Savings (Government Contributions) Bill
Thursday 12th January 2017
(7 years, 11 months ago)
Lords ChamberSavings (Government Contributions) Act 2017 View all Savings (Government Contributions) Act 2017 Debates Read Hansard Text Read Debate Ministerial Extracts Amendment Paper: Consideration of Bill Amendments as at 12 December 2016 - (12 Dec 2016)
The Commercial Secretary to the Treasury (Baroness Neville-Rolfe) (Con)
My Lords, I am delighted that the first Bill I am taking as Commercial Secretary is about supporting people to save. As we know, saving is a hugely important topic and a very personal one for people up and down this country.
The reality is that families in the UK are not saving enough. The saving ratio is near a record low and it is estimated that 21 million people in the UK do not have £500 in savings to cover an unexpected bill. In the current economic climate it is important that households keep setting aside what they can afford to build their financial resilience and save for the future. Saving benefits the economy, helping to create stable, long-term economic growth, and it benefits individuals, helping them meet their aspirations and prepare sensibly for the future. So we want to make sure that all people in this country, no matter their circumstances, have the tools at their disposal to save money in a way that works for them.
There have been a number of initiatives in this area over recent years. The personal savings allowance put an end to 17 million people having to pay tax on the interest they received on their savings. There have been substantial increases to the ISA allowance: from April people can save up to £20,000 in this tax-advantaged wrapper. The Autumn Statement announced further support for savers with the introduction of a new market-leading three-year savings bond from NS&I in spring 2017.
To help even more people save for the future, this Bill brings in two new schemes: the lifetime ISA and Help to Save. I will introduce them in some more detail. First, the lifetime ISA provides a new option for younger people who are looking to save for the long term. Essentially, this is designed to offer people more flexibility in how they save. For some people, the existing support that is available will be sufficient. There is already, for example, a good level of support provided through the pensions system, particularly thanks to automatic enrolment, a policy that has attracted support, rightly, on all sides of this House. It makes it compulsory for employers to enrol people into a pension scheme and contribute towards it.
However, when we did a consultation on pensions tax relief back in 2015, we found that younger people in particular could find pensions inflexible. So we looked at what more we could do to provide more choice and flexibility for them. That is why we designed the lifetime ISA to offer that as a complement to the pensions system. Adults will be able to open an account from the age of 18 to the age of 40, and carry on saving up to the age of 50. They can save up to £4,000 a year. They will earn a 25% tax-free bonus on their contributions from the Government, paid straight into the account, which represents a clear and attractive incentive to save.
The flexibility comes in how the lifetime ISA can be used. Savings under this scheme can be used to supplement your income in later life because you can withdraw funds, including the bonus, any time from the age of 60. But you can also use your savings to get on to the property ladder for a first home costing no more than £450,000. We know how important that is for many young people today. We were clear in our manifesto that we believe the chance to own your own home should be more widely available. Through the Bill, from April next year, people will have a new and more flexible way to save, which may be more suitable for their individual needs.
The other policy introduced in the Bill is Help to Save. This is another way in which we are looking to help people build up their savings, and this is specifically targeted at people on low incomes, for whom it can be a particular struggle to do so. In fact, research from the Centre for Social Justice estimates that 3 million low-income households have no savings at all. This is a serious statistic and one that we cannot ignore. Instead, we need to support and encourage more people to build up their resilience and become more financially secure. That is why it is the Government’s view that we should support those on low incomes who are trying to do just that by putting money aside on a regular basis. This Bill would therefore introduce a new Help to Save scheme no later than April 2018.
The scheme will be delivered by National Savings and Investments, building on its reputation as a trusted savings provider and ensuring that accounts are available nationwide. It would be open to any adult who is getting working tax credits, or who is getting universal credit and working enough to earn the equivalent of at least 16 hours pay at the national living wage. This means that there are around 3.5 million people who would be eligible for the scheme. Those eligible will be able to save up to £50 a month for two years—£1,200 in total—and then receive a 50% bonus on what they have saved. If, after those two years, they want to do that again for the next two years, they will be able to do so.
Help to Save offers a flexible way to save which we know that people value. First, there are no restrictions on what people are able to do with the bonus once they get it. Secondly, people will be able to take the money out at any time. There will not be any charge or penalty for doing so. That is why we see Help to Save as an attractive new scheme that would support and encourage people to save what they can. Having savings to fall back on can make all the difference to how well people can cope with unforeseen events that come their way.
Money Advice Service research in 2013 showed that 71% of UK adults faced an unexpected bill during the previous year. Research from the debt charity StepChange suggests that if a family has £1,000 in the bank, it is almost half as likely to fall into problem debt, by which is meant being in arrears with at least one bill or credit commitment. It is therefore really important that we take forward this scheme to help more people on low incomes build up a pot of money that can be spent however they want, but that might be particularly important in case of a rainy day.
The lifetime ISA and Help to Save are designed to do the same thing—namely, to reward those who are trying to save for the future and to encourage more people to follow their example. Whether it is young people saving flexibly for their futures or people on low incomes trying to set aside a bit of money each month, they deserve to have the tools to do that in a way that works for them. That is what these two new products offer. It therefore gives me pleasure to commend this Bill to the House.
Baroness Drake (Lab)
My Lords, increasing saving in the UK is good for people and for the economy. In recent years, the Government have introduced a raft of reforms to incentivise saving. Freedom on accessing pension saving and LISA are just two. The Explanatory Notes observe that this,
“range of reforms”,
is needed,
“to ensure that the right incentives and products are in place to meet savers’ needs”.
Unfortunately, it is increasingly difficult to understand exactly what the Government’s strategy is for savings, and for pension savings in particular. What are the “right incentives”, and why? What outcomes are they intended to achieve? What are the characteristics of the “right products”? Do they differ for different groups? What is the Government’s intention on tax relief to support savings? For employers, providers and consumers, the answers are increasingly confusing, complex and uncertain.
A LISA is another new savings product, but its introduction raises two fears that the Government have not addressed. The first concerns the risk that some people will opt out of a workplace pension in order to save into a LISA, believing that it offers a better proposition when it does not. The second is that the LISA is a government stalking-horse to trail the reform of pension tax relief and replace current workplace pension arrangements with a pension ISA. That would mean that the current pension saving regime—whereby income paid in pension contributions and investment growth on savings are both tax free and on retirement when savings are withdrawn, the first 25% is tax free, the rest being subject to tax—would be replaced with an ISA regime where contributions are made from taxed income but investment growth on savings and future withdrawals are tax-free.
