Ministerial Speech - ISAs, TESSAs and PEPs

- Tuesday, 3rd March 1998

 

Rt Hon Peter Lilley MP

Mr. Peter Lilley (Hitchin and Harpenden) I beg to move, That this House welcomes the success of TESSAs and PEPs in extending popular saving and deplores the Government's proposal to abolish them and replace them with Individual Savings Accounts (ISAs); condemns the retrospective taxation of the most prudent savers who have accumulated more than £50,000; believes that ISAs will involve high administrative costs, especially because of the unnecessary and unfair lifetime limit on tax-free saving; and urges the Government to bring forward new proposals that would not involve retrospective taxation, would build on PEPs and TESSAs, would reduce the costs of administering the schemes and would not involve a lifetime limit on the amount that may be invested. This is the first opportunity that we have had to debate an issue that is of great and growing concern to our constituents since the Paymaster General shook millions of people by announcing that he planned to abolish personal equity plans and tax-exempt special savings accounts. People were shaken because they could not have guessed from what Labour had said before the election just what would hit them. Last spring, the Labour party told us—and told the British people—that it had changed. This was new Labour: the people's party. Middle Britain was safe with new Labour, and so were its savings. It was the Prime Minister—"Trust Me Tony" himself—who said: We want to extend the scope of PEPs and TESSAs, so the idea that the Labour party is going to take action against those is completely absurd. Labour's manifesto reaffirmed that, stating: We will … extend the principle of Tessas and Peps to promote long-term saving. And it was the current Chief Secretary to the Treasury who was reported by the Investors' Chronicle as saying: The party has pledged that anyone who invests in a PEP or TESSA before the general election … would not be penalised under a Labour Government. The article went on to say that the Chief Secretary had reiterated Labour's promise that it would not retrospectively abolish tax incentives on PEPs or TESSAs. It doesn't matter what the issue is with tax, he said. People are entitled to certainty. If that did not reflect the Chief Secretary's remarks accurately, he could have written to deny it. Actually, he did write a letter to the Investors' Chronicle, in which he said: You correctly quote me as saying, 'We support Peps and Tessas but we want to build on that.' However the assertion in the article that 'Labour is examining proposals to abolish PEPs and TESSAs' is not true. 863 That was the height of deception. The Chief Secretary chose to deny the one assertion in the article that has since proved to be true, that Labour would abolish PEPs; but he chose not to qualify his clear assurances—which have since proved bogus—that Labour would do nothing retrospectively, that there would be no penalty for those with existing PEPs or TESSAs and that there would be no uncertainty in the tax regime. It is the betrayal of those pledges which has caused so much fury among our constituents. That betrayal is why this debate is being held today, and why we have dragged back the Paymaster General from Guernsey. People had been reassured by Labour's pledges; now they are angry, and rightly so. We will hound the Government until they honour their pledges to savers. People with longer memories might have known how little Labour cares for their savings. They will remember the deadly combination of socialism and inflation, which destroyed Britain's savings habit in the 1970s. Conservative Members are proud to have rebuilt savings in the 1980s and early 1990s. We did it, first, by building up pension funds, to the point at which the United Kingdom has more money invested in pension funds than does all the rest of the European Community put together. We introduced PEPs and TESSAs, and now 3 million people have PEPs and 4.5 million people have TESSAs. Those schemes have massively extended popular saving. We realise, of course, that more people need to save, and that many of those who already have savings need to save more. The Government would therefore have enjoyed our support if they had built on the success of our schemes. However, far from building on those schemes—building them up—the Government's proposals will mean cutting them back. Individual savings accounts will take away relief from those who have saved most prudently, giving less help, for less time, for less saving. The only silver lining in the Government's proposals is that they have decided to open up the proposals for consultation. Ministers may rather regret that decision, because the reaction of savers, savings providers and expert advisers has been universally critical. It is not only that the plans were announced by Geoffrey Robinson; they were designed by Heath Robinson. People's criticisms go to the heart of the Government's proposals. The best advice that Ministers could take would therefore be to listen to the thousands of small savers who are telling them, "Go back to the drawing board, and build on PEPs. In fact, do exactly what the Prime Minister and the Chief Secretary promised they would do. They should simply honour their pledges." The public have been most infuriated by the retrospective impact of the Government's plans. My postbag is full of letters from aggrieved savers, who thought that they were safe and trusted Labour. I do not know whether the Paymaster General reads such letters, but he certainly does not reply to them. Perhaps we should forward them to him in Guernsey. Nevertheless, he will have to listen to one or two of them today. A typical example is a letter from a pensioner in Abergavenny, who writes: This punitive tax proposal, in my view, breaks a contract which we established with a previous Government and it is neither just nor defensible. 