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7.57 p.m.
Lord Higgins: My Lords, I cannot but take up immediately a point made by the noble Lord, Lord Newby, since I was the Minister responsible for introducing VAT and steering the proposal through the House of Commons. For 25 years I have wondered who it was putting up those incomprehensible drafts. At last I find us face to face.
All speakers in the debate have congratulated my noble friend Lady O'Cathain, not only on choosing such an appropriate subject but on timing it very well. The nature of this debate is very much in the context of the consultative document issued by the Government and seeking to persuade the Government on a number of important issues. I am bound to say that in many respects they need to think again before bringing forward a final set of proposals.
My noble friend said that in her view often problems were opportunities waiting to happen. I have a nasty feeling that this is an opportunity waiting for problems to happen. If one looks at the representations that have been made in the light of the consultative document, it is very clear how significant the problems are--not least, for example, the regulatory problems raised by the noble Viscount, Lord Runciman of Doxford. There is grave concern, and we have no very clear idea as to how the difficulties are to be resolved.
My noble friend Lady Seccombe stressed that in many respects both PEPs and TESSAs have been extremely popular and, in my view, they have been very successful. There are dangers if they are tampered with. There is much to be said for leaving them as a free-standing operation, and treating the question of ISAs as a separate matter. Although the Government's policy is now to say "savings for the many, not the few", since there are 6.5 million people who have invested in PEPs and TESSAs it would be rather odd to describe them as "the few". A large number of people have taken advantage of them.
There has been some dispute between the noble Lords, Lord Barnett, Lord Currie and others, as to the extent to which such measures actually increase savings. It may be that particular transactions transfer from one asset class to another. Nevertheless, there must be a general presumption that, if the level of return on savings and investment has increased, there are likely to be more savings. Also, TESSAs and PEPs have done more. I believe that they have a significant effect in widening share ownership. People who would not previously have invested in equities, particularly as regards single PEPs, now do so. The PEP has become an efficient way, in competition with other possible assets, of providing pensions and facilitating mortgages. However, in all those respects it is important to ensure that we do not damage something which has, in my view, been a success. In many respects the Government will need to clarify a number of points.
The consultative document has been helpful in a number of ways but, strangely enough, one crucial point has not been clarified. It was raised by the noble Earl, Lord Clanwilliam, as to whether the £50,000 limit is on the contributions or on the value of the fund. Strangely, that does not appear in the consultative document. Perhaps I may ask two specific questions, giving particular examples. If the overall limit of £50,000 for ISAs is to be on contributions, as seems to be the case from a parliamentary Answer given in another place, if someone has contributed £40,000 to PEPs, the value of the asset is now £75,000. Can that person still contribute another £10,000? It is not clear from the consultative document.
Another example is the following. Suppose someone is transferring from a PEP or TESSA to an ISA, say, £50,000 and the shares subsequently increase in value. Does that person still get tax relief on those shares? One might expect that to be the case if it was the contributions criterion which was relevant. Alternatively, is that person suddenly to find that he or she no longer gets tax relief on the shares which he or she originally bought for significantly less than £50,000?
That brings out a point made by my noble friend who introduced the debate. There is an element of retrospection in what the Government propose. Alternatively, in the words which she used, there is a breaking of faith as regards contracts. I believe it is the case that if governments change the rules that is likely to have an effect on people who find they have been misled. At all events, that is the way they will feel.
Indeed, if one looks at the representations that have been received from various bodies, there is a critical approach not fully reflected in the debate this evening from the CBI, the Institute for Fiscal Studies and the National Institute for Economic and Social Research. I must declare an interest there as a governor. All made a number of important points, not least on breaking faith, but also as regards the cost. If we are trying to encourage people on lower incomes to save, we must recognise that at those levels the costs of the operation from the providers may well exceed any possible benefit. If one looks at the representations from Barclays Bank, it is doubtful whether, unless careful attention is given to the detail, providers will come forward to produce the kind of ISAs the Government have in mind.
Again, as regards the lifetime limit, it has been pointed out that it is not something in terms of revenue from someone who has retired or gone into a nursing home, where one might reasonably think it would be subject to--the rather unfashionable phrase--"affluence-testing". The costs of regulation are likely to be considerable.
Incidentally, as regards the providers, some of the analysis which has been produced by outside bodies suggests that the amount of returns in terms of various details of the ISA accounts which have to be produced each year by the providers is likely to be a significant burden. It would certainly be far in excess of anything which they have been required to produce, in terms of either PEPs or TESSAs.
I wish to say one word about the extraordinary proposal to have a premium bond element. If I understand it correctly, it is obscure and no doubt the Minister will tell us whether it is per account, per individual or according to how much is invested. It seems to me a rather bizarre proposal. I do not think it will have any significant effect. But it will mean that someone will have to know at the end of each period, each month, if there is to be a prize every month, exactly who has ISAs and who does not. Who will collect all that information? The providers, the Government or who? In practical terms it seems to me unlikely that it will be easy.