Those fears germinated when, in July 2015, the Government issued Strengthening the Incentive to Save: Consultation on Pensions Tax Relief. Concerns grew that the Government wanted to address current fiscal demands and reduce the current budget deficit by heavily reducing pension tax relief at the point of saving, which, for those who had those concerns, would be at the expense of building an adequate level of pensions savings, undermine the momentum in workplace pension saving, have a negative long-term impact on the Exchequer, and mean that people retiring in the future would make a limited tax contribution but consume high levels of public services, which would be deeply unfair on future generations. Pensioners on modest retirement incomes would lose out from the removal of tax relief at the point of saving and gain little from tax-free withdrawal of savings as they would not be paying tax anyway.
A fairer distribution of pension tax relief from the higher to the lower-paid saver is desirable. What is a sustainable level of fiscal support for long-term savings, given today’s public deficit and debt, is a legitimate question. Tax relief for private pension contributions through incentives to employers and employees is big—£48 billion last year, although that is a noticeable fall on previous years, with the lion’s share going into defined benefit schemes. But there is a real tension that the Government are not acknowledging between a Treasury that sees tax relief at the point of saving as an undesirable cost, given the current state of public finances and Brexit anxieties, and those who believe that tax relief at the point of saving is an integral part of supporting people in building an adequate and sustainable pensions system for the future.
Under current arrangements, an individual choosing a LISA rather than a workplace pension may end up with a smaller savings pot in later life—50% smaller. For a basic rate taxpayer saving into a workplace pension, 50%—half—of the minimum 8% contribution would come from the employer contribution and tax relief. If they opted into a LISA, they would receive only a 25% bonus from the Government on their savings from taxed income. The more generous the employer pension contribution, the greater the potential loss from saving into a LISA rather than a pension.
The LISA is a long-term saving product, with penalties for early access, with the exception of the add-on access for house purchase, but ISAs do not have the governance, value for money and regulatory requirements that workplace pensions have. Mis-selling risks abound. The Financial Secretary to the Treasury commented in the other place that,
“we heard that the pensions system on its own is too inflexible for young people”,
so the LISA is,
“giving people a new option that has been designed with flexibility in mind”.—[Official Report, Commons, 17/10/16; col. 606.]
But the DWP evidence contradicts her. It reveals that young people have the lowest opt-out rate from auto-enrolment of any group. If there is a problem with accumulating savings for house purchase, Help to Buy schemes are the answer, not a new, long-term saving product.
The Treasury costings do not assume that people will opt out of their workplace pensions to pay into a LISA. That may be right: the majority of people save into a pension by inertia. But if the Government turn pensions into an ISA into which employers auto-enrol their workers, workers will save into an ISA through inertia too. The concern is that that is exactly what the Government intend to do. A LISA is likely to be of benefit to people who have reached the limit of their allowance in tax-free pension saving, or who earn sufficient to save in both a LISA and a workplace pension. That may well increase the UK’s savings rate—there may be an element of substitution. It will provide a new option for the younger self-employed—40 is the age limit for opening a LISA—but, given that the average age of self-employed people is 47, it will not be accessible to the majority.
The real concern with the LISA is that the Government are further blurring the line of vision on savings. The distinct concept of pensions saving is at risk. The Minister may well dismiss my concerns, but if employers are not confident in the direction of government policy on private pensions, that will influence their behaviour and put a downward pressure on employer contributions into workplace pensions. I believe firmly that it is already happening.
Financial capability in the UK is persistently low, so measures to tackle persistent undersaving are welcome. The Money Advice Service 2015 Financial Capability Survey highlighted that lack of saving is a key risk to the financial resilience of households. The statistics make depressing reading: 17.3 million—44% of the working-age population—do not have £100 in savings; only four in every 10 save something every month; low income is a barrier to saving for families with children and those paying down debt; 44% of working-age people in the UK with no savings are classed as overindebted. But some on lower incomes do save: 26% of working-age adults in households with incomes below £17,500 are saving every month. A buffer against financial shocks helps to avoid inappropriate debt. For a mum in a low-income household with young children, replacing a broken washing machine is her financial shock. Some 71% of adults experienced an unexpected bill in the past 12 months, resulting in unexpected costs of some £1,545, yet of the people with no savings, 76% could not spare the money to pay an unexpected bill of even £300.
The Government’s Help to Save scheme is welcome as a measure to help boost the resilience of low-income households. I just wish that the Government were more ambitious, particularly given their recent high-profile commitment to address the challenges faced by those who are just about managing. The Help to Save scheme is targeted at 3.5 million people in lower-income households, costing up to £70 million in 2020-21. This compares with the expected cost of £850 million a year by 2020-21 of the LISA bonuses and increase in ISA limits. A fairer distribution of those incentives should have been considered.
The intended government match on savings up to £50 per month could be greater than 50%. Many of the target population will not be able to save £50. If they save £30, with a match, it will take them two years to save the £1,000 figure which StepChange, the debt charity, says is the minimum amount needed to reduce the number in problem debt by 500,000. Why is it necessary to wait two years before the match is paid? Financial shocks can hit people every year. The Government argue that two years is the optimal time to embed a savings habit, but their own evidence suggests it can be nearer 18 months.
Only one in seven, 500,000 of the target 3.5 million, are expected to take advantage of the scheme. That is low. The Government have a lot of contact with this group through the social security system, so I conclude by asking the Minister whether the Government will commit to bringing forward a plan, no later than six months after Royal Assent, which targets achieving a 50% participation rate by the eligible population in the Help to Save scheme.
Baroness Altmann (Con)
My Lords, this important debate has significant implications for younger generations. First, I congratulate the Government on the tremendous improvements they have made in recent years to the UK pensions landscape. As defined benefit schemes are on the brink of extinction in the private sector, I am delighted that the Government have made improvements that ensure defined contribution pension saving is now more user-friendly than it has ever been. Of course, if people have the opportunity of a good defined benefit pension, underwritten by their employer, that is hard to beat. However, some people with very small deferred entitlements in a final salary-type scheme may well be better off transferring their pension into a modern defined contribution scheme. We could not have said this a couple of years ago, but it can now be a sensible strategy for part of people’s past pension accruals.
Of course, defined benefit guaranteed pension income will not normally meet the costs of social care that many citizens will face. There is virtually no pre-funding of social care, either at public or private sector levels. Families are suddenly finding that a pension income is not all they need for a decent retirement. If you need looking after and have enough income or assets to be above the draconian care means test, you have to fund all your care costs yourself. That is why having some money saved up in case you need care is sensible advice for most families, especially baby boomers in our ageing population. But they do not know this. Most think the NHS will look after them from cradle to grave, as Beveridge’s national insurance scheme was often believed to achieve.
I am proud that this Government have acted to reform defined contribution pensions so that they can provide much better and more appropriate support for millions of people in later life. Some people will be able to use them to help to pay for social care, once the new pension freedom system is better understood, and perhaps with a little extra nudge from the Government. That would be a worthwhile focus of new saving incentives.
