Mark Hoban (Shadow Minister, Treasury; Fareham, Conservative)

I beg to move amendment No. 36, in clause 16, page 7, line 9, at end insert—

‘(1A) Funds in the account will be transferred into an Individual Savings Account as set out in the Finance Act 1998 (c. 36) of the kind prescribed by regulations and operated by the provider of the Saving Gateway account in question.’.

One of the debates that we had in the morning evidence-giving session last week was about what would happen to the money in the saving gateway account when the account matured and the account-holder received the matching maturity payment, as it is described in the Bill. We had quite an interesting debate on that point with the various witnesses and it was a subject that we returned to in the afternoon evidence-giving session.

It is an important issue, because the Bill’s objective is to try to develop a savings culture in the target group and we want that savings culture to extend beyond the  end of the two-year period. Therefore, it is important to understand what will happen to the balance at the end of that period.

I propose in my amendment that the balance on the account should be automatically transferred into a cash individual savings account and that that would, in effect, be the default setting. The Government, following discussions with various potential providers and the savings industry, have already said that if amounts are transferred from a saving gateway account into a cash ISA they will not count towards that year’s subscription. That is a welcome move. The amendment takes things one step forward from that, making the automatic default setting a cash ISA. That will help potential savers.

Cash ISAs, on the whole, tend to pay a much more generous rate of interest than most instant access accounts; they are a product that the Government have supported and they would provide the right default setting in such a situation. However, that was not a universal view in the evidence sessions. There was some suggestion in the afternoon session with the potential account providers that they might prefer another option—they said that some accounts might provide a higher rate. I suspect that they would prefer a default option into an account that perhaps offers a lower rate than a cash ISA, because such accounts tend to offer higher rates than most instant access accounts.

Matt Wakefield from the Institute For Fiscal Studies, who did a lot of the relevant evaluation, said:

“I do not see why, if it is possible to organise, it should not be an ISA that is tax free—just a cash ISA that operates as a cash savings account.”——[Official Report, Saving Gateway Accounts Public Bill Committee, 27 January 2009; c. 16.]

There is some debate about whether a cash ISA is difficult or complex to explain to someone who has had a saving gateway account. We could surmount that barrier by ensuring that, alongside the saving gateway programme, there is financial education for people who take out such accounts. The national money guidance scheme, which we are committed to, would provide such guidance to people who have a saving gateway account.

Stephen Ladyman (South Thanet, Labour)

I wonder whether the hon. Gentleman shares my concern that many people with such accounts will not be paying income tax, therefore a cash ISA might not be the most sensible form of saving for them. Perhaps a national savings account might be more appropriate.

Mark Hoban (Shadow Minister, Treasury; Fareham, Conservative)

That is a good point. Some people will not be paying income tax, but they would be in the same position if the default was a savings account that paid them a lower rate of interest net, whereas at least the interest on a cash ISA at maturity is paid gross. The interest rate on a cash ISA is higher as well. We should think not just about ISAs in the context of their tax treatment but about their characteristics in terms of the interest that they pay. People can exit a cash ISA before its maturity period ends and they will benefit from a higher rate of interest on that. Yes, interest may be deducted, but under our plans we would ensure that that interest was paid gross rather than net and if people did not pay tax they would receive the full benefit of that. From our perspective we have squared that circle in our policy. Perhaps the plans that the Chancellor seems keen to bring forward in the Budget  will also help people in this situation, by exempting them from payment of the basic rate of income tax on their savings income. If the Chancellor does that, we will support that measure.

There is a clear benefit to savers from the saving gateway account defaulting into a cash ISA, where returns tend to be higher. Cash ISAs are well marketed, are increasingly better understood by consumers and offer the best deal to savers. The better option is for the saving gateway account to default into a cash ISA, rather than simply defaulting into a current account, where it is available to spend. The fact that the money is not locked away but set in a separate account might encourage people to leave it alone for a bit longer, help them build up that nest egg and continue to pay sums into that account, whereas if it defaults into a current account the temptation might well be to spend it. We would all want to see more and more people who have had a saving gateway account continue to save. Therefore, defaulting to a savings account will help further to develop the saving culture that we are seeking to achieve through the Bill.

