(6 years, 4 months ago)
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Lord Leigh of Hurley
That this House takes note of the measures being taken to promote personal savings and the role they can play in building a stronger and fairer economy.
Lord Leigh of Hurley (Con)
My Lords, first, I offer heartfelt thanks to those noble Lords who have chosen to speak today. I know that personally I normally allocate the night before a speech to prepare or finalise my words—yes, these words have been prepared—and that many of your Lordships do likewise. Given the competing demands last night, I am very grateful to those in this Chamber who have decided to speak today. I am looking forward to hearing from all speakers but perhaps I may say how much I am looking forward to hearing, in particular, from my noble friend Lord Lilley and how pleased I am that he has chosen this debate for his maiden. We very much look forward to it.
I also preface my remarks by reminding your Lordships of my interests as listed in the register. I am on the advisory board of Metro Bank plc, and am the senior partner of Cavendish Corporate Finance, which advises companies in the financial services sector, including those in areas that I will cover today.
Despite our relatively small numbers this morning, I notice and welcome the enormous expertise of all the other speakers in this debate. In passing, I observe that this is the beauty of having in your Lordships’ House active working Peers of sufficient number to bring expertise to a debate like this, and it is why I am not convinced of the merits of too big a cull from our numbers of those with constructive knowledge.
Despite many predictions to the contrary, certainly given by some two years ago, much of the economy remains in good shape: GDP growth is up to 0.3% in May, from 0.2% in the previous quarter; ONS figures show exports at a record high of £620 billion in the year to May; tax receipts are up; and unemployment is down. However, as we consider these upward trends, we must of course consider something else—no, noble Lords will be pleased to hear that it is not the “B” word. We must consider the fundamentals that underpin this growth. How sound and sustainable are they?
There is a tendency to assume that all our prospects are determined by our legal and regulatory relationship with the European Union. Important though that is, we must not lose sight of matters that fall directly within our gift: technology, innovation, investment, research and so on. To add to that list, we are here to discuss savings, and specifically its role in making sure that our growth is sustainable and our productivity increasing. Governments tend to view savings with a degree of ambiguity: it is always tempting to encourage consumption now to boost tax revenues. One thing is certain about the UK, though: we never seem to save enough, regardless of where we are in the economic cycle of savings and tax revenues. However, the lack of savings harms our productivity by ultimately curtailing investment and innovation, and so it is neither trivial nor a quirk of the UK—it needs to be addressed.
What savings we do have are often locked up in unproductive assets such as property, stoking inflation and denying home ownership for too many. What can be done about it? In its most recent Financial Stability Report, the Bank of England states that household debt is now back below pre-financial crisis levels. If ever there is a time to pull hard on whatever policy levers we have, it is now. The economy is still growing and we need savings buffers to be replenished now.
Unsurprisingly, it is the least well off who have the least savings, forcing them to rely on high-cost credit. Clamping down on high-cost credit is not the answer. The reason why people use such services is not usually due to predatory lending, and is certainly not due to irresponsibility on the part of the borrower. It is simply not having savings to finance rainy-day activities such as trips to visit loved ones, white goods repairs or home improvement. The Building Societies Association is carrying out specific research into this. The biggest problem is affordability. The Government’s decision to take anyone earning up to £11,500 out of tax altogether has created more opportunities to save. We now need good policy to ensure that these opportunities are taken up. That is why we should commend the Help to Save scheme—a better targeted scheme than its namesake, Help to Buy. Help to Save allows anyone entitled to working tax credit or child tax credit to deposit up to £50 a month and receive up to £1,200 in tax-free bonuses. In addition, auto-enrolment has changed the nature of pension savings for good, with millions now contributing, giving them a real economic stake in our economy for the first time. Indeed, the proportion of eligible people contributing to workplace pension has risen from a low of 42% in 2013 to 81% today.
Accompanying these new schemes is an improvement in the financial advice available, through the new single financial guidance body, chaired by Hector Sants. Sound advice is a necessary condition of embedding a savings culture so that we can empower a new generation to take control of their finances responsibly. With savings policy and the vehicles available becoming more dynamic, the advice needs to reflect this. Bringing the work of the commendable Money Advice Service, the Pensions Advisory Service and the DWP Pension Wise guidance into one place is essential. As people move from ISAs to LISAs to pensions saving, giving them a single point of contact will enable them to make better decisions.
I also commend the ABI, which has produced a guide for the industry on working with and providing products to vulnerable customers. After all, the industry should not and does not have to wait for the regulator to develop an approach to dealing with customers who need additional help and advice. Having a vulnerability policy in place should be its first act of leadership on this issue.
Turning to regulation, it is first important to give credit where credit is due. The FCA is developing a highly progressive, market-leading approach to regulating new products and services. The “sandbox” is being imitated the world over as the best way to allow fintech firms to test out their products in a live firing exercise, so that they can understand how they will be treated when they scale up to the mass market. For savings and investment, this dynamic approach is creating new opportunities in AI, machine learning, fraud prevention and cybersecurity, and opportunities for the firms themselves through so-called regtech, which actually reduces compliance costs for regulated firms.
More prosaically, there are areas where the FCA needs to do better, especially in its over-zealous approach to consumer protection, which does long-term damage to both providers and savers. For example, the funding of FSCS is becoming hugely problematic for smaller firms. This is being driven by the lack of a long stop on claims, which means that pay-outs can still be demanded on advice that was provided in the 1980s. That does not seem right. It also means that the burden of covering this liability, of course, falls on those currently seeking advice, which seems unfair and makes the process more expensive for all those concerned.
Similarly, there remains too much legal ambiguity around the Financial Ombudsman Service, its judgments and the role of the FCA. Your Lordships will recall my comments in regard to the ombudsman during the Second Reading of the Enterprise Bill.
A good example of the issues with the ombudsman is the case of SIPPs, self-invested personal pensions. These are tax wrappers that enable investment into a range of HMRC-approved investments. The FCA has rightly acknowledged that SIPP operators are not responsible for the investment advice given to SIPP members—the former is responsible for the wrapper only—and yet this was overruled by the Financial Ombudsman Service, which is of course complete nonsense. The result is huge legal uncertainty for all SIPP providers and, more besides, continuing uncertainty as to the role of the ombudsman and its relationship with the FCA and the FSCS.
It might be a sensible starting point always to look at these issues from the perspective of the consumer—I understand that—but this should not include making judgments that are outside any current legal precedent. Ultimately, this will come back to the consumer, with less choice, more expensive advice and, yes, lower rates of savings and investments. I ask my noble friend the Minister to confirm to me—possibly later in writing—that it is still the Government’s policy to allow savers to invest in unregulated investments of their choice through a SIPP, which is a huge attraction to many who want to make their own investments and savings choice. If that is the case, what steps will Her Majesty’s Government take to ensure that SIPP providers will not be liable when, as is inevitable, some of these investments go wrong? I have seen huge uncertainty and I am very concerned about the SIPP market.
However, two other dynamics are potentially more impactful than government policy and regulation, both of which can be a force for good for savings: technology and new attitudes to responsible investment. First, technology is creating new products that make saving easier and even—believe it or not—fun for savers. Products such as Moneybox allow people to round up everyday purchases into investment funds. You buy your cup of coffee, you pay through Moneybox and you have the opportunity to put your change straight into a savings product. Monzo allows a customer to ring-fence a current account in any way to create pots of savings for different purposes. This is a far cry from filling in forms, going to the post office and getting plain vanilla, low-interest savings accounts.
Technology also helps with tackling the financial inclusion challenge. In 2012, 2 million people took out some form of high-cost credit. If they had access to savings pools this might not be necessary. Research has shown that if households had just £1,000 in accessible savings their risk of debt would be reduced by 44%, which could prevent half a million families from falling into problem debt.
The desire to save is ubiquitous but higher barriers exist for the poorest. Tax-free incentives such as ISAs are aimed at those who can afford to save thousands of pounds a year, so new businesses looking to help the unbanked, such as Pockit, which Cavendish is helping, are to be welcomed. It has found that few high-incentive savings products currently exist for those who can afford to put away a few pounds every week or month.
I recognise that the Government are addressing this issue from different directions. Last night—before 7 o’clock—I went to a DCMS reception for the inclusive economy at No. 10 Downing Street, where I met Jerry During, a director of Money A+E, which has a government grant and is an award-winning social enterprise that provides money, advice and educational services to BAME, black, Asian and minority ethnic people, and seeks to reach out to other communities in London. As I mentioned earlier, the Help to Save scheme will begin to address this problem, but technology can help as well. Companies like Aire provide non-standard credit scoring tools that allow normally sub-prime or unbanked borrowers to access cheaper loans.
