tax advantage, there is someone else who may consider that he can put less aside and take advantage of the tax break in order to accumulate a certain amount at the end of the day. The net effect on savings in the economy may go the wrong way. Some studies try to analyse the effects of tax on savings. My noble friend Lord Barnett mentioned one of them. I encourage him in his "econo-scepticism" in this matter. That particular study for the national institute, fine though it is, is based on a calibrated model, which is technical economics jargon for "largely made up". It is not really based on firm empirical foundations.
Therefore it is better to focus on the individual effects of the tax treatment of savings. I echo the point that my noble friend Lord Sainsbury has made; namely, the tax benefits that we give in this area are enormously concentrated on those who are already better off, particularly higher rate taxpayers. I think it was said that one-half of the benefits go to lower rate taxpayers. However, the implication is that one-half go to higher rate taxpayers, and that is a disproportionate benefit. That focus is much more concentrated even than as regards financial assets themselves. It is clear that the savings in our society are unequally distributed. If one considers the tax benefits given through PEPs and TESSAs, they have been disproportionately focused—even more than the disproportionate distribution of assets—on the better off. That is why I applaud the Government's decision to introduce a scheme that will allow the less well off to save and to gain tax advantage in an appropriate form. It is clear that such groups cannot lock up their savings for extended periods, nor should they take risks. It seems to me that the new ISA could well meet the needs of that group of people.
I recognise the issues that have been raised in this debate. The noble Lord, Lord Spens, gave a fascinating account of the economics of the matter. Those points need to be borne in mind. Costs must be kept down; simplicity is the key. We need to tackle the regulatory issues. I believe that it would be desirable—it should not be beyond the wit of man or woman—to define a scheme which provides for no lock-in periods, even for safe investments such as deposits, requires no minimum investment levels and is marketed through more accessible outlets. I heard the reservations of my noble friend Lord Desai, but I believe that one of the reasons the marketing of financial products is directed to a disproportionately limited group in society is that we have not devised the simple products that we can sell in a safe and reliable way through much broader outlets. I should like to see that happen. I note that the 1210 Government hope and think that they may well attract an additional 6 million savers as a consequence. If that is achieved, it would be a most desirable result.
The previous government sought to extend share ownership through their successive privatisations with special terms for small investors. That was largely a failure long term as most of the small investors sold out—wisely in many cases if one studies the record of the share prices in question—and the shares ended up with the large institutional investors. That form of investment was not the appropriate one for that group of savers. I believe that the scheme we are discussing has the much more realistic aim of spreading the habit of saving more widely in the community, not through risky equity investment but through advantageous, safe, prudent forms of savings. I hope that we can all support that laudable aim.
If the scheme that has been put forward can give tax relief at the appropriate point to those in low income groups it is desirable. That clearly means that if tax benefits are to be spread more widely, there needs to be a limit on the overall contributions that attract tax relief. and hence the need for an annual limit. The implication is that if a scheme of this kind is to run for some time, one also needs a lifetime contribution scheme to avoid a large proportion of savings which already exist attracting tax relief and imposing a high cost on the Exchequer. If the interest on all bank and building society deposits were sheltered, that would cost nearly £3 billion. That is a large amount of money that the Government could better spend in other directions.
I hope that this scheme will be welcomed in principle by all sides of your Lordships' House, and that it will be well targeted on poorer groups of society who missed out on the tax cut, tax break era of the previous government. I hope that the Government will provide a detailed scheme that can be made to work in the light of the points that have been raised in this debate.
§ 7.36 p.m.
§ Baroness Seccombe
My Lords, I was so pleased to see this subject down for debate today. I thank my noble friend Lady O'Cathain for initiating much needed discussion on this area of saving. I thank her and congratulate her on a typically robust introduction to the debate. I do not intend to detain your Lordships for long as I have no expertise in financial matters. However, I feel that I can speak as the man or woman in the street who just happens to like PEPs and TESSAs. I hope that your Lordships will forgive me if my contribution is seen as somewhat simplistic and brutal.
When my noble friend Lord Lawson of Blaby introduced PEPs I began to invest up to the annual limit. I did so as I understood that provided I kept the money in the PEP for at least a year it would remain free both of income tax and of capital gains tax. I felt it was the basis of a fund which one day might be called upon for long-term care and, if not, would provide for other needs. I have always thought that governments believed in people providing for themselves whenever possible. I even believed that the present government wished that also, but now I am not so sure.
1211 TESSAs, which were introduced at a later stage by my right honourable friend John Major, have also been a huge success. Millions of people, including myself, are on TESSA 2. These vehicles for saving have been both popular and encouraging. I cannot for the life of me understand why any government would wish to change the system unless of course it is really another two taxes to add to the 17 already introduced by this Government. I have tried to find some reliable information on ISAs—this Government's new idea—but so far without success. There is apparently no final decision yet as we are still in the consultation period.