Ian Pearson (Parliamentary Under-Secretary (Economic and Business), Department for Business, Enterprise & Regulatory Reform; Dudley South, Labour)

I understand the sentiment behind the amendment, which is that it should be made as easy as possible for account holders to continue to save once their accounts have matured. We also agree about the advantages that the ISA offers: the benefits of tax advantage, saving and ISAs are enjoyed by 18 million people in this country.

However, my hon. Friend the Member for South Thanet makes a good point, and we considered the issue carefully before reaching the decision that we did not want to mandate a roll-over account. Let me explain why and briefly mention something about the process. We want to make it as easy as possible for people to continue to save, so we need to make sure that people have a choice. However, we also need to ensure that something is in place for those people who do not make an active decision. Providers will therefore put in place default roll-over accounts, about which customers will be told when they open their saving gateway accounts. That information will be there up front.

As the end of the two-year maturity period of each saving gateway account approaches, providers will remind savers of the default option at maturity, as well as inform them about other options. If the saver does not make any active decision about what should happen to their money, it will move into the providers’ default roll-over account. Providers will be able to choose what that default account should be; it might be a cash ISA, or it might not. The amendment would take away that element of choice, and I understand why the hon. Member for Fareham thinks that that is a good idea.

We have considered carefully whether the type of default roll-over account should be mandated, and specifically whether it should be mandated to be an ISA. However, we have decided to take a flexible approach for three reasons. First, different potential providers have different views on the matter, as the Committee heard in the evidence sessions. A further reason is the point made by my hon. Friend the Member for South  Thanet: if people are in different circumstances, it might be that mandating an ISA would not be in their best interests. Secondly, in support of that, last week, Adrian Coles from the Building Societies Association said that doing so

“could preclude an institution offering a better account in some circumstances.”——[Official Report, Saving Gateway Accounts Public Bill Committee, 27 January 2009; c. 42, Q78.]

Again, I think that we can all envisage what those circumstances might be. Thirdly, we want to make sure that potential saving gateway providers who do not offer ISAs—and there will be some who do not do so, for whatever reason—are not excluded.

For those reasons, it is right not to be too prescriptive about the matter. Obviously, we will want to keep the issue under review and the Government would, indeed, be very concerned if we thought that the default roll-over accounts that were being proposed when the saving gateway accounts were initially offered were not going to offer reasonable levels of interest.

Different savers will have different needs and we want them to have a choice about what should happen to their money. An ISA will certainly be the right choice for many people, but not necessarily for all. Having heard those reasons, I hope that the hon. Gentleman will seek leave to withdraw his amendment.

Mark Hoban (Shadow Minister, Treasury; Fareham, Conservative)

I am not entirely convinced by the Economic Secretary’s argument and neither was I convinced by the arguments made by some of the potential account providers at the evidence session. The Economic Secretary occasionally accused me—jokingly, I think—of being the banker’s friend in debates on the Banking Bill. I was not entirely convinced by the evidence that potential account providers gave that they might wish to offer higher rate accounts and a cash ISA. I hope that my scepticism is ill founded and that in reality, they will offer higher rate accounts. The Economic Secretary has said that he will keep this under review.

Jeremy Browne (Taunton, Liberal Democrat)

One of the best ways to sell this legislation to the taxpayer—who, it is estimated, will pay in excess of £100 million a year to finance the scheme—is that it should imbue a saving culture among the people who participate. Surely, that goes to the nub of the issue. We should not compel people to save, but we should do our best to ensure that there is some easy provision for continuing to save beyond the two-year period.

Mark Hoban (Shadow Minister, Treasury; Fareham, Conservative)

I agree completely. The default should be an easy way of ensuring that people continue to save and put into practice the habits that they develop over the two-year period. That is important.

The Committee should send a clear message to potential providers that we expect them to provide a reasonable rate of return on the default account—it should not pay only a fraction of 1 per cent. interest, as some accounts do at present. These people should not be treated as second-class citizens. They should have access to default accounts with a good rate of return, and I believe that we all agree about that. I would prefer a bit more compulsion and less emphasis on encouragement, but I beg to ask leave to withdraw the amendment.