Secondly, responsible investment is becoming increasingly interesting to the next generation of savers. Some 77% of 22 to 29 year-olds in the private sector are now contributing to a workplace pension. As these pots are built up and technology allows better management and more transparency, where people’s money is invested is becoming more important. The United Nations sustainable development goals create opportunities for people to save more, but by investing in things that matter to them. Closer to home, in 2016 Swindon Council crowdfunded a green bond to allow local residents to invest in local solar energy projects, which is marvellous. Connecting local savers to investment opportunities that they themselves have a community stake in can be very powerful.
While saving rates are still low, there are reasons to be optimistic. Government policy is coming together through different departments with new technology and evolving social attitudes to create the best opportunity we will get to embed a savings culture in the UK. In doing so we will improve our productivity and, most importantly, reduce financial exclusion. That is why I am pleased to move a debate on this subject and I look forward very much to the contributions of noble Lords and of course to the response of my noble friend the Minister.
Lord Palmer of Childs Hill (LD)
My Lords, I thank the noble Lord, Lord Leigh, for introducing this debate because it gives us a chance to look at the various problems and see what assets are available. I also look forward to the maiden speech of the noble Lord, Lord Lilley, which will follow my contribution.
So much more could be done to promote personal investment, but we need to recognise the current problems, which the noble Lord, Lord Leigh, did not dwell on as much as he did on the assets. I have received an email from the Building Societies Association, as I am sure did all the speakers in this debate. It was really a bit of a nerve on the part of the association because building societies and banks are part of the problem. If you want to put money into a building society or bank account, which is the case for a lot of people, the rate of interest you will receive will be something like 1.5% if you are lucky. That is not an inducement to save. He also talked about ISAs. The low rates offered by building societies and banks, which I have already mentioned, are even lower for ISAs. You put your money into an ISA to get the tax benefits, but the building societies pay you less interest. The noble Lord says that ISAs are great, but they are not widely used by those at the bottom end of the income scale for the reasons that he himself mentioned. If the personal savings allowance free of tax is £11,500 and you can earn investment income if you are at the lower end of earnings of £5,000 without paying any tax at all, the benefit of an ISA with a lower rate of interest is not conducive to savings. That is a problem which I hope the Government will find some way to address.
What are the Government doing? They have an NS&I bond which on a one-year bond offers the wonderful sum of 1.45%—again, I am sure, an incredible inducement to those who want to save. Can the Minister ask the Government to consider once again an NS&I bond, which I have mentioned before in the House, paying 4% for a four-year bond? If that were to happen, it would bring in a vast amount of money to the government coffers and would look similar to taxation. It would mean that those people who wanted a secure investment could earn 4% if they tied their money up for four years, which really is not that much.
Can the Minister inform the House whether more people are investing in gambling with the National Lottery? I put my hand up and say that I do the same because ERNIE is probably a better and safer bet than hiding money under the bed, which I do not do, or putting it into a low-earning bank account. I have tried ERNIE and you can probably earn 2% per annum with a reasonable investment, with a big chance of winning a big prize. We have turned ourselves into a nation of gamblers.
Savings are not necessarily the best use of spare cash. For many, especially the heavily indebted, paying down debt is more beneficial than saving—reducing your mortgage is probably a better bet than savings. The noble Lord, Lord Leigh, quite rightly mentioned pensions. I am sure that other people who know far more about the pensions industry than I do will speak about it, but early pension draw-down is presenting a huge problem. Many people are investing their pension funds in inappropriate, costly or inefficient vehicles, severely damaging their savings. Some are actually being scammed. The Liberal Democrats worked hard in the passage of the financial guidance Act to make advice before draw-down a default option. This was sadly resisted by the Government.
The noble Lord, Lord Leigh, talked about unregulated investments. They are great for someone who wants to put a few thousand pounds of their accumulated wealth into something slightly riskier—much riskier in some cases—and probably earn a good rate of return but, if you are at the lower end of the scale, putting all or large sums of your money in unregulated investments is dangerous.
The noble Lord also quite rightly, in a wide-ranging speech, spoke about workplace pensions. It is obviously a good thing to get people to save in the workplace with a pension, but the corollary is that if you are at the lower end of the scale and you are putting money into a workplace pension you are almost certainly not going to have money to put into a savings account because you have a limited amount—you buy a loaf of bread first, pay the rent and what is left is taken for the pension. That is good, but it does not encourage other savings. The Government promised at Section 21(6) of the Act to bring in regulations to prohibit cold calling for pensions by the end of June just past. Will the Minister say, since we are now in July, what the current timetable is?
Getting advice on savings is critical. This passes from the Money Advice Service, which is pretty good, and Pension Wise to the new single financial guidance body set up by the Act. Could the Minister tell the House what progress is being made and how he sees the single financial guidance body operating?
With low rates of return, many people are turning, as they have done historically, to the stock exchange. Confidence in the safety of using a stockbroker has been undermined severely by the failure of Beaufort Securities, a large stockbroking firm. Investors assumed that their investments were ring-fenced, but Beaufort Securities closed down and PwC, that well-known audit firm, was appointed the administrator. It initially said that the charges could be up to £100 million. The surprise was that this came as a first charge on cash and shares—even those of the investors. I believe that, after protests, the administrator’s estimated costs were reduced to a mere £55 million. Of course, the FCA has a compensation scheme, so many of the smaller investors with brokers should be protected. In Beaufort’s case, this leaves eight to 10 larger investors not covered by the compensation scheme.
My noble friend Lord Lee of Trafford has asked Written Questions and Oral Questions on this matter. The answers were quite amazing, because they do not seem to appreciate the damage that the situation is causing. We are asked to increase savings and investment, but the very thought that client assets—cash and shares—are not protected could lead to a flight of clients from very reputable small and medium-sized broking firms: if they remain investors they will flee to the apparent safety of larger firms. Are the Government aware of these fears and are such fears being addressed?
The Motion is about promoting personal savings: it is a good idea. The noble Lord, Lord Leigh, touched on some of the statistics and I will not repeat them, but more than 40% of working-age people have less than £100 in savings for emergencies: that is 17.3 million people without at least £100 in a savings account. If one makes that calculation on all UK adults, not just those in employment, then 13% have no cash savings whatsoever, including all the elderly, who should have savings. Numeracy skills are particularly important. The Money Advice Service has said what affects savings, and I think it is worth repeating:
“Building a savings habit and a savings buffer to protect households from unexpected bills and increase financial resilience is a matter not just of situation (for example, spare cash available to save—determined by income, commitments and debts) but also skills (how engaged people are with their finances and how well equipped they are to manage them—for example, their numeracy) and ‘stance’”?
Do they have a “savings mindset” or a “‘live-for-today’ attitude”? What are their,
“perceptions of their financial situation”?
Do they have “financial confidence”, and what are their,
“feelings and beliefs about financial matters”?
As a chartered accountant, I have always been quite amazed at the lack of numeracy among very large numbers of people. They can probably add up the score in last night’s semi-final, but beyond that they get into a bit more difficulty. What affects savings? It is having money there, and I am not talking about emergency money but money for the future. If you put your money into pensions, that is one thing, but how much else is left? There is a difference that we must identify in this debate between savings for the unexpected—the emergency, something in the pot that can pay for the roof repair or illness in the family or whatever—and such savings as pension contributions. There is a difference, and what we fail to realise is that many at the lower end of the social scale do not have the choice of having enough for the emergency, so they go to loan sharks, as too many of them do, or borrow on their credit card at usurious rates of interest, rather than saving for the future. I am all for promoting savings but I hope that other speakers in this debate will also identify the problems that people at the lower end of the scale have with saving, and that those who do have money must be able to put it in a safe place and earn a reasonable return on their savings.
Lord Lilley (Con) (Maiden Speech)
My Lords, I am grateful to noble Lords and staff of this House for their warm welcome and unfailing helpfulness since I arrived here.
I perhaps owe noble Lords an explanation of the title I have adopted of Lord Lilley of Offa, since many have assumed that this refers to Offa’s Dyke along the Welsh Marches, with which I have no known connection. In fact, King Offa gave his name to the ward of Offa in my constituency of Hitchin and Harpenden, where he had his palace and I for the last 20 years have had my home. He also built the abbey in St Albans, which was my previous constituency, so I selected the name Offa as a tribute to both the constituencies I had the privilege to represent for more than 34 years.