To be frank, I do not think the public or even the Government themselves, including my noble friend the Minister, have yet realised how positive the defined contribution pension changes are, how much better the landscape now is and how much more suitable for 21st-century realities. This is evidenced by last week’s astonishing infographic purporting to educate the public about retirement saving, which does not even mention the word “pension”, only lifetime ISAs, other ISAs and premium bonds. It is vital that the Government urgently revise this public guidance and recognise the important difference between short-term saving and long-term investment. Young people saving for retirement require the latter and also need extra money for care. Defined contribution pensions can offer more than just a guaranteed income. Of course, a pension is typically thought of as a lifelong income in old age but that is not necessarily enough to look after today’s or tomorrow’s elderly people.
With the new pension freedoms that ensure all pension savers should have flexibility and choice to use their pension savings as best suits themselves, the Government have already achieved the kind of flexibility that the Minister was talking about for younger people. Rather than effectively requiring most defined contribution pension savers to buy an annuity, pensions can better fit in with people’s changing lives.
The new regime does not stop anyone buying annuities if that is the right product for their circumstances, but they do not now have to do so and especially not when they are still relatively young. Most people reach their defined contribution scheme age and are still working. They will be best served by being in a pension and keeping it intact to grow, paying in more each year, so that they will have more money to support them after they finish working. That is also an important potential purpose of pension saving—to provide as much private resource as possible to support individuals during their retirement years.
There are also new behavioural nudges for people so that they do not have to worry about leaving money in their pensions for as long as possible. Under the old regime, with a 55% death tax, people would not want to die with money in their DC pension, because more than half would be lost in tax. Now, they can just leave the money there into their 80s and 90s. As I have said, if they need to pay for social care, they may have money in their pension fund. If they are lucky enough not to need care, the money passes on tax free to the next generation.
Pensions are now a product that we can be proud of and that can help people in different ways with the retirement costs they may face, rather than focusing only on ongoing income. We should be building on this success, not putting it at risk with the measures in this Bill. Of course, most people may not yet have enough money saved up, but as we look to the future and as the baby boomer generations reach later life, many of them will have—or could have—money that they could keep, rather than spending it too soon as will be encouraged by the lifetime ISA.
The combination of reforms we have seen since 2010 fits well with the theories of behavioural economics too. Behavioural science has proven powerful in driving much wider coverage of pensions across the workforce. The policy of auto-enrolment is just starting, bringing in millions more people to pension-saving, often for the first time, supplemented by a good employer contribution. The theory of inertia is ensuring that opt-out rates are far lower than anyone predicted, especially, as the noble Baroness, Lady Drake, said, among the young. The vast majority of those who are automatically enrolled into a pension are staying there. The young are clearly willing to stay in pensions, and this is a massive success so far. So it is simply not correct for Ministers to assert, as in the past, that people do not like pensions. That is yesterday’s story and is also partly a function of the fact that many do not yet understand just how good pensions are these days.
We are on the cusp of a major success in extending pension coverage for millions of people, but the measures of this savings Bill put us in danger of snatching defeat from the jaws of victory. Auto-enrolment is only just beginning, and has been a great success so far. Once again, the noble Baroness, Lady Drake, through her work with the Pensions Commission, can be rightly proud of sowing the seeds of this success. But it is work in progress—auto-enrolment will not reach all relevant workers and the full minimum contributions until 2019. Even at that stage, contributions will still be too low for most people, and millions, especially lower-paid women and the self-employed, will be left out altogether. More needs to be done, but the programme is working, and I and other former Ministers have had to battle to keep auto-enrolment in place. I congratulate the Government on doing this, but I truly fear the lifetime ISA in the Bill could derail the project before it is properly up and running.
As the state pension is being cut—the new state pension will mean lower pensions in the long run for most younger people in this country—it is vital that we ensure more people have more private income to add to their basic level of state support. That is why it is so important to continue to incentivise saving for retirement and help people build up as much money as they can to see them through their ever-lengthening later life. Using pensions could best achieve that. Distracting them with a lifetime ISA risks it.
Pensions have the right behavioural nudges. Individuals are automatically enrolled, to take advantage of initial inertia, and they receive extra from their employer to add to their own contributions, and hopefully even more money in tax relief from the Government. So the individual who puts £1,000 of their own money into a workplace pension scheme where the employer matches their contributions could receive a further £1,000 from their employer and an extra £250 in basic-rate tax relief—or even more if they are on higher-rate tax—and possibly even more from salary sacrifice. This means their own £1,000 can be more than doubled on day one.
When they reach later life, the money they have saved up will be waiting for them. They can take a quarter tax free and can leave the rest invested. Any money withdrawn will be taxed as income in that year, so there is a built-in tax brake on taking the money out quickly. The pension tax structure deters early unnecessary spending. Future Governments should therefore have fewer poorer pensioners to support. Is that not what we incentivise retirement saving for? It is also important to mention that the new state pension does not just lift all pensioners above means testing; it only lifts them above pension credit. But if all they have is a new state pension, a future Government, and younger taxpayers, could still have to provide housing benefit, council tax benefit and other means-tested help. So those who have no other private resources will potentially fall back on the state.
That is why I am so concerned about the introduction of this so-called lifetime ISA and why I beg your Lordships’ indulgence for my long speech today. This is the only opportunity to put on record the strength of feeling on this matter. We do not have an opportunity to amend the Bill, but it is important to make these points. It is a dangerous distraction that could undermine pensions and increase future poverty. There are many concerns and all I can do is put on record what the problems are and hope that the Government will take notice before it is too late. This is a money Bill, so I cannot change it, but I believe that it needs radical rethinking.
If used for house purchase, this lifetime ISA is okay—but we already had a help-to-buy ISA, so why did we need something new to complicate the ISA landscape further? However, when masquerading as a pension, this product is dangerous. It is also a complex product and should not be sold carelessly—although I fear there will be inadequate suitability checks. “Lifetime” ISAs will not last a lifetime, even though the purpose of giving a taxpayer bonus is supposed to be to ensure that people can support themselves privately in their old age. Today’s taxpayers are subsidising the under-40s to build up a fund that is likely to be spent at around age 60. This new product has the wrong behavioural structure and I am warning now that it risks becoming a new mis-selling scandal in coming years.
I cannot see who will be better off in their old age saving in a lifetime ISA than if they had put the same money into a pension instead. But people will be confused. Young people I have spoken to—some of whom are on higher-rate tax and have access to a generous workplace pension—have already been attracted to the idea of using a lifetime ISA instead of a pension. Only when I explain that they will lose their employer’s contribution and higher-rate tax relief do they realise this could be a mistake. How many people will be misled and may come back in future years and complain about being mis-sold this product? I have spoken to 30-somethings who clearly misunderstand. Here are some further examples.