However, I have heard not one good word until today, or seen one written, about ISAs by the investment industry, financial journalists or by individuals. If it was thought that this new initiative would be well received, I can only think that the Government must have been listening to the wrong focus groups or may even have been asking the wrong questions. I think it is right to have an annual limit, but not an overall limit for a lifetime, even for new investors. The greatest crime, if I may call it that, is to penalise those who have been prudent over the years. To impose a limit of £50,000 on those who have already saved more than that in PEPs and TESSAs seems ridiculous and completely unacceptable.
I, along with hundreds of thousands of others, feel completely let down and cheated. I do not wish to stash my limited savings abroad. I resented the proposed limit being announced by one who has done so.
The consultation period, I presume, will continue until shortly before the Budget. I can only hope that the Minister will draw the debate to the attention of his right honourable friend the Chancellor of the Exchequer. The whole episode of ISAs has been a disaster so far and the retrospective taxation will not entice newcomers to invest. Perhaps the best advice was from one financial columnist who suggested that it was a good idea to invest but only £1 because in that way one would qualify for the free draw.
It is extremely sad to reflect on the brilliant initiatives introduced by my right honourable friends and to think that they may be replaced by an initiative which will find few friends.
§ 7.42 p.m.
§ Viscount Hanworth
My Lords, I, too, thank the noble Baroness, Lady O'Cathain, for introducing this timely topic. She did so in a spirit of constructiveness and in a way which has perhaps taken some of the wind out of my sails. I had thought that I could expatiate in an angry way; and I cannot do so. Nevertheless some noble Lords on these Benches were delighted to hear that the Government intend to dispose of one of the tax atrocities of the previous Tory administration which has been hanging over our heads.
It is worth while giving yet another summary of the provisions of the PEPs and TESSAs regime if only because they are so extraordinary. They represent a massive subsidy from public funds in favour of a few high income earners.
1212 Under the regime which is about to be abolished, a couple could save a total of £18,000 per annum in PEPs and another £2,000 in TESSAs and expect to derive an income which is wholly exempt from tax. The current cost to the Exchequer of the two schemes is estimated to be somewhere between £1.3 billion and £1.5 billion per annum. Little is known of the circumstances of the beneficiaries of these provisions beyond the fact that 50 per cent. of the tax relief is received by those in the highest tax bracket. In effect, a group of highly privileged persons is being rewarded over again for the privilege of being able to salt away large sums of money on an annual basis; and that benefice purports to be an incentive to encourage saving. The abolition of that abuse will surely warm the hearts of the egalitarians, of which there remain quite a few on these Benches. I am confident in asserting that and believe that we can declare roundly and without hesitation that the Government have got it right on this occasion.
Since December we have been hearing an extraordinary defence of the PEPs and TESSAs. In another place it has even been asserted that the abolition of the regime amounts to a kind of retrospective legislation. We have heard that, too, in this House. How can legislation which is intended to stem a flow of future emoluments to the rich, which springs from capital assets, be regarded as retrospective?
The new ISA scheme is designed to encourage saving among a wider class of middle and low income earners. We are told that 6 million people in all might come within its ambit. Even if that were the actual outcome, the ISA provisions would do little to amend the problems posed by the woefully inadequate pension schemes of the majority of our population.
People fail to provide for their old age because they fail to save. They fail to save because their incomes are inadequate for the purpose. We have been told that 50 per cent. of the population have less than £200 to their names, and not the more optimistic £500 about which we were told. If people cannot save on their own behalf, the Government must undertake to do so for them. And governments have been failing in this respect for many years. It is time to amend the situation.
The problems we face in securing adequate provision for people in their retirement cannot be explained by the lack of a culture of saving. They are to be explained by the startling inequalities of income and wealth in this country which deny the opportunity of saving to a large proportion of the population.
Perhaps it would be helpful to characterise the extent of income inequality in this country in abstract terms. The economists have a measure known as the Gini coefficient. To explain the measure we can perform the mental exercise of cumulating the nation's income, beginning with the incomes of those who earn least and progressing ultimately to the incomes of the highest earners. If income were distributed equally, we would be describing a straight line which rises at a slope of 45 degrees from the bottom left corner of a square box to the top right corner. As it is, the curve is almost flat at the beginning. Then somewhere beyond the mid-point of its base its slope begins to steepen radically as the 1213 earnings of the individuals entering the running total grow rapidly. Eventually the top right corner of the box is reached by an almost vertical ascent. We can measure how far the actual curve departs from the egalitarian line at 45 degrees. The maximum distance of this departure constitutes the so-called Gini coefficient.
