Savings (Government Contributions) Bill (First sitting)

Ian Blackford Excerpts

Tuesday 25th October 2016 Public Bill Committees

[Jeremy Quin]

Q I am grateful—it is 15% and 50%. I am a glass-half-full type of person, but I am sure the points were noted.

The other point I want to tease out is the reference to not everybody being ready, and the potential for delay. Hearing what Carol was saying, in particular, I take it that there is no sign that there will be an insufficient number of people to provide a market. There will be a market, and if people have to catch up they will have to catch up. We are offering a good product at an early stage—would that be fair?

Yvonne Braun: That is absolutely right. Our members very much want to make this work for their customers.

[Ian Blackford (Ross, Skye and Lochaber) (SNP)]

Q A lot has been said about auto-enrolment and those who have been left behind in the process up till now—the self-employed. Given that we know there is going to be a review of auto-enrolment in 2017, is there an argument for postponing this until we deal with auto-enrolment and those who need to be included?

Carol Knight: Not necessarily, no. We need to monitor the effects, without a doubt. We need to look at the take-up of auto-enrolment to see whether there is any discernible drop-out and a corresponding number of people going into the LISA. There are so many unknowns with auto-enrolment that it is difficult to say that we should postpone the LISA because of that.

There are a lot of people who are not going to get caught by auto-enrolment. One of my biggest concerns is about people who earn too little to even fall into that bracket. An increasing number of people have multiple income streams, each of which is too low to get caught. Auto-enrolment is not going to solve the problem for them, but a lifetime ISA could.

Yvonne Braun: I think that question of people with multiple employment will be one that we will have to return to in the automatic enrolment review, because I think that is the very point of the review—to see whether some tweaks need to be made to make it work better for more people.

The point that Carol made about monitoring the outcome is absolutely right. I think the view has been expressed that the risk of higher opt-out rates from automatic enrolment is small, because that has not occurred with the introduction of the help to buy ISA. However, I think it is important to remember that the help to buy ISA is quite a different proposition, because the maximum bonus is much, much lower, and also the bonus is not paid into the actual account, whereas here it actually goes into the individual’s account. So I think the experience with the help to buy ISA should not give us false comfort that the lifetime ISA will not have an impact on automatic enrolment.

It will be really important that we look at what happens from next April, when the lifetime ISA is introduced, and, as I said earlier, it will also be really important that the information and guidance that people receive is very, very clear about the importance of the employer contribution and about not losing that through a switch into a lifetime ISA.

[Ian Blackford]

Q How concerned would you be on that issue, Yvonne, particularly given what you said previously—that nobody will be better off with an ISA than they would be with investing in a pension scheme? I think that the figures that you gave to the Work and Pensions Committee were quite illuminating, because they demonstrated that someone earning £25,000 a year and putting 4% of their salary in over a 40-year period would be 33% worse off with a LISA. How concerned are you that people may be seduced into investing in a LISA over the opportunities and the benefits of investing in a pension?

Yvonne Braun: I think that is absolutely not the intention of the policy, because the Government have been very clear, from day one, that the LISA was not intended to supplant automatic enrolment but was intended to work as a complement to it. I think that if we can stay with that, and if the communication to people is clear on that point, then that risk is mitigated, although we should still monitor what actually happens on the ground, because it is easy to get confused about the numbers. We are talking about 25% Government bonus, which sounds better than 20% basic rate tax relief but is in fact exactly the same.

So clarity of the message is really important in all of this, and as I said, we think it is important that we use the guidance services for that, and also that the work that is done by the financial advice market review on rules of thumb considers what could be communicated to people about a workplace pension vis-à-vis a lifetime ISA. I think the two should be seen as the lifetime ISA being on top of—in addition to—the workplace pension, rather than there being some sort of binary choice.

[Ian Blackford]

Q In order to achieve that, how would you architect the guidance and advice that consumers need to get, to make sure that they don’t fall into the trap of investing in an ISA when a pension would be better for them?

Yvonne Braun: I think there needs to be a strong signpost towards the guidance services, and the guidance services need to be clear about the complementary nature of the two products—that it is not an either/or, much like it should not really be an either/or for people whether they save for retirement or for a house deposit.

[Dr Eilidh Whiteford (Banff and Buchan) (SNP)]

Q I want to continue along very similar lines to the previous questioner, because I was also very struck by the evidence that the Association of British Insurers submitted to the Work and Pensions Committee. I particularly note that a £25,000-a-year salary would be roughly the average female salary in this country. There has also been quite a lot of talk today about people on lower incomes, and it seems to me quite striking that if you are a person on an average or below-average salary, it is unlikely that you are going to “max out” your employer contributions or your annual allowance in any given year. So it does not seem to me that there are many advantages for a low or average-wage person in the LISA, and it seems that they would be better advised to invest in a pension. Looking at the discrepancy pointed out in the evidence, that could be £53,000 over a lifetime’s saving. Is it really advisable from a financial perspective to encourage anyone to invest in a LISA if they are on a low or average income?

