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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.
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
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.
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
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.
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