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Viscount Brentford: My Lords, I, too, am most grateful to my noble friend for introducing tonight's debate and for doing so fully and effectively. The debate follows both the December consultative document and also our debate on savings for retirement last October. I applaud the Government for encouraging savings by those with more modest incomes through being able to
I should like to ask the Minister a question on the components of ISAs; namely, cash, stocks and shares, life insurance and National Savings. I do not quite understand what my noble friend Lord Clanwilliam was saying about National Savings, as all are included that are not otherwise exempt from tax, such as National Savings certificates. Therefore, they must be outside the ISA. However, I am not clear why gilts are not included in that list. Perhaps the noble Lord will be able to tell me the reason. While they are free of CGT and interest can now be paid gross, the income outside an ISA would count towards personal allowances for income tax purposes. I should have thought that many investors, especially those with a more modest income, would feel happier to invest in a safe haven like a gilt, which can give quite a high income, rather than in stocks and shares.
I also have a question for the Minister about putting TESSA and PEP investments into ISAs--a question which many other noble Lords have mentioned. On page 10 of the consultative document, the Government say that they want,
I wonder why they do not want all previous investors to retain the tax-free savings. Who are the minority to whom they do not want to carry through the tax-free benefit? I suggest that all funds should be able to remain tax free.
As far as concerns the £50,000 overall limit, can the Minister say why the Government will not consider increasing the amount to £100,000? I agree that there should be a limit, but I wonder whether the sum of £50,000 is too low. I give the Minister four reasons. First, as regards anyone investing up to the annual limit of £5,000--or even, if that was increased, £6,000, to facilitate the arithmetic of the noble Lord, Lord Spens--for 10 years of his working life, why should that person not be able to save in the system for longer?
Secondly, the value of an annuity purchased with an ISA on retirement would be very much more meaningful if that person were able to make the purchase with £100,000 rather than £50,000. It seems to me that that would be a great help on his retirement. Thirdly, it is an active disincentive for those who have already made substantial savings through TESSAs and PEPs that they should not go on saving. That is a great pity.
My fourth point has already been mentioned by noble Lords. My suggestion would help those institutions providing ISAs to balance their books and not make a loss because of the difficulty of dealing with small sums
I have one final question and answer to put forward. In their document the Government ask whether prize draws will lead more people to save. I believe that the answer is no. However, perhaps I may ask the Government a question. Will there be one entry per individual who invests in ISAs? On the other hand, if it was one entry per £1,000 invested in an ISA, so that a person with a £2,000 investment would have twice the chance of the person with £1,000, I believe that such a scheme would encourage investors to save more. I wish the scheme well, but I believe that there are a number of points which still need to be ironed out.
Lord Currie of Marylebone: My Lords, I start by thanking the noble Baroness, Lady O'Cathain, for introducing this stimulating and timely debate. We have had a wide-ranging debate and I believe that the points that have been made will be extremely helpful to the Government in thinking through the details of the scheme that they propose. We should also thank my right honourable friend the Chancellor of the Exchequer for allowing us to debate this set of questions before the scheme is put in place. Without this clear and innovative commitment to consultation on a scheme which is clearly important for the future of savings in this country, we would not have been able to have such an informed debate and allow it to feed in to government thinking. Certainly it was not the practice under the previous government, but I hope that it continues to be the practice of this one. Indeed, it allows us to draw on wide expertise and it is an innovation that I warmly applaud.
