Economy: Personal Savings

Lord Young of Cookham Excerpts

Thursday 12th July 2018 Lords Chamber

[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.