Workers on basic-rate tax mistakenly believe that the 25% Government bonus is better than 20% tax relief. Of course, they are exactly the same. A 20% grossing up is equivalent to a 25% extra bonus, but who will explain that to customers? I urge the pensions industry to do more to help people to see the extra money from government, or other taxpayers, which is paid into their pension.
Some people have been attracted to the idea that they can get their money back if they need to, whereas pensions are locked until age 55. What they do not understand is that the Government take a heavy “withdrawal charge” from their fund if they want to spend it before 55. Unless they are buying their first home or are terminally ill, they face this so-called 25% penalty. But people think that that is merely taking back the 25% bonus. Once again, who will explain that it is far worse than that? They will lose far more than the government bonus and, indeed, some of their original amount. If they put in £1,000 and saw no investment growth at all, it would be worth just £937.50—which is another big danger of using the lifetime ISA for saving for retirement.
The dual purpose of this lifetime ISA will confuse people. Just when we have the opportunity to capitalise on the success of pension reform—auto-enrolment, pension freedoms—and the Pension Wise service, which offers real value to people and can help them save money until their 80s and 90s, along comes a new product that adds complexity and is unlikely to last so long.
Using a lifetime ISA instead of a pension will mean less money being put in on day one, less money growing, especially as much of it will be in cash—we know that that is what ISAs are predominantly used for—and more money spent more quickly in later life. Indeed, this lifetime ISA seems such a waste of taxpayers’ money. It will be good for those who have already filled their pension pot or their annual allowance, but it will not be good for those younger people saving for retirement. LISA contributions must stop at age 50. Fifty is only the start of the second half of one’s adult life, when pension savings could be stepped up, rather than suddenly stopping. I know that the FCA will try to impose regulatory requirements to protect customers, but with the best will in the world, reams of new disclosure documents are hardly going to help in practical terms. I believe that the LISA product introduced by this Bill is a—perhaps inadvertent—mistake. I have studied, managed and advised on pensions and pensions policy for nearly 40 years, and I share with noble Lords today my fears that this Bill risks worse retirement outcomes for generations to come.
Baroness Greengross (CB)
My Lords, having just heard from two fantastic acknowledged experts on this issue, I shall be much more general and very brief. We ought to start by looking at the total lack of knowledge of financial services that the general population in this country have. They have no idea how long they are going to live or about what their savings are going to provide for them when they retire. There are worries at the moment as well about what will happen to our economy in the shorter term.
I congratulate the Government and their predecessor on introducing auto-enrolment, which is a great success. However, I share the worries that have been put forward about these being early days and we cannot really estimate at the moment quite what the benefits are.
The International Longevity Centre UK, which I am privileged to head up, recently published a report called Consensus Revisited. It elaborates on the ignorance that the general public have, saying that even with the planned changes to state pension age, people will still require sufficient savings to fund up to one-third of their adult lives in retirement, which is over 20 years. In 2012, women left the workforce at 63 while men left slightly later, which means that men are going to fund 21 years in retirement and women 26, which is a long time. I do not think the public really understand that or have grasped those figures.
In future, therefore, adequate retirement income will hinge on people saving enough through defined contribution schemes, but as yet we know that is not the case. Projections suggest that unless contributions into DC schemes rise, fewer than half of median earners will be able to secure an adequate retirement through auto-enrolment. On average, employees contribute just 2.9% of their salary to a DC pot, whereas members of defined benefit schemes put in 5.9%, so there is a big difference. The difference in the employer contribution is even starker: just over 6% for DC schemes but over 15% for DB schemes. So there is still quite a lot of worry, and there are many things to sort out before we get this right. Given the lack of knowledge about longevity and what the two previous speakers have so wisely said, I agree that we must be careful with the LISA because it could be a threat to pensions, damage pension saving and, at any rate, cause quite a lot of confusion.
I was privileged to attend a meeting of experts, who all agreed that we need to promote pensions and explain them much better. I hope the Government have plans to engage in that. User-friendly communications, more education and much more engagement are essential.
The other thing we ought to note is that there is quite a lot of feeling that more employer engagement is necessary. It is important to ensure that employers become more involved in pension provision and get engaged in retirement savings for their staff. I do a lot of work with Business in the Community, as I know the Minister has done for many years, and I have chaired the CSR All-Party Group for years and now do so jointly with a Member of the Commons. Perhaps through that we can do more to promote the best of this. At the moment, though, it is important that we wait and look again at the LISA threat. I agree with the noble Baronesses about its dangers. Perhaps there is a chance to look again in some detail at what we are discussing.
Lord McKenzie of Luton (Lab)
My Lords, I share the frustration of the noble Baroness, Lady Altmann, that procedures on money Bills allow us only a Second Reading on the Bill. Although I see the noble Lord, Lord Young, blanching a bit at the prospect of a Committee stage on this Bill, we are not going to have one anyway.
I start by acknowledging the importance of encouraging individuals to save and accepting that there should be a role for incentivising saving through the tax system—although not necessarily exclusively through that—recognising always that support given through the tax system invariably does nothing for those at the lower end of the income scale. The Minister in introducing the Bill talked about the increase to £20,000 of the annual ISA allowance or the increase in the personal allowance, but those are so far beyond the circumstances of millions of our fellow citizens that it is difficult to see in this context how they will help.
I will concentrate most of my remarks on the lifetime ISA but first I have a few comments about the Help to Save scheme. This is targeted at those in receipt of universal credit and with household earnings at least equivalent to 16 hours at the national living wage, or to those in receipt of working tax credit. Entitlement to the latter—as I understand it—requires an individual aged over 25 to work at least 30 hours a week. If they are aged under 25 they will get it if they work at least 16 hours a week but have a disabled worker element or certain responsibilities for children. Can the Minister explain the differential working requirements for eligibility?
As other noble Lords have said, the impact assessment expects that around 500,000 people will open accounts in the first two years, saving an average of £27.50 a month. This will be from a potential eligible population of 3.5 million from 2.5 million households, 90% of which will have annual income below £30,000. As we have heard, the scheme will cost £70 million. Can the Minister say—or perhaps write to me if she cannot—what proportion of these individuals, who will be individuals in work, are likely to be within the scope of auto-enrolment? Can the Minister also say how the administration of the scheme will seek to ensure that the necessary savings have come from the eligible individuals and not been provided by family or friends, with the opportunity of sharing the government bonus when it arrives? That would seem to be potentially defeating the system.
