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The second possibility is to create a link to the Social Fund, so that those who have built up some savings, and demonstrated that they have a savings habit, would have preferential access to a top-up loan or grant, which would enable them to afford a deposit to get back into housing. For many, that is the real source of continual poverty. Once they are evicted and lose their housing, they can never get the money together to get back into rented accommodation.
Those two changes would significantly enhance the perceived attractiveness of putting savings aside in these schemes. They would address real issues on people’s minds and would increase the incentive to participate. I will leave it to the noble Baroness, Lady Hollis, to raise the issue of pensioners. However, in passing, I add it as a third area which the Government might amend. It is odd to suggest that people cease needing this just because they pass over the pension age. While many pensioners may have capital, many do not. They would benefit from the incentive to build up enough of a cushion to deal with the odd, unexpected bill. However, even with those additions, we have to accept that this Bill will remain a mouse—maybe a slightly stronger one. If we are to address the lack of savings in this country, we need to go further. I suspect that is beyond the scope of this Bill.
There are a couple of things that I have spoken about in the House before, which I would like briefly to mention at this stage. One major step forward would be to remove taxation from all income derived from savings. It seems anomalous that, having encouraged people to save out of taxed income, we tax them again on the income that they produce from those savings. It is no incentive to save and no way to encourage people to be independent. My suggestion would simplify a whole range of schemes that are wholly designed to get around the taxation of savings, and would be a major step forward.
The second point that I want to put to the House is about recognising the importance of passing down modest levels of accumulated savings from one generation to the next, and in particular allowing people who have built up a pension pot, and who believe that they can get by by drawing income from that capital rather than converting it into an annuity, to preserve their pension pot and not to have to convert it into an annuity, and to pass that savings pot down to the next generation to go into its pension pot without being lost to an annuity conversion or being subject to high levels of taxation. We must accept that, in the current situation, it will take several generations to build up the levels of capital in this country that will give people the independence that we want them to have.
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I know that it is asking a lot of the Minister to leap to those suggestions in this Bill, but I ask him to consider the other suggestions. Meanwhile, I welcome the Bill.
3.30 pm
Lord Morgan: My Lords, this is a modest seeming Bill that embodies important, progressive principles. It dispels the commonly held illusion that poorer people do not save, do not want to save and cannot save, and it confirms what the Institute for Fiscal Studies and others have shown: that matching payments of this kind can provide people on poor incomes with an effective incentive to save. It can make a real difference to their lives, notably in dealing with the problems of indebtedness. As my noble friend has observed, previously higher-paid people have had benefits through the tax system: for example, up to 40 per cent tax relief on ISAs.
The Bill is an attempt to deal with lower-paid people, and is therefore an attempt to deal with an implicit class bias in our current savings and taxation system. At a time when ordinary people feel powerless in the face of unaccountable and irresponsible capitalists in our society, it takes a perhaps modest step towards empowerment, and the Treasury and its officials should be congratulated on it. It is not a rash experiment, as we have heard; it has been thoroughly tested in two major Treasury schemes in which, I believe, 22,000 people took part. The schemes proved the popularity and effectiveness of regular savings among less well-off working people of working age, and showed that new savers can be generated and the pattern of saving behaviour altered.
The Bill offers, as we have heard, a clear and simple structure for saving, with the Government matching savings by 50p per £1. Perhaps £1 per £1 would be an even more attractive scheme for people in the gateway scheme. It covers up to 8 million people: a wide range of poorer people on various allowances, benefits and tax credits. A simple system of passporting makes it straightforward to proceed from entitlement to benefits to eligibility for the gateway scheme, and the fact that there is no means test is of enormous merit, given all the indignity that has been associated with means-testing.
The Bill is very helpful to women, among others. Women with scant means who are trying to manage household budgets will find it helpful, and it will reinforce one of the points made in a debate last week in your Lordships’ House on the impact of our current economic problems on women. In that connection, I was pleased to hear that carers will be included in this scheme. We have been pressed, strongly and rightly, to include carers, who are commonly on lower incomes. It is difficult to see why people receiving a particular allowance should be included and people receiving a carer’s allowance should not. The role of carers was recently highlighted in the Carers (Equal Opportunities) Bill passed in the Commons by my honourable friend and former pupil, Hywel Francis, the MP for Aberavon. I am glad that that principle is now to be extended.
