[column 163] First extract

Schedule 2

LIFE POLICIES, LIFE ANNUITIES AND CAPITAL REDEMPTION POLICIES

Mr. Ridley

I beg to move Amendment No. 30, in page 38, line 7, leave out Part I.

[column 164]

The Chairman

With this we are to take Amendment No. 34, in page 38, line 44, leave out from “1975” to end of line 45.

Mr. Ridley

I hope, contrary to what the Financial Secretary has just said, that he will continue to show the same enlightened attitude to Schedule 2 as he has shown throughout Schedule 1.

This is a probing amendment, and I feel that the Financial Secretary would like to explain to the Committee why he believes it right that the Treasury should now take on the job of certifying those policies which qualify under the Taxes Act. I do not have strong views either way as to whether they should or should not. But, on the other hand, a change of this sort requires justification. Once a matter like this is in the hands of the bureaucrats, we know from experience that there is delay and procrastination, that it is impossible to get a straight answer and that business will be held up. Large numbers of life policies are always being produced; different companies produce different types of policy and it is essential that the policing operation should be speedy and effective.

There are amendments to tidy up the schedule, if the Committee feels disposed to accept them, but first we should like from the Financial Secretary a justification for making the change from life policies certifying that their policies qualify, to the Treasury having to give their consent.

Amendment 34, which we are discussing with Amendment 30, seeks to leave out the words at the bottom of page 38:

“and is in the opinion of the body issuing it a qualifying policy.”

It is a small point, but I should have thought those words were unnecessary. If the Treasury has certified that a policy is a qualifying one, there is no need for the body concerned to express any opinion at all itself. It having been said by the Treasury that the policy is qualifying, why is it necessary for the opinion of the body issuing it to be taken into account? Indeed, it leaves a slight doubt about the whole matter which I should have thought would be better cleared up by leaving the words out.

Whilst on this point, I should report that two or three people in insurance, who have had great experience of these matters feel, that there is some doubt about the meaning of some of Schedule 2; they doubt whether it is satisfactorily drafted. In fact, there is a suggestion that a certificate under [column 165]paragraph 1(1)(b) of the schedule, that a standard form of policy is a standard form of qualifying policy, is not conclusive evidence that the policy which conforms with it is itself a qualifying policy. That is a point far beyond my legal ability, but if the Financial Secretary would look into the matter and drop me a line I should be quite happy. I hope, therefore, that he will justify the existence of this paragraph and the last two lines at the bottom of page 38.

Dr. Gilbert

The reason for the Revenue taking over from the life offices the task of certifying policies is to have greater uniformity in the qualifying procedure. It is also to enable policies to be certified ex ante before they are issued, rather than having policies issued and then having a debate between the life office and the Revenue about whether a policy that had been issued did, in fact, qualify. I am sure that the hon. Member for Cirencester and Tewkesbury (Mr. Ridley) appreciates that this change will relieve the life offices of a considerable volume of work, a matter which I am sure will commend itself to him.

Let me emphasise at once that this change in no way implies any distrust by the Revenue of the way in which life offices have been carrying out their responsibilities. It is merely an administrative tidying up.

I appreciate the hon. Gentleman's point that when these certifications are to be handled by the Revenue, the Revenue will appreciate the need for decisions to be taken speedily. There are, of course, later amendments dealing with that matter.

On Amendment No. 34, the hon. Member asked why life offices are brought into the act at all, once the Revenue has given a certification. The hon. Gentleman may be under a misapprehension here. The Revenue certification will say that this type of policy meets the requirements for certification. It will be necessary for the life office subsequently to certify the individual policy that qualifies with relationship to various other criteria, such as the premiums payable and the amount payable on death. At present both these operations are done by the life office. We are dividing the two operations between the Revenue and the life office. Both operations remain necessary. I hope that the hon. Gentleman appreciates that this minor reform will be for everyone's convenience.