Given the woeful level of personal savings in this country, the opportunity to build a small nest egg is important. The impact assessment cites the Family Resources Survey, which suggests that half the households with income below £30,000 have no savings at all—no wonder, given the battering they have endured under this Government. We have heard other figures as well leading to the same conclusion. The StepChange Debt Charity published research in 2015 which found that 14 million people had experienced an income or expenditure shock in the previous 12 months. This might have been a job loss, reduced hours, illness, a business failure, a relationship breakdown or even a washing machine breakdown—but without any savings they had to resort to debt to try to cope. The extent to which Help to Save will provide some small level of savings which can be available in such emergencies is to be supported—although, as my noble friend Lady Drake pointed out, the Government’s own ambition for the scheme seems modest.
A year ago, the FT carried a story that the then Chancellor was planning to overhaul the pension tax relief system. No wonder, perhaps, when the annual cost to the Exchequer was running at some £35 billion, including the national insurance issue, but netting for tax receipts on pension income. Moreover, two-thirds of pension tax relief was going to higher and additional rate taxpayers—a wholly unjustified distribution of outcome—notwithstanding a succession of tightenings of the annual and lifetime allowances.
The Chancellor was reported to have his sights on abandoning the current system, by which tax relief is given at somebody’s marginal tax rate, in favour of implementing a flat tax, suggested at between 25% and 33%. Since then, matters have moved on, including the Chancellor himself. The consultation on pensions tax relief has concluded, with no clear support for the Chancellor’s position, but it was expected that Budget 2016 would produce fundamental changes. What we got was the announcement of lifetime ISAs and Help to Save—hence the Bill before us.
The rationale advanced by the Government was that they wanted to help young people save flexibly and ensure that they did not have to choose between saving for retirement and saving for their first house. The lifetime ISA can be used to buy a first home at any time from 12 months after opening the account, and can be withdrawn with government bonuses from the age of 60 for use in retirement. Amounts can be withdrawn at any time, but with a 25% charge to recoup the government bonus—the equivalent of which was referred to by the noble Baroness, Lady Altmann.
For retirement savings, the structure of the lifetime ISA is effectively a TEE system: individual contributions paid from taxed income—no tax relief on contributions—investment income tax-free at the fund level and retirement income tax-free. That is a wish of the Treasury secured and some of us—pretty much everyone who has spoken—fear that it is the thin end of the wedge. Despite the impact assessment assuming that individuals will not opt out of workplace pension schemes to save in a lifetime ISA, I share concerns voiced in another place and by my noble friend Lady Drake and the noble Baroness, Lady Altmann, that it could undermine the progress of auto-enrolment and add confusion to an already complicated pension system.
The impact assessment identifies several groups who are expected to save in the ISA, but there seems to be no encouragement to see whether needs currently unmet by auto-enrolment can be brought into that fold. Of course, this is the year of the auto-enrolment review. It is encouraging that opt-out rates have been below original expectations, but we should recognise that these are still early days, as the noble Baroness, Lady Greengross, said, and that, with increased employer and employee contribution rates, they are still due to increase.
Compared to the current pension tax arrangements —an EET system—individuals will typically get a poorer deal from the Treasury by using the ISA route to secure a retirement income. This is particularly because of the tax-free lump sum currently available, and because an individual’s tax rate in retirement will typically be lower than when they are in work. What the individual loses, the Treasury gains. Of course, these matters are not set in stone, and the tax system is likely to change—indeed, it should—but currently, an individual saving for retirement via an ISA rather than an occupational pension scheme, notwithstanding the limited 25% bonus, is likely to be worse off. How are these issues to be communicated to consumers?
As a retirement vehicle, it should be noted that contributions to the lifetime ISA must cease when someone reaches the age of 80. That is hardly a lifetime. The noble Baroness, Lady Altmann, made the point that that is just the age where one would expect pension contributions to be ramped up. Retirement income cannot be accessed tax-free until the age of 60, although there is an opportunity to access savings at any stage with a 25% tax cost.
There is little in the impact assessment about the extent to which it is envisaged that individuals will draw down on their savings for a house purchase or leave it for retirement. One might just comment that contemplating the purchase of a first home at up to £450,000 is a sign of the times.
The Budget 2016 document indicated that the Government would explore the prospect of borrowing against lifetime ISAs, provided the funds were fully repaid. Has any progress been made on that? One can see some merit in having an incentivised savings product that can be available to cover a number of circumstances, but this should not be used to apply a regime, particularly a tax regime, which is less favourable than the stand-alone arrangements would be for any particular component. That is particular mischief of this Bill.
The Bill is a missed opportunity. It was certainly a chance to address anomalies in the tax system and the skewed benefit to the better-off. It was an opportunity to address some of the access issues for auto-enrolment, but perhaps also to move away from tinkering with individual housing initiatives to do something more fundamental. It was also an opportunity to do much more to build resilience for the poorest in our communities.
Lord Sharkey (LD)
My Lords, the provisions in the Bill appear at first glance to be quite straightforward. The Bill sets up the mechanisms to create lifetime ISAs and a Help to Save scheme. As the noble Baroness, Lady Drake, noted, the total cost to government in 2020-21 of the LISA is estimated at £830 million. The total cost to government of the Help to Save scheme in the same period would be £70 million. This is a very small amount. Can it really be correct? I would be grateful if the Minister could confirm that the impact assessment has this right. If it is right, does it not say something about the scale and ambition of the scheme? Does it not amount to tinkering?
According to the impact assessment, both schemes are driven by a desire to increase the level of household savings. In particular, the LISA will help young people to save flexibly for the long term and provide help with buying a first home. Help to Save will help working families on low incomes build up a rainy-day savings fund. All this sounds laudable, but there are some obvious questions and worries about both schemes.
The first worry is that neither scheme seems particularly likely to have much real impact. Both could be characterised as yet more confusing tinkering with the housing market and the tax system. Both are ways of avoiding directly addressing fundamental problems and both add to the complexity of an already very complex system. Neither scheme faces up to what is a major problem for households; namely, the level of debt that they already hold.
This debt is now again as high as it was in 2008. In the year to 30 November 2016, consumer debt rose by 10.8% and there are fears that, especially among less well-off households, some of this rise is being used to fund normal living costs when real wages are declining. The expected rise in inflation would make this problem worse. It may be true that increased debt-fuelled consumer spending is driving current economic expansion, but this is not a sustainable position. And it is true that for many households, particularly the low-income households targeted by Help to Save, paying down debt is a better option than saving.
The Government have correctly identified two real problems: the difficulty that most people now have in buying a first home and the lack of any financial cushion for those on low incomes. But the solutions to these problems need to be systemic and enduring; they need to be more than tinkering. To solve the housing problem, we emphatically do not need more demand-side schemes; we need more supply. Nothing else will have, or has had, any significant effect.