Having done so, I thought I had better check out King Offa, in case he had done anything embarrassing. I discovered that he reigned from 757 to 796 AD. At that time, our European neighbours were united under Emperor Charlemagne in what historically minded Euro enthusiasts see as a precursor to the European Union. Charlemagne, hoping to bring Britain under his sway, proposed that his son marry King Offa’s daughter. Offa, wary of England becoming a vassal state and wanting a fair and equal partnership, as the Prime Minister might say, determined that he would accept only if Offa’s son married Charlemagne’s daughter simultaneously. Emperor Charlemagne was so enraged by this impertinence that he closed all European ports to English shipping—an early example of a “no deal” outcome. However, the trade war hurt Europeans at least as much as it hurt us and, thanks to the mediation of the Church—I hope right reverend Prelates will stand by in case they are needed in the future—trade was resumed after a year or two. I am happy to say that King Offa negotiated the first trade treaty between this country and our European neighbours. This certainly is not an occasion to reflect on the lessons to be drawn from this and subsequent attempts throughout history by continental rulers to bring this country to heel by restricting our trade, except to note that they all failed.
Before moving to the less contentious subject of this debate, I hope noble Lords will bear with me if I mention, as I have been advised by several noble Lords is normal procedure on maiden speeches, the experience I hope to bring on subjects which may come before this House in future. Certainly, trade is a subject I hope to return to in future debates, though not primarily in the context of Brexit. My first career was working in developing countries on aid and development programmes and, because of that, David Cameron asked me to chair his policy commission on globalisation and global poverty alongside Bob Geldof—an unlikely pairing, but one which would bear fruit, not least in my conviction that the best route out of poverty for developing countries is trade. As a result, I founded and co-chaired for 10 years the All-Party Parliamentary Group on Trade Out of Poverty, which remains a passion of mine.
My second career was as a partner of a major firm in the City where I specialised in investment in the energy sector. In the Commons, I served on the Energy and Climate Change Committee—I hope to return to those topics, too.
As Secretary of State for Trade and Industry, I was involved in negotiating the last successful international trade treaty, the Uruguay round, and also implemented the single market programme in this country, as well as negotiating the first passporting directive, all of which I hope may be of use in forthcoming debates on the Trade Bill and Brexit.
Finally, in my five years at the Department of Social Security, followed by 20 years as an ordinary constituency Member on the Back Benches, I came to the conclusion that most of the social problems in this country are either caused or aggravated by the acute housing crisis we have in Britain—that is one of the issues I want to focus on in future—and that most of our economic problems were related to the lack of vocational and technical skills of our indigenous population. Those are the two issues I care about most, and I hope to offer every support to my supporter and noble friend Lord Baker of Dorking—he does great work on that front.
I congratulate my noble friend Lord Leigh of Hurley on securing today’s debate on an important subject, when the level of savings in this country is so low. It is matter of importance to me because, as Social Security Secretary, I was responsible for the pension system and for coping with those who had been unable or unwilling to acquire sufficient savings to cope with emergencies or, above all, with their old age.
I shall make a few brief observations. First, discussion about savings in this country is dominated by an unhealthy obsession with tax reliefs and incentives. In fact, there is little evidence that tax reliefs affect the amount people save; they affect merely the form in which they save it. Moreover, the main beneficiaries of tax incentives are, by definition, those with large savings, who are also usually those with large incomes. Tax reliefs can have no impact on those who are too poor to save and have little, if any, effect on those whose time horizons are too short to recognise the need for saving. This obsession with tax reliefs has created a bewildering labyrinth of incentives which is costly to navigate and off-putting to those with limited financial expertise, so they have the reverse effect to that which is intended.
Secondly, that is not to say that there should be no recognition of savings in the tax system. On the contrary, the tax treatment of savings should be based on the simple principle that income should not be taxed twice. You should not be taxed when you earn the money you save and when you realise those savings as a pension or whatever. This is a matter of equitable principle rather than incentives.
Thirdly, as long as people pay the same marginal tax rate when they draw down their savings as when they earned them, it makes no difference whether tax relief is given on contributions, as we do for pension schemes, or on withdrawals, as we do for ISAs. Despite what many people believe, both methods have an identical arithmetical impact. We should give one relief or the other on any source of savings, but not both or neither.
Fourthly, there may be a case for using the tax system to channel some savings into specific kinds of investment—for example, more risky equity or early-stage investments—but we should not imagine that that will increase the total level of saving and investment in the economy, and we should be cautious about encouraging people to take undue risks with their money if they are not in a position to do so.
Fifthly, the main concern of the state is to ensure that people who have the means to save for a rainy day, for temporary hardship and, above all, for their old age do save when they have that opportunity rather than becoming a tax burden on more prudent citizens. People who cannot defer gratification or have very short time horizons are the least likely to be motivated by tax incentives, however generous or ingenious. Reluctant though I am to say it, ensuring that everyone builds up their savings when they have the means to do so requires an element of compulsory saving and/or restrictions on drawing down savings. Auto-enrolment in workplace pensions is a good step in that direction, particularly for those who perhaps cannot bring themselves to go to full-scale compulsion.
Sixthly, unlike with tax reliefs and incentives, requiring everyone to save a minimum amount of their disposable income may increase the total level of saving and investment in the economy and thereby increase the level of incomes in future.
Those were the principles that lay behind the scheme that I announced in 1997 for what was called basic pension plus. It was intended that, over a generation, it would ensure that everyone received a basic pension, not only guaranteed by the state as at present—and that guarantee would continue—but backed up by a savings pot. Moreover, it would have massively increased capital ownership because everyone would own their pension pot, they could pass it on to their family if they died before it was drawn down as a pension and they could put more money into that pot and benefit from superior investment performance while being protected by the guarantee of their basic pension against underperformance. If it increased the total level of investment in the economy and that boosted economic growth by just 0.1% a year, the scheme would have paid for itself.
That particular scheme died with the 1997 election defeat and I do not imagine that it will be resurrected, but I still believe that the principles that I have outlined today should guide the evolution of our savings and pensions system in future.
The Lord Bishop of Chester
My Lords, on behalf of the House, I thank the noble Lord, Lord Lilley, for his splendid maiden speech and look forward to many contributions from him in future. He mentioned the kingdom of Mercia; Chester was the northern outpost of that kingdom, so I look forward to collaboration with the noble Lord, as we do collaborate on a think tank concerned with energy and climate policy. The noble Lord had a very distinguished record in the other place, but some of us remember him most for singing at the Conservative Party conference, to the tune of “Land of Hope and Glory”, words which I have deliberately forgotten for the purposes of today’s speech. He brings an incisive mind and great integrity to the House, and we look forward to his further contributions.
I am also grateful to the noble Lord, Lord Leigh of Hurley, for securing this debate and for his informative and skilful introduction. I shall look up Monzo, one of the saving apps to which he referred, afterwards.
Given that around 40% of people of working age have no savings and that half of those who use credit cards apparently do not pay them off at the end of the month— to choose just two of the multiple range of indicators one could choose from—there are deep, if complex, issues facing our society at the level of personal finance.
I happily and gratefully acknowledge the various recent government initiatives which have attempted to respond to these, notwithstanding the possibility that they may not be as effective as hoped. The Help to Save scheme for low-income families, the various manifestations of ISAs—including the recent Help to Buy and lifetime ISAs—and the National Savings bond, which offers a slightly more generous rate of interest than can be achieved elsewhere, will all have some helpful impacts for individuals and families over the coming years, I do not doubt.
I would like to offer some comments on broader aspects of the situation which we face. I refer first to housing because buying a house used to be the main way in which individuals and families saved for the future, as the principal on a mortgage was gradually repaid. Until about 10 years ago, the proportion of people who owned their own home was on a long-term rising trend. The process of paying off a mortgage, typically for people who might have got into the housing market in their 20s or 30s, was essentially a form of steady saving. A majority of young people now have to rent—in some cases, they choose to rent—which means that they do not have the stake in wider society which saving and house owning itself help to provide. This debate is not about home ownership and housing policy as such, but the issues are quite deeply connected, as the intentions behind the Help to Buy and lifetime ISAs indicate.
On the housing front, we seem to have reached an unsatisfactory position, with the lack of a clear national policy that is likely to deliver the houses we are going to need in future and need today. For my part, I see little alternative to a return to more direct government and local authority investment as part of the necessary response, along with appropriate management and regulation of the mortgage market. I do not see how just leaving things essentially to the market will work. That has been the fundamental approach for the past 30 years; it has clearly not generated the housing that we need but has generated quite fundamental problems. For those on the housing ladder, it has worked well, of course. The persistent and progressive rise in house prices has been popular with home owners. For those who have benefited—and I have been one of them—wealth and savings have increased almost without effort.