864 A gentleman from Chester sent me a copy of his letter to the Prime Minister. He wrote: We have worked hard, saved and planned for our retirement on the assumption that whatever steps we have taken would be honoured by whichever party was in power at the time. We have paid our taxes and behaved as responsible citizens and now your Government—the one we were asked to trust remember—has broken the contract between the state and those people who have more than £50,000 in PEPs. The Government said that education was to be their passion. Some teachers in Birmingham disagree. They write: We are retired teachers who thoroughly enjoyed our chosen profession and who, during the later years of employment, made a conscious decision to save as much as we could from our salaries through PEPs and TESSAs towards our old age. Unlike the Paymaster General, we do not have a large offshore trust, a mansion in Surrey, a residence in Godalming or a villa in Tuscany. We are just very ordinary members of the public who welcomed the opportunity by the Conservative Government to invest for our futures. Through careful planning and by putting prudence before pleasure we have been able to save in excess of the £50,000 limit now being proposed by Mr. Robinson. I could go on. We have all received heaps of such letters. Even if the Government will not listen, they must realise that to withdraw tax relief from savings that people made in good faith is not only wrong, but undermines the credibility of any future system. People will fear that if ISAs are successful, that regime too, could be changed. The Government must honour their contract with people who have saved in good faith. Even if the £50,000 lifetime limit is not applied retrospectively, it remains the biggest problem in the ISA plan. There is no need for a lifetime limit, given that the annual limit on the amount that people can invest has been reduced, but if the Paymaster General insists on a lifetime limit, £50,000 is simply too low. The Paymaster General may consider it more than enough for humble folk not used to his style of life, but it is not a huge sum. Another saver from Peterborough wrote: I may have to spend the final years of my life in a nursing home where fees are approximately £20,000 per annum, so £50,000 will last just two and a half years. The Paymaster General himself admitted in reply to my right hon. Friend the shadow Chief Secretary that £50,000 invested in equities yields an annum income of less than £1,500 after tax. The Lord Chancellor would not get many rolls of wallpaper for that. We do not know how many hundreds of thousands of savers have already accumulated more than £50,000. The Government did not even bother to find out before launching the new scheme, but it is not just those who have already reached the limit who will be hit. We should be encouraging those with £30,000 or £40,000 to continue building up their savings, yet the Government's plans mean that after a few more years, they, too, will lose the incentive to save. Will the Government publish an estimate not just of how many people have already reached the £50,000 limit, but of how many will reach it over the next few years? It is not just the public who oppose the scheme. The experts are virtually unanimous in giving it the thumbs down. That is not my assessment. A survey of finance directors carried out by the company of one of Labour's most prominent business supporters, Alec Reed, found that more than 70 per cent. were opposed to ISAs. 865 The scheme is half-baked, ill thought out, unnecessarily complex and unlikely to achieve its stated objectives—in short, very new Labour. Criticisms come from people who are well disposed to the Government. Richard Branson condemned it as "retrospective". The Financial Times said that it was unfair … unattractive … and bureaucracy gone mad". The Sunday Times said: ISAs will be the most complex instant access accounts ever. The Consumers Association said: We are struggling to see the point of ISAs. We see no real advantages but a lot of problems. The only possible justification for persisting with the reform would be if it generated more saving. The National Institute of Economic and Social Research is unequivocal about that, saying: The Government's proposed replacement of PEPs and TESSAs by Individual Savings Accounts would reduce the pool of savings available to finance investment in Britain. and speculates that this could result in a reduction in the overall level of national wealth by as much as 4 per cent. of GDP". ISAs could hope to attract extra savings, particularly from the less well-off, only if they offered either lower costs or better incentives, but far from reducing costs, the new rules will add to them. According to the management consultants OSI, setting up new systems to replace PEPs and TESSAs will cost nearly £1 billion. That is equivalent to an extra £30 a year for every ISA for the next five years. Running costs would also be higher than for PEPs and TESSAs because the lifetime limit is very costly to monitor, the profusion of annual limits adds to the costs and the absurd raffle will also cost money to run. At the same time as driving up costs, the Government are reducing the tax relief in ISAs, particularly for small savers on the basic rate, whom they are supposed to attract. For such savers, relief from capital gains tax is likely to be of no importance, because they are unlikely to have capital gains greater than the £6,500 annual CGT exemption that they get outside an ISA. The tax relief that really matters to them is that on dividends. Under the Conservatives' tax regime, for every £80 of net dividends, the fund manager could reclaim an additional £20 of tax credits. That was more than enough to cover the typical management charge. Under the ISA tax regime, the same dividends will give a credit of only £8.90. That is insufficient to cover the current costs of PEPs, let alone the higher costs of ISAs. Moreover, that tax credit will disappear after five years. I am glad to see that the Paymaster General is briefing the Chief Secretary, who was clearly unaware of the point. We know that he has been cut out of the circulation on welfare to work. He has clearly also been cut of the circulation of information on the debate that he is about to speak in. The absurdity is that, whereas the majority of those with PEPs were basic rate taxpayers, ISAs will be attractive only to higher rate taxpayers. Does the hon. Member for Bolsover (Mr. Skinner) realise that the scheme that his Government are proposing will shut out 866 from equity investment anyone on the basic rate of tax or paying no tax and that the scheme will be worth while only for those paying 40 per cent. tax?

 

Mr. Dennis Skinner (Bolsover) rose—

 

Mr. Lilley I am glad to have the hon. Gentleman's support.

