Savings (Government Contributions) Bill

Lord McKenzie of Luton Excerpts

2nd reading (Hansard): House of Lords & 3rd reading (Hansard): House of Lords & Committee: 1st sitting (Hansard): House of Lords & Report stage (Hansard): House of Lords
Thursday 12th January 2017 Lords Chamber

[Lord McKenzie of Luton (Lab)]

My Lords, I share the frustration of the noble Baroness, Lady Altmann, that procedures on money Bills allow us only a Second Reading on the Bill. Although I see the noble Lord, Lord Young, blanching a bit at the prospect of a Committee stage on this Bill, we are not going to have one anyway.

I start by acknowledging the importance of encouraging individuals to save and accepting that there should be a role for incentivising saving through the tax system—although not necessarily exclusively through that—recognising always that support given through the tax system invariably does nothing for those at the lower end of the income scale. The Minister in introducing the Bill talked about the increase to £20,000 of the annual ISA allowance or the increase in the personal allowance, but those are so far beyond the circumstances of millions of our fellow citizens that it is difficult to see in this context how they will help.

I will concentrate most of my remarks on the lifetime ISA but first I have a few comments about the Help to Save scheme. This is targeted at those in receipt of universal credit and with household earnings at least equivalent to 16 hours at the national living wage, or to those in receipt of working tax credit. Entitlement to the latter—as I understand it—requires an individual aged over 25 to work at least 30 hours a week. If they are aged under 25 they will get it if they work at least 16 hours a week but have a disabled worker element or certain responsibilities for children. Can the Minister explain the differential working requirements for eligibility?

As other noble Lords have said, the impact assessment expects that around 500,000 people will open accounts in the first two years, saving an average of £27.50 a month. This will be from a potential eligible population of 3.5 million from 2.5 million households, 90% of which will have annual income below £30,000. As we have heard, the scheme will cost £70 million. Can the Minister say—or perhaps write to me if she cannot—what proportion of these individuals, who will be individuals in work, are likely to be within the scope of auto-enrolment? Can the Minister also say how the administration of the scheme will seek to ensure that the necessary savings have come from the eligible individuals and not been provided by family or friends, with the opportunity of sharing the government bonus when it arrives? That would seem to be potentially defeating the system.

Given the woeful level of personal savings in this country, the opportunity to build a small nest egg is important. The impact assessment cites the Family Resources Survey, which suggests that half the households with income below £30,000 have no savings at all—no wonder, given the battering they have endured under this Government. We have heard other figures as well leading to the same conclusion. The StepChange Debt Charity published research in 2015 which found that 14 million people had experienced an income or expenditure shock in the previous 12 months. This might have been a job loss, reduced hours, illness, a business failure, a relationship breakdown or even a washing machine breakdown—but without any savings they had to resort to debt to try to cope. The extent to which Help to Save will provide some small level of savings which can be available in such emergencies is to be supported—although, as my noble friend Lady Drake pointed out, the Government’s own ambition for the scheme seems modest.

A year ago, the FT carried a story that the then Chancellor was planning to overhaul the pension tax relief system. No wonder, perhaps, when the annual cost to the Exchequer was running at some £35 billion, including the national insurance issue, but netting for tax receipts on pension income. Moreover, two-thirds of pension tax relief was going to higher and additional rate taxpayers—a wholly unjustified distribution of outcome—notwithstanding a succession of tightenings of the annual and lifetime allowances.

The Chancellor was reported to have his sights on abandoning the current system, by which tax relief is given at somebody’s marginal tax rate, in favour of implementing a flat tax, suggested at between 25% and 33%. Since then, matters have moved on, including the Chancellor himself. The consultation on pensions tax relief has concluded, with no clear support for the Chancellor’s position, but it was expected that Budget 2016 would produce fundamental changes. What we got was the announcement of lifetime ISAs and Help to Save—hence the Bill before us.

The rationale advanced by the Government was that they wanted to help young people save flexibly and ensure that they did not have to choose between saving for retirement and saving for their first house. The lifetime ISA can be used to buy a first home at any time from 12 months after opening the account, and can be withdrawn with government bonuses from the age of 60 for use in retirement. Amounts can be withdrawn at any time, but with a 25% charge to recoup the government bonus—the equivalent of which was referred to by the noble Baroness, Lady Altmann.