It is likely that perhaps the Government, on reflection, will regard it as an extra incentive which, in the classic words, creates more problems than it solves. The burden of doing that seems totally disproportionate, compared with the amount of money that might be involved.
Having said that, I do not believe that the debate has reflected the amount of criticism from responsible bodies. Perhaps I may quote from the report of the Consumers Association. It said:
- "We are struggling to see the point of ISAs. We see no real advantages but a lot of problems".
We may consider other comments. Certainly the Sunday Times regards them as a disaster and it went on to say on 7th December 1997:
- "ISAs could herald the end of free banking ... ISAs will be the most complex instant-access accounts ever".
There are real problems with this. Even the Financial Times--not normally given to hyperbole--stated on 6th December 1997:
- "The Individual Savings Accounts seems like another example of bureaucracy gone mad".
That is overstating it but the real point needs to be made. We have had a consultative document and in some respects it is helpful. But at the same time a number of important issues have not been resolved and are not clear.
I believe that one ought at this stage to say that there is a strong case for delay and for a serious re-think of the proposition. That is not least for the reason given by my noble friend Lady O'Cathain in her opening remarks that the strain on the IT resources will be considerable. It is not just self-assessment--a horrifying situation in many respects--but many banks will be heavily engaged in coping with the millennium bug, to which my noble friend drew attention, and also with the move towards EMU. The fact that we are not joining does not mean that the banks will not have an enormous burden to carry if it goes ahead on schedule.
I believe that this has been an extremely helpful debate but there are a significant number of important problems which ought to be carefully considered. I hope that the Government will not rush forward in a few weeks' time with the proposals but that they will treat the £50,000 limit as an assumption, which is the expression in the consultative document. I hope that they will look carefully at a number of the points that have been raised in the course of the debate particularly on the regulatory side and on the cost providers' side.
8.8 p.m.
Lord McIntosh of Haringey: My Lords, it is customary on these occasions for the Minister winding up for the Government to thank noble Lords who have taken part in the debate, particularly the noble Baroness who initiated it. I am fortunate, apart from two reservations, that I am able to do so wholeheartedly. The noble Baroness, Lady O'Cathain, knows my problem with her. The first of my two reservations is that she is so logical, so rapid in her delivery and so economical with words that I cannot even keep up with making notes of what she says, let alone try to understand it. So
if she has got past my defences on a number of occasions--as I fear she has--she will have to forgive me. I shall read her speech with great attention.My second reservation is what I would describe as a problem but what the noble Baroness would no doubt describe as an opportunity for the Government. The problem is that the consultation period on ISAs finished at the end of January. The results of the consultation and what notice the Government take of it--I can assure the House that the Government are taking serious note of the consultation--will not be known until the Budget on 17th March. There is nothing I can do to anticipate even the little I know of the results of the consultation and the decisions that the Government will take as a result. It is therefore a problem for me, but an opportunity for the Government.
I can say without hesitation that this debate has been the most valuable contribution to the consultation for which I could possibly have hoped. However, it may have been a little disappointing to the noble Lord, Lord Higgins, who has been reading the papers, the briefing material that has come to him and the views of those who have a vested interest, to find that they are a good deal more critical of ISAs and a good deal more defensive of TESSAs and PEPs than the debate has been. Perhaps on this occasion your Lordships reflect a more considered view than that expressed by others in the public domain.
I begin by re-emphasising the point made particularly by my noble friend, Lord Currie; that is, that the personal sector savings ratio is of enormous importance to our economy and that our economic policies in general must be directed, among other things, to improving the personal sector savings issue, which is peculiarly vulnerable, as he said, to instability in the economy. That is why the whole thrust of our economic policy in the past nine months has been to start with economic stability as part of a wider commitment to investment and saving.
Our commitment has been to low and stable inflation because low and stable inflation is the necessary prerequisite for investors and savers who expect us--and will not react unless we succeed in doing it--to break out of the "boom-bust" cycle which has been characteristic of our economy in recent years. The boom-bust cycle is bad for business; it is bad for individuals; and it is certainly bad for the kind of stability which encourages individuals to save. That is why we have given the Bank of England the responsibility of setting short-term interest rates on the basis of the long-term needs of the economy rather than on political considerations. That is why we put the emphasis on sound public finance with a five-year deficit reduction plan and the code for fiscal stability which was announced by the Chancellor in his pre-Budget report.
