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Lord Naseby: My Lords, I declare an interest as chairman of the Children's Mutual. I support the comments of my noble friend on the Front Bench. I wish to add a couple of points in relation to Amendment No. 1 and then turn to the two amendments standing in my name.
First, it seems, on the one hand, that the Government are rightly and understandably saying that they recognise that one should not differentiate between one child in a family and another but they want time to reflect on that and to see how their proposals operate in the market. The problem with that is that the providers themselves are now planning the software and all the other necessary preparations, which are exceedingly complicated. Therefore, providers need to have a clear, authoritative statement from the Government on whether the scheme will be extended at some point. A specific date does not necessarily have to be given, but there certainly needs to be a statement from the Government that the scheme will be extended back to the remaining children within a family.
My second point is that the Government are saying, as I understand it, that, for the moment, there are alternative methods of saving for children. The friendly society of which I have the privilege of being chairman has been selling to the children's market for 40 years. We know that market well and we know that about 20 per cent of families save specifically for their children. It reaches nowhere near the concept of the child trust fund, which is why that concept is so exciting in the first place. It is why, from the beginning, the average family will look to the child trust fund as the mechanism to save for all of its children. The kind of question we are getting from people seeking information is: "Can I split my endowment in two so that my elder son can benefit from the CTF and have top-ups too?". I understand why there should not be top-ups, but it is difficult to explain why they should not benefit from CTF. I hope that the Government will think again about finding a means of involving children who just miss out.
The purpose of my Amendment No. 18 is to equal tax advantages, but not the other CTF provisions, to children born before 1 September 2002 and therefore
not eligible for the CTF, and to do that through other regulated savings schemes. I see the provision as second best, but it is worth proposing and it would provide the means for raising any tax exemptions on subscriptions into those schemes to the same level as set for the CTF of £1,200 per annum. It would treat all children fairly, especially families of mixed ages; it would further encourage the savings habit; and it would provide a positive commitment to enhancing financial awareness.In case the Government say that that is all very well, but it is too expensive to do it, I have tabled an amendment with regard to friendly societies. I re-emphasise my involvement in that movement. Half of children's savings are provided by friendly societies. It requires only a change of figure in the regulations from £270 to £1,200 to make it possible, through the tax-exempt policy for friendly societies, at least to provide a vehicle. It could be a time-barred vehicle. There is nothing to prevent the Government from saying that for an interim period of five years they will increase the figure to £1,200 and will then review it. That will at least put child A on an almost level playing field with child B.
Lord MacGregor of Pulham Market: My Lords, I support this series of amendments. We had a long debate in Committee so I can be brief. First, I congratulate my noble friends on the Front Bench on the ingenious way in which they introduced the amendments and managed to make them stick.
There are three reasons why I support the amendments. The first is the effect on families. There will be confusion among many parents when they discover that a child born in 2001 is not eligible for the tax benefits, but that a child born after September 2002 is. They will certainly regard that as unfair, and it may well discourage some families, grandparents, family friends or whomever from putting money into the trust fund because it will discriminate between children in the same family. Indeed, I am aware of no other children's savings product that discriminates between children in the same family, which is what this does.
The second reason is the effect on the children. The purpose of the child trust fund is to encourage through grant and tax relief a savings habit among young children. In addition, as the Minister repeatedly said in justifying the scheme, the literature to be circulated with the trust fund will provide a financial education for them. Unfortunately, those two advantages will not be available to the older children in the family.
We are talking about children who are now about two and a half years old. It is unlikely that they will be able to read the literature or be aware of the tax advantages until they are much older. Therefore, they are deprived of those advantages from the outset, which is unfortunate. Indeed, no other savings scheme for children has this level of tax advantage. My noble friend Lord Naseby indicated how it might be done, but the suggestion of my noble friend Lady Noakes is simpler taken with the educational aspect. If those are advantages for children born since September 2002, they should be an advantage for all children.
The third reason relates to the point of view of the provider. We are all aware that the Children's Mutual, which has done so much work in this area, will be taking up child trust funds in a big way. However, the project is marginal for many other providers. It is a question of volume—and it really is marginal. If parents are discouraged from topping up for those children who are receiving a £250 grant and are unable to do anything for the rest of the family, that will have a disadvantage on the whole. However, if these amendments were accepted, undoubtedly the volume going into the child trust fund would be greater and might encourage more providers to participate.
For those three reasons, I believe that these amendments are desirable.
6.45 p.m.
Lord McIntosh of Haringey: My Lords, I shall not follow the noble Baroness, Lady Noakes, in a discussion about savings ratios. All right, if she wants me to, I will to the extent of one sentence. She is right that savings ratios since 1998 have been of the order of 4 to 5 per cent. There have been periods when they were higher, but the average over the past 40 years has been 3.5 per cent. There is therefore nothing dramatic or relevant to the Bill about savings ratios.
