Select Committee on Treasury Minutes of Evidence

Examination of Witnesses (Questions 100-119)


30 NOVEMBER 2005

  Q100  Mr Mudie: I am not the Minister. I am asking you the basis on which you took this slightly bizarre decision. The evidence we have got as to why do not we give them proportionately, but I did not think that was sensible either. I thought there must be some record to performance. If I am handling somebody else's money and I am just saying, "You can have a third, you can have a third, you can have a third", and they are all different performers, somebody who gets the rotten performance is going to turn round and say, "You did not exercise due care with regard to my investment." It just seems self-evident to me.

  Mr Lewis: The risk is greater if you ended up having such an arrangement with one provider.

  Q101  Mr Mudie: Minister, you have decided and I am just asking you a question and there is the first test. Goodness gracious me, in this Committee we have had poor insurance people pulled in in terms of mis-selling, et cetera. You are mis-investing and you are not even bothering about investment but you are just closing your eyes and allocating, which seems to me a very dangerous policy, but it is for you. One of the questions that was raised that we worried about was the fact that the decision on a top-up is linked to tax credits. Talk about linking yourself to success. You are in even deeper water here. Are you happy with linking the top-up to this policy that has a fair number of critics, with a fair number of good reasons for having critics?

  Mr Lewis: I think most of the criticism is about the administration of the policy not necessarily the principles that underpin the policy or the policy itself.

  Q102  Mr Mudie: I will not argue with that but the outcome is?

  Mr Lewis: I think in terms of the decision that has been made, if you are going to recognise that some people ought to be getting a higher amount than others you have got to determine the most appropriate and effective way of reaching that decision and the criteria that you apply, I think the decision that has been made on balance is right. I think I would struggle to find another proxy we could use that would be more satisfactory.

  Mr Orhnial: In terms of the tax credit it is a completely separate means test.

  Q103  Mr Mudie: You are linked to the Inland Revenue, are you not, you have that data so why did you link it to one part of the tax credit rather than the income part which is a bit more stable and bit more clear to you?

  Mr Orhnial: Because it is only the tax credit system that will take account of the income of the whole household rather than individuals, which is what the income tax system does.

  Q104  Mr Mudie: You have no doubt about this policy? You are very, very happy with it? Remember, you are going to come back in a year.

  Mr Orhnial: The linkage is after the end of the year, it is after reconciliation at the point we know what people's income has been, so, yes, it is the best available.

  Q105  Mr Mudie: One of the things that is raised is that—for the poorer families you might say this is not of interest to them—for other families there is a £1,200 upper limit. Is the whole vehicle going to be index-linked? Is the £250 to start with going to be £250 for five years or is it going to be index-linked so it keeps its true value? Is the top-up going to be index-linked? Is this limit on the amount going to remain the same? It has always seemed strange to me that, for example, National Savings you could only buy £1,000 worth of children's bonds. Have you taken a decision on index-linking?

  Mr Orhnial: What we are doing—

  Mr Mudie: You clearly take the decisions. Everybody is looking at you.

  Q106  Chairman: George, let's have the answer.

  Mr Orhnial: Sorry, you were looking directly at me. What we are doing at the moment is consulting on the amount of the payment at age seven and that will then determine what the amount is. When the Government decides it will determine what that amount is. Certainly there are no plans to index link.

  Q107  Mr Mudie: A youngster getting £250 now rather than two years ago is 5% or 6% less in real value which, when we are talking in terms of investment over 18 years, has lost 6% already, two years' inflation, so why are you not index linking it? If the principle is that £250 is a good figure, a sound figure, a well thought out figure then why on earth are you not index-linking it?

  Mr Lewis: That seems to be a proposal and criticism of the policy rather than a question.

  Q108  Mr Mudie: It is not a criticism.

  Mr Lewis: At the moment that is the basis on which the scheme has been established but having looked at the question of payments to seven year olds and any payments we would decide to make in secondary then maybe this kind of issue can be looked at again.

  Q109  Mr Mudie: When are you going to look at it. A kid in 2003 got £250 quid. A kid this year has got less.

  Mr Lewis: We are not looking at it at the moment.

  Mr Mudie: So they have got less every year.