Now, however, we have a real dilemma. Let us suppose that the supply of houses for sale increases to the point where the market starts to reduce their prices. Those who have bought houses in recent years will then experience a loss in their investment—that is, their savings—and all sorts of political stresses and strains would result. This is why I have come to think that the Government really have no choice but to act to control and regulate aspects of the housing market much more proactively than has been the case in recent decades. If this does not happen, I fear that the well-meaning ISA schemes which are designed to help people on to the housing ladder, will not be very effective.
The housing-related aspects of saving are only part of a larger picture, of course, which properly includes pension saving and a wider provision for care needs in old age. I wholeheartedly welcome the auto-enrolment provisions on the pensions front, but they must not be allowed to mask the fact that very many employees are now in defined contribution pension schemes, which are much less generous than the defined benefit schemes that they would have enjoyed in the past. The same is true for the self-employed, as annuity rates have lowered the pension value of the funds for which they have saved.
From whichever angle one views the situation, there is a need to encourage a culture of greater financial responsibility and one more orientated towards saving in our country. Our savings ratio is way below other developed countries, and that is simply storing up problems for the future.
This is a subject in which the Church has taken a certain interest over the years. Some time ago, in collaboration with the Church of Scotland, the Church of England launched the Churches’ Mutual Credit Union, and it would be helpful to have a renewed interest and support for credit unions in general. Perhaps when he responds, the Minister will say something about the contemporary view of the role of credit unions. For some reason, they seem rather to have slipped from our attention.
More recently, the most reverend Primate the Archbishop of Canterbury, who served on the banking commission after the recent financial crisis, set up a task group on responsible credit and saving. Out of this has come a submission to the current consultation on PSHE arguing that serious financial education should begin at primary school and continue throughout a child’s school career. The most reverend Primate’s Just Finance Foundation is helping to run financial education programmes in 120 schools, in partnership with the financial education charity Young Money, under the title LifeSavers. LifeSavers helps children learn how to manage money wisely and provides training and resources for teachers to carry on that work in the classroom. Nearly 15,000 children have already taken part in LifeSavers, and 1,000 teachers have been trained through the continuing professional development scheme that LifeSavers offers.
There are wider social dimensions and impacts, of course. Disputes and strains around finance are a significant factor in adult relationship breakdown, with all the trauma and cost, both to the individuals and to wider society, which generally result from relationship breakdown. I hope the Minister will comment on how the recent government savings initiatives can be supported and complemented by much better financial education, in partnership with the charitable initiatives I have described and which other noble Lords have mentioned.
I conclude with a final, rather broad and perhaps disputable comment. In my adult life, I have watched the development of a more consumerist culture based on the primacy of the freedom of the individual. This has had many benefits—and I would not deny that for a moment—but it has also had a downside. The more that a society is based on the freedom of the individual, the more likely it is that that society will generate winners and losers, and reinforce the winning and losing outcomes. America is the prime example here, with its persistent and large underclass, and it has also fed the gambling problem in our society, which we are attempting to deal with now by, for example, reducing the stake on betting terminals from £100 to just £2. There is a grinding of gears going on as the Government try to implement that.
It is the task of government and of society as a whole to be alert to the downside that results from a free society, which is intrinsically the right way to organise ourselves, and to counteract the unfortunate consequences that tend to result. We also have a growing underclass that sees little point in saving seriously for the future, just as we have a prison population that is twice what it was earlier in my adult life.
The issues behind today’s debate are for the whole of society and touch on these broader social issues. That is why the recent pension and ISA developments, welcome as they are, risk merely scratching the surface of the challenges we face unless they are faced more comprehensively.
Baroness Altmann (Con)
It is a pleasure to follow the right reverend Prelate, and I, too, congratulate my noble friend Lord Leigh for initiating this debate on the important issue of the fall in the savings rate. I also offer my congratulations to my noble friend Lord Lilley on his brilliant maiden speech. We all look forward to hearing many more words of wisdom from him in the coming years.
This is a debate about the role of savings in economic growth, building a stronger and fairer society, and promoting personal savings and the savings habit, which is surely an element dear to the hearts of most of us Conservatives and, indeed, most of us in this House across all parties. I congratulate my noble friend the Minister and the Government on some of the excellent initiatives that have been introduced to promote and build up a savings culture once again. Many of us have been concerned that that savings culture has been lost or damaged in recent years, partly due to the Bank of England’s emergency measures of quantitative easing, which have driven interest rates down so low, and have caused serious problems to pension schemes in this country.
The introductions of auto-enrolment and the pensions freedoms have been excellent opportunities to increase the coverage of pensions and make them more user friendly. In addition, we have had the Pension Wise service, which will be merged into the single financial guidance body, which is something that we could and should have had years ago—a national scheme that will help individuals better understand how to manage their money and pensions. Indeed, it will include debt, too.
The charge caps on default funds in pension schemes, after so many scandals with excessive what we call “rip-off” charges for so many years, are again extremely welcome. I also welcome the increase in ISA allowances, but I shall come back later to express some concerns about the overall ISA framework.
On exempting savings interest from tax, every little bit helps when interest rates are so low. That is certainly to be commended. The Help to Save scheme, which a number of noble Lords have mentioned, will I hope be an excellent initiative. And then there is help with debt generally, in controlling excessive charges on high-cost credit. All these things are to be commended, but many areas still need improvement.
I shall focus on some of the ways in which issues such as saving and debt are causing problems in the economy, and some of the possible resolutions, before finishing with some of the longer-term issues for savings and investment. From the point of view of the Lords Select Committee on Financial Exclusion, it was clear that there are real problems across the country, with 31% of the population reporting signs of financial distress. Twenty per cent of 18 to 24 year-olds are having problems with credit scores, which will lead to a rise in debt levels and in the use of high-cost debt, which are a significant cause for concern. The Bank of England’s analysis responded to concerns about the extreme rise in debt levels across the country, suggesting that they were not of such concern because increases in borrowing rates had been matched by rises in the value of financial assets. That did nothing to assuage my concerns or those of many others because, of course, most people who have high debts do not own financial assets, and therefore are negatively affected.
We are seeing this in the workplace. I declare an interest; I am advising a social enterprise that is trying to help workers manage their high-cost debt in the workplace through salary deduction and consolidation at lower rates. We know that financial worries exacerbate stress and mental health issues. These are already the biggest causes of sickness absence from the workplace, with 17.5 million working hours lost as workers take time off due to financial stress. Barclays did a study in 2014 which suggested that 46% of employees worried about finances. In 2017, the CIPD suggested that 25% of employees said that financial problems affected their work performance. Indeed, in the public sector for some reason that was 30%. So clearly there are issues. If employers can see the clear self-interest in helping their staff reduce debt costs and manage their debts, using programmes such as salary finance, which enable employers to deduct debt repayment from their staff’s salaries so they do not have to keep worrying about juggling debts and about where and how to manage repayments, it could be a win-win by improving productivity, staff well-being and the financial resilience of our population, which is so important as we move forward. We have had some years of very reasonable economic performance, but we cannot expect that necessarily to continue, so if we are able to build up financial resilience, that can only be of benefit to society as a whole.
I cannot properly speak in this debate without mentioning the exciting and brilliant topic of pensions—at least, I think they are exciting and brilliant. As the noble Lord, Lord Palmer, said, this brings us to the important issue of the difference between savings for a rainy day and investment for the longer term. Too often I feel that the public—and indeed sometimes policy—confuse the two and think of it all as savings, whereas there is a fundamental difference in terms of long-term investment. Pension saving by its nature is long term. We have hundreds of billions of pounds built up in pensions in this country. I know that we keep reading headlines about the pensions crisis and that there is not enough in pensions, but there is a huge sum of money in pensions, and we perhaps have an opportunity to focus on using those assets productively.
There is an attempt, on which I commend the Government, to use more of the assets of local authority pension schemes to invest in infrastructure. Consolidating the schemes, we could use pension assets for social housing and environmentally and socially responsible investing. There is an opportunity in the workplace with auto-enrolment. Will the Minister comment on the opportunity to engage in particular young people but workers of any age with what their pensions are invested in and to educate them and enable them to understand investment? So many people fail to understand the first thing about pensions, despite the fact that, with the pension freedoms, they are the most brilliant product. They are user friendly and can be used in ways in which we did not use them before. As we spread auto-enrolment across the whole workforce, this is increasingly important.