The extent of income inequality in the countries of western Europe can be compared simply be comparing their Gini coefficients. The results of recent comparisons have been quite startling. They indicate that the UK suffers a degree of inequality which is in excess of the rest of Europe. I am sure that many of my colleagues on these Benches will join me in calling upon the Government to defeat the Gini of inequality.
§ 7.47 p.m.
§ Lord Newby
My Lords, I join all other speakers in thanking the noble Baroness for initiating the debate. It has demonstrated that we are grappling with a fascinating, potentially important initiative but one which has a number of down-sides unless the Government get it right. The Government should be congratulated, too, on producing a consultation document which gives a relatively sensible amount of time in which to make comments. It is also easily readable.
On leaving university my first job was with Customs and Excise. I was given the task of helping to draft the first set of booklets which explained to retailers how they would account for VAT. I am afraid that it was not just beyond my abilities but beyond the collective abilities of the entire serried ranks of Customs and Excise officials. In the end we produced seven booklets on seven schemes. I think that it is fair to say that most of the small shopkeepers about whom we were worried—the equivalent of the small savers about whom we are concerned today—found it extraordinarily difficult to make any sense of the booklets. The consultation document is remarkably brief and clear. It has avoided the pitfall that all tax officials have in their mind—that unless they put in every last detail someone will say, "You didn't think of For many officials that is a severe worry.
From these Benches, we support the principle of encouraging higher levels of savings, in particular for those on relatively low incomes. We have to accept that for those on low incomes who do not pay tax, saving is a luxurious concept which is a long way from the reality of their daily lives. However, we clearly want to see the savings principle extended down the income scale.
I wish to talk principally about how that might be achieved. Perhaps I may make two points about the £50,000 limit. It has been mentioned by a number of speakers. The reason given by the Treasury in the consultation document as to why £50,000 has been chosen is that, combined with the annual contribution rate, that should keep the cost of the scheme in line with the estimated costs of continuing the existing PEP and TESSA schemes. A group of people feel aggrieved that what they saw as an ongoing tax saving will now in part potentially be taxed. What will be the additional cost to 1214 the Treasury if the existing holders of TESSAs and PEPs, with an aggregate total of more than £50,000, were enabled to transfer across the full combination without any proportion of it being taxed? I do not know, but I suspect that it is not a particularly large amount.
The second question that I wish to raise in relation to the figure of £50,000 is whether it will adequately deal with some of the purposes for which we all wish people to save. One such purpose, even if one has a pension or series of pensions, is long-term care. It is a very real issue for many elderly people. According to Laing & Buisson, the sector leaders in this area, the advice is that an individual should seek to have a fund of approximately £54,500 available for long-term care. That sum represents three years of care in an average nursing home. In certain circumstances the cost can be significantly greater. I know that the £50,000 is an investment sum rather than a capital sum at the end, but it seems to me that the sum is rather small if one expects it to deal with a number of major blocks of expenditure with which elderly people may find themselves towards the end of their lives. That should be a relevant consideration as Ministers decide whether £50,000 is the right figure or whether the amount should be rather larger. I hope that at the end of the day the figure is not determined merely in relation to the overall cost of the scheme.
The success of this scheme depends on attracting people who are on more modest incomes, and there are two components that need to be examined carefully. Incidentally, I believe, as the noble Lord, Lord Sainsbury, said, that the scheme has a number of features—of which flexibility is one—which suggest that it may be possible to change saving habits so that one is not simply looking at a static situation. The first question to be examined is how one can devise products that are simple to understand and not too costly to run. There is an inevitable tension between simplifying the product and having proper regulation in place. The history of pensions mis-selling leans towards a requirement for effective regulation. But, equally, there is a danger in that over-regulation pushes up costs and reduces flexibility of access.
When talking to one of the major clearing banks, I discovered some of the current illogicalities. For example, were I to order a PEP over the phone, the cost to the bank would be only one-twentieth of the cost of my going into the bank to fill in the form face to face. The reason, I gather, has to do with audit and the fact that the present regulations do not allow for what I believe is called screen audit—that is, there has to be a paper record. That kind of technical consideration, which imposes considerable costs on certain aspects of policy selling at present, needs very careful thought, while at the same time not throwing the baby of regulation out with the bath-water of simplicity.
A hugely important consideration is how to make this product more accessible. I do not know whether I need to declare an interest in that I have on occasion been to a supermarket and done the shopping—indeed to a Sainsbury's supermarket. Supermarkets have many virtues, and one can see the virtue of being able to deposit money there. The consultative document refers 1215 to making payments at supermarkets; it does not refer to making withdrawals at supermarkets. I do not know whether that is a subtle form of "quasi-lock-in", so that everybody will find it easy to put the money in but pretty difficult to get it out—in which case I congratulate the Inland Revenue on its ingenuity.
