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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.
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
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
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.
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.
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.
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