Savings (Government Contributions) Bill (Third sitting)

Ian Blackford Excerpts

Thursday 27th October 2016 Public Bill Committees

[Peter Dowd]

I am grateful to my hon. Friend for bringing that in. I reaffirm the point: we have a responsibility and duty to ensure that we nail this issue down. The last thing any of us wants is, in three, four, five or six years’ time, to have to unravel and unpick a problem we could have avoided in the first place. That is our intention. The new clause is not a spoiler; it is a genuine attempt to get the issue into the open.

[Ian Blackford (Ross, Skye and Lochaber) (SNP)]

Should we not reflect on what experts in the industry have said? Zurich said there is a danger that the LISA

“would derail auto-enrolment and reverse”

the progress made

“in encouraging…people to save”

for later life. We heard evidence on Tuesday that nobody would be better off coming out of auto-enrolment and investing in a LISA.

Specifically on mis-selling, do we not run the risk of ending up with financial institutions marketing the LISA in a way that is to its detriment? I cannot put it any other way: that is creating the circumstances for mis-selling, and having shaped the Bill in this way, the Government are responsible for that.

[Peter Dowd]

I thank the hon. Gentleman for his intervention. That reinforces the concern out there. If his point was completely off the wall, I would say so, but it is not. Millions of people out there have completely lost confidence in much of the sector. That is partly why, as was alluded to by the witnesses, if people are saving, they are often doing so in cash ISAs—because they are not sure about stocks and shares and other things. They therefore put their savings in products that give them a return of 0%, 0.1%, 0.2%, 0.3%, or 1% if they are lucky. We must create an environment in which people save and feel confident that they will get a reasonable return on their investment, especially if that investment is for their later years. That is perfectly reasonable.

This is not a question of protecting people from themselves. We are saying, “If you want to buy a product, look it over, and we will set up mechanisms to enable that to happen.” In a sense, it is for the Government to decide whether they believe that what they are doing is enough.

The Work and Pensions Committee said:

“We recommend the Government develop a communications campaign that highlights the differences between the LISA and workplace pensions. It should make it clear that the LISA is not a pension and that, for employees who have been automatically enrolled, any decision to opt-out is likely to result in a worse outcome for their retirement.”

It is not just the Labour party, the Scottish Nationalists or anyone else saying that; a bipartisan Committee that includes Government Members is saying it. That is why I said that there is a little wisdom there that we should tap into.

Opposition Members are concerned that the Government are not doing enough to ensure that people who are considering opening a LISA are fully aware of all the pensions savings options available to them. New clause 2 would require the Government to legislate to ensure that all applicants for a lifetime ISA had to prove that they had received independent financial advice if they intended to use the ISA for retirement savings. If they had not received such advice, the provider of the lifetime ISA would have to direct them to independent financial advice.

With so many bodies from across numerous industries outlining concerns that there is a risk that people will save into a lifetime ISA when it is not the most beneficial retirement savings option, I cannot see a reasonable argument against ensuring that applicants receive independent financial advice before opening an account. To paraphrase Mr Lewis, it seems palpably sensible to take that approach. I hope that the Government give careful consideration to our proposal and take on board the concerns that not only I but many people have expressed.

[Ian Blackford]

The Scottish National party welcomes the attempts by Peter Dowd, the hon. Member for Bootle, to ask the UK Government—

[The Chair]

Order. You refer to hon. Members not by their name but by their constituency. He is the hon. Member for Bootle.

[Ian Blackford]

Indeed. The hon. Member for Bootle is right to ask the UK Government to keep a watchful eye on the impact of automatic enrolment. However, that does not go far enough. The LISA must be paused. It is a gimmick that has not been thought through. The impact assessment states:

“The government could have done nothing more, relying on existing tax incentives to promote saving among younger people and working families on low incomes. However, this would have failed to provide the necessary level of support for those who are unable to use existing support to plan and save for their future.”

What a dismal statement. Where is the vision? Where is the hope? Where is the idea of a Government who can architect a pensions savings system that encourages young people to save? Should we not bring forward next year’s review of auto-enrolment and make sure that we have the tax incentives and the structure right? That is what we should be doing, not introducing this hopeless gimmick that risks mis-selling to young people in this country. This Government stand charged with creating circumstances that could lead to mis-selling through this product. They should be utterly ashamed of themselves.

The SNP has tabled amendments that ask for the LISA to be halted until workplace savings are enhanced through automatic enrolment, which is the right way to proceed. Stakeholders have picked apart the UK Government’s main arguments for the LISA, including that it will be good for self-employed individuals who are left out of automatic enrolment. The British Bankers Association said that

“two thirds of the self-employed are already ineligible for the lifetime ISA.”––[Official Report, Savings (Government Contributions) Public Bill Committee, 25 October 2016; c. 18, Q34.]