Perhaps I may put the debate in a slightly wider context as regards the question of savings in the economy as a whole, and make a few broader points. If one is thinking about savings in the British economy, the major influence is not the sort of subject that we are debating tonight--that is, the details of tax, and so on, important though that is--but rather the fluctuations in the economy as a whole. I have in mind the boom-and-bust and the surges in inflation that we have seen in the past. For example, the personal sector savings ratio is driven very much by that--it was 13 per cent. at the beginning of the 1980s and halved by 1988 with the boom. It then went back up to 13 per cent. by 1992 and has been coming down a little ever since. That has nothing to do with the tax scheme and everything to do with the cyclicality of the British economy. The lesson I draw from that is that the surest way to maintain stable savings behaviour is to ensure a stable economy. That is why the decision to give the Bank of England independence--we shall consider that matter when we discuss the Second Reading of the Bank of England Bill on Friday--and the unpopular, but I
There is also much evidence that tax treatment of savings does an enormous amount to move savings from one instrument into another but achieves rather little overall in promoting savings for the economy as a whole. Important though it is, it rather determines the form of savings and not the overall level. Indeed, one might think that tax breaks even have a perverse effect. For each person who is encouraged to save more through a tax advantage, there is someone else who may consider that he can put less aside and take advantage of the tax break in order to accumulate a certain amount at the end of the day. The net effect on savings in the economy may go the wrong way. Some studies try to analyse the effects of tax on savings. My noble friend Lord Barnett mentioned one of them. I encourage him in his "econo-scepticism" in this matter. That particular study for the national institute, fine though it is, is based on a calibrated model, which is technical economics jargon for "largely made up". It is not really based on firm empirical foundations.
Therefore it is better to focus on the individual effects of the tax treatment of savings. I echo the point that my noble friend Lord Sainsbury has made; namely, the tax benefits that we give in this area are enormously concentrated on those who are already better off, particularly higher rate taxpayers. I think it was said that one-half of the benefits go to lower rate taxpayers. However, the implication is that one-half go to higher rate taxpayers, and that is a disproportionate benefit. That focus is much more concentrated even than as regards financial assets themselves. It is clear that the savings in our society are unequally distributed. If one considers the tax benefits given through PEPs and TESSAs, they have been disproportionately focused--even more than the disproportionate distribution of assets--on the better off. That is why I applaud the Government's decision to introduce a scheme that will allow the less well off to save and to gain tax advantage in an appropriate form. It is clear that such groups cannot lock up their savings for extended periods, nor should they take risks. It seems to me that the new ISA could well meet the needs of that group of people.
I recognise the issues that have been raised in this debate. The noble Lord, Lord Spens, gave a fascinating account of the economics of the matter. Those points need to be borne in mind. Costs must be kept down; simplicity is the key. We need to tackle the regulatory issues. I believe that it would be desirable--it should not be beyond the wit of man or woman--to define a scheme which provides for no lock-in periods, even for safe investments such as deposits, requires no minimum investment levels and is marketed through more accessible outlets. I heard the reservations of my noble friend Lord Desai, but I believe that one of the reasons the marketing of financial products is directed to a disproportionately limited group in society is that we have not devised the simple products that we can sell in a safe and reliable way through much broader outlets. I should like to see that happen. I note that the
The previous government sought to extend share ownership through their successive privatisations with special terms for small investors. That was largely a failure long term as most of the small investors sold out--wisely in many cases if one studies the record of the share prices in question--and the shares ended up with the large institutional investors. That form of investment was not the appropriate one for that group of savers. I believe that the scheme we are discussing has the much more realistic aim of spreading the habit of saving more widely in the community, not through risky equity investment but through advantageous, safe, prudent forms of savings. I hope that we can all support that laudable aim.
If the scheme that has been put forward can give tax relief at the appropriate point to those in low income groups it is desirable. That clearly means that if tax benefits are to be spread more widely, there needs to be a limit on the overall contributions that attract tax relief, and hence the need for an annual limit. The implication is that if a scheme of this kind is to run for some time, one also needs a lifetime contribution scheme to avoid a large proportion of savings which already exist attracting tax relief and imposing a high cost on the Exchequer. If the interest on all bank and building society deposits were sheltered, that would cost nearly £3 billion. That is a large amount of money that the Government could better spend in other directions.
I hope that this scheme will be welcomed in principle by all sides of your Lordships' House, and that it will be well targeted on poorer groups of society who missed out on the tax cut, tax break era of the previous government. I hope that the Government will provide a detailed scheme that can be made to work in the light of the points that have been raised in this debate.
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