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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.
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.
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
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 x". 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
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
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.
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