One of the Government’s major arguments has been shown to be fatally flawed. Why do we not reform auto-enrolment to make sure that the self-employed are included? That is the right way to progress.

At present, as a savings model, the LISA only supports the wealthy—those with the ability to save. New clause 2 is a welcome move to promote financial advice. We welcome this amendment. However, an SNP new clause that will be tabled ahead of the next stage will go further and explicitly demand that the advice extends to workplace savings and automatic enrolment and targets young people. We encourage Labour colleagues, and indeed the Government, to join us in supporting that new clause.

In its oral evidence to the Committee, the Association of British Insurers raised concerns about the communication of the difference between automatic enrolment and the LISA. There is a real concern that individuals could switch out of automatic enrolment and into LISA, and that

“they could lose up to a third once they get to the age of 60.”––[Official Report, Savings (Government Contributions) Public Bill Committee, 25 October 2016; c. 5, Q1.]

The ABI also said that

“there needs to be a strong signpost towards the guidance services.”––[Official Report, Savings (Government Contributions) Public Bill Committee, 25 October 2016; c. 9, Q14.]

Individuals who choose to invest in a LISA, rather than investing through automatic enrolment, could lose a third of their retirement benefits.

Carol Knight of the Tax Incentivised Savings Association said:

“We should be looking at retirement saving as a whole and helping people to put different types of assets towards funding later life.”––[Official Report, Savings (Government Contributions) Public Bill Committee, 25 October 2016; c. 14, Q26.]

It is clear that stakeholders are concerned about the confusion that may arrive for savers with the introduction of the LISA. When he gave evidence to the Committee, Tom McPhail from Hargreaves Lansdown said forcefully:

“We are in danger of sending ISAs down the same road as pensions, making them more and more complicated.”––[Official Report, Savings (Government Contributions) Public Bill Committee, 25 October 2016; c. 15, Q29.]

He advised of savers that it is

“really important that we support them with good information”.––[Official Report, Savings (Government Contributions) Public Bill Committee, 25 October 2016; c. 16, Q31.]

As well as the potential distractions from auto-enrolment pension schemes, the LISA represents a major missed opportunity to increase the attractiveness of auto-enrolment. In a submission to the Work and Pensions Committee, the union Prospect argues:

“If Government wants to subsidise younger workers saving towards a deposit on a first home it could just as easily do so through changing the rules relating to the taxation of pension schemes as through introducing the Lifetime ISA. Such an approach would greatly increase the attractiveness of automatic enrolment pension schemes.”

The submission goes on to say:

“Anecdotally, Prospect members who opt out of automatic enrolment pension schemes sometimes report they do so in order to be able to save towards a deposit for a first home. Research shows a majority of young people would be more inclined to save into a pension scheme or would save more if they could use their pension pot to fund a deposit for a first home.”

Prospect also points out:

“In New Zealand the rules of the Kiwisaver allow the withdrawal of savings to purchase a first home”,

and research from the Pensions Policy Institute shows that early access and borrowing against funds for the purpose of home purchases are permitted in other countries.

David Wren of the BBA pointed out that the LISA will be the sixth type of ISA on the market. He said:

“The hybrid nature of the product—between saving for a house and saving long term for retirement—also adds considerable complexity for people who are choosing where to save and what to do.”––[Official Report, Savings (Government Contributions) Public Bill Committee, 25 October 2016; c. 17, Q32.]

He also noted that

“complexity is definitely the enemy of success in getting people to save.”––[Official Report, Savings (Government Contributions) Public Bill Committee, 25 October 2016; c. 20, Q39.]

That is why robust financial advice that takes account of an individual’s other savings and pension pots is essential. We do not accept that no alternatives to the LISA were considered—the impact assessment for the Bill spells that out clearly. The Government must look at other options. Surely the delay that we are calling for would give the space for a pause.

Since its introduction in 2012, auto-enrolment has been a success, with more than 6.7 million workers successfully enrolled by September 2016 and lower opt-out rates and higher employer compliance than was initially expected. That success has been built on the back of a broad political consensus and thorough planning ahead of its introduction. As the National Audit Office report on auto-enrolment pointed out, the policy faces greater operational risk as it is rolled out to small employers. The phasing in of increases to minimum contribution levels also presents challenges. A separate NAO report identified a potential risk if individual interventions

“are managed separately without adequate consideration of their impact on the overall objective of increasing retirement incomes.”

That warning could hardly fit the circumstances of the introduction of the LISA any better.

The Government’s main priority should be to build on the success of auto-enrolment to date and deal with the upcoming challenges that have been identified. That work should include strategies for addressing issues with ineligibility for auto-enrolment and for increasing contributions under auto-enrolment. That is particularly important for workers aged under 40, because most will be worse off in retirement as a result of the introduction of the new state pension. Prospect also said that

“the Government is in danger of losing focus on what should be its priority with the introduction of the Lifetime ISA.”