In July last year, your Lordships’ Economic Affairs Committee, of which I am a member, published a report which addressed the housing crisis. The report was called Building More Homes and, unsurprisingly, that is what it recommended. In particular, it noted that the private sector, as currently incentivised, would not build the number of homes needed, that the Government had no real prospect of reaching its target of 1 million new homes by the end of the Parliament, and that this target was itself much too low. The Committee recommended among other things that the cap on local authority borrowing to build homes be lifted. Only by doing this did we see any prospect of any real relief to our housing crisis. We did not feel that the many existing demand-side initiatives were likely to have much real effect. Most of these initiatives simply push those near the ownership threshold over the line. They probably contribute to price inflation and certainly do not provide large-scale or comprehensive help across tenure types.
I feel that this will be true of the LISA scheme in the Bill before us. It is not just that the measure is more demand-side tinkering, which it is; there is another serious problem and it is one of confusion. This issue was raised frequently as this Bill went through the Commons. The potential for confusion arises, as many noble Lords have said, from making a choice between a LISA, an employer’s pension scheme and auto-enrolment. How is this important choice to be made? Who will offer impartial guidance?
On 9 October last year, the Government announced their intention to create a new, single public financial guidance body to provide debt advice, and money and pensions guidance. This new body will replace the Money Advice Service, the Pensions Advisory Service and Pension Wise. The consultation was launched on 19 December last year and closes on 13 February. This new replacement single body will not be in place before autumn 2018. The LISA will be introduced next April and Help to Save a year later, at the latest—both before the new financial guidance body is in place. This seems like bad timing.
The Government clearly do not believe that the current financial guidance system is working well, and they will replace it. But in the meantime, it creates further financial complexity for individuals by introducing these new products. This is surely dangerous, especially if it leads to individuals making wrong decisions about pension provision or if low-income households are encouraged to take up Help to Save when they would be better off paying down debt. This is not a small or trivial problem. For many low-income households, saving may be an unsatisfactory and expensive substitute for debt repayment. Who will these households turn to for impartial advice?
The Bill itself is silent as to who will manage the LISA and Help to Save schemes, although it says that LISA account holders will be able to transfer their holdings between plan managers. It also talks of “account providers”—plural—for the Help to Save scheme. This all sounds as though there will be more than one provider for each scheme. However, in the Commons, on 17 October, Jane Ellison explained that both schemes would in fact be administered by,
“a single provider, National Savings & Investments”.—[Official Report, Commons, 17/10/16; cols. 607-8.]
Why is this? Why are the Government introducing a monopoly supplier across both these products and what is the point of the transfer provisions in this Bill if there is no one to transfer anything to? I would be grateful if the Minister could tell us why the Government have chosen to establish these monopolies. Can she say whether the Government considered commercial or mutual alternatives? If they did, why did they reject them or, if they did not consider them, why not?
It seems to me particularly important that we have answers to these questions in view of the provisions in paragraph 3(2) of Schedule 1, which seems to give the Treasury unlimited powers over claims for LISA bonuses and—more alarmingly—allows delegation of these powers to HMRC. This seems intrinsically unhealthy and probably not acceptable to potential commercial or mutual providers. Can the Minister say whether the Government have discussed these provisions with potential commercial and mutual plan managers and if so, what the response was? Schedule 2 gives the Treasury more or less the same powers to amend by regulation the details of the Help to Save product. It is extremely odd that Schedule 2 contains an entire section—part 3, paragraph 9—that defines an authorised account provider for Help to Save when there is to be only one monopoly provider. Is this a case of the Government changing their mind as the Bill progressed through the Commons, or of the Government preparing the ground for the introduction of multiple providers? I hope that it is the latter. The Minister was asked about this situation in the Commons, in particular why credit unions could not be providers of Help to Save schemes. There was no convincing or clear answer. When challenged, the Minister asserted that multiple providers would not offer value for money. As Gareth Thomas observed, no costings were produced to justify this claim; in fact, no evidence was given for it at all.
Rather confusingly, however, in the closing stages of the Bill in the Commons the Minister displayed an evident sympathy for using credit unions and a willingness to reflect on the idea. Can the Minister, therefore, update the House on the Government’s thinking on alternative providers for both schemes, and in particular on credit unions as providers for the Help to Save scheme? Can the Minister commit to allowing credit unions to be providers, and to allowing and encouraging alternative providers for both schemes?
Lord Tunnicliffe (Lab)
My Lords, I start by welcoming the Minister to the esoteric world of Treasury legislation. In the light of the debate so far, she is no doubt taking some comfort in the words in parenthesis after “Second Reading”, which read “and remaining stages”. The noble Baroness will not always be quite so lucky.
I thank the Minister for introducing this Bill and those who have spoken in this debate. I will do my best to follow the pension experts and my noble friends Lord McKenzie and Lady Drake, who did a far better job than I could ever hope to do in mapping out the implications of this Bill for the pensions landscape.
Labour supports measures that allow more people to save for the future. At a time when household debt stands at record highs and when having tens of thousands of pounds of debt is regarded as the norm for many young people, policies that can contribute to bringing about a culture change towards saving must be welcome. That being said, we are not sure that the two measures outlined in the Bill—the establishment of a lifetime ISA and the Help to Save scheme—will do what they are designed to do. More worrying is the concern from some sectors that they will undermine the progress that has been made, specifically on auto-enrolment.
I will pick up on three points that have attracted cross-party consensus and discuss some of the issues that have arisen since this Bill left the other place: how lifetime ISAs will impact the pensions market, appropriate advice services and the factors involved in the Help to Save scheme.
One of the most contested aspects of the Bill is the impact that these measures, particularly the lifetime ISA, will have on the broader pension savings market. The Minister in the other place has said that the new ISA and traditional pension products are complementary, but pension experts do not share that confidence. Indeed, in the case of one or two pension experts, particularly the noble Baroness, Lady Altmann, that is something of an understatement. We must avoid adding to the already complex quagmire that is the pensions landscape. These proposals came out of a government consultation on reforming pensions tax relief in July 2015, which seemed to acknowledge the scale of the challenge that reform would present without providing conclusions on how to tackle these challenges. Instead, the then Chancellor, George Osborne, stated that it was clear that there was no consensus.
We are concerned that these policies have been thought up without full consideration of the short and long-term implications. The FoI request by New Model Adviser confirms that the DWP has not carried out its own assessment of auto-enrolment opt-out rates caused by the lifetime ISA because there is a Treasury assumption that people will not opt out of workplace pensions. Therefore, it did not feel the need to carry out its own separate evaluations.
My colleagues in the other place asked the Government to consider reviewing annually the impact that the lifetime ISA was having on the rate of auto-enrolment. The response to the FoI request said that the DWP regularly meets the Treasury to discuss pensions and savings policy, but I wonder whether the Minister can expand on that and explain, in the light of this new information, why a review would not be appropriate. I believe that many of the fears voiced about the impact of this scheme on auto-enrolment could be sensibly assuaged if we knew that a regular review was being carried out. As Tom Selby, senior analyst at AJ Bell, said:
“At this stage we are totally blind to the number of people who could opt out of a workplace pension ... Ideally the government would have tested how the lifetime ISA will interact with auto-enrolment ahead of the product’s launch next year”.