The Bill has many good features. It will run for a reasonable period and is due to start in 2010, which may be a better year than 2009 to launch such a scheme. There is to be a variety of providers, and
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As we have heard, the Bill should be welcomed on all sides of the House. It enjoyed cross-party support in the House of Commons as a measure for financial involvement, financial education and financial inclusion. For people of a conservative outlook, you would think that a saving gateway would be a welcome form of escape from the dependency culture in which so many working-class people have been imprisoned over the generations. It should encourage a greater mood of self-reliance and enable categories of people not hitherto involved in saving to become familiar with the principles of financial management. That is particularly valuable in the middle of this economic turmoil, when the basic principles of financial management personally, let alone nationally, have clearly not penetrated into many people.
For those of us on the left, the idea of a saving gateway scheme should be welcomed as a way of extending social equality and opportunity. It will do something modest but none the less important in principle towards weakening the entrenched class divide in this country. It offers help to those who need it the most. Tackling financial exclusion is a way of tackling social exclusion more generally. I believe therefore that important social as well as financial principles are embodied in the Bill and I warmly support it.
3.37 pm
Baroness Pitkeathley: My Lords, I am delighted to speak briefly in support of this Bill and I thank my noble friend for introducing it. However, I should say immediately that this would not have been my position when it was brought forward originally. This is a cash savings account for individuals on low incomes with excellent incentives and the promise of kick-starting the saving habit among people on lower incomes by the provision of matched funding. Encouraging people who do not normally do so to engage with financial services will promote financial inclusion and will undoubtedly help those on low incomes to manage their finances, plan for the future and guard against the financial insecurity that plagues our society at present. That is all very much to be applauded, but in its original form, the Bill intended that while other income replacement benefits were to be part of the scheme, carer’s allowance was specifically to be excluded. The Treasury Minister in another place said at Second Reading:
“We have thought carefully about making carer’s allowance itself a qualifying benefit. However, although all recipients of carer’s allowance will have low earnings, many may be in higher earning households; in fact, carer’s allowance recipients are less likely to be in poverty than the average adult. Extending the scheme to all carers regardless of their level of savings or other financial circumstances would therefore mean that it was poorly targeted.—[Official Report, Commons, 13/1/09; col. 171.]
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While that statement may be technically correct, it has none the less caused great concern as the figures from the Work and Pensions Committee later showed. It said:
“While the evidence suggests that Carer’s Allowance makes a modest contribution to reducing poverty among carers, further exploration of this data is needed to examine how far the differences shown are related to uneven take-up of this benefit; ineligibility for CA when the cared for person is not a recipient of relevant benefits themselves; and issues relating to age”.
It is misleading to compare carer’s allowance recipients with the general population. They should be compared with people who share other characteristics; for example, gender and age. They may be clustered just above the formal poverty line but they tend to have lower incomes than the general population. Many of them have retired early and have a small occupational pension which takes them just above the threshold for means-tested benefits, but they are by no means well off. Carer’s allowance recipients are in the bottom two quintiles of income distribution compared to 37 per cent of all adults. This clearly shows that the Minister’s claim that carers may be in high-earning households was not quite accurate.
Carers also spend many years on a low income and claiming benefit. More than two-thirds of carer’s allowance recipients claimed the benefit for more than two years and 40 per cent receive it for more than five years. This makes it extremely hard to accrue savings. We should remember that caring is a long-term business.
Poverty statistics take into account only income, not household expenditure, and clearly carers have higher costs for things such as heating and transport. Like other families, carers are feeling the pinch in these difficult economic times but for them this is no change; they have always found that caring leads them to financial difficulties. They face higher costs associated with caring, such as heating, water and transport costs, and at the same time do not get much support from local authority services. Many families do not receive publicly funded care and are forced to arrange their own care, which can be expensive and of poor quality. That places a very heavy burden on their budgets.
Research carried out by Carers UK—I declare an interest as its vice-president—published in December last year found that many carers are living in poverty. From a survey of 1,700 carers, 75 per cent reported that they struggled to pay essential bills; 52 per cent were cutting back on food; and 54 per cent were in debt, of whom nearly a third owed more than £10,000 and were resorting to bank overdrafts and credit cards.