For retirement savings, the structure of the lifetime ISA is effectively a TEE system: individual contributions paid from taxed income—no tax relief on contributions—investment income tax-free at the fund level and retirement income tax-free. That is a wish of the Treasury secured and some of us—pretty much everyone who has spoken—fear that it is the thin end of the wedge. Despite the impact assessment assuming that individuals will not opt out of workplace pension schemes to save in a lifetime ISA, I share concerns voiced in another place and by my noble friend Lady Drake and the noble Baroness, Lady Altmann, that it could undermine the progress of auto-enrolment and add confusion to an already complicated pension system.

The impact assessment identifies several groups who are expected to save in the ISA, but there seems to be no encouragement to see whether needs currently unmet by auto-enrolment can be brought into that fold. Of course, this is the year of the auto-enrolment review. It is encouraging that opt-out rates have been below original expectations, but we should recognise that these are still early days, as the noble Baroness, Lady Greengross, said, and that, with increased employer and employee contribution rates, they are still due to increase.

Compared to the current pension tax arrangements —an EET system—individuals will typically get a poorer deal from the Treasury by using the ISA route to secure a retirement income. This is particularly because of the tax-free lump sum currently available, and because an individual’s tax rate in retirement will typically be lower than when they are in work. What the individual loses, the Treasury gains. Of course, these matters are not set in stone, and the tax system is likely to change—indeed, it should—but currently, an individual saving for retirement via an ISA rather than an occupational pension scheme, notwithstanding the limited 25% bonus, is likely to be worse off. How are these issues to be communicated to consumers?

As a retirement vehicle, it should be noted that contributions to the lifetime ISA must cease when someone reaches the age of 80. That is hardly a lifetime. The noble Baroness, Lady Altmann, made the point that that is just the age where one would expect pension contributions to be ramped up. Retirement income cannot be accessed tax-free until the age of 60, although there is an opportunity to access savings at any stage with a 25% tax cost.

There is little in the impact assessment about the extent to which it is envisaged that individuals will draw down on their savings for a house purchase or leave it for retirement. One might just comment that contemplating the purchase of a first home at up to £450,000 is a sign of the times.

The Budget 2016 document indicated that the Government would explore the prospect of borrowing against lifetime ISAs, provided the funds were fully repaid. Has any progress been made on that? One can see some merit in having an incentivised savings product that can be available to cover a number of circumstances, but this should not be used to apply a regime, particularly a tax regime, which is less favourable than the stand-alone arrangements would be for any particular component. That is particular mischief of this Bill.

The Bill is a missed opportunity. It was certainly a chance to address anomalies in the tax system and the skewed benefit to the better-off. It was an opportunity to address some of the access issues for auto-enrolment, but perhaps also to move away from tinkering with individual housing initiatives to do something more fundamental. It was also an opportunity to do much more to build resilience for the poorest in our communities.

--- Later in debate ---

[Baroness Neville-Rolfe]

As with all impact assessments, it is an estimate. We looked at the Help to Buy ISA, which is similar to the lifetime ISA in that it gives a 25% bonus to support people to buy a first home. That has not led to a surge in opt-outs. Instead, opt-out rates for automatic enrolment are still much lower than the Government expected, as several noble Lords said; they are currently 9%. The overall programme assumption was, I understand, 28%. We will of course regularly monitor the lifetime ISA going forward to make sure that it is achieving its aim—as the noble Baroness, Lady Greengross, suggested, and indeed as we do with all important policy areas. But I am not convinced, to respond to the point made by the noble Lord, Lord Tunnicliffe, that we need a formal annual review.

The noble Baroness, Lady Greengross, asked how many people using Help to Save were eligible for automatic enrolment. We set out our expectations of take-up of Help to Save. I am afraid that, as with all forecasts, there is uncertainty, so at this stage we are not able to say how many of these people will also be eligible for automatic enrolment.

Several noble Lords talked about guidance and communication. The Government announced in October 2016 that they plan to replace the three government-sponsored financial guidance providers—the Money Advice Service, the Pensions Advisory Service and Pension Wise—with a new, single financial guidance body, which I welcome. Through creating a single body we intend to make it as easy as possible for consumers to access the help they need to get all their financial questions answered. For example, this could be through helping families to balance their household budget or for individuals considering their options in retirement. Consultation on the precise design of the single guidance body is currently live and closes on 13 February. MAS, TPAS and Pension Wise will continue to provide guidance to consumers until the new body goes live.