When talking about supermarkets, one also ought to look at any kind of retail outlet that sells lottery tickets. If an outlet is capable of doing that, it should be capable of doing a very simple financial transaction. I hope that possibility will be examined. Post offices and sub-post offices are another type of place that might be considered for this purpose—not least because people on all levels of income have a sense that a post office is the kind of secure place to which you go to deposit money and draw it out. Arguably, in some cases people might feel that more so than they would about a supermarket.
I wish to make one final point on accessibility. The noble Lord referred to the question of advice. For many, it is a hugely complicated area. Sources of advice will be greatly required. I have one thought as to where such advice might come from. I hope the Government might give some thought to the fact that trade unions are increasingly seeking to provide additional services. Why not encourage them to provide advice on this kind of savings scheme? It would provide access to many of the people whom it is hoped to bring into the scheme.
I have something of a quibble regarding the state of the debate. We can only assess whether this scheme will work in the context of what will happen to pensions. If we are to make a plea to those on modest incomes to save more, a fairly clear set of priorities will need to be given. Are we asking them first to put their money into a stakeholder pension? If that is compulsory, it will not be a question, but if it is not, presumably the Government will say, "That's the first place we want you to be putting your money", and in a sense the ISA is of secondary importance. Yet we are debating the ISA as if it were the only possibility. That whole issue needs to be addressed when we have the full menu.
In conclusion, we on these Benches believe that ISAs can play a useful role as one of a range of vehicles available to people who are looking to save. As I say, the nature of that role will become clear only when the Government's plans for the pension system have been outlined. The debate has demonstrated some of the knotty regulatory and technical issues that must be resolved if ISAs are to fulfil their potential. I hope the Minister has found the debate helpful, and that the details of the scheme will reflect many of the points that have been made.
§ 7.57 p.m.
§ Lord Higgins
My Lords, I cannot but take up immediately a point made by the noble Lord, Lord Newby, since I was the Minister responsible for introducing VAT and steering the proposal through the House of Commons. For 25 years I have wondered who it was putting up those incomprehensible drafts. At last I find us face to face.
1216 All speakers in the debate have congratulated my noble friend Lady O'Cathain, not only on choosing such an appropriate subject but on timing it very well. The nature of this debate is very much in the context of the consultative document issued by the Government and seeking to persuade the Government on a number of important issues. I am bound to say that in many respects they need to think again before bringing forward a final set of proposals.
My noble friend said that in her view often problems were opportunities waiting to happen. I have a nasty feeling that this is an opportunity waiting for problems to happen. If one looks at the representations that have been made in the light of the consultative document, it is very clear how significant the problems are not least, for example, the regulatory problems raised by the noble Viscount, Lord Runciman of Dox ford. There is grave concern, and we have no very clear idea as to how the difficulties are to be resolved.
My noble friend Lady Seccombe stressed that in many respects both PEPs and TESSAs have been extremely popular and, in my view, they have been very successful. There are dangers if they are tampered with. There is much to be said for leaving them as a free-standing operation, and treating the question of ISAs as a separate matter. Although the Government's policy is now to say "savings for the many, not the few", since there are 6.5 million people who have invested in PEPs and TESSAs it would be rather odd to describe them as "the few". A large number of people have taken advantage of them.
There has been some dispute between the noble Lords, Lord Barnett, Lord Currie and others, as to the extent to which such measures actually increase savings. It may be that particular transactions transfer from one asset class to another. Nevertheless, there must be a general presumption that, if the level of return on savings and investment has increased, there are likely to be more savings. Also, TESSAs and PEPs have done more. I believe that they have a significant effect in widening share ownership. People who would not previously have invested in equities, particularly as regards single PEPs, now do so. The PEP has become an efficient way, in competition with other possible assets, of providing pensions and facilitating mortgages. However, in all those respects it is important to ensure that we do not damage something which has, in my view, been a success. In many respects the Government will need to clarify a number of points.
The consultative document has been helpful in a number of ways but, strangely enough, one crucial point has not been clarified. It was raised by the noble Earl, Lord Clanwilliam, as to whether the £50,000 limit is on the contributions or on the value of the fund. Strangely, that does not appear in the consultative document. Perhaps I may ask two specific questions, giving particular examples. If the overall limit of £50,000 for ISAs is to be on contributions, as seems to be the case from a parliamentary Answer given in another place, if someone has contributed £40,000 to PEPs, the value of the asset is now £75,000. Can that person still contribute another £10,000? It is not clear from the consultative document.
1217 Another example is the following. Suppose someone is transferring from a PEP or TESSA to an ISA, say, £50,000 and the shares subsequently increase in value. Does that person still get tax relief on those shares? One might expect that to be the case if it was the contributions criterion which was relevant. Alternatively, is that person suddenly to find that he or she no longer gets tax relief on the shares which he or she originally bought for significantly less than £50,000?
