Lord McKenzie of Luton
Main Page: Lord McKenzie of Luton (Labour - Life peer)Child Trust Funds (Amendment No. 3) Regulations 2010
Lord McKenzie of Luton Excerpts
Lord McKenzie of Luton
My Lords, I speak in favour of the amendment moved by my noble friend Lord Davies and in opposition to the content of the regulations.
Wherever we end up on this issue this afternoon, and if the statutory instrument is to proceed, I support the proposition of the noble Lords, Lord Naseby and Lord Hodgson, that we should do what we can to preserve the infrastructure of the arrangements, so that they do not die and can be revived at some stage.
I shall also digress a little into pensions, as did the noble Lord, Lord Hodgson. I was not sure whether we would discuss them this afternoon, but I contest the proposition that the noble Lord made about the record of the previous Labour Government. Yes, we did introduce the Pensions Regulator and, indeed, the Pension Protection Fund. Without those very important planks of pension provision, many more people today would have lost their pensions and be without decent provision in retirement. I have a specific question for the Minister. The noble Lord, Lord Hodgson, raised the issue of what he called a tax charge on pensions. It was not a tax charge on pensions, but a change in the imputation system which reduced corporation tax and therefore denied the repayable tax credit. If the noble Lord’s party sees that as an attack on pensions, can the Minister say whether that will be reversed and whether it is the policy of the coalition Government to revert to an imputation system of tax, or whether they will continue with, in his noble friend’s words, a tax raid on pensions?
As we have heard, these regulations are the first instalment of the coalition Government’s proposals to scrap child trust funds altogether. The Government have other form on this. Child trust funds are one of the initiatives that a Labour Government developed to promote asset-based welfare, in recognition of the importance of asset holding in determining approaches to employment, education and well-being. The other initiative was the savings gateway. It consists of a time-limited two-year savings account for those in receipt of certain means-tested benefits and credits—those on low incomes. Up to certain limits, the Government were to match savings pound for pound. That was clearly a way of incentivising saving by those for whom a tax break is not particularly relevant. Sadly, we are now told that this programme will not now be introduced this month, as it is also not affordable. This removes at a stroke one of the pillars of asset-based welfare, for a saving of £115 million in 2014-15—savings, by definition, paid for by the poor. They are some of the same families and individuals who will pay the highest price for the winding up of child trust funds, and they are some of the same families who will miss out because of the coalition Government’s scrapping of the tax credit elements for infants, the termination of the health in pregnancy grant, the limitation of the Sure Start maternity grant for the first child, and the freezing of child benefit.
These regulations end all government contributions for children at age seven. This is a loss of £250 for most children, but a loss of £500 for seven year-olds in low-income families. There is also a reduction in the special contribution of £500 for looked-after children. The poorest and most vulnerable are having to bear the greatest burden. There is yet worse. At present, children entitled to any rate of DLA are entitled to an annual government contribution of £100, or £200 if the highest rate of the care component is received. From April next year, this is to be snatched away as well. Government contributions to accounts when first opened are to be reduced by £200 for most children and £400 for the poorest.
My noble friend Lord Davies made the point that although the Conservatives’ manifesto made clear that they would seek to remove the universal element of the child trust fund, they had a commitment to preserve the remainder:
“We will … cut government contributions to Child Trust Funds for all but the poorest third of families and families with disabled children”.
So how do we justify the current situation? What was it that the Lib Dem wing of the coalition said that persuaded the Tories? I am bound to say that I hope it was more than what the noble Lord, Lord Newby, just enunciated. What was the quid pro quo, and how much of the half a billion pounds of saving comes from withdrawing support from the poorest families? Perhaps the Minister could specifically let us know.
We have heard about the Children's Mutual, which is a provider of accounts. It claimed that the child trust fund is the most successful savings policy to date. Does the Minister share that assessment? Does he at least accept that over 5 million children now have child trust fund accounts—I think the noble Lord, Lord Naseby, said 6 million—and, with the Government’s safety net, there is now virtually 100 per cent take-up of the facility. Some 1.4 million parents, families and friends are contributing to the accounts and, had the scheme continued, from 2020, each year nearly £3 billion would have been available to young people as they reached adulthood. Seventy per cent of the government investment goes to households with average or below-average incomes, and 50 per cent to the 1.5 million families with incomes under £16,000. Since the introduction of child trust funds, the number of children having regular long-term savings made for them has nearly doubled. While the annual cost is not insignificant, tax relief for ISAs costs double the tax relief for child trust funds, and even after proposed changes to tax relief on pensions, it is many multiples of the cost of child trust funds with take-up being 30 per cent and 40 per cent respectively, subject to auto-enrolment.