Yvonne Braun: I think what is also important here is that we consider people’s individual choices. As long as people are clear about what they are giving up, we cannot stop them from potentially opting for a lifetime ISA if that makes sense. Ultimately, this is about giving people more options—that is the intention—but I think there has to be a very clear message of, “If you opt for a lifetime ISA over a workplace pension, the downsides look like that.” That is quite important to draw out.

Carol Knight: That is absolutely right. When you are looking at a workplace pension where you have got the employer contribution going in, that definitely changes the dynamic. So I think it would be very hard to justify anyone using a LISA as an alternative to that because of that extra contribution going in. However, for people for whom that is not an option—those people may be comparatively young and not necessarily have any sure view of how their life is going to pan out—the concept of putting money into a pension that is completely locked away might just stop them saving altogether, because their lifestyle is such that they want the option to be able to have access to money at a point at which they need it, and within a pension they cannot do that. The lifetime ISA gives them that flexibility, where they have the opportunity to save money and the opportunity for a 25% bonus that is easy to understand—matching contributions is an easy concept—and, if their lifestyle is such that a crisis arises where they need access to money, they can get to it. The lifetime ISA will give them that, but a pension will not.

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[Huw Merriman]

Thank you.

[Ian Blackford]

Q I want to come back to the issue of risk. We all know that when you invest in a pension scheme, the trustees will then look at the appreciation of risk that you would expect to take on board. They obviously look at the timeline of when you expect to retire and gear any assets according to that assessment.

If we have a situation here where an individual can invest in an ISA, and can invest up to 100% in equities, they may decide to draw down that pot at any time for a particular type of event. We know that there is always a risk of a downturn in the market. Most actuaries will tell you there is a one in seven year risk of a downturn in the market. Are we not inadvertently exposing consumers to risk? Does it not come back to the point that was raised by my hon. Friend the Member for Banff and Buchan that we are exposing consumers to risk, not just of mis-selling, but of investing in an asset where there could be a risk of a downturn in the market seriously impacting the choices that they then make?

Carol Knight: There is always that risk, but I do not think we are looking at the lifetime ISA as an alternative to a pension. We are looking at it as complementary to a pension. Firstly, the lifetime ISA could go into a cash ISA, but as a long-term savings product it is generally accepted that cash is not necessarily the best way to do that. Again, it points to getting good guidance and information to people to help them make informed decisions as to the type of assets they are going to put into that product.

[David Rutley]

Q You have talked about some of the issues around signposting and also discussed the pros and cons versus pensions. That is clearly a very big issue. This issue is not quite as big, but do you have any views about the LISA versus the help to buy ISA, and any potential confusion that could cause in the minds of first-time buyers?

Yvonne Braun: As I understand it, the help to buy ISA lapses in 2019. This is the successor vehicle. It is important that the lifetime ISA, from the perspective of a house purchaser, is structured in a much more attractive way, because you actually get the payment of the Government contribution into your account, whereas with the help to buy ISA, the Government contribution goes through your conveyancer or solicitor towards the house purchase. It is a completely different ball game.

This is why I was saying it is difficult to draw comfort from the experience with automatic enrolment and the help to buy ISA, because it is not as attractive as the lifetime ISA. But yes, I see it as a successor vehicle. There is still a question around the transition and transfer of funds that sit in help to buy ISAs into lifetime ISAs, but I am sure that will be resolved.

Carol Knight: The other difference is that the help to buy ISA is just a cash ISA, whereas within a lifetime ISA you can have investments which, in the longer term, are generally considered to be a better option.

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[Huw Merriman]

Q I have one more question. This takes me back to my misspent youth, more than 25 years ago, when for four years as a student I worked for Abbey National as a cashier and customer service adviser. We would sell this type of product. We had a whole suite of products that had penalties if, say, you were five years into a bond and withdrew early. This is not rocket science. We could explain that to our customers, and that was without the benefits of the internet. I am still a bit sceptical about why this landscape is so complex to your members; it does not seem that different, and we were easily able to sell things 25 years ago.

David Wren: The landscape has probably changed slightly in 25 years. We very much welcome the Financial Conduct Authority consultation on this, because its view on how we engage with customers and make sure that they get the right protections is really important. Yes, a range of products are available, but as Tom said earlier, a lot of people will now buy online, through a call centre or through an app, so they are not going to see someone face to face. Again, we need to make sure that people are given access to the right information to allow them to make the right decisions. That is absolutely doable, and, as I said earlier, we hope that the Government will work with us on getting the right information to people. It is the landscape that is complex, as opposed to the individual products.

[Ian Blackford]

Q David, in your submission, you say:

“In particular, there is a concern that cash held in LISAs will only be suitable for those looking to buy a home, whilst stocks and shares will be more suitable for those investing for later life, looking towards retirement.”

Is there not a risk that if an individual invests in stocks and shares and then buys a home at the wrong time because the market has fallen, we inadvertently expose consumers to risk as a consequence of this policy?

David Wren: I think that is exactly right. That is exactly why we need to make sure that people are getting the right support in picking a product, and in the underlying investment for that product. I am sure that Tom is more expert in this than I am, but for pensions, stocks and shares are typically viewed as the right investment. Those ups and downs will average out over the course of your life. I assume that most people are saving for a home in a relatively short time-window—five to 10 years. Stocks and shares are inherently more risky. The point at which you are starting a family and want to buy a home may be the point at which the market is not going through a particularly buoyant phase.