So, for all these reasons, it was inconsistent to exclude carer’s allowance but include other income replacement benefits. Carer’s allowance should be treated the same as other benefits. In addition, excluding carer’s allowance sent a negative message to carers, who saw themselves excluded from a government policy that was extending to other benefit recipients. At a time when the Government are making carers a high priority—indeed, they have a very proud record as far as carers are concerned—this was inconsistent. Following publication of the National Carers Strategy last June, the Government committed themselves to ensuring that by 2018 no carer should be forced into financial hardship by their caring role.
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I am absolutely delighted that the Government have seen sense and responded to persuasive arguments. I pay tribute to my honourable friend Steve Ladyman, the former carers Minister in another place, who has worked very hard to have carers included in the Bill. The Minister has now said that it is right that the Government should be open to listening to arguments and that when they find good and persuasive ones they should change their mind. I am glad that they have done so. I wish the Bill a speedy passage through your Lordships’ House.
3.44 pm
Baroness Hollis of Heigham: My Lords, we have a low savings ratio in this country compared to, say, Germany—one of the points interestingly made by the noble Lord, Lord Blackwell—because our savings are largely embedded in houses and pensions, neither of which counts towards the savings ratio, which is essentially get-at-able, rainy-day, liquid savings. That low ratio may not matter very much when we have full employment, the opportunity for overtime and an approximate matching of income and expenditure, but increasingly, as the recession deepens and financial insecurity grows, people need rainy-day savings.
We in this country have not done very well in allowing people to access their illiquid savings—to get early access to the tax-free lump sum of their pension during their working life, for example, if they face repossession—or to draw down capital from their home through safe equity-release schemes in retirement to cope with growing need, particularly the wish to stay at home rather than go into long-term care. We make it very difficult for people to borrow from themselves, to move between capital and income and to move, as the noble Lord, Lord Blackwell, said, between pre-retirement and post-retirement assets. We have hung on to financial products that are increasingly not fit for purpose, designed for one gender and a different generation.
The saving gateway is therefore to be welcomed, especially as it will include help for carers, which is excellent news, as my noble friend Lady Pitkeathley indicated. Since 1997 we have transformed income welfare; tax credits and pension credits, underpinned by the minimum wage and greatly improved state pensions, together have tackled poverty. But the disparities in wealth are still twice as great as those in income. Following in the footsteps of the child trust fund, we are increasingly engaged not only in income welfare but in asset welfare, and rightly so.
In the saving gateway, as my noble friend explained to us, the Government will be adding 50p to every £1 saved over two years, to a maximum of £25 a month or £900 in total. The early gateway pilots, as he said, showed that people who had not hitherto saved did so, and that, even when the 50p-matching incentive stopped, they none the less continued to save. They regained control over their lives. They worried less when the washing machine broke down; they could plan a little more, weather stress a little better, spread their bumpy outgoings and avoid high-cost borrowing or getting into debt. As one participant said of the saving gateway:
“It made me feel more secure and I didn’t feel so panicky. Before, I would panic if I thought something was going wrong”.
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The scheme is limited to people of working age on low incomes, passported on to it by their benefit claims—income support, JSA, tax credits and now the carer’s allowance. Incidentally, they are passported, not means-tested, which is good to note. Why, as the noble Lord, Lord Blackwell, said, is the scheme confined to people of working age? Why are pensioners denied access to it? My noble friend was typically generous in addressing that issue, and I am grateful—at least, I think I am—for his pre-emptive strike. Essentially, his case was that pensioners are thought to have less need and greater resources, and therefore they can cope. I challenge that. On any needs and resources analysis, I argue, pensioners have the greater claim.
My understanding is that pensioners were excluded because the Government followed the recommendations of the IPPR report by Sodha and Lister, researchers I expect to respect. The need of pensioners, however, is dismissed in their report of nearly 70 pages in under seven lines. Excluding pensioners, they say,
- “is sensible, as it makes most financial sense for pensioners to be consuming resources they have saved during their working lifetimes”.
They add that only better-off pensioners would take it up, and that instead their pension credit should be increased. I do not know whether their remarks are underpinned by research about pensioners’ savings, expenditure, coping strategies, vulnerability, needs or indeed their likelihood to panic if the washing machine breaks down. There is certainly no evidence of any of that in their report, merely the statement offered that those of working age should acquire the savings habit while those of pension age should acquire the spending habit. I see why they might say that—they do not want pensioners going without in order to leave something to their family—but the notion that denying them the saving gateway would thereby encourage pensioners to change their behaviour and spend is, in my view, flawed and possibly pernicious.