That brings out a point made by my noble friend who introduced the debate. There is an element of retrospection in what the Government propose. Alternatively, in the words which she used, there is a breaking of faith as regards contracts. I believe it is the case that if governments change the rules that is likely to have an effect on people who find they have been misled. At all events, that is the way they will feel.
Indeed, if one looks at the representations that have been received from various bodies, there is a critical approach not fully reflected in the debate this evening from the CBI, the Institute for Fiscal Studies and the National Institute for Economic and Social Research. I must declare an interest there as a governor. All made a number of important points, not least on breaking faith, but also as regards the cost. If we are trying to encourage people on lower incomes to save, we must recognise that at those levels the costs of the operation from the providers may well exceed any possible benefit. If one looks at the representations from Barclays Bank, it is doubtful whether, unless careful attention is given to the detail, providers will come forward to produce the kind of ISAs the Government have in mind.
Again, as regards the lifetime limit, it has been pointed out that it is not something in terms of revenue from someone who has retired or gone into a nursing home, where one might reasonably think it would be subject to—the rather unfashionable phrase"affluence-testing". The costs of regulation are likely to be considerable.
Incidentally, as regards the providers, some of the analysis which has been produced by outside bodies suggests that the amount of returns in terms of various details of the ISA accounts which have to be produced each year by the providers is likely to be a significant burden. It would certainly be far in excess of anything which they have been required to produce, in terms of either PEPs or TESSAs.
I wish to say one word about the extraordinary proposal to have a premium bond element. If I understand it correctly, it is obscure and no doubt the Minister will tell us whether it is per account, per individual or according to how much is invested. It seems to me a rather bizarre proposal. I do not think it will have any significant effect. But it will mean that someone will have to know at the end of each period, each month, if there is to be a prize every month, exactly who has ISAs and who does not. Who will collect all that information? The providers, the Government or who? In practical terms it seems to me unlikely that it will be easy.
1218 It is likely that perhaps the Government, on reflection, will regard it as an extra incentive which, in the classic words, creates more problems than it solves. The burden of doing that seems totally disproportionate, compared with the amount of money that might be involved.
Having said that, I do not believe that the debate has reflected the amount of criticism from responsible bodies. Perhaps I may quote from the report of the Consumers Association. It said:We are struggling to see the point of ISAs. We see no real advantages but a lot of problems".We may consider other comments. Certainly the Sunday Times regards them as a disaster and it went on to say on 7th December 1997:ISAs could herald the end of free banking … ISAs will be the most complex instant-access accounts ever".There are real problems with this. Even the Financial Times—not normally given to hyperbole—stated on 6th December 1997:The Individual Savings Accounts seems like another example of bureaucracy gone mad".That is overstating it but the real point needs to be made. We have had a consultative document and in some respects it is helpful. But at the same time a number of important issues have not been resolved and are not clear.
I believe that one ought at this stage to say that there is a strong case for delay and for a serious re-think of the proposition. That is not least for the reason given by my noble friend Lady O'Cathain in her opening remarks that the strain on the IT resources will be considerable. It is not just self-assessment—a horrifying situation in many respects—but many banks will be heavily engaged in coping with the millennium bug, to which my noble friend drew attention, and also with the move towards EMU. The fact that we are not joining does not mean that the banks will not have an enormous burden to carry if it goes ahead on schedule.
I believe that this has been an extremely helpful debate but there are a significant number of important problems which ought to be carefully considered. I hope that the Government will not rush forward in a few weeks' time with the proposals but that they will treat the £50,000 limit as an assumption, which is the expression in the consultative document. I hope that they will look carefully at a number of the points that have been raised in the course of the debate particularly on the regulatory side and on the cost providers' side.
§ 8.8 p.m.
§ Lord McIntosh of Haringey
My Lords, it is customary on these occasions for the Minister winding up for the Government to thank noble Lords who have taken part in the debate, particularly the noble Baroness who initiated it. I am fortunate, apart from two reservations, that I am able to do so wholeheartedly. The noble Baroness, Lady O'Cathain, knows my problem with her. The first of my two reservations is that she is so logical, so rapid in her delivery and so economical with words that I cannot even keep up with making notes of what she says, let alone try to understand it. So 1219 if she has got past my defences on a number of occasions—as I fear she has—she will have to forgive me. I shall read her speech with great attention.
My second reservation is what I would describe as a problem but what the noble Baroness would no doubt describe as an opportunity for the Government. The problem is that the consultation period on ISAs finished at the end of January. The results of the consultation and what notice the Government take of it—I can assure the House that the Government are taking serious note of the consultation—will not be known until the Budget on 17th March. There is nothing I can do to anticipate even the little I know of the results of the consultation and the decisions that the Government will take as a result. It is therefore a problem for me, but an opportunity for the Government.
