Savings (Government Contributions) Bill (Third sitting)
(Limited Text - Ministerial Extracts only)
Read Full debateThe Committee divided: - Ayes: 3 / Noes: 9 - Question accordingly negatived.
Kelvin Hopkins
I agree with the hon. Gentleman that there is a serious problem for the self-employed. There is a lot of bogus self-employment, with employers forcing their employees into self-employment. If we counted only genuine self-employment, there would be far fewer self-employed people. We could then make sure that people are paying into the system through taxes and national insurance contributions. They could also be enrolled in a compulsory state system of earnings-related savings. I agree that there is a problem with the self-employed and I am glad that the Government are reviewing the problem, but we have to go far further into that than we are discussing today.
What my hon. Friend the Member for Bootle said is sensible, practical and reasonable. The Government should just accept his argument and say, “Of course, we want a review of the impact on the automatic enrolment and pension savings and we want to have proper advice for people applying for lifetime ISAs.”
When I was investing in my middle years—rather than my later years, as I am now—people gave me advice. People came to my door and talked about their savings schemes. I did not understand what they were talking about, even though I used to teach statistics and am mathematically qualified and could understand logic. It became clear to me that the people coming to my door did not understand the instruments either. They were selling something because they had been told to sell and they were on commission: “Just sell it, get the signature on the bit of paper, come away and we will give you 5%.” When they did not understand, I thought it was even more terrifying. No wonder we had mis-selling on a gigantic sale. Billions are now having to be paid back, and no doubt billions have been lost for ever and will never be paid back because many people died before compensation was thought about.
We have a problem. We have to make things automatic, simpler, with a state-managed system involved. We also need to ensure that, if there is any kind of subsidy for pensions in old age, it should go to the poor and not to the better-off like me. The gulf between rich and poor in our country has widened. We have a serious problem of poverty in old age and we have to deal with that through the state. I hope to persuade my own party to adopt a policy of that kind, as and when we become the next Government.
The Financial Secretary to the Treasury (Jane Ellison)
It is a pleasure to be here with you and the Committee, Mr Chope. I thank everybody for their attention at the very good witness sessions on Tuesday, when we heard from some very interesting people who were good enough to give up their time to come and inform our deliberations.
I will say a general word around lifetime ISAs when speaking to clause 1 and will come on to new clause 2. However, I should say first that there is much about the spirit of the new clauses and amendments proposed with which I agree, as I think we all would. When I come to speak on them, it will be to demonstrate that they are unnecessary or would not work as intended. I do understand the spirit in which they are tabled. I also note, as we all have, that there are areas of significant consensus across the Committee, particularly around auto-enrolment, the success it has been and the wish to see it go from strength to strength.
I will come to that in a moment, but I will first introduce the broader product. We believe the lifetime ISA is a positive addition to the savings landscape. That was a view substantiated by a number of the experts we heard from on Tuesday. It will support younger people to save for a first home and to supplement their long-term savings by topping up individual contributions with a generous 25% Government bonus of up to £1,000 a year.
In 2015, the Government held a full consultation on pension tax relief, which is the background to how we came to the lifetime ISA. The outcome was clear: there was at that time no consensus for fundamental reform to the pension tax system. In some ways, some of the comments that we have heard in speeches this morning reflect the fact that there is still a desire among some people for a fundamental redrawing of the landscape, but the reality is that that is a debate for another time and place. We are in Committee to deal with this Bill, but I acknowledge that that other debate is ongoing.
Throughout the course of the consultation, young people indicated that they wanted more ways to save flexibly for the future. At Budget 2016, therefore, the Government announced the introduction of the lifetime ISA, which has been welcomed by insurers, ISA providers and other industry experts, as we heard on Tuesday. Although some people had some concerns, I think it is fair to say that there was a broad degree of welcome from people across the sector. They see the lifetime ISA as a valuable new vehicle to help young people save.