The IPPR believes that pensioners need income, hence the recommendation on pension credit rather than capital. It is wrong—they need both. Of course the IPPR’s proposal to increase pension credit is nice but, the £1 billion or £3 billion price tag aside, it rather misses the point. Pension credit supports income. The 70 year-old needs modest savings just as much as the 40 year-old. Pensioners on pension credit do not usually have—in the words of the IPPR’s report—“spare” resources to consume, which is why they are eligible for pension credit in the first place. They are usually poorer, older women. They do not have occupational pensions, they certainly will be too old for the personal accounts that my noble friend cited, and they may well be pensioners for 25 years or more. In comparison, the typical lone parent on income support is on that benefit, on average, for less than three years.
The notion that pensioners should consume, run down and run out of any tiny savings they may have, and expose themselves to the buffeting of every minor financial calamity over 25 years, seems to be the height of folly. We are asking pensioners to gamble on their own longevity. Will your washing machine die before you do? Will you be in residential care before you need to repair your roof? Their needs over time—and the length of time is key—will grow. Far from consuming, they, too, need to save if they do not have a cushion
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Pensioners at 70 need to smooth out bumpy expenditure just as they did when they were 40. They have the same need to feel in control of their finances, the same hunger for a bit of security, and the same neediness and vulnerability if that is denied. In other words, the 70 year-old, as much as the 40-year old, needs not only income, but capital as well.
We do not require claimants of IS or JSA to have consumed all their savings before they can get benefit and be passported on to the saving gateway. Their first £6,000 of capital is disregarded, and thereafter a notional tariff applies, just as in pension credit—and rightly so. It is a false economy of the state to strip out, 1930s-style, any modest savings. Why then is it acceptable for someone on JSA to have £6,000 of capital yet be eligible for the saving gateway, but for a pensioner with only £600 of capital to be excluded? Just because the first person is 40 and the second person is 70 will not quite do, with an equality Bill coming our way.
I beg my noble friend to bring forward an amendment to bring poorer pensioners—those on pension credit—into the saving gateway. We have tackled wonderfully well the issue of the poverty of pensioner income. We now need to think again about the poverty of pensioner savings. Then the saving gateway would really make a difference.
3.53 pm
Lord Newby: My Lords, the aims of this Bill are undoubtedly admirable and we support them and it. The Minister explained that there are two principal aims. The first is to encourage those on the most modest incomes to save sums regularly, so that they develop the savings habit and in doing so have the funds to hand to deal with emergencies or to fund essential capital expenditure. The second is to promote financial inclusion and to bring people into contact with the financial institutions, often for the first time.
So far, so good. However, I have several doubts about whether the Bill will achieve these aims, not least, as the noble Lord, Lord Blackwell, almost put it, because of its mouse-like qualities. First, and uniquely among government savings initiatives, the Bill provides for only a limited period during which eligible people will be able to get government support for their savings. We believe that this is two years, although the Bill says nothing firm about a time limit. But a time limit there definitely is.
This is unlike all the current principal savings incentives offered by the Government. For example, it is completely unlike the ISAs, where, in effect, there is an unlimited period in which to make savings. One can see by the amount of advertising done by the financial institutions towards the end of the financial year that they know that many people simply will not put aside cash or other forms of saving unless they are reminded of it and unless the tax incentives, year on year, are brought fully into view.
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Secondly, the tax benefits for making pensions provisions last for an individual’s entire lifetime of making contributions, which can be up to four decades and beyond. Even under the child trust fund scheme, a second payment is made after seven years and parents can make top-up payments tax-free for the 18-year life of the fund. So why do the Government feel it necessary to subsidise tax incentives for those who are rather better off over the long term but to support the very poor for only two years?
The noble Lord, Lord Morgan, talked about the inherent class bias in the current savings regime. The Bill does not go as far as it might in redressing that bias, particularly now that carers are brought within its remit, which we welcome. As the noble Baroness, Lady Pitkeathley, said, many people are carers for significantly longer than two years and, in my view, they require a longer period during which to have an incentive to continue saving.
I mentioned that we assume that the period of the incentive will be two years. The Minister said so, but we would not know that from reading the Bill. On this and on every substantive issue, the Bill is completely silent. It has 32 clauses and 29 separate delegated powers. We protested about this when it was debated in the Commons and I am protesting about it again. It is a very inadequate way of dealing with legislation to have all the substance in secondary legislation, which, as we know, will be unamendable.
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