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Mr. Ridley

I find those explanations quite convincing. In thanking the Financial Secretary, I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Mr. Ridley

I beg to move Amendment No. 31, in page 38, line 27, at end insert:

“(2) The Board shall, upon an application being made to them to which this Schedule refers, give their decision in writing as to whether a policy is a qualifying policy or not, within a period of 21 days.”

The Chairman

With this we are to take Amendment No. 33, in page 38, line 32, leave out from “Schedule 1” to end of line 33 and insert:

“they shall furnish the body with written reasons for their refusal, and the body may appeal to the Special Commissioners, and, on a point of law, to the Courts.”

Mr. Ridley

This amendment seeks to place a duty upon the Board of Inland Revenue to give a positive answer in writing within the period of 21 days of receiving an application as to whether a policy qualifies or not. Some safeguard is essential, and 31 days is the sort of time provided in similar legislation. At some stages the Taxes Acts give the Revenue 30 days. The Financial Secretary may think that 30 days would be better. It is very important that those conducting insurance business should at least be certain that they will get a quick answer.

Perhaps I may be personal for a moment. I recently had an insurance company authorised by the Department of Trade, and it is a most lengthy and time-consuming business. Meanwhile, the expenses of the company are ticking up and no business can be done. The same will be true of policies of this sort. If they are not approved, the company is costing money without being able to do any business. That is extremely bad for the policy-holder, as well as for the company, because it results in less favourable terms in the end. So we should place upon the Revenue a duty to give an answer within a certain period of time.

Mr. Crawshaw, you have kindly said that we may discuss Amendment No. 33 with this amendment. It is equally important. It gives the insurance company the right to appeal to the Special Commissioners and, on a point of law, to the courts. It also places on the Revenue the duty to furnish the insurance company with [column 167]written reasons for a refusal of a qualification, if such a refusal is made. It is designed for protection of the policy-issuing life office, which will be able to discover why it had its policy disqualified. If the office disagrees with the reasons, it will have right of appeal against the decision. 5.30 p.m.

I am frightened that this immensely efficient and complicated bureaucratic régime with which we are surrounding our insurance will result in a stultification of business and a lack of flexibility. If an insurance company has a good idea for a new policy and for some reason of cussedness it is turned down and the policy does not qualify, there should be a right of appeal to some other body to make sure that the Treasury is not being idle, saying “This is something new, we do not want to bother with that, let us turn it down” . That would be a bad thing for the insurance industry.

We are less keen on life assurance in this country than are most other advanced countries. A much smaller proportion of our population take out life assurance. If we do anything to inhibit the growth of the industry it will be a great shame. I believe that the two amendments, either one or the other, or both—whichever the Committee will accept—would add to the possibility of the industry being free to do as much as it may without incurring the Treasury's wrath, and to do it quickly and effectively.

Dr. Gilbert

I am afraid that my good conduct has come to an end, because I shall be advising my hon. Friends to resist these two amendments.

The Revenue is planning in practice to give its decisions in fewer than the 21 days specified in the first amendment, and it hopes, on average, to have decisions available within 14 days. But the hon. Gentleman is seeking to lay a statutory duty on the Board of Inland Revenue to give a decision in writing within 21 days. It is possible to envisage circumstances—I hope that they will be infrequent, and it is the Revenue's intention that they should be very rare indeed—where the board might not be able to fulfil that statutory duty. That is why I cannot accept the amendment.

If the hon. Gentleman wishes to return to the matter on Report, I should say in [column 168]fairness to him that his amendment is technically defective in one or two respects. First, it fails to point out from when the period of 21 days is to start to run, and, second, it makes no provision for consequences that might follow from any failure by the Revenue to meet the 21-day limit laid down.

Amendment No. 33 has three provisions. It imposes a statutory duty on the Board of Inland Revenue to give reasons in writing for decisions or refusals that it has given. Second, it gives a life office a right of appeal to Special Commissioners against a decision by the Revenue, compared with provisions in the Bill which gives a policyholder the right of appeal to the General Commissioners. Finally, it provides expressly a right of appeal on a point of law from the Commissioners to the courts.