I shall just mention some notes of caution and ask the Minister to comment on some of them. First, as has been mentioned, it is vital to help consumers. A proper ban on cold calling is long overdue. All the scandals I have seen in pensions have started from a cold call. We worked hard across the House on the Single Financial Guidance Body and on the Bill that has just gone through to try to introduce a proper ban on cold calling that would require the FCA, the regulator, to prevent and disallow providers using leads from unregulated lead generators that started with a cold call. That is work in progress and has not yet been achieved.
There is also an issue with the ombudsman. A report has been issued today, I believe—I do not know whether my noble friend has had time to see it—on some of the failings of the Financial Ombudsman Service. There is great merit in helping consumers by merging some of the activities of the various consumer services that are there to help the public. The Pensions Ombudsman does not deal with all pension complaints. The Financial Ombudsman Service deals with some of them, the Pensions Ombudsman with others. Would it not make sense to have every pension complaint dealt with by one ombudsman?
My noble friend Lord Lilley mentioned pensions tax relief. I have long believed that most people do not have the first clue how much they get from pensions tax relief or what it is worth, yet we spend more than £40 billion a year on it. If we could rebadge pensions incentives as a flat-rate top-up, a bonus that you get for saving in a pension that is contributed to by the taxpayer, people would start to understand it and value it.
One could get even more radical and suggest that auto-enrolment, once it is bedded in, becomes compulsory. That would mean that the Treasury might not need to spend any of the money it spends currently on tax relief on auto-enrolment pensions, saving the taxpayer a fortune. The value of the pensions tax relief is tiny compared to the value of the employer contribution, which is a major incentive. Going on from that, it would be possible to have more generous incentives, funded by the taxpayer, to encourage people to build on more than the minimum under auto-enrolment, which I think most of us would agree will not give you a huge pension. It will give you a bit extra, above what the state can give you.
There is a scandal in the pensions system at the moment which I am very concerned about. I have raised it in the House several times and I implore my noble friend to take this issue back and ask for urgent action. It concerns what are called net pay administration schemes. There are millions of low-paid workers—this applies only to workers earning below £11,850—who are auto-enrolled into a pension administered in such a way that they cannot get the 25% bonus of tax relief that they are due. Most people do not know about it. I do not want most people to need to know about it. I urge the Government to deal with it so that these people, who are surely those who need most help with pension saving, end up with the money they are owed. I do not want another big scandal on this.
The other issue that concerns me is the lifetime ISA. In my humble opinion, it is dangerous, confusing to the individual and a huge mis-selling risk. Most people who go into it will need financial advice—but not necessarily a financial adviser—because they will not understand the penalty of at least 6% that they will pay if they take the money back. If we want to incentivise house purchase, we should do so directly, rather than confusing people with something that masquerades as a pension but has completely the wrong behavioural incentives. With pension freedoms, pensions are brilliant, because there is now more reason to keep them into your 80s, and that is what pensions should be about: lasting for the rest of your life, not giving you a pot of money to spend at age 55 or 60.
That brings me to my final point, which is that we must address the issue of saving for social care. Nothing has been done on this. We spend £40 billion incentivising retirement saving in just one product—the pension—yet a pension is not enough to see people through 21st century retirement. I recently had a response from the Government to a Written Question which identified that the over-65s—just the over-65s—have on average almost £40,000 in ISAs. There are millions of people with this money; it is not earmarked for anything. We know that the baby boomers are criticised for having savings, pensions and houses, but we should be harnessing that and celebrating it. If we look forward 10 or 15 years and they start needing care, but they have spent all that money, we will have a problem. However, if we have encouraged them to keep some of the money they have saved for care, we will have the beginnings of some kind of resolution to the care crisis, which makes the pension crisis pale into insignificance.
There is not a penny set aside for the future funding of social care—not by individuals, or the Government, whether national or local—and this cost is coming. Perhaps we could have a care ISA allowance. People could rebadge the ISAs they have, and maybe we could incentivise that by making them inheritance tax-free. That would not cost the Government much at all right now, but it would mean that people could save for later life. We could maybe allow people to take money out of their pensions tax-free if it were used for care in later life. Anything we can do to help people—the baby boomers, in particular—keep their ISAs and pensions for later life would be commended. I would be most grateful if the Minister would comment on that. I congratulate my noble friend again on raising this important debate.
Lord Suri (Con)
My Lords, I thank my noble friend Lord Leigh for introducing this most important debate. I welcome my noble friend Lord Lilley, whom we used to see guest speaking when my noble friend Lord Young of Cookham was our MP.
Saving is a necessity. Without savings, or a bank account to put savings into, it is practically impossible to meaningfully participate in the modern economy. Even travel is increasingly difficult without a bank account and some healthy savings to draw upon. I consider that my success is partly based on a strong habit of saving, and the savings of others made available to me through loans and guarantees. The fact that some do not have savings or a bank account is the scourge of financial exclusion, and ought to be considered a contributor to economic malaise. It is a surprising fact that nearly 2 million people in this country do not have a bank account. That ought to give us pause for thought. This country has one of the most advanced financial systems in the world. A few minutes away in the City of London, we have some of the finest minds and technology in existence figuring out new and innovative methods of banking, but we overlooked an issue piling up on our own front door.
In my view, the issue starts from an early age. If one is born into a family without a regular habit of saving or with an inability to save, one does not learn the habits required at an early age, such as setting aside a portion of the pay cheque, shopping around for the best perks and rates, and understanding how to use a bank account and receive or send funds. This is regrettable, if understandable, but we can make changes through the national curriculum. I am pleased that financial literacy has been a statutory requirement as part of the curriculum since 2014, but more needs to be done.
Given all that we teach children, it seems to me that a greater focus is needed on important tasks that all of us here probably take for granted. If children and teenagers are given some practical advice on saving and banking, I strongly believe that they will be more disposed towards participating. Young people are far more likely to be at risk of financial exclusion: some 8% of them do not have a bank account, compared with 0.7% of the national population. Since there is to be education targeted at younger people, it ought to be accompanied by a range of accounts targeted at them too.
The public sector should not seek to get involved with this, bar the notable exception of the National Savings and Investments Bank. Instead, there ought to be a partnership with banks to create these new products and market them sensibly so that young people can make an informed choice. If they get into the habit of putting money into the bank early, they will not lose it. There is a quiet joy in putting in the pennies and seeing the pounds take care of themselves.
The other area this feeds into is universal credit. At present, claimants face enormous difficulties accessing their social security payments if they do not have a bank account. Furthermore, the monthly payment risks those without good spending habits running out of money. I support monthly payments as they mimic normal wages, but further emphasis should be put on financial education as this system is brought online and more people are switched over.
Lord Northbrook (Con)
My Lords, we should all be grateful to the noble Lord, Lord Leigh of Hurley, for raising this important topic for the House to discuss. We do so in the context of the ONS stating that the UK savings rate in 2017 was at its lowest since 1963. Conversely, the level of consumer debt is rising rapidly. The rating agency Fitch states, according to an article published by the Daily Telegraph in May, that UK households are borrowing more than they are saving for the first time since the late 1980s. According to the Association of Accounting Technicians ISA working group report of March 2018, household debt has increased by 7% over the last five years, including a 20% increase in consumer credit.
The Government deserve great praise for their encouragement of savings. However, one consequence of their very success in keeping inflation under control is that interest rates have also been very low. A consumer mentality may have developed for some to question the point of saving when they are getting such a low return on their money, particularly if they are fearful of putting money into the stock market. The four main areas I wish to cover where the Government are encouraging savings for those fortunate to have reasonable spare cash for the medium to long term are ISAs, National Savings & Investments—NS&I—self-invested pension schemes and, finally, the Help to Save scheme. Any criticisms of mine on these are not meant to be of the concept as a whole, but more about the complications that have developed over time.
ISAs are the child of the original PEP and TESSA schemes introduced by a Conservative Government in 1987 and 1990 and succeeded by ISAs. The Government deserve praise for raising the savings limit from the original £3,000 for a cash ISA and £7,000 for a stocks and shares ISA, to £20,000 a tax year for one or the other. These measures can be said to have simplified the ISA landscape and made ISAs more attractive. Unfortunately, other changes over the past 19 years have complicated the issue. Five extra types of ISA have been introduced, four of which have weaknesses as well as strengths.
First, there is the junior ISA. It is very important to encourage more children to adopt a savings habit, and having an account helps this. However, existing standard child savings accounts are not ordinarily subject to income tax anyway, because they would rarely produce enough income to exceed the personal savings allowance of £1,000 for 2018-19.
