Economy: Personal Savings

Lord Northbrook Excerpts

Thursday 12th July 2018 Lords Chamber

[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.