Ian Blackford
Does not the Minister accept that all the generous bonus will do, in effect, is compensate those who have gone into the LISA for the fact that, in contrast to a pension where people are putting pre-tax income in, the money is coming out of post-tax income, so on a zero-sum basis it comes out more or less the same? Anyone going into a pension can expect to get employer contributions, so anyone saving in a pension will be better off. For the life of me, I cannot understand, given the cross-party consensus about supporting and strengthening auto-enrolment, why on earth she wants to muddy the water so that people might be seduced into this product when they should be investing in a pension.
Jane Ellison
This perhaps goes to the nub of the disagreement we have in Committee: the Government do not see it as an either/or. The hon. Gentleman is very much positing the product versus pensions as an either/or, but we have been quite clear that the lifetime ISA is a complement, and we heard that from witnesses. I also think that, while acknowledging the consensus to protect auto-enrolment, and indeed to encourage people to save with the pension products appropriate for them, to jump from that to the assumption that the lifetime ISA is, by its nature, going to undermine everything else is a jump too far. I would reject some of his language. Later, I will come on to some points to support my assertion.
The clause itself sets out the defining characteristic of the lifetime ISA: a Government bonus will be paid by Her Majesty’s Revenue and Customs where a qualifying addition is made to a lifetime ISA in a relevant period. “Lifetime ISA”, “qualifying addition” and “relevant period” will be defined in regulations, which will also provide that the Government bonus will be 25% of all qualifying additions made to the account. I confirm that those new regulations will be brought to the House for debate ahead of the launch of the new account in April 2017. Further detail on the lifetime ISA is set out in schedule 1.
New clause 1 seeks to place a requirement on the Government to conduct an annual review of whether the lifetime ISA has had any impact on workplace pensions, and in particular automatic enrolment, as we heard from the shadow Minister. The Government are absolutely committed to automatic enrolment, which will help 10 million people to newly save or to save more into pensions by 2018.
The lifetime ISA is designed to be a complement to automatic enrolment and workplace pensions, not a replacement. We are clear about that language, and we will continue to be. The aim of the lifetime ISA is to support younger people to purchase a first home and to supplement their long-term savings, not to choose between the two. The reality is that some of the youngest people who take out this product will be able to take the money out at 60, but that will not be their retirement age. We are talking about people saving for a later phase of their life, perhaps the last phase of their working life, or to do something in their later years that they always wished to do but did not have the chance to do when they were younger.
The Government’s different policies on employer contributions to a pension and a lifetime ISA reflect all that, which goes to the point made in an intervention. Employers have a statutory obligation to contribute towards pensions under automatic enrolment. They also have a direct incentive to do so through relief on national insurance contributions. The cost of that to the Exchequer was £13.8 billion in 2014-15, which is a powerful demonstration of the Government’s commitment to retain strong incentives in the system. Neither is the case with the lifetime ISA.
We have already conducted an impact assessment, published alongside the Bill, and we clearly do not expect that people will opt out of their workplace pension in order to pay into a lifetime ISA instead. The help to buy ISA already provides a 25% bonus to support people to purchase a first home, but the launch of that did not lead to a surge in opt-outs. I accept that it is a slightly different product, with a different timescale. Nevertheless, there is real-world evidence that it did not lead to that.
Ian Blackford
I agree with the Minister about us all being satisfied by the opt-out rate being lower than anticipated. The real challenge will come in the next few years, as rates going into the auto-enrolment scheme increase. That is why it is important we keep the primary focus on auto-enrolment, to ensure that as contribution levels increase, we do not inadvertently see an increase in the opt-out rate, with people perhaps switching to the LISA.
Jane Ellison
I entirely accept the hon. Gentleman’s broad point. He assumes the worst will happen, whereas I have good evidence to show that that is not a reasonable assumption. I will go on to show that we are keeping these things under constant review across the broad piece of pensions and savings.
The lifetime ISA, like all Government policies, will be kept under review to ensure that it is meeting its objectives. We already publish a wide range of details about the take-up of Government-supported savings accounts such as ISAs, and we intend to take a similar approach with the lifetime ISA. Similarly, national statistics and other information such as the Office for National Statistics wealth and assets survey set out information on the savings held across a range of different household types. It is quite granular information.