I can say without hesitation that this debate has been the most valuable contribution to the consultation for which I could possibly have hoped. However, it may have been a little disappointing to the noble Lord, Lord Higgins, who has been reading the papers, the briefing material that has come to him and the views of those who have a vested interest, to find that they are a good deal more critical of ISAs and a good deal more defensive of TESSAs and PEPs than the debate has been. Perhaps on this occasion your Lordships reflect a more considered view than that expressed by others in the public domain.
I begin by re-emphasising the point made particularly by my noble friend, Lord Currie; that is, that the personal sector savings ratio is of enormous importance to our economy and that our economic policies in general must be directed, among other things, to improving the personal sector savings issue, which is peculiarly vulnerable, as he said, to instability in the economy. That is why the whole thrust of our economic policy in the past nine months has been to start with economic stability as part of a wider commitment to investment and saving.
Our commitment has been to low and stable inflation because low and stable inflation is the necessary prerequisite for investors and savers who expect us—and will not react unless we succeed in doing it—to break out of the "boom-bust" cycle which has been characteristic of our economy in recent years. The boom-bust cycle is bad for business; it is bad for individuals; and it is certainly bad for the kind of stability which encourages individuals to save. That is why we have given the Bank of England the responsibility of setting short-term interest rates on the basis of the long-term needs of the economy rather than on political considerations. That is why we put the emphasis on sound public finance with a five-year deficit reduction plan and the code for fiscal stability which was announced by the Chancellor in his pre-Budget report.
Therefore, both monetary and fiscal stability are the necessary climate for savings and investment. That is the context in which we should look at the issues being debated today. But of course my noble friend Lord Barnett is entirely right in saying that the issue of tax relief on savings is a good deal less important than the 1220 issue of the overall level of savings. I will not get involved in economists' arguments with him about the relationship between savings and investment, save to say that if we look at tax-relieved savings—TESSAs and PEPs—they represent only about 3 per cent. of individually held financial assets, admittedly on a definition which includes pensions and insurance. So, though we see those as part of a wider picture, we must not think of tax relief on savings as being a dominant consideration in the setting of the personal sector savings ratio.
The other distinction which should be made and which was made by a number of noble Lords is between the kind of savings represented by TESSAs and PEPs and to be represented by ISAs, and pensions. The noble Baroness Lady O'Cathain asked why we were dealing with the matter outside the pensions review. My noble friend Lord Barnett said that there would be more real savings if they were linked with pensions. Both are right. But we see the individual savings accounts as being complementary to pension provision. We do not apologise for the fact that we are carrying out consultation concurrently on stakeholder pensions in the consultation paper published by the Department of Social Security in November last year. That refers to something to which I shall return later, mentioned by the noble Viscount, Lord Runciman; that is, the need for simplicity and for regulation in savings. As a number of noble Lords identified, there is potential for conflict between a search for simplicity and the need for regulation and it is a matter which will be of great concern as we consider the results of the consultation.
A number of noble Lords, notably the noble Earl, Lord Clanwilliam, and the noble Lord, Lord Newby, asked whether compulsion was essential for a stakeholder pension. That is exactly one of the issues on which the Government will be taking a view as they respond to the consultation exercise currently in force.
Let us turn to the non-pension aspect of individual savings, which is what ultimately concerns this debate. The definition of what we are discussing is something which is not locked into retirement but is available on instant access—a characteristic of existing TESSAs and PEPs. The noble Baroness, Lady O'Cathain, asked me what she called a stupid question: why we are going through the rigmarole of changing to ISAs when we are happy with PEPs and TESSAs? We do not necessarily agree that we are entirely happy with the current system. Apart from anything else, the current system is based on an annual limit rather than a lifetime limit and the projections to the Treasury of tax foregone are explosive. We must consider the ultimate effect to the revenue of a system which relies only on annual limits rather than on lifetime limits and that constraint would apply to any government considering the future of TESSAs and PEPs whether or not they were going to be continued or replaced with another product.
The problem is that we know that much of the existing tax relief goes to those savers with the larger holdings; as my noble friend Lord Sainsbury said, to older and richer people. That is where the issues of fairness and equity, which featured so strongly in the design of the ISA, come into play.
1221 My noble friend Lord Sainsbury asked whether TESSAs and PEPs have increased savings overall. The answer must be that, given that they represent only 3 per cent. of all savings, it is unlikely that they have increased savings overall. The people who have been saving through TESSAs and PEPs are those who were likely to save by other means if those TESSAs and PEPs had not existed.
But we have a manifesto commitment that within the same constraints of public expenditure, which includes tax foregone, we will double the number of individuals who are given an opportunity to save and an encouragement to save by saving without tax. That is in the context, as we were reminded, of the fact that half the population of this country has less than £200 in savings and a quarter has no savings at all. That is the basis on which we are proceeding with this proposition.