 

Mr. Skinner I shall tell the right hon. Gentleman, a previous Tory Minister, what I think. The issue is marginal in the extreme. However, I remember that every pensioner in Britain-10 million of them, including some who were able to find money to put in PEPs or TESSAs—lost £20 a week because of the Tory Government's decision to change the method of calculation for the old-age pension, linking it to prices instead of wages. The result was that every one of them constantly told me about the rotten, lousy Tory Government. What the right hon. Gentleman is saying today is just a bout of hypocrisy. Why does he not get back to his chateau in France?

 

Mr. Lilley As I said, I am grateful for the hon. Gentleman's support. He says that a limit of £50,000 on tax relief is trivial. It is to him. He entered the House in 1970. I have had distinguished accountants calculate the cost of purchasing the pension that he is entitled to from the House of Commons. It would cost £356,000. He is worth even more than the pension scheme of the Paymaster General, and considerably more than the Chief Secretary, who is languishing at a mere £140,000, excluding his ministerial pension.

 

Mr. Skinner I never realised that it was that much. If someone has been advising me wrongly, I shall go to my hon. Friend the Economic Secretary to the Treasury, who is dealing with the mis-selling of pensions, to ensure that it is put right. I come here every day to earn my money, unlike many Tories, who, not content with their £40,000 salary as a Member of Parliament, are lining their pockets with moonlighting jobs, directorships and consultancies, picking up as much as £200,000 or £300,000 a year. Why does the right hon. Gentleman not direct his attacks on them?

 

Mr. Lilley The hon. Gentleman is worth every penny, and we wish him a very happy retirement.

 

Mr. Barry Gardiner (Brent, North) Will the right hon. Gentleman give way?

 

Mr. Lilley I am going to make some progress. I have not made an estimate of the hon. Gentleman's pension, so he will have to apply for one.

 

Mr. Gardiner rose—

 

Mr. Lilley I am not giving way. I was pointing out that there will not be any incentive in five years' time, when it is planned that the tax credits in the scheme will disappear entirely. Can the Chief Secretary or the Paymaster General put their hands on their hearts and advise any basic rate taxpayer to invest in shares via an ISA? They will not. The Paymaster General is right not to, because he is sitting next to the 867 Economic Secretary, who is in charge of pensions mis-selling. The Paymaster General knows that, if anybody gave such advice professionally, they would be guilty of mis-selling. Where are the 6 million extra savers whom the Prime Minister tells us will be attracted to the scheme? The Prime Minister says that he sees them queueing up in Tesco, buying their corporate bonds with their Brooke Bond and getting their share tips with their PG Tips. The truth is that they are a phantom army. They do not exist; they had to be invented to pretend that tax relief was going to be spread more widely. In fact, tax relief under the scheme is being withdrawn wholesale. The effect of the scheme will be simply to raise extra tax revenue from savers. The Government's plans amount to a savings tax, to add to their pensions tax. Do the Government accept that, as a very minimum, they must come up with a radically redrawn plan? Will they ensure that their final version fully respects those who have saved in good faith? There must be no retrospective taxation. There must be no lifetime limit—or at least a limit much higher than £50,000. The system must be simpler and have lower costs. Can the Minister give a guarantee today that those elements will be included in the final scheme? If there is one characteristic that is starting to define this Government, it is that they practise the opposite of what they preach. When they say one thing, one can be sure that they will do another. They said that they wanted investment for the long term, so they introduced a £5 billion-a-year tax on pension funds—the country's main source of long-term investment. They said that they were pro-business, so they have imposed a £22 billion extra tax burden on the corporate sector in this Parliament. They said that they would stamp out abuse of offshore trusts, so they put in charge of the policy a Minister who has millions salted away in an offshore tax haven. When Labour spokesmen said before the election that they would not harm PEPs and TESSAs, the alarm bells should have started sounding for small savers. Under this Government, black is white, higher tax is a boost to investment, and the abolition of PEPs and TESSAs is to be sold as an opportunity for more people to save. Whoever had announced this misbegotten plan, it would have provoked anger, but for it to come from the Paymaster General added insult to injury. The Chancellor has extraordinary insensitivity and arrogance. It was a cheek to put the Economic Secretary, Robert Maxwell's public relations spokesmistress, in charge of pensions mis-selling. It was brazen to put the Financial Secretary, who was taken to court for failing to pay her poll tax, in charge of tax collection. But it was an insult to put the tax-dodger general, with £12 million in an offshore tax haven, in charge of taking away tax relief from middle Britain. Power has simply gone to the Government's head. I assure the House that we will not abandon this issue until the Government recognise that their scheme is mean, costly, complex, retrospective and a breach of trust. We will defend the savers of middle Britain.

 

--- Later ---

 

Mr. Lilley On a point of order, Mr. Deputy Speaker. It has been suggested to me that my description of the Paymaster General as the tax-dodger general may be out of order, in which case I withdraw it unreservedly.

 

Mr. Deputy Speaker (Sir Alan Haselhurst) The House will be grateful for that.

 

 

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