As the hon. Member for Ross, Skye and Lochaber said earlier, we have a legislative commitment to review certain aspects of auto-enrolment in 2017. In addition, we have the discretion to conduct wider review activity. We recognise that broader challenges and questions have been raised by stakeholders in connection with the review—for example, questions of inclusion and adequacy. It is important we look at the scope and the right sequencing of review activity. The Government are currently scoping the review and hope to update further on that by the end of the year. Of course, the debate we are having in this Committee will inform those deliberations. Because of that, we consider publishing an additional review of the scheme’s operation to be unnecessary in terms of its interaction with the product we are discussing in this clause. I therefore urge the hon. Member for Bootle not to press new clause 1.
New clause 2 seeks that the Government provide in regulations that independent financial advice is made available to all customers making an application for a lifetime ISA. I think we all agree with the thrust of the debate on the new clause. We have all seen victims of mis-selling and want to ensure that our constituents go into every financial decision with the best information available. The Government want people to have the information they need to make important financial decisions and we will achieve that by providing clear factual information on gov.uk, as well as working with the Money Advice Service and its successor to ensure they make appropriate and impartial information available.
New clause 2 would require all individuals to take out financial advice before they open a lifetime ISA. I want to demonstrate that that is not practical, however well intentioned it is. Financial advice is relatively expensive. The point has been made that we do not want to disadvantage younger people and basic rate taxpayers who want to take advantage of this product. Our impact assessment and all the work that we have done indicate that the vast majority of people who take up the product will be basic rate taxpayers.
Research carried out by Unbiased shows that the average cost of financial advice for customers is £150 per hour and the average advice process takes around eight hours. That totals £1,200. Even if we assume that that is the upper end of estimates, it is still £200 more than the maximum annual bonus that an individual could receive from the lifetime ISA. That would create a significant barrier to all but the wealthiest individuals opening a lifetime ISA, and I know that that is the opposite of the Opposition’s intent.
Kelvin Hopkins
If there was a simple state office where people could obtain such advice from an objective, publicly employed adviser rather than a private financial adviser, would that not be an efficient and relatively cheap way of providing good, reliable advice?
Jane Ellison
I think we would all agree on the broad point about wanting people to have access to financial advice whatever their income, but we are dealing with this Bill. The Government will consult and take soundings on the successor to the Money Advice Service and the other advice services that will be brought together, and I am sure that we will have a good debate about that in due course. The hon. Gentleman may wish to contribute those broader thoughts to that debate.
Let me turn to the current regulatory framework around the LISA. It is worth saying that it is not the Government’s role to set that regulatory framework. The hon. Member for Luton North talked about the different regulatory landscape at the time when he was being sold products—not particularly well, apparently. We are all thankful that that landscape has changed greatly since those days, and rightly so, but it is the role of the independent Financial Conduct Authority to regulate the providers of ISAs, and it will likewise set the appropriate framework for the lifetime ISA.
The FCA will consult on the regulatory regime for the lifetime ISA throughout the autumn and will, as is its ordinary remit, ensure that providers are transparent to customers about the products that they are offering and those products are sold with suitable safeguards in place. We heard in some of the evidence sessions on Tuesday about how the industry wants to get advice right. Everyone has been scarred by what has happened in years past. As I said to the hon. Gentleman, we will consult later this year on the scope of the new financial guidance body, as a complement to the industry’s advice. We heard people such as Martin Lewis talk about the common-sense advice that people need to hear, and that is also an important part of the landscape from which people can seek guidance. I am sure that Martin Lewis and others will contribute to the debate about the new advice services.
I reassure the hon. Member for Bootle that information about the lifetime ISA will be available so that potential customers can make informed choices about which financial products to use. We want people to understand what the right choices are for them, but it would not be appropriate for the Government to require advice to be provided, as that would create a significant financial barrier to individuals accessing the lifetime ISA. It is the independent FCA’s role, not the Government’s, to set the regulatory framework for ISAs. For those reasons—not because I disagree with the spirit of his new clause but because I do not think it would work in practice—I encourage him to withdraw new clause 2.