I shall return to the capping issue later but I want to make clear that capping is an essential part of any tax-free saving package. It has to be. If one is to double the number of savers, if one is to bring more people into the ranks of those who are making provision for the future and benefiting the economy of this country at the same time, one simply cannot have explosive costs to the Treasury. That means lifetime capping and it means a figure. It may not be £50,000; I do not know. That is one of the issues for consultation. But one has to balance the benefit of extending tax-free savings to those who are—I was going to say "more worthy", but perhaps I should not say that—benefiting less from existing tax regimes. Half of the cost of tax relief, as we have been reminded, notably by my noble friend Lord Hanworth, goes to a very small minority of higher rate taxpayers. That is simply not acceptable as a use of what is in effect public money.
I turn to the question of the product itself, the individual savings accounts. I have already said that individual savings accounts are out for consultation. The noble Baroness, Lady O'Cathain, asked me whether we had not allowed too little time for industry to design ISA systems before testing them. The noble Lord, Lord Higgins, went so far as to suggest that the whole thing should be delayed. I can assure him that that will not go down very well at the Treasury.
This is the timetable. The Chancellor will be delivering his Budget on 17th March. That will be followed by detailed consultation with providers on the necessary regulations which we hope to lay in Parliament by the summer. On that basis, there should be approximately nine months to get systems going before the start of the scheme in 1999, including time for live system testing. We recognise that the industry faces difficult information technology programmes, a point made by the noble Baroness, Lady O'Cathain, and our discussion with the industry takes account of that.
What are the features of the proposals for consultation? They are not set in stone. The first is simplicity, and I very much like the acronym, KISS—keep it simple, stupid. I do not think it is in contrast to simplicity to say that there can be a wide range of products. There is provision for cash—up to £1,000 per 1222 annum. I take the point of my noble friend Lord Sainsbury about separating cash from equities; and that indeed may arise from the fact that we are going to have new outlets for this product. There will also be a wider range of stocks and shares. I can confirm to the noble Viscount, Lord Brentford, that gilts will certainly be included, particularly, for example, if they are part of the investment portfolio of a unit trust. There will also be life insurance to add an element of protection for those who want it. I shall have to come back to the question of insurance advice, which featured widely in the debate, but I have not forgotten it. There will also be the possibility of links with National Savings. I remind the noble Earl, Lord Clanwilliam, that the capping limit for ISAs, TESSAs and PEPs is in addition to tax free National Savings, but he is quite right to say that there should be a link. So simplicity is an important feature of our proposals.
The second is accessibility, and this is the question, first, of not having a lock-in period. I must disagree with the noble Earl, Lord Buckinghamshire. Instant access is an important way of removing the current disincentive to saving which exists for many people. There is no minimum investment level. My noble friend Lord Sainsbury had some useful criticisms on that point which we shall certainly bear in mind. There is also the whole issue of new outlets. Without treating it with disrespect, which I found in the speeches of my noble friend Lord Desai and the noble Lord, Lord Newby, I do not think the idea of having swipe cards in supermarkets is terribly funny. Provided it is not part of a re-evaluation of one's whole financial life history, I do not see why it should not be something that is done at the same time as one buys groceries. This is for people who do not go to banks or investment houses—and there are an awful lot of them.
Finally, there is the issue of fairness. We have had, although very muted, some expression of the concerns which have been expressed publicly about unfairness to existing TESSA and PEP holders. What I have to say on that point is that TESSAs in existence on 1st April next year will run their full five-year period and can transfer to ISAs on maturity. Existing PEP savers will be able to keep their PEPs until 1st April next year and then switch to ISAs. They will normally be doing it with the same fund managers. In any case, there is a six-month grace period.
I now turn to the issues of breaking faith and capping, which were raised by a number of noble Lords. The noble Baroness, Lady O'Cathain, referred to an unwritten contract. I do not think that is sustainable. First, there is no taxation of past gains. As I said, PEPs will continue to have tax-free gains until 1999 and TESSAs will be tax free to maturity. But in any case there is no long-term commitment by governments that there will never be tax changes which will not affect the way in which people choose to spend their money. That has been a feature of taxation since the time of William Pitt the Younger, if not back to Cardinal—I shall forget about the cardinal; or shall I say, Cardinal Morton? That, perhaps, would be more appropriate.
1223 Capping, and lifetime capping, has to be a feature of any scheme which is not explosive. The noble Earls, Lord Buckinghamshire and Lord Clanwilliam, and the noble Viscount, Lord Brentford, spoke as if there were something wicked about the £50,000 figure. Our evidence is that it will affect relatively few people. It is a figure for an individual rather than for a couple. It does not include tax-free National Savings. With one exception, which I must make clear, it is based on contributions and not on the final value, the exception being that we do not always know what the contributions have been on existing PEPs. That is a technical problem which has still to be resolved. But ISAs themselves will be free to enjoy unlimited capital growth, and, I believe, within a very short time this will be recognised as being an orderly change of taxation policy.