[Kelvin Hopkins]

I rise to support new clauses 1 and 2, along with everything said by my hon. Friend the Member for Bootle and much of what was said by the hon. Member for Ross, Skye and Lochaber. It would be sensible of the Government to accept the new clauses. They are practical and logical, and it is perfectly reasonable that we want a review of the effect of the LISA on auto-enrolment and pensions savings and that anybody choosing to buy a LISA is given proper advice. None of that would undermine the Government’s legislation; it would actually improve it considerably and give the necessary protections.

I have considerable doubts about the wisdom of going ahead with lifetime ISAs. The whole pensions and savings world has been far too complicated for far too long. Some 25 or 30 years ago, I reached the age at which I had sufficient income to start to save so that I would have extra income in my later years—I must say that I am now benefiting from that, in spite of having a very generous parliamentary pension as well. At that time it was extremely complicated. There were tax-exempt special savings accounts, personal equity plans, ISAs, national savings certificates and all sorts of tax-free savings instruments, but interestingly they were all perfectly acceptable for people on higher rate tax like me. I have always been concerned about that.

--- Later in debate ---

[The Financial Secretary to the Treasury (Jane Ellison)]

It is a pleasure to be here with you and the Committee, Mr Chope. I thank everybody for their attention at the very good witness sessions on Tuesday, when we heard from some very interesting people who were good enough to give up their time to come and inform our deliberations.

I will say a general word around lifetime ISAs when speaking to clause 1 and will come on to new clause 2. However, I should say first that there is much about the spirit of the new clauses and amendments proposed with which I agree, as I think we all would. When I come to speak on them, it will be to demonstrate that they are unnecessary or would not work as intended. I do understand the spirit in which they are tabled. I also note, as we all have, that there are areas of significant consensus across the Committee, particularly around auto-enrolment, the success it has been and the wish to see it go from strength to strength.

I will come to that in a moment, but I will first introduce the broader product. We believe the lifetime ISA is a positive addition to the savings landscape. That was a view substantiated by a number of the experts we heard from on Tuesday. It will support younger people to save for a first home and to supplement their long-term savings by topping up individual contributions with a generous 25% Government bonus of up to £1,000 a year.

In 2015, the Government held a full consultation on pension tax relief, which is the background to how we came to the lifetime ISA. The outcome was clear: there was at that time no consensus for fundamental reform to the pension tax system. In some ways, some of the comments that we have heard in speeches this morning reflect the fact that there is still a desire among some people for a fundamental redrawing of the landscape, but the reality is that that is a debate for another time and place. We are in Committee to deal with this Bill, but I acknowledge that that other debate is ongoing.

Throughout the course of the consultation, young people indicated that they wanted more ways to save flexibly for the future. At Budget 2016, therefore, the Government announced the introduction of the lifetime ISA, which has been welcomed by insurers, ISA providers and other industry experts, as we heard on Tuesday. Although some people had some concerns, I think it is fair to say that there was a broad degree of welcome from people across the sector. They see the lifetime ISA as a valuable new vehicle to help young people save.

[Ian Blackford]

Does not the Minister accept that all the generous bonus will do, in effect, is compensate those who have gone into the LISA for the fact that, in contrast to a pension where people are putting pre-tax income in, the money is coming out of post-tax income, so on a zero-sum basis it comes out more or less the same? Anyone going into a pension can expect to get employer contributions, so anyone saving in a pension will be better off. For the life of me, I cannot understand, given the cross-party consensus about supporting and strengthening auto-enrolment, why on earth she wants to muddy the water so that people might be seduced into this product when they should be investing in a pension.

[Jane Ellison]

This perhaps goes to the nub of the disagreement we have in Committee: the Government do not see it as an either/or. The hon. Gentleman is very much positing the product versus pensions as an either/or, but we have been quite clear that the lifetime ISA is a complement, and we heard that from witnesses. I also think that, while acknowledging the consensus to protect auto-enrolment, and indeed to encourage people to save with the pension products appropriate for them, to jump from that to the assumption that the lifetime ISA is, by its nature, going to undermine everything else is a jump too far. I would reject some of his language. Later, I will come on to some points to support my assertion.

The clause itself sets out the defining characteristic of the lifetime ISA: a Government bonus will be paid by Her Majesty’s Revenue and Customs where a qualifying addition is made to a lifetime ISA in a relevant period. “Lifetime ISA”, “qualifying addition” and “relevant period” will be defined in regulations, which will also provide that the Government bonus will be 25% of all qualifying additions made to the account. I confirm that those new regulations will be brought to the House for debate ahead of the launch of the new account in April 2017. Further detail on the lifetime ISA is set out in schedule 1.