Therefore, both monetary and fiscal stability are the necessary climate for savings and investment. That is the context in which we should look at the issues being debated today. But of course my noble friend Lord Barnett is entirely right in saying that the issue of tax relief on savings is a good deal less important than the
issue of the overall level of savings. I will not get involved in economists' arguments with him about the relationship between savings and investment, save to say that if we look at tax-relieved savings--TESSAs and PEPs--they represent only about 3 per cent. of individually held financial assets, admittedly on a definition which includes pensions and insurance. So, though we see those as part of a wider picture, we must not think of tax relief on savings as being a dominant consideration in the setting of the personal sector savings ratio.The other distinction which should be made and which was made by a number of noble Lords is between the kind of savings represented by TESSAs and PEPs and to be represented by ISAs, and pensions. The noble Baroness Lady O'Cathain asked why we were dealing with the matter outside the pensions review. My noble friend Lord Barnett said that there would be more real savings if they were linked with pensions. Both are right. But we see the individual savings accounts as being complementary to pension provision. We do not apologise for the fact that we are carrying out consultation concurrently on stakeholder pensions in the consultation paper published by the Department of Social Security in November last year. That refers to something to which I shall return later, mentioned by the noble Viscount, Lord Runciman; that is, the need for simplicity and for regulation in savings. As a number of noble Lords identified, there is potential for conflict between a search for simplicity and the need for regulation and it is a matter which will be of great concern as we consider the results of the consultation.
A number of noble Lords, notably the noble Earl, Lord Clanwilliam, and the noble Lord, Lord Newby, asked whether compulsion was essential for a stakeholder pension. That is exactly one of the issues on which the Government will be taking a view as they respond to the consultation exercise currently in force.
Let us turn to the non-pension aspect of individual savings, which is what ultimately concerns this debate. The definition of what we are discussing is something which is not locked into retirement but is available on instant access--a characteristic of existing TESSAs and PEPs. The noble Baroness, Lady O'Cathain, asked me what she called a stupid question: why we are going through the rigmarole of changing to ISAs when we are happy with PEPs and TESSAs? We do not necessarily agree that we are entirely happy with the current system. Apart from anything else, the current system is based on an annual limit rather than a lifetime limit and the projections to the Treasury of tax foregone are explosive. We must consider the ultimate effect to the revenue of a system which relies only on annual limits rather than on lifetime limits and that constraint would apply to any government considering the future of TESSAs and PEPs whether or not they were going to be continued or replaced with another product.
The problem is that we know that much of the existing tax relief goes to those savers with the larger holdings; as my noble friend Lord Sainsbury said, to older and richer people. That is where the issues of fairness and equity, which featured so strongly in the design of the ISA, come into play.
My noble friend Lord Sainsbury asked whether TESSAs and PEPs have increased savings overall. The answer must be that, given that they represent only 3 per cent. of all savings, it is unlikely that they have increased savings overall. The people who have been saving through TESSAs and PEPs are those who were likely to save by other means if those TESSAs and PEPs had not existed.
But we have a manifesto commitment that within the same constraints of public expenditure, which includes tax foregone, we will double the number of individuals who are given an opportunity to save and an encouragement to save by saving without tax. That is in the context, as we were reminded, of the fact that half the population of this country has less than £200 in savings and a quarter has no savings at all. That is the basis on which we are proceeding with this proposition.
I shall return to the capping issue later but I want to make clear that capping is an essential part of any tax-free saving package. It has to be. If one is to double the number of savers, if one is to bring more people into the ranks of those who are making provision for the future and benefiting the economy of this country at the same time, one simply cannot have explosive costs to the Treasury. That means lifetime capping and it means a figure. It may not be £50,000; I do not know. That is one of the issues for consultation. But one has to balance the benefit of extending tax-free savings to those who are--I was going to say "more worthy", but perhaps I should not say that--benefiting less from existing tax regimes. Half of the cost of tax relief, as we have been reminded, notably by my noble friend Lord Hanworth, goes to a very small minority of higher rate taxpayers. That is simply not acceptable as a use of what is in effect public money.
I turn to the question of the product itself, the individual savings accounts. I have already said that individual savings accounts are out for consultation. The noble Baroness, Lady O'Cathain, asked me whether we had not allowed too little time for industry to design ISA systems before testing them. The noble Lord, Lord Higgins, went so far as to suggest that the whole thing should be delayed. I can assure him that that will not go down very well at the Treasury.
This is the timetable. The Chancellor will be delivering his Budget on 17th March. That will be followed by detailed consultation with providers on the necessary regulations which we hope to lay in Parliament by the summer. On that basis, there should be approximately nine months to get systems going before the start of the scheme in 1999, including time for live system testing. We recognise that the industry faces difficult information technology programmes, a point made by the noble Baroness, Lady O'Cathain, and our discussion with the industry takes account of that.