The Work and Pensions Select Committee was unambiguous when it said:
“Opting out of AE to save for retirement in a LISA will leave people worse off”.
A review would ensure that if such trends were identified, the worst effects could be mitigated. It is difficult to understand how the Government can disagree with something that seeks to safeguard one of the few positive changes to have taken place in the pensions industry in recent decades. I would be grateful if the Minister could address these concerns.
I now turn to the issue of appropriate advice which should accompany the rollout of lifetime ISAs and the Help to Save schemes. The Work and Pensions Select Committee, which I have just quoted, was clear about the possible negative impact that switching to a lifetime ISA could have on a person’s finances. Therefore, it is crucial that such implications are widely known and that information about these products is easily accessible. The FCA has stated that investors in the lifetime ISA should be given a specific risk warning about incurring the early withdrawal charge, which would lead to them receiving less from their lifetime ISA than they paid in. There are clearly concerns about how the product will work in practice. I think that the following quotation speaks volumes:
“I consider myself moderately financially literate. Yet I confess to not being able to make the remotest sense of pensions. Conversations with countless experts and independent financial advisers have confirmed for me only one thing—that they have no clue either. That is a desperately poor basis for sound financial planning”.
That was Andy Haldane, the Bank of England’s chief economist. When he admits that pensions have become so complex that even he cannot make the remotest sense of them, I think it is time to reflect on the quality of the service being provided.
In Committee in the other place the Financial Secretary to the Treasury stated that people would be able to access the relevant information about these products through government websites, as well as by working with the Money Advice Service and its successor. What materials do the Government envisage that the MAS will produce, and how do they intend to ensure that, once the MAS is abolished, continuity in the accessibility and accuracy of information will be ensured? Furthermore, what correspondence have the Government had with the FCA regarding communication requirements? This concern has been echoed by a number of speakers in this debate. Surely we are entering an ever-more complex scene, with less and less assurance that the right advice will be available.
I turn finally to the Help to Save scheme, which has been designed for those in receipt of universal credit or working tax credits. As the IFS has stated:
“Key issue is whether those who use Help to Save will be the under-savers”.
The saving gateway scheme, piloted in 2010, offered similar support. However, the IFS evaluation found,
“no evidence of an increase in overall savings”.
Can the Minister explain how the Government have used this lesson and adapted the current scheme appropriately? Furthermore, can the Minister expand on the rationale for the two-year limit? It would be useful to get a better understanding of the Government’s thinking on this matter.
I will close as I began, by thanking those who have spoken in this debate. I look forward to the Minister’s response.
Baroness Neville-Rolfe
My Lords, I thank all noble Lords who have contributed to the debate today, and I thank the noble Lord, Lord Tunnicliffe, for his very kind welcome. I certainly look forward to working with him and other noble Lords in this esoteric and interesting area and bringing light to the issues.
I think we all agree on the importance of people having effective tools to help them save money. As the noble Lord, Lord McKenzie of Luton, suggested, saving is important and we need the right quiver of incentives—and I welcome his support for Help to Save. I think there is an equal consensus around the need to encourage more people to save. I take the point that there may be more to do to publicise the progress that we have made on defined benefit pensions, described by my noble friend Lady Altmann—who is in a great position to encourage pensions saving and to explain how valuable it can be. However, I do not agree with her conclusion on the lifetime ISA: it has been supported by many, including the ABI, individual members and, indeed, Martin Lewis.
I turn to the link between the lifetime ISA and automatic enrolment, which was first raised by the noble Baroness, Lady Drake. I am well aware of her great expertise on pensions and, indeed, her role in the seminal Turner commission report—I remember well that huge report, which was very authoritative, arriving on my mat when I was responsible for pensions at Tesco, where we really cared a lot about helping people both to have a good pension and to save for their retirement. Those of us who care about pensions can be champions, as the noble Baroness, Lady Greengross, said. I share her respect for the work of Business in the Community, as she well knows.
I stress that we are fully committed to supporting people through the pensions system. Automatic enrolment will help 10 million people to be newly saving or saving more by 2018. The lifetime ISA is designed to complement that. It gives young people more choice in how they save for the long term. It is not a replacement for pensions. The Government’s policy towards employers reflects this. Employers have a statutory obligation to contribute towards pensions under automatic enrolment, as well as a direct incentive. Neither is the case with the lifetime ISA. Our impact assessment, based on an OBR-certified costing note, is clear that we do not assume that anybody will opt out of a workplace pension to save into a lifetime ISA—as the noble Baroness, Lady Drake, said.
The Help to Buy ISA is similar to the lifetime ISA in that it gives a 25% bonus to support people to buy a first home.
Lord Tunnicliffe
May I check the logic of that? Is the Minister saying that the OBR has certified that it is a reasonable assumption that nobody will opt out as a result of a lifetime ISA, or merely that it took that as an input assumption in doing its analysis?
Baroness Neville-Rolfe
As with all impact assessments, it is an estimate. We looked at the Help to Buy ISA, which is similar to the lifetime ISA in that it gives a 25% bonus to support people to buy a first home. That has not led to a surge in opt-outs. Instead, opt-out rates for automatic enrolment are still much lower than the Government expected, as several noble Lords said; they are currently 9%. The overall programme assumption was, I understand, 28%. We will of course regularly monitor the lifetime ISA going forward to make sure that it is achieving its aim—as the noble Baroness, Lady Greengross, suggested, and indeed as we do with all important policy areas. But I am not convinced, to respond to the point made by the noble Lord, Lord Tunnicliffe, that we need a formal annual review.
The noble Baroness, Lady Greengross, asked how many people using Help to Save were eligible for automatic enrolment. We set out our expectations of take-up of Help to Save. I am afraid that, as with all forecasts, there is uncertainty, so at this stage we are not able to say how many of these people will also be eligible for automatic enrolment.
Several noble Lords talked about guidance and communication. The Government announced in October 2016 that they plan to replace the three government-sponsored financial guidance providers—the Money Advice Service, the Pensions Advisory Service and Pension Wise—with a new, single financial guidance body, which I welcome. Through creating a single body we intend to make it as easy as possible for consumers to access the help they need to get all their financial questions answered. For example, this could be through helping families to balance their household budget or for individuals considering their options in retirement. Consultation on the precise design of the single guidance body is currently live and closes on 13 February. MAS, TPAS and Pension Wise will continue to provide guidance to consumers until the new body goes live.