Secondly, there is the Help to Buy ISA. The scheme enables people saving for their first home to receive a 25% boost to their savings from the Government when they buy a property of £250,000 or less—£450,000 in London. According to HM Treasury, the Help to Buy ISA has helped over 106,000 property completions, and the average age of a first-time buyer in the scheme is 27, compared to a national first-time figure of 30, which indicates that it makes a real difference. However, there are weaknesses. To complicate matters, the scheme is due to be scrapped in 2019 and rolled into the lifetime ISA—which I will come on to—although subscribers can continue saving into their account until 2029. Help to Buy ISAs should lose “ISA” from their title to avoid confusion. This should be relatively straightforward, as there are already numerous other government house-buying schemes, such as equity loan and shared ownership, which do not have the ISA title associated with them. In addition, removing this from the ISA family would take away the confusion between investing in this and in a cash ISA.
Thirdly, the most complicated recent ISA is the lifetime ISA, as referred to by my noble friend Lady Altmann. It has its strengths. A LISA can be used to buy a saver’s first home or to save for later life. In addition, the Government will add a 25% bonus to the subscriber’s savings, up to a limit of £1,000 a year if the maximum £4,000 is saved. However, its weaknesses outweigh its strengths. The age restrictions are unnecessary and restrictive. Savers must be over 18 and under 40 to open a LISA, and cannot make contributions beyond the age of 50, so this can hardly be considered a lifetime investment. Savers cannot take their savings out of a LISA until they are over 60 unless they pay a punitive penalty, which is 25% if they withdraw money or transfer the lifetime ISA to another type of ISA before reaching the age of 60. As the FCA has repeatedly made clear, many investors wrongly believe that the 25% charge is just giving up the 25% bonus. However, as my noble friend Lady Altmann has already pointed out, the charge is equivalent to losing the whole government bonus and paying a further 6.25% charge on the investor contribution portion of the withdrawn sum. Overall, a lifetime ISA is probably not as effective in saving for later life as are most pensions. Although there is a bonus, there is no employer contribution or tax relief.
Fourthly, there is the innovative finance ISA. It has advantages: it provides increased choice to investors and has the potential to improve competition in the banking sector by diversifying the available sources of finance. But its weaknesses are also apparent: there are few products and consequently a low take-up. It could be replaced with an investment allowance, which would largely achieve the same objective. It could also be argued that it dilutes the ISA brand.
On National Savings & Investments, I refer to oral evidence given to the Treasury Select Committee in May by the NS&I chief executive. In the last reported financial year it raised £11.8 billion, which he said was about 10% of the total raised through NS&I and the gilts market. Interestingly, it now regards the Post Office as a rival, whereas in the old days all NS&I products were sold through it. NS&I has a useful role, but it is necessary to watch its interest rates. This is proven by its pensioner bonds, which were issued at a very generous rate of 4%, causing a stampede of people who wanted to invest in them. The new bonds now offer a rate of 2.25%, even though this is still very competitive by current interest rate standards.
In the area of pension fund savings I will look at two areas: tax relief on contributions and the change to annuity rules on withdrawals. Since 2011, the Government have decided to reduce the total lifetime allowance to SIPPs from £1.8 million to £1 million. “So what?”, you might say, as it still seems a large figure. But there are unintended long-term consequences. Individuals may well become more reliant on the state in the long term, adding extra pressure on the NHS in particular. I have also heard that doctors are retiring early simply to avoid breaching this limit, which also adds to pressure on the NHS. In the short term the reduction is saving the Government money on tax relief, but in the long term it will create an extra cost. If the Government cut back on the lifetime allowance further, as I suspect, I strongly believe that the amount of tax relief clawed back should be put towards the social care budget for pensioners; I am cribbing shamelessly an idea of my noble friend Lady Altmann.
The change in annuity rules was welcome. However—the Government cannot be held responsible for this except to flag it up more—some individuals have already failed to realise that if they withdraw more than a certain percentage of their funds, they could be clobbered with a tax charge of up to 45%. It has been a clever way to raise more tax, but again it may have long-term consequences. Pensioners could exhaust their own pension fund pot and become more reliant on the state. Overall, though, I approve of the change to the annuity rules, if investors take a sensible course of action to them.
The Help to Save scheme, which was mentioned by many other speakers, is a very good example of a new government initiative to promote personal savings by lower and middle-income groups. As many other speakers have said, around 16.8 million people have less than £100 in savings available to them at any time. I served as a member of the Financial Exclusion Committee, and I highly recommend our report of March 2017, which highlighted the background to the scheme. It will be open to 3.5 million adults in receipt of universal credit, and it works by providing a 50% government bonus on up to £50 of monthly savings into a Help to Save account. The bonus will be paid after two years, with an option to save for a further two years, which means that people can save up to £2,400 and benefit from additional government bonuses worth up to £1,200. Help to Save was welcomed by our witnesses, who also noted that matched funding schemes were one type of savings product that had been proven to work well.
Finally, one product feature also referred to in our report that has the potential to help those on low incomes is “jam-jarring”. This is a feature of a small number of accounts—chiefly offered by some credit unions and prepaid debit card products—whereby customers can automatically put aside amounts from their income into virtual “jam jars” for regular essential expenses such as rent and utility bills, preventing money set aside for one expense being used for another.
In summary, the Government have done much to encourage personal saving in a low-interest-rate environment. Indeed, the total figure given to our committee of all ISA savings had reached the very impressive figure of £8 billion at the time of our report. However, as indicated by the low savings ratio figure, this disguises the fact that a lot of people are not saving or are unable to save, and, as stated at the start of my speech, people are borrowing more than they are saving for the first time since the 1980s.
Lord Davies of Oldham (Lab)
My Lords, first, I extend my congratulations to the noble Lord, Lord Lilley, on his maiden speech. The noble Baroness, Lady Altmann, reflected on the fact that we will benefit from his contributions in the years to come. However, with the present level of national debate on Brexit, I imagine that we will be hearing from the noble Lord in our debates in the slightly shorter term.
Secondly, I congratulate the noble Lord, Lord Leigh, on introducing this debate—not only because the topic is of such significance but because of the extensive way in which he covered some very real issues relating to savings that need to be faced by the Government. He is slightly more bullish on the economy than I will be when I make my general comments, but I agree with him entirely that people’s propensity to save relates very much to their earning power and their level of security with regard to the economy. Therefore, the Government’s first task is to do better than they have in recent years.
The noble Lord emphasised that there were some advantages from the development of workplace pensions. We all recognise that and welcome it on this side of the House. However, our anxiety, which has been clearly expressed in the debate—the noble Baroness, Lady Altmann, referred to it—is that workplace pensions might detract from people’s approach to saving in other respects, yet that depends on two things. One is the nature of employers’ schemes. Those vary a great deal and it would be a mistake if we attributed to the pension schemes that are evolving the features of the best examples of those provided in the past, often by companies with extensive resources which could and did afford to look after their workers’ pensions, having been much more generous than is likely to be the case at present.
The second is the number of people in employment. We all know that the Government constantly boast that employment is at a high level, and it is true that a high level of people have a full-time or part-time job that provides resources for them. However, many who are in the gig economy are employed and therefore come up on the bright side of the Government’s employment ledger but, when it comes to the employer’s contribution or even the worker’s ability to save, the earnings level that they are operating at in many instances—we have seen how even substantial employers treat people in the gig economy and those in part-time work, easily reducing their hours at will—means that a substantial section of our population cannot be expected to benefit from the new proposals for the development of pensions.
We welcome the substantial increase in the number of those who have taken up these schemes, as they will play an important part in the future, but the anxiety is that they might direct resources away from other schemes with greater advantages. The noble Lord, Lord Palmer, indicated that an awful lot of the saving that currently goes on in our society is negative saving—that is, the returns are lower than the rate of inflation—and that encouraging people to save is encouraging them to reduce their overall assets. Therefore, we must be very concerned about the rate of inflation but we also need to recognise that people are currently extremely wary of saving because of the persistence of low interest rates, which means that they do not expect to get significant returns from many of the offers to save. Of course, we in the Opposition support the measures that enable people to save for the future and the genuine incentives to encourage saving, but we need to ensure that people pay due regard to the fact that there will come a time in life when the costs are high and earnings are very low, and that it will be necessary to have adequate resources.