I shall take those in reverse order. I am advised that the final point is unnecessary because a general right of appeal in such circumstances already exists and that intention, therefore, is superfluous. We could not accept the second point because the tax liability which is at issue is not the tax liability of the life office but the tax liability of the policyholder. Therefore, it is for him to appeal with respect to his own liability. The General Commissioners have always been regarded as the appropriate body for individual taxpayers to appeal to about reliefs, deductions, personal allowances and so on.

In our view, moreover, it is very unlikely that there will be cases where the Revenue and the life office are unable to reach agreement about qualification. If necessary, it should not be beyond the wit of the life office, it it wants to take one of these matters to appeal, to issue a specimen policy even to one of its employees and then make a test case of it. The life office could guide the matter through. There is an important matter of principle here, which, I hope, on reflection, the hon. Gentleman will see has some force, that the right of appeal should lie with the policyholder whose tax is at stake rather than with the life office.

Finally, the amendment imposes a statutory duty on the Board to give written reasons for its refusal in any case where it does so. I have no difficulty with that element in the amendment, if the hon. Gentleman wants to come back to it at some time, because it is the Board's intention to state fully its reasons for [column 169]refusing a qualification in any case. However, because that element is intermingled with the other two parts of the amendment to which I have already referred, I am afraid that I am still unable to recommend it as it cannot at this stage be broken out from the rest of the amendment. Therefore, I have for those reasons to advise the Committee that the two amendments are not acceptable.

Mr. Ridley

Clearly, my making longer speeches has had the desired effect. The Financial Secretary is now fully briefed on the schedule, and I congratulate him on that. I thank him, too, for the quite satisfying explanation which he gave on the subject matter of these two amendments.

I am happy to hear that he would have no objection to an amendment dealing with getting the Treasury to give reasons for any refusal. That would be an improvement which I may well need to bring in on Report. I think, however, that the Financial Secretary has given satisfactory answers to the other points.

Dr. Gilbert

May I intervene briefly at this stage? I am sure it was a slip of the tongue, but it would not be the Treasury that would be doing it; it would be the Board.

Mrs. Margaret Thatcher

Before my hon. Nicholas RidleyFriend asks leave to withdraw the amendment, I must say that he is a little more easily satisfied by the John GilbertFinancial Secretary than I am with his answer to Amendment No. 31. I wondered whether the Financial Secretary thought that the limit of 21 days was too short, Could the amendment be reconstructed to give a time limit of say, approximately twice that amount, so that during that time the Board could ask for further and better particulars? Perhaps the Financial Secretary would consider it on that basis. I understand that 21 days is a little short, and if the Board wanted further and better particulars, a time limit of twice that time would be a little short, but I think that to leave it without the certainty that one is not entitled to any decision within any specified length of time is asking too much. First, it could deprive insurance companies of a lot of business, and secondly, it could deprive others of a lot of relief. If we were to reconsider the construction of the amendment, with a longer time, specifying the date from which the time ran [column 170]and what would happen if one got correspondence about it or further and better particulars would the hon. Gentleman consider that?

Dr. Gilbert

I shall always consider proposals that come from the right hon. Lady, Certainly, to go from three weeks to six weeks would make a considerable difference. May I suggest that she puts an amendment down on Report, so that we could have time to consider it before then? I tried to assist her, indicating where the present amendment is defective, so that I should not seek to rest on an argument of that sort on Report. But I should like to think about it, and also consider what criticism there might be after the 42 days were up and it had not proved possible, for perfectly good reasons, to come to a decision. But I hope that circumstances of that sort do not arise. It is certainly the Revenue's intention that they should not. It hopes to give answers within a couple of weeks.