The noble Baroness, Lady Drake, raised the issue of pensions tax relief, as did other noble Lords. Our responses to the Treasury’s pensions tax consultation indicated that there was no clear consensus for reform and, therefore, that it was not the right time to undertake fundamental reform to the pensions tax system. But obviously the Government have moved, with the Bill, to encourage younger people to save through the lifetime ISA—and that was a key theme that came out of the consultation.

The noble Baroness, Lady Drake, raised the question of mis-selling risk, which was also a concern of my noble friend Lady Altmann. I agree that it is very important for individuals to have clear information on their products. That is why we will publish factual information about the lifetime ISA on GOV.UK, as well as working with the Money Advice Service and its successor to ensure that they make appropriate and impartial information available. As was said, it is the independent Financial Conduct Authority’s role to regulate account providers, including how they sell a product to consumers. It is currently consulting on the approach and has set out its proposals.

Having said all of that, the communication issue has come up under several different headings. If noble Lords would find it helpful, I will undertake to look through Hansard at the various points that have been made on communication and set out in a letter to noble Lords who have taken part in this debate just what our plans are. That will enable me, for example, to check with the FCA about its current plans and take account of any consultation responses that may already be available. We need to make sure that at the point of sale providers are transparent about risks, including any potential early withdrawal charge and with information on automatic enrolment. That theme came through from almost all noble Lords who spoke. It is a very important area. As has been said, this is a Money Bill, but that does not mean that we cannot set out how we see these things being properly communicated.

The noble Lord, Lord Sharkey, questioned the impact assessment. I understand, from checking with the experts, that it is correct. I was glad that he raised housing because it is an important area. The OBR has noted that the effect of the lifetime ISA on house prices is highly uncertain and its predicted impact is significantly smaller than overall house price movements. As we know, a number of factors can affect house prices, which will be subject to change in future years. For example, we are taking steps to boost housing supply. Following the announcement of £5.3 billion additional investment in housing in the Autumn Statement, we expect to double our annual capital spending on housing during this Parliament. We will publish a housing White Paper shortly, which I hope will address some of the supply issues the noble Lord raised and allow this House to have further exchanges on this incredibly important issue for the future of our economy and our industrial strategy. I believe the lifetime ISA is one way to make sure that first-time buyers have the support they need to get on to the housing ladder.

I will address a number of technical points raised by the noble Baroness, Lady Drake. She asked whether the Government would commit to a 50% participation rate for Help to Save. The Government are not setting any specific target around take-up of Help to Save because we want opening an account to be an active decision by those who feel Help to Save is right for them. However, we will continue to work with the account provider and other interested parties to ensure that people are made aware of the scheme and receive the right support and guidance.

The noble Lord, Lord McKenzie, talked about eligibility for the under-25s. A person aged under 25 is eligible for working tax credit if they work a minimum of 16 hours a week and have a child or a disability—I am learning a lot from this debate. Our intention is to passport people into eligibility for Help to Save. This is a well-established way of targeting support at people on lower incomes. Importantly, it removes the need for people to complete a further means test to prove that they are eligible, which we know could deter people from opening accounts.

[Lord McKenzie of Luton]

Perhaps the Minister will write in due course. There seems to be a disparity between the requirements for universal credit and for working tax credit. In universal credit you must have 16 hours at the national wage. For working tax credit, unless you fall within the disability or childcare categories, you need 30 hours of work. Why have the Government used those particular thresholds?

[Baroness Neville-Rolfe]

It is an important but esoteric point. If I may, I will write to the noble Lord. I am sure that in time I will understand these arrangements better. On his point about saving on behalf of others, individuals will pay into accounts and receive a government bonus. There will be no restrictions on what individuals do with the bonus or savings, or where the money has come from. However, HMRC will carry out additional checks on a number of accounts and will respond to any intelligence it receives from third parties where this gives rise to doubt about a person’s eligibility.

The noble Lord asked about the Government’s latest position on borrowing from lifetime ISAs. The Government continue to consider whether there should be flexibility to borrow funds from an individual’s lifetime ISA without incurring a charge if funds are fully repaid, but have decided that it will not be a feature when it becomes available in April 2017.

The noble Baroness, Lady Drake, said that the Help to Save scheme was not generous enough. On increasing the 50% bonus, our pilots for the saving gateway showed that a higher match rate of 100% made people only 5% more likely to open an account than a 50% match, and the amount of money saved into accounts was not significantly affected. On the two-year bonus period, I can make it clear that no one will be penalised for early withdrawals if they need to make any. The rationale of the scheme is to encourage people to develop a regular savings habit that will last beyond their participation in the scheme because it is valuable more generally.