The noble Baroness, Lady Drake, raised the issue of pensions tax relief, as did other noble Lords. Our responses to the Treasury’s pensions tax consultation indicated that there was no clear consensus for reform and, therefore, that it was not the right time to undertake fundamental reform to the pensions tax system. But obviously the Government have moved, with the Bill, to encourage younger people to save through the lifetime ISA—and that was a key theme that came out of the consultation.
The noble Baroness, Lady Drake, raised the question of mis-selling risk, which was also a concern of my noble friend Lady Altmann. I agree that it is very important for individuals to have clear information on their products. That is why we will publish factual information about the lifetime ISA on GOV.UK, as well as working with the Money Advice Service and its successor to ensure that they make appropriate and impartial information available. As was said, it is the independent Financial Conduct Authority’s role to regulate account providers, including how they sell a product to consumers. It is currently consulting on the approach and has set out its proposals.
Having said all of that, the communication issue has come up under several different headings. If noble Lords would find it helpful, I will undertake to look through Hansard at the various points that have been made on communication and set out in a letter to noble Lords who have taken part in this debate just what our plans are. That will enable me, for example, to check with the FCA about its current plans and take account of any consultation responses that may already be available. We need to make sure that at the point of sale providers are transparent about risks, including any potential early withdrawal charge and with information on automatic enrolment. That theme came through from almost all noble Lords who spoke. It is a very important area. As has been said, this is a Money Bill, but that does not mean that we cannot set out how we see these things being properly communicated.
The noble Lord, Lord Sharkey, questioned the impact assessment. I understand, from checking with the experts, that it is correct. I was glad that he raised housing because it is an important area. The OBR has noted that the effect of the lifetime ISA on house prices is highly uncertain and its predicted impact is significantly smaller than overall house price movements. As we know, a number of factors can affect house prices, which will be subject to change in future years. For example, we are taking steps to boost housing supply. Following the announcement of £5.3 billion additional investment in housing in the Autumn Statement, we expect to double our annual capital spending on housing during this Parliament. We will publish a housing White Paper shortly, which I hope will address some of the supply issues the noble Lord raised and allow this House to have further exchanges on this incredibly important issue for the future of our economy and our industrial strategy. I believe the lifetime ISA is one way to make sure that first-time buyers have the support they need to get on to the housing ladder.
I will address a number of technical points raised by the noble Baroness, Lady Drake. She asked whether the Government would commit to a 50% participation rate for Help to Save. The Government are not setting any specific target around take-up of Help to Save because we want opening an account to be an active decision by those who feel Help to Save is right for them. However, we will continue to work with the account provider and other interested parties to ensure that people are made aware of the scheme and receive the right support and guidance.
The noble Lord, Lord McKenzie, talked about eligibility for the under-25s. A person aged 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—I am learning a lot from this debate. Our intention is to passport people into eligibility for Help to Save. This is a well-established way of targeting support at people on lower incomes. Importantly, it removes the need for people to complete a further means test to prove that they are eligible, which we know could deter people from opening accounts.
Lord McKenzie of Luton
Perhaps the Minister will write in due course. There seems to be a disparity between the requirements for universal credit and for working tax credit. In universal credit you must have 16 hours at the national wage. For working tax credit, unless you fall within the disability or childcare categories, you need 30 hours of work. Why have the Government used those particular thresholds?
Baroness Neville-Rolfe
It is an important but esoteric point. If I may, I will write to the noble Lord. I am sure that in time I will understand these arrangements better. On his point about saving on behalf of others, individuals will pay into accounts and receive a government bonus. There will be no restrictions on what individuals do with the bonus or savings, or where the money has come from. However, HMRC will carry out additional checks on a number of accounts and will respond to any intelligence it receives from third parties where this gives rise to doubt about a person’s eligibility.
The noble Lord asked about the Government’s latest position on borrowing from lifetime ISAs. The Government continue to consider whether there should be flexibility to borrow funds from an individual’s lifetime ISA without incurring a charge if funds are fully repaid, but have decided that it will not be a feature when it becomes available in April 2017.
The noble Baroness, Lady Drake, said that the Help to Save scheme was not generous enough. On increasing the 50% bonus, our pilots for the saving gateway showed that a higher match rate of 100% made people only 5% more likely to open an account than a 50% match, and the amount of money saved into accounts was not significantly affected. On the two-year bonus period, I can make it clear that no one will be penalised for early withdrawals if they need to make any. The rationale of the scheme is to encourage people to develop a regular savings habit that will last beyond their participation in the scheme because it is valuable more generally.
Baroness Drake
I appreciate that this is a money Bill, but on the noble Baroness’s last point—I really do want the Help to Save scheme to work—the fact that the evidence shows that a matching contribution from the Government raises the participation rate by only 5% is not a reason not to match, because for those who are participating, their resilience is greater. A sort of apples-and-pears argument is being deployed here. A more generous match increases the resilience of those who do participate.
On the participation rate, all the behavioural evidence is that simply having good information does not necessarily deliver the level of behavioural response. More of a nudge, more of an active plan, may deliver more than a one-in-seven participation rate.
Baroness Neville-Rolfe
I take note of the noble Baroness’s point. There is a balance here. I have set out why we have got to where we have got to. Indeed, I look forward to debates on the statutory instruments for this Bill in the fullness of time. I am sure nobody has ever said that before.
The noble Lord, Lord Sharkey, asked about other providers. He referenced a discussion in the other place about the involvement of credit unions. We have appointed NS&I as the scheme provider to remove significant administrative and compliance costs associated with allowing different providers to offer accounts. An option where we fund NS&I to provide accounts while allowing other providers to offer accounts on a voluntary basis would not provide value for money, but—this answers his question—we shall not rule out the option for a range of providers to offer accounts as long as they deliver national coverage. We felt that the credit union did not do that. That is why the Bill has been drafted to accommodate different models of account provision, although other models are not in the current plan.
Lord Sharkey
I am grateful to the noble Baroness for that answer and I understand the position the Government have taken. Are there ongoing conversations with credit unions and other commercial suppliers of both these schemes?
Baroness Neville-Rolfe
I believe that the Economic Secretary to the Treasury has had some discussions of which the noble Lord may be aware, but I should not want to suggest that we are about to change the situation. I have made it clear that the provision is written in an appropriately broad fashion. I can also confirm that the Government are not restricting the number of lifetime ISA providers. Provision will be open to any provider with the appropriate HMRC and FCA approvals.
When it comes down to it, this money Bill is all about supporting people who are trying to save, whether through increased support to those on low incomes through Help to Save or through the increased flexibility and choice for younger savers offered by the lifetime ISA. This is a Bill that supports people trying to do the right thing—those who want to save and to be financially prepared for the future. I am therefore pleased to commend this Bill and to ask the House to give it a Second Reading.