I have much appreciated the contributions from noble Lords, particularly the extent to which the right reverend Prelate, the noble Lord, Lord Lilley, and others emphasised that we need to prioritise financial education and understanding. Far too many people in our society are still largely ignorant of the financial situation they face. People get into debt because they pursue potentially the worst route for borrowing. That happens through ignorance and through the desperation of approaching debt, but it is also due to a lack of knowledge of how adequately to resolve that debt. I appreciated the number of speakers who emphasised that.
I also recognised what the right reverend Prelate said when he referred to the fact that an obvious form of saving is buying a property, and he spoke about the development of home ownership through mortgages. We all accept that in the past such assets were more easily achieved, but these days a substantial number of our younger population have no chance at all of reaching the level of savings necessary to undertake a mortgage against the house prices they are confronted with. We have a rent generation and we need to think about the support that that generation will need when they do not have the obvious support that comes with buying a house with a mortgage, as the right reverend Prelate emphasised.
The Chancellor has sought to emphasise that he wants to increase the level of saving. However, we are worried about the extent to which certain initiatives, particularly the lifetime ISA, which has been referred to by several noble Lords, will be a deterrent to individuals pursuing better strategies in the long term. ISAs have an element of glamour about them but that glamour can be appreciated only by people who are already reasonably resourceful and in a position to take them up. We recognise, however, the incentives that support them.
The lifetime ISA and the Help to Save scheme have shown that the Government are concerned about the long-term position of people in our society, but I am not so sure we are all convinced that there is a level of fairness attached to these provisions. We see a lack of government measures to address the problems faced by those on much lower incomes than those to whom ISAs are addressed. We understand that the Government have recognised that people have great difficulty saving when they are getting help from universal credit. Given the enormous difficulties the Government have had in rolling out their universal credit proposals, it is not surprising that people’s confidence has been shaken, along with their ability and proclivity to save.
Quite a significant percentage of our population are in work and yet still have recourse to use foodbanks. I note that the Government purported to recognise that with regard to the health service, when they were shocked to discover that nurses had such low pay that they were going to foodbanks. But it is more extensive than nurses, and it is an indication that this debate is about not just the improvement of savings but fairness. We need to be fair to those who have the greatest need in our society and who have to manage budgets in such extreme circumstances that they have very little excess to address to savings.
We in the Labour Party are particularly concerned about levels of credit and credit cards. It has now reached proportions where the Government ought to act and, if they do not, the next Labour Government certainly will. We think there should be a cap on the charges that credit cards attract, because we are all too well aware that many people can get into real difficulty using them. It seems obvious that it is necessary for some limitations on this. The Government have seen the extensive growth of credit card usage and know the significant number of people who have regular debts that they are just not, at any time, paying off, and therefore that debt is increasing. The Government need to act in these areas.
Part of the problem for people trying to save is that they face great difficulties in this economy. There is an indication that, this year and next, there may be some improvement in wage growth. It follows seven years of Governments, led by the Conservative Party, under whom wages have not risen at all. That is a phenomenon that we have not seen for very many years. I have in the past suggested that it goes back to Napoleonic times—it certainly goes a long way back. We must recognise that people’s confidence is bound to be shaken in circumstances where their incomes do not improve.
It would be churlish if we did not recognise the extent to which the Chancellor is seeking to address savings overall, and we give credit to the attempts to put forward initiatives. However, we share with many others reservations about the strategies being pursued, as have been identified in this debate. In fact, I tore up a third of my speech after the noble Baroness, Lady Altmann, made such detailed challenges to the Minister. In replying to the debate, he will have to spend all his time dealing with the points that she alone made. Other points have been made by other noble Lords, however, and I know the Minister will address them.
This has been an interesting and constructive debate. It is an indication of a fundamental problem in our society. We are talking about the long-term necessity of savings against a background in which the present position of the economy, and the predictions of where we will be in the next five years, are such that it will be a very difficult case for the Government to convince people that the future is sufficiently secure for them to take steps towards significant savings.
Lord Young of Cookham (Con)
My Lords, I begin by joining others in thanking my noble friend Lord Leigh for securing this debate and for his speech in support of the Motion. I was particularly struck by the point that he made about the potential of modern technology to help saving—the ability to put small sums of money in a pot and to let it grow—and I will say a little more later on about the role of fintech in this important area.
I thank all noble Lords who have taken part, not least my noble friend Lord Lilley. This is the second time I have had the good fortune to listen to a maiden speech from my noble friend. I was on the Front Bench in another place on 24 November 1983, when the new Member for St Albans spoke. It was an outstanding speech at the beginning of a long and successful career. Back then, he spoke of the imperatives of containing public expenditure, and in particular our contribution to the European budget, but went on to reassure the House that he had always been a passionate supporter of our membership of what was then the European Community. In the intervening 35 years, he played a leading role in the Thatcher and Major Governments, as well as being shadow Chancellor in Opposition. As other noble Lords said, we look forward to him sharing with the House his experience in a wide range of government departments. I noted with interest the six principles he enunciated which should guide policy on saving. I will make a quick comment on his suggestion that there is a bewildering array of tax reliefs. The Conservative Party believes in choice and flexibility for savers. That is why several different ISA types are available, depending on an individual’s age, risk appetite and savings goals. Having listened to two of his maiden speeches, I wonder where we will both be for his third.
The Government recognise the significant role that savings play in enabling individuals and families to achieve their aspirations. Savings bolster household wealth and support the economy by stimulating “sustainable” growth—a word used by my noble friend Lord Leigh—and innovation. Household saving tends to be lower when household wealth is high and unemployment is low. Household financial net wealth as a proportion of income is close to its record high, while the unemployment rate is at its lowest since 1975. The thrust of our policy has been not just to reinforce a savings culture in those who have always saved but to promote that culture in those who need it most and those who have traditionally not made it a priority—namely, those on low incomes and the young, as mentioned by many noble Lords, including the noble Lord, Lord Palmer.
I note the important use of the word “fairer” in my noble friend’s Motion—a point that was emphasised by the noble Lord, Lord Davies. We have indeed sought to help people at all income levels. This is easier to achieve if more people are taking more pay home. Because of increases to the personal allowance, a typical basic rate taxpayer will pay £1,075 less income tax in 2018-19 than in 2010-11, allowing more headroom for saving. Again, this point was made by my noble friend Lord Leigh.
However, we have to do much more, particularly with the groups I mentioned earlier—those on low incomes. The Money Advice Service in 2016 told us that four in 10 working people across the UK lack a savings buffer, with less than £100 in savings available to them at any one time—a point made by the noble Lord, Lord Palmer. One-quarter of households have total financial assets that are less than £1,100; and almost 26% of working adults have no savings. This evidence speaks to a demonstrable lack of a financial safety net for many in our society, leaving households in a state of financial uncertainty—a point well made by my noble friend Lady Altmann. With that uncertainty comes vulnerability to unexpected bills or income shocks and, as many noble Lords said, exposure to loans at high rates of interest.
The noble Lord, Lord Palmer, made a useful distinction, reinforced by my noble friend Lady Altmann, between money put aside for retirement—long-term savings—and money available for emergencies. That is a useful distinction that we have to bear in mind.
The reforms introduced by this Government are a critical step in tackling the barriers to savings and ensuring that the right incentives are in place for savers so that they can build up a necessary buffer, either by saving through NS&I with total security or with other investments where we have taken steps to minimise the risk of misselling or fraud. The noble Lord, Lord Davies —who is never churlish—was good enough to compliment the Government on some of the initiatives they have taken in order to achieve this mutually acceptable goal of helping those on low incomes.
A key initiative, which was referred to many times during the debate, was the introduction of a Help to Save scheme in 2018 for working people on low incomes, who will be able to save up to £50 a month and benefit from a 50% government bonus. This recognises the point made by the noble Lord, Lord Palmer, and others that tax relief is of no use if people’s incomes are below their personal allowance—hence the substitution of tax relief with a government bonus.
Help to Save will support working families on low incomes to build up their rainy-day savings buffer. The scheme will be open to adults in receipt of working tax credit or universal credit with minimum household earnings equivalent to 16 hours a week at the national living wage. We estimate that 3.5 million people will be eligible and anticipate a take-up of 10% in the first year.
Turning to young people—again mentioned by many noble Lords—we recognise the challenges they face in becoming home owners. That is why we launched the help to buy ISA in December 2015. This helps first-time buyers save up a deposit for their first home, with a 25% bonus on up to £12,000 of savings. To the end of December 2017, over 170,000 bonuses, worth £132 million, have been paid, which supported over 125,000 property completions.