If the savings gateway and child trust funds are to go, what alternative policy approaches does the Minister recommend to encourage children and young people into recognising the value of saving? How does he propose to do that? Doubtless, he will pray in aid the importance of financial capability education. In this regard, we note that the Red Book identifies the launch of the new national financial advice service next spring. The coalition Government’s document states that it is to be,
“funded in full from a new social responsibility levy on the financial services sector”.
When he replies to the debate, will the Minister update us on this service, which is clearly well advanced if it is to be launched next spring? What form will the levy take? How much is intended to be raised? What is included within the definition of the financial services sector? If the levy is not to be in place by next spring, how is the service to be funded?
The coalition Government do not need to axe child trust funds. Leaving aside issues around the timing and depths of the cuts the Government intend to make, which we have made clear we consider to be too soon, too far and dangerous, there is a fundamental matter of priorities. What thinking goes into a Budget judgment that determines that a banking levy should raise less than a quarter of the cuts in welfare measures? What analysis drives the conclusion that savings should be given a boost by ending the obligation to annuitise at age 75, which is relevant only to those with very substantial pension pots, but that all children should not be given a helping hand to get into a savings culture and build assets for when they become adults? If the Government want to encourage people to save more and borrow less, why abolish this important programme that helps young people to save? If they are intent on rolling back universality in the welfare system, why extend this to poor families and families of disabled children?
These regulations are unworthy. I will conclude with a quotation from the alliance that is seeking to push back the measures. It states:
“We recognise that in a time of severe cuts financial contributions from the state to any savings schemes are hard, yet there is still an urgent need to encourage families to save for their children's futures. The Child Trust Fund is the most successful government saving scheme ever. It has made great strides towards increasing the asset base in Britain, helping families save for the costs they will face as their children make the transition into young adulthood. At present, nothing has been proposed to be put in its place. That is why we formed the Save Child Savings Alliance. The key element of the Child Trust Fund must be retained, even if Government decides that the Treasury cannot afford contributions at present”.
Lord Blackwell
My Lords, I rise briefly to support the Minister in bringing forward these regulations. I declare my interest as director of a life and savings institution in the UK, but stress that I speak in a purely personal capacity. Like my noble friend Lord Newby, I have opposed these funds on principle. At the level at which they are funded, they are an example of gimmick politics—where the Government take money off taxpayers and then give it back in ways that are meant to make the population feel grateful for their largesse, having taken off significant amounts in administration costs.
The reason why the poorest in this country do not have significant savings is that they cannot afford to save. The best way to help those people is to reduce their taxes and target benefits on them. That is why I favour anything that reduces public expenditure and enables us to take more people out of tax, as the last Budget started to do at the lowest end of the income level. Of course it is important to encourage savings, but an important characteristic of that is to have the simplest possible regime, not one that is adorned with lots of Christmas tree ornaments. We have very effective ways of encouraging savings through the ISA and pensions regimes. The Government should focus every effort on making those schemes as universally attractive and accessible as possible. This scheme does little to add real wealth to the poorest people in this country. It is an adornment that we can do without.
Lord Sassoon
My Lords, I am grateful to those who have taken part in today’s debate. A number of noble Lords have spoken eloquently about the advantages of the child trust fund, and I agree with much of what they said, although others have pointed out that, even setting aside the issue of affordability, the child trust fund is not a perfect vehicle. However, as I said earlier, given the unprecedented budget deficit that we face, the question is whether government payments into the fund remain affordable, and I am afraid that the Government believe they simply are not.
I turn to a number of the specific points that were raised. I start with a point made on both sides of the House by a number of your Lordships, including my noble friends Lord Naseby and Lord Hodgson of Astley Abbotts, and the noble Lord, Lord McKenzie of Luton, concerning whether the wrapper or unique number would continue to allow people to save through the child trust fund mechanism. Many other speakers suggested that the wrapper should remain available to parents, even once government contributions had stopped, or that some other, new form of tax-free savings account for children should be put in place. To reiterate what I said earlier, the Government are considering this question carefully and I am sure that it is one of the major issues that will be discussed later this week by my honourable friend the Financial Secretary when he meets representatives of the industry. I thought that the contributions of my noble friends who expressed their understanding of why the CTF had to go were particularly telling.
I shall pick up some of the other points. I suppose that it is good knockabout stuff to try and pick out what people said in manifestos and to compare that with the coalition agreement, and we will live with that game for some time to come. In response to the noble Lords, Lord Davies of Oldham and Lord McKenzie of Luton, I say that it is indeed the case that both the Conservative and Liberal Democrat manifestos set out an intention to reduce spending on the child trust fund, as did the coalition agreement and the programme for government. We have since then looked at the options and the Government believe that it is right to stop the government contributions entirely as that will make the greatest contribution towards deficit reduction.
