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11.11 pm
Dr. Vincent Cable (Twickenham): When the concept of ISAs was introduced, my colleagues and I were complimentary about the vision of a large expansion of savings, which was initially envisaged as being from£6 million to £12 million. In the early stages of the discussion, the Government showed some willingness to
listen to criticism, and that is why we had the retreat on the lifetime savings question. However, as the details of the proposal have developed, there has been a growing scepticism--even among those of us who are well disposed to the idea--about how it will work in practice.
The first important issue is whether the proposal satisfies the problem of low-income savers. The Economic Secretary described the underlying reasons behind ISAs--that providing liquidity for low-income savers would encourage savings behaviour. All the research has shown that that is totally inadequate as an incentive for the low-income saver. Roughly 30 per cent. of households pay no tax and will derive no tax benefit from a scheme of this kind.
A more serious problem is the large number of people on very low incomes--who are in debt in many cases--and the many people who are in the benefits system. The Government have understood, particularly in relation to work, the extent and difficulty of the poverty trap: as people work more, they lose benefit and run into tax threshold problems, and there is a disincentive to work. The Government have begun to address those difficulties, but there is a similar poverty trap in relation to savings, as represented by the capital limits. The Government have shown no move so far to address that problem.
I recall addressing that point to the Paymaster General more than a year ago, and he promised us a comprehensive review of the savings trap for low-income savers. Nothing has been said about it. Judging by the development of Government policy--particularly the growth of means testing for the elderly--all the signs are that the poverty trap for low-income savers will become more, rather than less severe.
I hope that the Economic Secretary will tell us what the Government plan to do in parallel with ISAs to deal with the problem of savings for those who are not tax beneficiaries. That also links to the question of CAT marking. I have spent a lot of time talking to people who are in the specialist business of trying to market savings instruments to low-income savers. Pearl--a company that has a niche in that area--has been mentioned. The friendly societies also do so. Over and again, those providers of means of saving to low-income families say that, to do the job, they have to do it on a house-to-house basis. They collect regular, small-scale contributions and offer advice with their products. That cannot be done within the charges limits that the CAT system operates. It is a major disincentive, which is why the Economic Secretary to the Treasury will find that friendly societies will not offer CAT-marked ISAs. Perhaps, in her reply, the hon. Lady can summarise the evidence that she has received from that group of providers in response to her consultation.
CAT marking has been dealt with, but it is important to emphasise that many of the reservations about the principle have been expressed not merely by those who have a vested interest but by objective analysts. I do not know whether the Economic Secretary to the Treasury has seen the evidence supplied by the Consumers Association--a totally impartial body that caters particularly to middle and low-income savers. It makes the explicit point that, while it is a strong supporter of benchmarking and product rating, it is nervous about the idea of CAT-marking ISAs. It feels that awarding kite marks may lead to a false confidence on the part of consumers that ISAs are suitable for them at all times
and in all circumstances. The Government must reflect carefully, given the force of the objections from such bodies.
Mr. Howard Flight (Arundel and South Downs):
First, I must declare an interest as the chairman of an investment management business that offers PEPs.
When the Government announced their proposed changes, they made it clear that their key objective was to offer something that would be attractive to the less well off--to lower income groups. The Economic Secretary to the Treasury also argued that the new arrangements were not motivated by the desire to save the tax cost of the scheme and that they would be redistributive. However, the Green Paper made it abundantly clear that one of the key objectives was to stop the growing tax-loss cost of the old PEPs and TESSAS. Also, the new arrangements will be tax disadvantageous to those paying no income tax or the lowest rate after the loss of the 10 per cent. advance corporation tax refund in 2004.
I cannot understand how the new scheme will be the slightest bit attractive to those in low-income groups. The Economic Secretary argued that many people will use the cash ISA and that the old cash TESSA was unattractive because of the lock-in. We all know that it would not have been a problem to abolish the lock-in on the TESSA. That is a false argument and, if it is the sole argument on which the Government base their case, it is a pretty poor case.
The attitude of the industry has been illustrated in tonight's speeches. In the main, it is, "Let's get on with it. We've got to make it work. We've got to do the best." However, without party political prejudice, the industry in general regards ISAs as an inferior product to the old PEPs and TESSAs. The ISA has one advantage, which is the wider flexibility of equity investment. The rules on PEP equity investment--and for that matter on bond investment--had little logic.
I want to highlight some mechanical problems. The principal stupidity is that two different systems will run in parallel, with all the costs and problems that that will involve. Even the advantage of flexibility will be undone by the need for parallel vehicles to meet the PEP rules and the ISA rules. Client reporting will differ for ISA clients and PEP clients. Reporting to the Inland Revenue will also change, and that will add extra administration costs. The mini and maxi schemes are quite
incomprehensible to most of the industry. How on earth the Government can believe that someone passing through a supermarket will understand them, I simply cannot imagine. As has been said, virtually all supermarkets have made it clear that they will not offer ISAs, although the Government's key message was that supermarkets would sell ISAs.
I am greatly relieved that the Government have climbed down on their half-baked proposals to CAT-mark indexed schemes. That would have sent investors a most unwise message. As the pension trustees of the House of Commons pointed out to me recently, indexed investment is likely to perform less well in bad markets, although it may outperform in good markets. There are arguments both ways, but to favour one over the other would have been foolish.
I broadly welcome CAT-marking principles, if they merely show that a product is reasonably and fairly priced, and properly run. I have written to the Economic Secretary with a question, but I have received no reply in a month. The proposals for cash ISAs seem most peculiar in that they give deliberate advantage to large, cartelised banks and building societies. America has been successful in developing money funds to compete with banks and to improve people's returns. The CAT marks will apply to money ISAs in relation to the rates of interest that they will pay, not the charges. That means that only a bank or a building society will be able to provide a CAT-marked cash ISA. The Association of Unit Trusts and Investment Funds has confirmed that money funds--no matter how cheap and efficient--cannot qualify for CAT marking. Will the Economic Secretary clarify that point? If it is correct, it seems wrong in principle. A major objective should be competition with the banks, which will drive down their charges and drive up their competitiveness.
Ms Hewitt:
With the leave of the House, Mr. Deputy Speaker, I shall reply to this interesting debate. Just as the president of the Confederation of British Industry yesterday dismissed the views of the shadow Chancellor on the public finances, so the savings industry does not share in the cynicism and nit picking that we have heard from the Opposition. The industry is getting on with making ISAs a success. Virgin Direct says that individual savings accounts combine the most attractive elements of personal equity plans and tax-exempt special savings accounts, and that CAT-marked ISAs are likely to have wide appeal. Midland bank says that the new scheme has features that will attract many new savers, particularly those with smaller amounts to invest. Fidelity says that 80 per cent. of its PEP and TESSA holders are considering investing in ISAs.
Some 200 managers are already approved by the Inland Revenue, a point raised by the hon. Member for Guildford (Mr. St. Aubyn). Another 100 have applied for a help visit from the Revenue. From April, ISAs will be available by phone and mail, through the internet and by personal application.
The hon. Member for Twickenham (Dr. Cable) raised the specific point about the savings disincentive, something that we are considering in the context of the pensions review. That is not an issue for that half of the population with savings below £200 for the simple reason that a means-tested benefit results in a savings disincentive--a benefit reduction--only if savings are £3,000 or more. It is obviously a concern for people, particularly elderly people, with savings at that level, but it is not an issue for those who have little or no savings.
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