We also need to recognise that for a lot of people—bear in mind that lifetime ISAs are available from 18—buying a house is a medium-term activity. That may well be over a more than 10-year timeframe. That becomes a very challenging time. It is not obvious that cash is the right investment; it is not obvious that stocks and shares are the right investment. That is a very difficult decision for someone to make.

[Ian Blackford]

Q There was this debate about moving from “exempt, exempt, taxed” to “taxed, exempt, exempt”, which was taken off the table. Was this not really just a back-door way for the previous Chancellor to bring forward this policy?

David Wren: I do not think I could comment on what the previous Chancellor was thinking when he introduced this. This is a “taxed, exempt, exempt” product. When I said earlier that it was difficult for me to work out whether I should open a lifetime ISA or pay into my pension, it is for exactly that reason: it is the difference between the money being exempt when I take it out, hopefully, at 60, versus paying tax on a pension at 60. Having both products in the market is incredibly complicated. Explaining the concept of “taxed, exempt, exempt” or “exempt, exempt, taxed” to someone is challenging. The Institute for Fiscal Studies wrote a very good study earlier in the year, in March-time, in which they talked about how this worked for different investments, but it is a thick document, and it requires a dark room and a lot of peace and quiet to really get into the detail.

Tom McPhail: We did some client research early this year on entry; everybody was under 40 and did not own a house. However, they were all Hargreaves Lansdown customers, so I cannot claim that this is representative of the population as a whole. Having said that, 14% of them said that they would look to use the lifetime ISA to save for a property, and 68% were looking to save for their future, so there was an emphasis on the longer term there.

The majority who expressed a preference did so for stocks and shares investing, rather than looking to cash, so there was a weighting—a sense that people were seeing this as a longer-term savings product, rather than a short-term cash product, in contrast to something like the help to buy ISA. This suggested to us that they were seeing it as being closer to a pension than a help to buy ISA. Clearly, there was a bit of both going on in there in the mix.

On your point about taxation, clearly we have different personnel at the helm now, so perhaps priorities and agendas have changed, but I think that it is worth reiterating that all the reasons why pension taxation was examined in the first place are still there and are unresolved.

[James Cartlidge]

Q I want to carry on with this point about complexity, because it seems to me that you are using the word “complexity” where others might use the word “flexibility”, dare I say. As we discussed with the previous witnesses, it is surely not unreasonable for a young family to be entirely focused on buying property, particularly if they live in areas that are very expensive. Perhaps they are on a short-hold tenancy with less security, and so on. Therefore, when presented with a savings option, they will want to opt for a deposit.

I take your point about help to buy ISAs, but they are going in two years, we understand. Do you accept that the flexibility that comes from a pseudo-pension product that could be used for a mid-life event—in other words, buying a house—is what makes LISAs unique, unlike auto-enrolment? There is a big market for this, and there are a lot of people who would welcome that choice.

Tom McPhail: We think there are other and better ways of addressing that problem that would be simpler and more sympathetic to investors’ needs. We support the auto-enrolment agenda, and we think it is important to get as many of the people you have just talked about as possible into an arrangement where they are saving for their retirement. Some of them may choose to opt out of a pension and eschew the benefit of an employer contribution, and to save into an ISA instead. For some, that might be a logical, rational and appropriate decision to make. That would, of course, mean that they were not saving for retirement in the most tax-efficient way available to them. In fact, potentially, they would not be saving for retirement at all, if they had opted out of a pension to achieve that goal.

One of the risks is that the lifetime ISA will subvert the pension-saving agenda. It is critical that pension providers and human resources managers—anyone involved in pensions—are communicating effectively around those trade-offs, the risks of giving up the benefits of the employer contribution, and the long-term consequences of that.

The help to buy product gave people taxpayer support in buying a house. There was actually relatively little wrong with it. It was there as a vehicle for saving in the short term, to build up a cash pot specifically to buy a house. The idea of trying to have your cake and eat it—of trying to save up for a house and for retirement within one product—that is where the complexity comes from, and that is where you are trying to do two things with one bag of money. If you use it to buy your house, it is not a savings product anymore.

We have already talked about eligibility for the lifetime ISA, and the fact that most self-employed people—for whom this could be a really good idea—are not eligible because of the age restriction. So I agree with you, but I am not sure that we are going about this in the best way.

David Wren: We really like the help to buy ISA; it is clear and unambiguous. Are you saving for a house? Are you a first-time buyer? Put money in. It is cash, and there is no confusion about whether you are also saving for your pension at the same time, because that is not a feature of the product. It is a really nice, neat product, which says, “Here’s what I do; here’s how I help you; and the Government will provide you with some help to buy your first house.” It is a shame that it will be removed in 2019. It has been very successful, and something like 250,000 were opened in the first six months of the product. That kind of really clear labelling and signposting that others have talked about is something that help to buy really had, and that the lifetime ISA risks not having.