We then had a number of contributions—including from the noble Lords, Lord Davies of Oldham and Lord McKenzie, and from my noble friends Lord Hodgson of Astley Abbotts and Lord Blackwell—about who had done what on savings over the past few years. I noted that the noble Lord, Lord Davies, talked of this as an onslaught on savings while, on the other hand, my noble friends talked about the hammer blows inflicted on savings by the previous Labour Government. I do not think that this is the time to go into who has done what to whom.
Some of my noble friends have pointed out that what the previous Government did to support ISAs was important, and that if it was affordable, the child trust fund initiative had an important role to play. I think that we would all agree that the recent level of savings has been too low. It is the current Government’s intention to foster a culture of personal responsibility and better financial planning to improve individuals’ independence over their lifetime, particularly in planning for retirement. We will measure the policies on savings against the coalition’s three principles of freedom, fairness and responsibility, while making sure that such measures are affordable and effective. Attention has already been drawn to the fact that the Budget announced a number of measures which will take the first steps—I stress, first steps—in meeting these aims, such as the annual financial health check and an end to the effective requirement to annuitise pension savings at 75. That is an important reform that has not been mentioned this afternoon.
There was then a particular stress—again from the noble Lords, Lord Davies and Lord McKenzie, and from the noble Lord, Lord Morgan—on whether we were hitting low-income families and how this was fair. They did not draw attention to the reforms that we are making to the tax credit system. We are tackling the deficit in a way that is fair and ensuring that tax credits, which are an important part of this construct, are targeted at those who need them most. I remind noble Lords that the Government will freeze child benefit to help fund very significant increases in child tax credit and will invest around £3 billion in the child element over the next two years. Although we are making significant savings to reduce the deficit, we can be sure that this will not lead to a negative measurable increase in child poverty over the next couple of years.
Lord McKenzie of Luton
On the issue of no measurable increase in child poverty over the next few years, can the noble Lord remind us which year is the basis for making that assessment? I think that updated statistics came through between the Budget pronouncements and where we are today. Will he confirm that, so that we can have absolute clarity?
Lord Sassoon
I thank the noble Lord for his question. I think that it will relate to periods looking forward, on a rolling basis. However, I will let him know the base for this particular two-year period. I think that the point here is that the coalition Government will make every effort to protect the poorest in our society, including children, by a combination of measures, of which the cessation of the child trust fund is only one.
Other points were made by the noble Lords, Lord Liddle and Lord Davies of Oldham, about protecting those on the lowest incomes and those with disabilities, and about the distributional effect of the child trust fund. However, as my noble friend Lord Newby pointed out, the evidence to date suggests that the child trust funds of children in better-off families are expected to be worth, on average, considerably more than those of children in lower income families when they reach the age of 18. The distributional impact is therefore not clear, and it may well be that on some of the estimates a child in a better-off family would have a fund amounting to some £4,700 whereas a child in a lower-income family would have one that totals only £3,600.
We recognise the additional needs that face children with disabilities, and the Government will publish a Green Paper in the autumn to look at a wide range of issues for children with special educational needs and disabilities. To reconfirm the point I made earlier, from next year we will recycle the funding that would have been used to make the additional payments within the CTF to disabled children, and use those funds to provide additional respite breaks. I should also note that my noble friend Lord Newby pointed out alternative ways of delivering an increasing savings habit which we all want to see.
The noble Lord, Lord Davies of Oldham, made the particular point that many young people are in debt at 18 and need the CTF. In that context, I again stress that we have announced plans for a free annual financial health check that will give everyone a chance to review their finances and get the help they need to take action to improve them. That will be launched nationally in spring 2011.
The noble Lord, Lord McKenzie of Luton, asked whether the Government would reverse the abolition of the dividend tax credit changes that so dramatically hit pension funds under the previous Government. I regret to say that there are a lot of tax and other measures introduced under the previous Government that it might be highly desirable to reverse but which, regrettably, cannot all be dealt with. The coalition’s programme for government said that we would like to reverse this change, and we will revisit it when the public finances improve.
My noble friend Lord Newby felt that the CTF would benefit the middle classes and not the poor, thereby benefiting the wealthy more. I have already touched on that point, and should now like to confirm the statistics. Only 13 per cent of families on lower incomes are making contributions each year, compared with 30 per cent of other families. Indeed, as one might expect, the contributions are likely to be lower for lower-income families. I can therefore confirm my noble friend’s point.
The noble Lord, Lord McKenzie of Luton, asked a specific question on the financial health check and the social responsibility levy. I confirm that that levy is intended to fund the national financial advice service, which will include the annual financial health check to which I referred. However, we are ready to listen to views from everyone on how the Government should support debt advice.