I agree with the noble Baroness that with this Bill we want to encourage saving. That is one of the objectives of the child trust fund. However, we believe that it can be and should be achieved without legislating for child trust fund accounts for older children.
Perhaps I may begin this Report stage by saying that we had a good idea with child trust funds. We put it into our election manifesto; we defined it carefully; and we consulted on it carefully. After all, we won an election and introduced legislation. But the measure must be carefully defined, workable, understandable and acceptable to families and financial providers.
Now, this and several other amendments seek to embroider and add to it. They would certainly add substantially to the cost, if Amendment No. 13 is to be taken as being consequential on this amendment. It would allow for contributions from the Government. Surely, once someone has had a good idea and it has been agreed that it is a good idea and that it should go ahead, we should stick to the simple, well defined, well thought-out scheme which we have before the House and not try to play with some of its provisions.
The new clause proposed by Amendment No. 11 and the related amendments would introduce a second form of child trust fund account for children born between 1 September 1988 and 31 August 2002. It is not being proposed, except as a power under Amendment No. 13, that they should have the initial government contribution, and there is no requirement on the Government to pay supplementary or further contributions such as the age-related contributions, although they would be allowed to do so.
We are not convinced that these accounts, without an additional endowment, would offer parents—particularly parents on low incomes—a powerful incentive to save. The feedback from our research
shows that one of the key attractions of the child trust fund is that the government endowments are an effective way to encourage parents to save. The research carried out by IPPR indicates that,
- "£250 would start the ball rolling. People might get into the routine of saving".
- "£250 is a fair start. It is positive. With interest and Christmas money going in, that would build up".
The only real incentive to save without the government endowment would be the tax advantage nature of the account. The noble Baroness, Lady Noakes, carefully disclaimed saying that she was not proposing a tax break for the wealthy, but the impact of her amendments is more likely to appeal to those on a higher income. Only about 50 per cent of children have any savings in their own name, despite the current tax advantage savings vehicles that exist.
It is our firm belief that the industry will step in if it senses a demand for other types of children's savings vehicles. I cannot imagine a parent going to open a child trust fund account, asking whether there is a similar account for older children and not being offered other options. I am sure that that applies to the Children's Mutual.
However, what if the market fails to step in as I have suggested? The Financial Secretary to the Treasury made two commitments on Report in the Commons which should reassure this House. First, the Government will continue to monitor whether, after the launch of the child trust fund, parents feel their demands for accounts for older children have been met. Secondly, the Government are working on proposals to meet any gaps identified. My right honourable friend pointed out that any changes could be met by regulations. No amendments to the Bill, which might create additional complexity, are needed.
I might perhaps reassure the House further by explaining how we intend to monitor the market. We have consulted financial providers throughout the development of the child trust fund. We intend to continue those consultations in the period before the launch and in the first years of the child trust fund being available. In conclusion, I can give the noble Lord, Lord Naseby, the clear statement that he sought for the benefit of providers. It is not our intention to extend the child trust fund before 1 September 2002.
However, I would not like any noble Lord to think that we are simply going to ignore the needs of children born before 2002. We are developing the child trust fund website. That will have a section specifically for children who are not eligible for the child trust fund, giving them information about other savings opportunities. I hope that the amendment will not be pressed.
I turn to the amendments of the noble Lord, Lord Naseby. Amendment No. 18 would grant tax relief for child trust fund accounts to accounts for older children. I assume that those would be child trust fund-type accounts with the same key features. If the settlements legislation were to be disapplied on children's
savings other than child trust fund accounts, even with a £1,200 annual limit on contributions, no controls would be in place to ensure that each child had only one such account. That could lead to widespread abuse. Parents could open multiple accounts for their children, or grandparents for their grandchildren, in order to shelter savings and investment income from tax. Rigorous controls must be built into the child trust fund system to ensure that only one child trust fund account can be opened for each child.The settlements legislation has been disapplied for child trust fund accounts only because children have no access to the funds until they are 18, and then only the child or young adult is entitled to the funds. It would not be appropriate to give the same treatment to tax-exempt savings plans—the noble Lord, Lord Naseby, pointed out they can attract £270 a year—precisely because those plans do not necessarily belong to the child, nor are the funds locked in until the age of 18.
The noble Lord's Amendment No. 20 would amend Clause 14, which relates to insurance companies and friendly societies. The clause provides for the child trust fund business of life insurance companies and friendly societies to be taxed in the same way as their ISA business. The amendment simply supplements Amendment No. 18, except that it would not extend the treatment of funds to life insurance companies, only to friendly societies.
Given our decision not to create child trust fund-type accounts for older children without waiting to establish how the market meets any demand for them, it would not be appropriate to amend the Bill in the way proposed by Amendments Nos. 18 and 20.
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