The right reverend Prelate the Bishop of Chester made a broader point about housing. Over £40 billion is being invested in housing and we are taking initiatives on rented housing—for example, promoting three-year tenancies. A number of noble Lords mentioned the use of pension funds. Some pension funds are now investing in rented housing, an area in which traditionally they have not invested, and that is helping to increase the supply of housing.
We created a new lifetime ISA from April 2017 that enables younger people to save up to £4,000 a year, tax free, with a 25% government bonus. My noble friend Lady Altmann repeated today the reservations that I am sure she has made on earlier occasions about the lifetime ISA. It has now completed its first full year of operation and initial reports to HMRC show that for the 2017-18 tax year, approximately £130 million has been paid to 14 LISA managers in respect of over 170,000 investors. This encourages the next generation, to whom my noble friend Lord Leigh referred, to get into the habit of saving and helps them to simultaneously save for both a first house and later life with the same product.
A number of suggestions were made during the debate—including from my noble friend Lady Altmann—that there should be a social care ISA. As she knows, there will be a Green Paper on social care in the autumn. As to the suggestion from my noble friend Lord Northbrook that, were there to be any further reductions in tax relief on pensions—I have no idea whether there will be—any savings from that reduction should be put into a special pot for social care, I am sure that the authors of the social care Green Paper will bear that in mind.
My noble friend Lord Northbrook made a number of suggestions for simplifying and rationalising the ISA family. He referred to the Help to Buy ISA which, as previously announced, is due to close to new entrants in November 2019. However, the lifetime ISA offers similar support for those who are looking to buy their first home.
As to those who are even younger—a point raised by my noble friend Lord Suri and others—the Government also believe that financial education is key in helping people increase their financial capability and build up their financial resilience, an expression used by my noble friend Lady Altmann. It is particularly important that children and young adults receive financial education to help them shape their financial habits later in life. This is why financial education was introduced to the national curriculum in England in 2014 as part of the curriculum for citizenship education for 11 to 16 year-olds.
Moving on to advice, I pay tribute to the work carried out by my noble friend Lady Altmann at the DWP to promote both auto-enrolment and the Single Financial Guidance Body. Further work to improve financial capability for the population as a whole is currently undertaken by the Money Advice Service, which delivers our financial capability strategy. However, as my noble friend mentioned, the functions of MAS—including its work on financial capability—will soon be merged into the new Single Financial Guidance Body, which will simplify the existing public financial guidance landscape and make it easier for people to get help with money matters. The noble Lord, Lord Palmer, asked what its objectives will be. It will work with the charitable organisations mentioned by the right reverend Prelate.
Again on the population as a whole, from April 2016 the personal savings allowance—which has not been mentioned in the debate but is important—and ISAs have meant that over 95% of people have no tax to pay on their savings income, and we have given people more freedom of choice when deciding where to save tax-free. ISAs are more generous than ever before, as my noble friend Lord Northbrook mentioned, and we made the largest ever increase to the ISA limit, from £15,240 to £20,000, in April 2017. They remain an incredibly popular product, with around half of UK households having one. Of the 21.6 million individuals who benefited from holding an ISA in 2014-15, over half had incomes of under £20,000.
At the other end of the age spectrum, the Government have made security in retirement a central part of their reforms since 2010. The introduction of auto-enrolment has reversed the previous decade-long decline in workplace pension saving. It has changed the culture of saving, making workplace pension saving the norm for a new generation. Over 9.7 million people have been automatically enrolled since 2012.
My noble friend Lord Leigh mentioned advances in technology, which he is right to point out are being used to make it easier for some people to save. The fintech sector has the capacity to deliver huge benefits across society. It is a fantastic example of how competition can be a force for good. The Government’s new fintech sector strategy, published on 22 March, explains how we intend to ensure not only that the UK remains the best place in the world for fintech, but that these opportunities are realised in full.
It is hoped that these measures will stimulate a robust savings culture in this country and contribute to overall household wealth. Indeed, we have witnessed the financial position of households improve significantly since the financial crisis. Household net financial worth as a share of income is close to record highs, and debt-to-income is significantly below pre-crisis levels. Debt interest payments to income are also at a record low.
Perhaps I may turn to some of the issues raised; I apologise in advance for not answering them all. My noble friend Lord Leigh asked about SIPPs. The HMRC framework for permitted investments for SIPPs does not dictate what can be placed in a pension; rather, it sets out what types of investments attract tax relief. The effect of this, as he said, is that many more types of investments can now be placed into pension schemes as SIPPs. The FCA has rules in place which oblige SIPP operators to assess if there are problems with an investment or an introducer. As a result of these rules, SIPP operators are required to take appropriate action, including stopping certain investments. They must also take reasonable steps to ensure that a proposed underlying investment for a SIPP is a genuine asset and not part of a fraud or scam. However, perhaps I can take up my noble friend’s generous offer to write to him about that in more detail.
A number of noble Lords, including the noble Lord, Lord Palmer, and my noble friend Lady Altmann, asked about pensions cold calling. As they both know, amendments were made to the Financial Guidance and Claims Bill as it passed through this House a year ago. We will be launching a consultation on the draft regulations shortly and we intend to lay the regulations before Parliament in the autumn. The Economic Secretary to the Treasury will also publish a statement shortly providing a progress update and outlining a timetable for delivering the ban. The noble Lord, Lord Palmer, asked if I would introduce a 4% NS&I bond. That is slightly beyond my capacity at the Dispatch Box, but we note his request. NS&I’s operating framework supports a fair and competitive savings market by ensuring that the products it offers balance the interests of savers on the one hand and taxpayers on the other, while also looking at the market as a whole.
The right reverend Prelate raised the role of credit unions and mentioned the important work the Church has done in promoting savings and helping people who are vulnerable. I am well aware of the Churches’ Mutual Credit Union, a mutual society formed in collaboration between the Church of England, the Church of Scotland, the Methodist Church of Great Britain, the Church in Wales and the Scottish Episcopal Church—a broad church if ever there was one. The Government remain committed to supporting credit unions, which provide vital services to financially underserved communities.
My noble friend Lady Altmann raised an issue which I know she has talked about before: pensions tax relief and low-income workers, and the fact that the tax relief does not filter through to those below a certain threshold. We are well aware of this issue, and in December the DWP published its review of automatic enrolment and committed to exploring the difference in treatment that she referred to, making the most of new opportunities while at the same time balancing simplicity, fairness and practicality. We will engage with stakeholders to see if we can resolve that problem.
A number of noble Lords mentioned that it is difficult to promote saving when interest rates are so low. It is a valid point but the other side of the coin is that low interest rates have helped households and businesses through difficult economic times, and while it may not have been in the interests of pensioners, many pensioners have children and grandchildren who will have benefited from low mortgage rates, and they have an interest in businesses doing well. Low interest rates have certainly helped businesses. As I say, there is the other side of the coin as regards low interest rates.
My noble friend Lord Suri asked about progress in making available bank accounts for those who currently do not have them. The Treasury’s 2017 publication shows that in total, there are nearly 8 million basic bank accounts open in the UK, while just over 900,000 new accounts were opened between July 2016 and June 2017.
I am conscious that I have not gone through all the issues that were raised and I will write in response to the outstanding ones. To conclude, the Government recognise the importance of savings and we have taken action to support savers at all income levels and at all stages of life through a range of aims such as saving for a rainy day, for retirement or towards home ownership. We have made significant changes over recent years, including introducing the personal savings allowance. This means that over 95% of people have no tax to pay on their savings income, all of which contributes to the building of an economy that is fit for the future, and a stronger, fairer place for our people to thrive. We take to heart all the suggestions that have been made during the debate, and once again I thank noble Lords for their contributions.
Lord Leigh of Hurley
My Lords, I thank all noble Lords who have taken part in this debate. One never knows quite what to expect in any debate, but I had not expected a debate on savings to include an extremely interesting lesson about eighth-century politics. I am extremely grateful to my noble friend Lord Lilley for that and for his welcome remarks in his maiden speech. The noble Lord, Lord Davies of Oldham, was typically gracious enough to compliment my noble friend Lady Altmann. We all benefit from my noble friend’s extremely detailed knowledge of the savings and pensions industries—I will always remember to differentiate between the two—but she does not have a monopoly of wisdom. The time that was kindly allotted to us enabled a number of very interesting arguments to be fully developed. It was a pleasure to hear those arguments taken forward and to have a short-lived break from Brexit, which I understand will change very shortly.
My noble friend the Minister was, as ever, most courteous in his response. There is a limit to what the Government can do in a low-rate environment, but one thing they can do is listen to good advice. For that, I am very grateful.