I conclude my remarks about clause 1 by saying that the lifetime ISA will benefit many young people by supporting them to save flexibly for the long term. It is designed to complement the pension system, not replace it. The clause makes provision for the fundamental feature of the lifetime ISA: the Government bonus. We think that is a positive product for young people, and we do not want them to lose out on, for example, a year’s worth of saving and the compound interest on that because of the delay that has been called for. I therefore ask Committee members to support clause 1.
Peter Dowd
I welcome some of the Minister’s comments on both new clauses, and the spirit in which she made them. In the spirit of trying to move on, we will not push new clause 1 to a Division. We acknowledge that the Minister has said that there will be reviews of some fashion, though maybe not statutory reviews; we will take that away and consider it, and may come back to the question of reviews. Our concerns in relation to auto-enrolment can be appreciated. It has been a good product, to use the jargon, and we do not want to lose that. However, again, in the spirit of moving on, we will pull away from the new clause.
We will push new clause 2, on independent financial advice, to a vote, because this House has to lay down a marker when it comes to people’s future and making a significant investment in a product. The lifetime ISA is a significant investment, whatever way we look it. Importantly, it is also a significant investment by taxpayers; that has to be taken into account. If somebody wants a lifetime ISA, and rightly understands that the Government will put a lump sum towards it, it is not unreasonable for us to say that we expect that person to take independent financial advice.
Peter Dowd
It is, and that is why I am trying to push that message home. To some extent, we need to draw a line in the sand.
Jane Ellison
Given that some of the debate on new clause 2 has been about the concern that the product would be insufficiently attractive to people on lower pay, the practical nature—not the spirit—of what the hon. Gentleman proposes would essentially be regressive, and make the product less attractive to those on lower incomes, whom we wish to attract.
Peter Dowd
I completely understand that. The Bill is full of principles: we want people to save and to have pensions, to have the Government cough up towards that, and the individual to put money in personally. There is a whole series of things that we say must be part of the process in principle. For us, there is also the principle at stake of seeking independent financial advice. That is not unreasonable.
Kelvin Hopkins
I rise to support my hon. Friend’s new clause. Many of us have long been concerned about the massive rise in house prices. I will give a simple example. When I bought my first house in Luton in 1969, house prices were three times average earnings. Now in Luton, they are 12 times average earnings.
Millions of people are seeing the possibility of home ownership disappearing. Owner-occupation is in decline; it is becoming a smaller sector, and we are seeing an opening up of major social divisions between owner-occupiers and renters. For owner-occupiers, equity will cascade down the generations, and their children and grandchildren will stay in the owner-occupied sector because they will inherit the equity. Those who are not in the sector and do not have sufficient income will remain outside the sector, as will successive generations after them—unless they win the lottery or become extremely wealthy for some other reason, but that will apply to only a small number. The great majority of people will find it very difficult to become owner-occupiers if they do not have equity handed down by their forebears.
Adding extra cash to help people who are already likely to be in a position to buy their own home will simply increase house prices further and take home ownership even further away from those who do not have equity and are unlikely to be able to afford a home. We have to see some action by Government over time at least to stabilise house prices, so that more people can get into owner-occupation, and so that those who aspire to be a homeowner have a realistic prospect of becoming one.
I support what my hon. Friend said. We have to build many more houses. The only way to stabilise house prices is to raise supply, not increase demand, which would just push house prices up. It is not the price of houses that is increasing, but the price of the land on which they are built. The cost of building a house does not increase by that amount; it is the land on which it is built. There is a case for land value taxation and doing something about the price of land.
It is a mad world. In 1969, I thought becoming an owner-occupier was a bit of an adventure, but I could afford it on one income—mine, which was not massively high, because I was a trade union research officer. Nevertheless, I could afford to buy a three-bedroom house with a garage and gardens back and front—a nice, typically British home, which we might all aspire to. If I were trying to buy the same house now, with the same sort of income, in the same town, I would have great difficulty. On my generous parliamentary salary, I might stand a better chance, but not on the salary that I had at the time, so I think my hon. Friend the Member for Bootle is absolutely right, and I support his new clause 3.
Jane Ellison
The Committee is enjoying the autobiographical journey to Luton North through the ages.
