My Lords, increasing saving in the UK is good for people and for the economy. In recent years, the Government have introduced a raft of reforms to incentivise saving. Freedom on accessing pension saving and LISA are just two. The Explanatory Notes observe that this,
“range of reforms”,
is needed,
“to ensure that the right incentives and products are in place to meet savers’ needs”.
Unfortunately, it is increasingly difficult to understand exactly what the Government’s strategy is for savings, and for pension savings in particular. What are the “right incentives”, and why? What outcomes are they intended to achieve? What are the characteristics of the “right products”? Do they differ for different groups? What is the Government’s intention on tax relief to support savings? For employers, providers and consumers, the answers are increasingly confusing, complex and uncertain.
A LISA is another new savings product, but its introduction raises two fears that the Government have not addressed. The first concerns the risk that
some people will opt out of a workplace pension in order to save into a LISA, believing that it offers a better proposition when it does not. The second is that LISA is a Government stalking-horse to trail the reform of pension tax relief and replace current workplace pension arrangements with a pension ISA. That would mean that the current pension saving regime—whereby income paid in pension contributions and investment growth on savings are both tax free and on retirement when savings are withdrawn, the first 25% is tax free, the rest being subject to tax—would be replaced with an ISA regime where contributions are made from taxed income but investment growth on savings and future withdrawals are tax-free.
Those fears germinated when, in July 2015, the Government issued Strengthening the Incentive to Save: Consultation on Pensions Tax Relief. Concerns grew that the Government wanted to address current fiscal demands and reduce the current budget deficit by heavily reducing pension tax relief at the point of saving, which, for those who had those concerns, would be at the expense of building an adequate level of pensions savings, undermine the momentum in workplace pension saving, have a negative long-term impact on the Exchequer, and mean that people retiring in the future would make a limited tax contribution but consume high levels of public services, which would be deeply unfair on future generations. Pensioners on modest retirement incomes would lose out from the removal of tax relief at the point of saving and gain little from tax-free withdrawal of savings as they would not be paying tax anyway.
A fairer distribution of pension tax relief from the higher to the lower-paid saver is desirable. What is a sustainable level of fiscal support for long-term savings, given today’s public deficit and debt, is a legitimate question. Tax relief for private pension contributions through incentives to employers and employees is big—£48 billion last year, although that is a noticeable fall on previous years, with the lion’s share going into defined benefit schemes. But there is a real tension that the Government are not acknowledging between a Treasury that sees tax relief at the point of saving as an undesirable cost, given the current state of public finances and Brexit anxieties, and those who believe that tax relief at the point of saving is an integral part of supporting people in building an adequate and sustainable pensions system for the future.
Under current arrangements, an individual choosing a LISA rather than a workplace pension may end up with a smaller savings pot in later life—50% smaller. For a basic rate taxpayer saving into a workplace pension, 50%—half—of the minimum 8% contribution would come from the employer contribution and tax relief. If they opted into a LISA, they would receive only a 25% bonus from the Government on their savings from taxed income. The more generous the employer pension contribution, the greater the potential loss from saving into a LISA rather than a pension.
The LISA is a long-term saving product, with penalties for early access, with the exception of the add-on access for house purchase, but ISAs do not have the governance, value for money and regulatory requirements
that workplace pensions have. Mis-selling risks abound. The Financial Secretary to the Treasury commented in the other place that,
“we heard that the pensions system on its own is too inflexible for young people”,
so the LISA is,
“giving people a new option that has been designed with flexibility in mind”.—[Official Report, Commons, 17/10/16; col. 606.]
But the DWP evidence contradicts her. It reveals that young people have the lowest opt-out rate from auto-enrolment of any group. If there is a problem with accumulating savings for house purchase, Help to Buy schemes are the answer, not a new, long-term saving product.
The Treasury costings do not assume that people will opt out of their workplace pensions to pay into a LISA. That may be right: the majority of people save into a pension by inertia. But if the Government turn pensions into an ISA into which employers auto-enrol their workers, workers will save into an ISA through inertia too. The concern is that that is exactly what the Government intend to do. A LISA is likely to be of benefit to people who have reached the limit of their allowance in tax-free pension saving, or who earn sufficient to save in both a LISA and a workplace pension. That may well increase the UK’s savings rate—there may be an element of substitution. It will provide a new option for the younger self-employed—50 is the age limit for opening a LISA—but, given that the average age of self-employed people is 47, it will not be accessible to the majority.
The real concern with the LISA is that the Government are further blurring the line of vision on savings. The distinct concept of pensions saving is at risk. The Minister may well dismiss my concerns, but if employers are not confident in the direction of government policy on private pensions, that will influence their behaviour and put a downward pressure on employer contributions into workplace pensions. I believe firmly that it is already happening.
Financial capability in the UK is persistently low, so measures to tackle persistent undersaving are welcome. The Money Advice Service 2015 Financial Capability Survey highlighted that lack of saving is a key risk to the financial resilience of households. The statistics make depressing reading: 17.3 million—44% of the working-age population—do not have £100 in savings; only four in every 10 save something every month; low income is a barrier to saving for families with children and those paying down debt; 44% of working-age people in the UK with no savings are classed as overindebted. But some on lower incomes do save: 26% of working-age adults in households with incomes below £17,500 are saving every month. A buffer against financial shocks helps to avoid inappropriate debt. For a mum in a low-income household with young children, replacing a broken washing machine is her financial shock. Some 71% of adults experienced an unexpected bill in the past 12 months, resulting in unexpected costs of some £1,545, yet of the people with no savings, 76% could not spare the money to pay an unexpected bill of even £300.
The Government’s Help to Save scheme is welcome as a measure to help boost the resilience of low-income households. I just wish that the Government were more ambitious, particularly given their recent high-profile commitment to address the challenges faced by those who are just about managing. The Help to Save scheme is targeted at 3.5 million people in lower-income households, costing up to £70 million in 2020-21. This compares with the expected cost of £850 million a year by 2020-21 of the LISA bonuses and increase in ISA limits. A fairer distribution of those incentives should have been considered.
The intended government match on savings up to £50 per month could be greater than 50%. Many of the target population will not be able to save £50. If they save £30, with a match, it will take them two years to save the £1,000 figure which StepChange, the debt charity, says is the minimum amount needed to reduce the number in problem debt by 500,000. Why is it necessary to wait two years before the match is paid? Financial shocks can hit people every year. The Government argue that two years is the optimal time to embed a savings habit, but their own evidence suggests it can be nearer 18 months.
Only one in seven, 500,000 of the target 3.5 million, are expected to take advantage of the scheme. That is low. The Government have a lot of contact with this group through the social security system, so I conclude by asking the Minister whether the Government will commit to bringing forward a plan, no later than six months after Royal Assent, which targets achieving a 50% participation rate by the eligible population in the Help to Save scheme.
5.48 pm