What are the features of the proposals for consultation? They are not set in stone. The first is simplicity, and I very much like the acronym, KISS--keep it simple, stupid. I do not think it is in contrast to simplicity to say that there can be a wide range of products. There is provision for cash--up to £1,000 per
annum. I take the point of my noble friend Lord Sainsbury about separating cash from equities; and that indeed may arise from the fact that we are going to have new outlets for this product. There will also be a wider range of stocks and shares. I can confirm to the noble Viscount, Lord Brentford, that gilts will certainly be included, particularly, for example, if they are part of the investment portfolio of a unit trust. There will also be life insurance to add an element of protection for those who want it. I shall have to come back to the question of insurance advice, which featured widely in the debate, but I have not forgotten it. There will also be the possibility of links with National Savings. I remind the noble Earl, Lord Clanwilliam, that the capping limit for ISAs, TESSAs and PEPs is in addition to tax free National Savings, but he is quite right to say that there should be a link. So simplicity is an important feature of our proposals.The second is accessibility, and this is the question, first, of not having a lock-in period. I must disagree with the noble Earl, Lord Buckinghamshire. Instant access is an important way of removing the current disincentive to saving which exists for many people. There is no minimum investment level. My noble friend Lord Sainsbury had some useful criticisms on that point which we shall certainly bear in mind. There is also the whole issue of new outlets. Without treating it with disrespect, which I found in the speeches of my noble friend Lord Desai and the noble Lord, Lord Newby, I do not think the idea of having swipe cards in supermarkets is terribly funny. Provided it is not part of a re-evaluation of one's whole financial life history, I do not see why it should not be something that is done at the same time as one buys groceries. This is for people who do not go to banks or investment houses--and there are an awful lot of them.
Finally, there is the issue of fairness. We have had, although very muted, some expression of the concerns which have been expressed publicly about unfairness to existing TESSA and PEP holders. What I have to say on that point is that TESSAs in existence on 1st April next year will run their full five-year period and can transfer to ISAs on maturity. Existing PEP savers will be able to keep their PEPs until 1st April next year and then switch to ISAs. They will normally be doing it with the same fund managers. In any case, there is a six-month grace period.
I now turn to the issues of breaking faith and capping, which were raised by a number of noble Lords. The noble Baroness, Lady O'Cathain, referred to an unwritten contract. I do not think that is sustainable. First, there is no taxation of past gains. As I said, PEPs will continue to have tax-free gains until 1999 and TESSAs will be tax free to maturity. But in any case there is no long-term commitment by governments that there will never be tax changes which will not affect the way in which people choose to spend their money. That has been a feature of taxation since the time of William Pitt the Younger, if not back to Cardinal--I shall forget about the cardinal; or shall I say, Cardinal Morton? That, perhaps, would be more appropriate.
Capping, and lifetime capping, has to be a feature of any scheme which is not explosive. The noble Earls, Lord Buckinghamshire and Lord Clanwilliam, and the noble Viscount, Lord Brentford, spoke as if there were something wicked about the £50,000 figure. Our evidence is that it will affect relatively few people. It is a figure for an individual rather than for a couple. It does not include tax-free National Savings. With one exception, which I must make clear, it is based on contributions and not on the final value, the exception being that we do not always know what the contributions have been on existing PEPs. That is a technical problem which has still to be resolved. But ISAs themselves will be free to enjoy unlimited capital growth, and, I believe, within a very short time this will be recognised as being an orderly change of taxation policy.
A number of noble Lords with particular expertise in this area referred to the administration and marketing costs. I respect that expertise, which I do not share. It will all be reported back as part of the consultation, as indeed will the comments about prize draws.
Finally, I refer to one aspect of the debate which I did not particularly expect, but which I was very pleased to hear play a major part in it. That is the question of security and regulation and the necessity for, and quality of, advice. I acknowledge that this receives almost no mention in the consultation paper. Someone said that it was only referred to in passing in paragraph 14. That is certainly a defect.
I believe that the noble Lord, Lord Newby, had it right. I believe that there is a conflict between simplicity, small numbers and the need for regulation. I do not believe that for most of the investments made in ISA they will be earth-shattering events in people's financial planning. Although we pay very great attention to what the noble Viscount, Lord Runciman, says, I am not convinced that the problems of the necessity for advice apply as severely as he believes to relatively simple products whose advantage to the many is tax relief rather than fine judgment as to the return on the investment itself.
It is certainly true that taking out life assurance needs advice. But it may not be true that small, additional payments for those who already have life assurance provision need the same quality of advice as required by the most fundamental decisions. As the noble Lord, Lord Naseby, said, it is true that in certain circumstances there will have to be some control of advisers. In the end, I do not believe that we shall find that the kinds of products and levels of saving which take place are going to bring into play the regulatory problems which some noble Lords have anticipated.
I have taken far too long. I repeat what I said at the beginning. This debate is part of the consultation process. It has been an extraordinarily valuable part. When noble Lords see the result at the time of the Budget or shortly thereafter, I hope they will feel that their participation in the debate has been worthwhile. I am convinced that it has been.
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