A number of noble Lords with particular expertise in this area referred to the administration and marketing costs. I respect that expertise, which I do not share. It will all be reported back as part of the consultation, as indeed will the comments about prize draws.
Finally, I refer to one aspect of the debate which I did not particularly expect, but which I was very pleased to hear play a major part in it. That is the question of security and regulation and the necessity for, and quality of, advice. I acknowledge that this receives almost no mention in the consultation paper. Someone said that it was only referred to in passing in paragraph 14. That is certainly a defect.
I believe that the noble Lord, Lord Newby, had it right. I believe that there is a conflict between simplicity, small numbers and the need for regulation. I do not believe that for most of the investments made in ISA they will be earth-shattering events in people's financial planning. Although we pay very great attention to what the noble Viscount, Lord Runciman, says, I am not convinced that the problems of the necessity for advice apply as severely as he believes to relatively simple products whose advantage to the many is tax relief rather than fine judgment as to the return on the investment itself.
It is certainly true that taking out life assurance needs advice. But it may not be true that small, additional payments for those who already have life assurance provision need the same quality of advice as required by the most fundamental decisions. As the noble Lord, Lord Naseby, said, it is true that in certain circumstances there will have to be some control of advisers. In the end, I do not believe that we shall find that the kinds of products and levels of saving which take place are going to bring into play the regulatory problems which some noble Lords have anticipated.
I have taken far too long. I repeat what I said at the beginning. This debate is part of the consultation process. It has been an extraordinarily valuable part. When noble Lords see the result at the time of the Budget or shortly thereafter, I hope they will feel that their participation in the debate has been worthwhile. I am convinced that it has been.
§ 8.32 p.m.
§ Baroness O'Cathain
My Lords, I wish to thank all noble Lords who have participated in this debate. It was extremely good. I now confess that I was dreading this evening because it is the first time that I have introduced a debate in your Lordships' House. It is an occasion which is as terrifying as making a maiden speech. I thank all noble Lords who have made it so much easier for me. I said at the outset that I wished the debate to be constructive, and that was certainly achieved. It was the House at its best, allowing us to benefit from the expertise and experience of all Members. What great and wide-ranging experience we have listened to this evening. The debate was constructive and critical in parts—but it was constructively critical.
My noble friend Lord Buckinghamshire said that the Chancellor of the Exchequer had missed a golden opportunity. I take mild issue with him. We still have four weeks and six days before the golden opportunity is missed. I took heart at the suggestion of the noble Lord, Lord Currie, and that of the Minister that the debate will be helpful in the final deliberations. The proceedings this evening will make most interesting reading in Hansard. But those who are not here will have missed out on the wonderful humour and the mind pictures generated by the noble Lord. Lord Desai, following the harassed mother down the supermarket aisle, trying to discover whether she would be able to put an ISA on her swipe card, while the children and the goods on display were distracting her. It was wonderful humour, accompanied by serious and radical economic proposals. How I wish that the noble Lord had been my professor of economics.
Three other humorous pictures will stay in my mind, two of them generated by the noble Lord, Lord Spens. First, there was the vision of him feeding all the data into his computer and then giving it a kick. I thought. my goodness, it must be much more robust than my computer, or do I suggest that his kicking skills are on a par with those of the England and Ireland rugby teams last weekend? I guess that I shall loathe him for ever for the second one. Every time I see the amount of £5,000 I shall want to divide it by 12. The other humorous point was the description of the VAT booklets concocted by the noble Lord, Lord Newby.
On a more serious note, in passing I was saddened by the contribution of the noble Viscount, Lord Hanworth, but I shall not feel personally guilty for the fact that by judicious saving through PEPS and TESSAs I have been greatly helped in coping with a huge drain on income by providing long-term care for a seriously disabled person for nine years. No one should think nasty thoughts about people who wish to relieve the state of a burden that it would have to shoulder were it not for such savings.
I thank the noble Viscount, Lord Runciman, for his clear description of the regulatory framework. I knew that I would learn a lot tonight and I certainly have about that.
1225 My noble friends on this side of the House were unstinting in their support and encouragement. Their contributions were all so good and varied and, remarkably, there was very little repetition. I thank them all.
Finally, I come to the Minister. He said that this debate was the most valuable contribution that he could have hoped for. I take slight issue with his remarks about the explosive cost to the Treasury. Surely there is an offset in the reduction in demand on the public purse from those who use savings to provide for their old age and long-term care.
I thank the Minister for his comprehensive wind-up. On a personal note I thank him and all noble Lords on the Government Benches for always pronouncing my name correctly. I beg leave to withdraw the Motion.
§ Motion for Papers, by leave, withdrawn.