Kelvin Hopkins
I used to be a teacher—I taught economics years ago—and I always found that using examples kept the class alive and entertained them. It also helped them to understand the points that I was making.
Jane Ellison
To that end, he has succeeded magnificently; everyone looks thoroughly engaged, which is not always the case in Bill Committees, it is fair to say.
Before I speak about schedule 1 and new clause 3, I have a couple of points to make. I do not intend to go into a wide discussion about house building. We all agree that we need to build more houses. Earlier this month, the Government unveiled a £5 billion package at the Conservative conference, which will make substantial progress and build on the progress already made.
The help to buy ISA is often unfairly criticised. In a way, those myths then transfer across to criticism of the lifetime ISA, so it is worth putting on the record that the take-up of the help to buy ISA has been high; there have been more than 650,000 of them to date. Where people have used help to buy to buy a home, that home has been worth on average £167,250, which is well below the scheme’s property price cap of £250,000, or £450,000 in London. That underlines the fact that we expect the majority of those who use the lifetime ISA to be basic rate taxpayers.
I will turn to schedule 1 and then make a point or two about new clause 3, because I hope to show the shadow Minister that I can respond to his substantive concern. The schedule sets out some of the detailed rules of the lifetime ISA. It is a long schedule, so I propose to provide only an overview.
Regulations made under paragraph 11 of the schedule will set out who is eligible for a lifetime ISA by specifying who “the investor” is. We intend to provide in regulation that a new account may be opened only by a person aged under 40, and that payments to a lifetime ISA may only be made until an account holder reaches 50. That is to reflect the fact that the scheme, as discussed, is designed to support younger people in getting into the habit of saving. Draft regulations have already been published for consultation, and they will be considered and debated by the House before the product is launched.
Paragraphs 7 and 8 of schedule 1 concern withdrawals. Account holders will be able to withdraw sums from their lifetime ISA at any time; that is consistent with normal ISA rules. Such withdrawals will not be subject to a withdrawal charge in the circumstances set out in paragraph 7, which include account holders purchasing their first home after saving in a lifetime ISA for 12 months or longer, or reaching a specified age, which regulations will set at 60.
Regulations will also set out detailed rules for the processes to be followed when a withdrawal is made to buy a first home. We intend to consult with industry experts to ensure that those regulations are simple to apply and that they meet our objectives for the scheme. Officials have been working hard and openly with industry experts for some months to ensure a product that works well. There will also not be a withdrawal charge when an account holder dies or becomes terminally ill, or when savings are transferred to another lifetime ISA.
Peter Dowd
To start with, I telegraph the fact that we will not pursue this matter. However, it is important to get on the record the fact that where Government policy has an effect on house prices, it is important—given the current state of the housing market, which is overheating due to lack of supply—to have that logged and noted, however marginal the effect appears to be. I am not suggesting that the Minister has brushed that point aside, but it is our responsibility to bring that effect to account.
The Minister quoted some figures on seeking advice for particular products, but 0.3% inflation on housing is a fair old amount of money. If that is 100,000 transactions a year of around £750, that is the best part of £70 million-odd a year added to house prices by this policy alone. If we are to introduce policies that add to an already overheating sector, it is important that as a nation, a Government and a Parliament, we take into account their impact. That additional £750 for that person is £750 not going somewhere else in their budget. I only say that to try to get that issue into the smorgasbord of issues that we have to take into account. I will not be pursuing the matter.
Question put and agreed to.
Schedule 1 accordingly agreed to.
Clause 2
Government contributions to Help-to-Save accounts
Question proposed, That the clause stand part of the Bill.
Jane Ellison
The Prime Minister has set out the Government’s mission to build a country that truly works for everyone, not just the privileged few. Clause 2 introduces the Help to Save product, and we can be extremely encouraged that it speaks directly to that mission. Evidence from the Joseph Rowntree Foundation cited in the House of Commons Library briefing paper shows that between a quarter and a third of households have said that they are unable to make regular savings for rainy days. According to the family resources survey, a household with less than £25,000 in income is twice as likely to have no savings as a family with more than £50,000. We heard from the debt charity StepChange in its written submissions—this point was amplified in its contribution to the evidence session—that access to a £1,000 savings pot can reduce the likelihood of the average family falling into debt by almost half.