  Chairman: George, you have got your answer.

  Q110  Mr Mudie: The evidence we have got suggests that with topping up, et cetera, et cetera, a youngster could end up with £22,000. That is not what is going to happen but you could see that they could end up with more than £9,000 in the account, perhaps £10,000 or £12,000. You close their account at 18 and this sum is in a tax protected account. You are on record as saying you have got to move it to a tax efficient. What does "tax efficient" mean and what do you see a youngster with £10,000 tax free (almost like an ISA account not paying any capital gains, not paying any income tax) at 18 doing with them? Have you thought it out?

  Mr Lewis: No, at the moment the sort of situation would be that you would be able to put up to £7,000 in a share ISA but there would not be an equivalent tax efficient for the amount that you have described, £20,000 to £21,000.

  Q111  Mr Mudie: So you will have to give it some thought before these youngsters reach 18?

  Mr Lewis: You are asking us to. There is not at the moment.

  Q112  Peter Viggers: Will there be a cut-off point? Will there be an age at which children will no longer be eligible for a payment if they have not been allocated a payment in April 2006?

  Mr Lewis: Sorry?

  Q113  Peter Viggers: Will there be a cut-off point? You are going to start the process of allocating stakeholder accounts for children whose parents have not done anything about it in April 2006. Will there be a cut-off point. Will you in 2007 or 2009 or 2012 say no claim has been made for the child, we were not been able to trace the child, but the child comes forward, and it could be five, it could be seven or it could be 12 years old and say, "Where is my money?" Is there going to be a cut-off point?

  Mr Lewis: No, I think it is evident that if somebody can demonstrate that we have failed to open an account when we should have done, and there is clear evidence to support the fact that the child simply got missed in the system or something, I think we have to put that right.

  Q114  Peter Viggers: The child may have drifted in and out of care and may be eligible for the higher rate rather than the lower rate at different times. How much is it going to cost for all this tracing?

  Mr Lewis: I think you are talking about the exception in terms of the overall cohort rather than the rule so I do not think you are talking about excessive administrative cost, but there has got to be equity and fairness and transparency, and if a child or young person is entitled to the amount and they are not receiving it we have to put that right.

  Q115  Peter Viggers: I am concerned about administrative cost and I would be grateful if I could ask through you, Chairman, whether we could have a note on that.

  Mr Lewis: Yes.[6]

  Chairman: We are virtually at the end. I just want to pick up on one point but Jim has a question?

  Q116  Jim Cousins: My colleague Mr Mudie asked you about the situation at 18 and obviously it is not reasonable to ask you now to talk about what products might exist or what wrappers might exist in 18 years' time, but at the same time are you not a bit concerned that we now have a growing collection of tax protected or tax protection wrappers round different things like the child trust fund, ISAs, some of the national savings products, all of which have different architectures, different methods of contribution, different total sums of money that can be contributed. Would it not be right to actually look at this collection of tax protection wrappers and try to see how there can be a gradual integration of these schemes into something with architectures that are less individual and idiosyncratic?

  Mr Lewis: We are committed to a review of ISAs in 2006, as you know, and that might be an opportunity to look at some of those issues, but in principle trying to create a more cohesive, coherent system I think will be a good thing, yes.

  Q117  Jim Cousins: But are you saying that at the time of the review of ISAs, and let's face it the review of ISAs on the last occasion was simply a little announcement saying they were going to run on longer and insurance ISAs were going to be consigned—

  Mr Lewis: —Which you have personally.

  Q118  Jim Cousins: Never mind about that. That was not very much of a review whereas this really would require a proper review of these tax protection wrappers and the various bits of product architecture that go with them. Are you saying that the review of ISAs will be like that?

  Mr Lewis: That has not been decided yet but I will say I need to reflect again on the question of the positive proposal, if you like.

  Q119  Chairman: Alright we will leave that there now. Just two final points from me. Just going back to the National Savings issue, Minister, could you just confirm that if National Savings asked you to be allowed to offer a cash-based product that you could change the rules if you wanted to? Is that the position?

  Mr Lewis: The position at the moment is they cannot offer a pure equity product because of their remit, but they could partner other organisations to enable them to do that.

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