New clause 1 seeks to place a requirement on the Government to conduct an annual review of whether the lifetime ISA has had any impact on workplace pensions, and in particular automatic enrolment, as we heard from the shadow Minister. The Government are absolutely committed to automatic enrolment, which will help 10 million people to newly save or to save more into pensions by 2018.

The lifetime ISA is designed to be a complement to automatic enrolment and workplace pensions, not a replacement. We are clear about that language, and we will continue to be. The aim of the lifetime ISA is to support younger people to purchase a first home and to supplement their long-term savings, not to choose between the two. The reality is that some of the youngest people who take out this product will be able to take the money out at 60, but that will not be their retirement age. We are talking about people saving for a later phase of their life, perhaps the last phase of their working life, or to do something in their later years that they always wished to do but did not have the chance to do when they were younger.

The Government’s different policies on employer contributions to a pension and a lifetime ISA reflect all that, which goes to the point made in an intervention. Employers have a statutory obligation to contribute towards pensions under automatic enrolment. They also have a direct incentive to do so through relief on national insurance contributions. The cost of that to the Exchequer was £13.8 billion in 2014-15, which is a powerful demonstration of the Government’s commitment to retain strong incentives in the system. Neither is the case with the lifetime ISA.

We have already conducted an impact assessment, published alongside the Bill, and we clearly do not expect that people will opt out of their workplace pension in order to pay into a lifetime ISA instead. The help to buy ISA already provides a 25% bonus to support people to purchase a first home, but the launch of that did not lead to a surge in opt-outs. I accept that it is a slightly different product, with a different timescale. Nevertheless, there is real-world evidence that it did not lead to that.

--- Later in debate ---

The opt-out rate for automatic enrolment is still lower than the Government expected, and is currently at 9%. The overall programme assumption for opt-out is 15%, reduced from the original estimate of 28%, which I think we all welcome. The Government estimate was not quite right at first and I am happy that we are undershooting. People—particularly young people—are sticking with auto-enrolment and not opting out at the rates Members thought they might.

[Ian Blackford]

I agree with the Minister about us all being satisfied by the opt-out rate being lower than anticipated. The real challenge will come in the next few years, as rates going into the auto-enrolment scheme increase. That is why it is important we keep the primary focus on auto-enrolment, to ensure that as contribution levels increase, we do not inadvertently see an increase in the opt-out rate, with people perhaps switching to the LISA.

[Jane Ellison]

I entirely accept the hon. Gentleman’s broad point. He assumes the worst will happen, whereas I have good evidence to show that that is not a reasonable assumption. I will go on to show that we are keeping these things under constant review across the broad piece of pensions and savings.

The lifetime ISA, like all Government policies, will be kept under review to ensure that it is meeting its objectives. We already publish a wide range of details about the take-up of Government-supported savings accounts such as ISAs, and we intend to take a similar approach with the lifetime ISA. Similarly, national statistics and other information such as the Office for National Statistics wealth and assets survey set out information on the savings held across a range of different household types. It is quite granular information.

As the hon. Member for Ross, Skye and Lochaber said earlier, we have a legislative commitment to review certain aspects of auto-enrolment in 2017. In addition, we have the discretion to conduct wider review activity. We recognise that broader challenges and questions have been raised by stakeholders in connection with the review—for example, questions of inclusion and adequacy. It is important we look at the scope and the right sequencing of review activity. The Government are currently scoping the review and hope to update further on that by the end of the year. Of course, the debate we are having in this Committee will inform those deliberations. Because of that, we consider publishing an additional review of the scheme’s operation to be unnecessary in terms of its interaction with the product we are discussing in this clause. I therefore urge the hon. Member for Bootle not to press new clause 1.

New clause 2 seeks that the Government provide in regulations that independent financial advice is made available to all customers making an application for a lifetime ISA. I think we all agree with the thrust of the debate on the new clause. We have all seen victims of mis-selling and want to ensure that our constituents go into every financial decision with the best information available. The Government want people to have the information they need to make important financial decisions and we will achieve that by providing clear factual information on gov.uk, as well as working with the Money Advice Service and its successor to ensure they make appropriate and impartial information available.

New clause 2 would require all individuals to take out financial advice before they open a lifetime ISA. I want to demonstrate that that is not practical, however well intentioned it is. Financial advice is relatively expensive. The point has been made that we do not want to disadvantage younger people and basic rate taxpayers who want to take advantage of this product. Our impact assessment and all the work that we have done indicate that the vast majority of people who take up the product will be basic rate taxpayers.

Research carried out by Unbiased shows that the average cost of financial advice for customers is £150 per hour and the average advice process takes around eight hours. That totals £1,200. Even if we assume that that is the upper end of estimates, it is still £200 more than the maximum annual bonus that an individual could receive from the lifetime ISA. That would create a significant barrier to all but the wealthiest individuals opening a lifetime ISA, and I know that that is the opposite of the Opposition’s intent.