Faced with that evidence—and the evidence we all know from our constituency surgeries of people living fragile financial lives, where one thing going wrong can tip them into debt or other problems—it is only right that we provide a strong incentive and reward for working households on lower incomes to build a savings buffer.
Help to Save will support up to 3.5 million people on lower incomes who are just about managing but may be struggling to build up their savings. It will help them develop their financial resilience and ability to cope with unexpected financial pressures. Clause 2 sets out the main characteristic of Help to Save: the Government bonus or contribution, which will be paid by the paying authority. The bonus will be paid at 50% of the highest balance achieved in the account. Over the four-year maturity period of the account, an eligible individual can save up to £2,400 and earn a Government bonus of up to £1,200. We intend that HMRC will pay any bonus amounts due and that that will be passed to eligible individuals by the account provider. Schedule 2, which we will consider shortly, makes further provision in relation to Help to Save accounts and the Government bonus.
Help to Save will meet a real need and will support many of those who are just getting by, helping them to build their financial resilience and supporting their ability to cope with financial shocks.
Question put and agreed to.
Clause 2 accordingly ordered to stand part of the Bill.
Schedule 2
Help-to-Save accounts: further provision
Dr Whiteford
I beg to move amendment 6, in schedule 2, page 16, line 31, at end insert—
‘(1A) The conditions specified under sub-paragraph (1) shall not include the condition that the individual be over 25 years old if that individual meets all other specified conditions relating to the working tax credit.’
Currently those aged under 25 only qualify for Working Tax Credits if they work at least 16 hours a week. This amendment would ensure any individual aged under 25 would qualify for a Help-to-Save account if they met other specified criteria.
In relation to later amendments to the schedule, I declare an interest as a member of the North East Scotland Credit Union. I tabled the amendment with my hon. Friend the Member for Ross, Skye and Lochaber. In contrast to the LISA, the Help to Save product offers genuine benefits for low and middle-income savers. All our amendments today seek to strengthen it and address some of the limitations that have emerged in the written and oral evidence.
Currently, the under-25s will not qualify for Help to Save unless they are in receipt of the disabled element of working tax credit, or they are responsible for children and are working 16 hours a week or more. Many young adults under 25 who are in full-time work could benefit greatly from Help to Save. The amendment would ensure that those under 25 could qualify for a Help to Save account on the same basis as those over 25 if they meet the specified criteria.
We know that the under-25s need some encouragement to save. As we heard from the Minister, having some savings can be incredibly advantageous; it cushions them against unexpected financial shocks and prevents them having to use the excruciatingly expensive payday lenders and getting into problem debt when they face unplanned costs.
Help to Save is probably a more realistic way for people to save for a first home than the LISA. Extending it to more young people in that age group can only help to incentivise early saving and improve financial literacy. It seems wrong to deprive young adults who are already working more than 30 hours a week of the opportunity to benefit from this scheme just because of their age.
Jane Ellison
The amendment would ensure that individuals aged 25 or under would be eligible for an account if they meet the conditions relating to working tax credit eligibility. It is worth making it clear that under-25s will be eligible to open accounts if they meet the relevant criteria for working tax credit or universal credit. A person under 25 is eligible for working tax credit if they work a minimum of 16 hours a week and have a child or a disability.
Our intention is for eligibility for a Help to Save account to be determined by people passporting from working tax credit and universal credit. That is a well established way of targeting support to people on lower incomes. The Government recognise that some people of working age with lower incomes may not be eligible for Help to Save, but passporting is the simplest and most effective method available for determining and notifying eligibility; it is fundamental to the efficient operation of the scheme.
In particular, passporting means that people will not be required to complete a means test to prove that they are eligible for an account, or to contact the Government. It avoids the need to develop bespoke systems to determine eligibility that would be an additional cost to the Government and could deter many savers. That is why we will resist the amendment and I ask the hon. Member to withdraw it.
Dr Whiteford
I would rather press the amendment to a vote.
Question put, That the amendment be made.