Mr. Ridley

There is one question I should like to ask. The Financial Secretary said that it was really up to the policyholders to appeal if they were not satisfied with the disqualification, because they lost their tax relief. But is it? The life office will go along to the Treasury and say “We are thinking of issuing this policy” , and the Treasury will say “yes” or “no” . The would-be policyholder will never get a look in. If the Treasury says “no” , it is unlikely that the life office will farm out the disqualified policy to a policyholder and say “Would you like to appeal against this disqualification?”

The whole mechanism for appeal, on mature consideration, seems a bit remote. I wonder whether it should be that in some way or other the life policyholder has a right of appeal, however best that is framed. I do not know whether any hon. Member with greater legal training than I would like to suggest how that could be brought about. It seems that the policyholder is not in a position to make an appeal. The life office has less motive to make an appeal and, indeed, will not benefit either way because it is not the recipient of tax relief. We are in a bit of pickle here. Perhaps the Financial Secretary could shed a little more light on the matter.

Mrs. Margaret Thatcher

Could I add a point before the Financial Secretary [column 171]replies? It is something of a departure from revenue law in my day that one could submit a hypothetical scheme for adjudication. It appears that this can now be done and, therefore, it might mean at the same time having a special appeal mechanism if that scheme is not adjudicated upon. I know that in practice in the old days one could almost agree with the Special Commissioners as to what would be allowed under the surtax direction provisions. However, that was a practical measure and not agreed under the law. This seems to be a new provision in revenue law from my time, dealing with it frequently, where one could submit something and say “If we do this, will it be all right?” What happens if it will not be all right?

Dr. Gilbert

The right hon. Lady raises rather wider issues than did her hon. Friend, as I understood it. The amendment is addressed to policies already in existence. What the right hon. Lady is talking about is an appeal procedure with respect to policies not yet been issued. That matter does not arise on this amendment, but I should be happy to consider it. I should have thought that even by following the procedures that I have outlined it would be possible to get a decision quickly and cheaply by issuing a specimen policy when there was a dispute and having the matter settled before the General Commissioners.

We are making something of a mountain out of a molehill, because I do not think that it will arise very often. We do not expect that there will be any difficulties. I am informed that, as far as can be traced, there have not been any appeals against a Revenue decision since 1968. Therefore, the position is not as worrying in practice as the right hon. Lady thinks it might be.

Mr. Peter Rees

If I may be permitted to intervene briefly—I apologise to the Committee for not having heard all the debate—I wonder whether the Financial Secretary has given enough weight to the fact that in these matters it will be the insurance company that will be the most versed. I appreciate this is technically and in form a matter which touches the personal reliefs of the individual taxpayer and, therefore, it might [column 172]be thought to be a matter which should be sorted out by him or on his behalf before the General Commissioners.

May I take up the point made by my hon. Friend the Member for Cirencester and Tewkesbury (Mr. Ridley)? Might it not be convenient if there were a concurrent right of appeal by the company concerned? The point of Amendment No. 33 is that this right of appeal should be either to the General Commissioners or to the Special Commissioners. Therefore, the company issuing the policy could assume the burden of litigating this matter with the Revenue.

I appreciate what the Financial Secretary said about it being done cheaply and expeditiously before the General Commissioners, but in my limited experience these things are rarely done cheaply or expeditiously. It may be that my profession is partly responsible. It may be that the Chief Secretary's profession is. However, whoever is responsible for the fact that this type of litigation is often complex and prolonged, the point that the Committee must face is that that is often the case. Therefore, I suggest, with profound respect to the Committee and to the Financial Secretary, that it might be better that the burden in that situation should be placed on the company issuing the policy or, at any rate, it should have the right of intervening. If it has a right of intervening, and if there is a complex point, it might be more convenient for it to go to the Special Commissioners rather than the General Commissioners.

I am not seeking to shut out the General Commissioners, for whom I have a profound respect. It seems to me that, with a little more flexibility, this could be put before a different forum by a different person, in other words by the insurance company itself.

The Financial Secretary realises that there is a problem here. It is not a partisan point; it is a matter for the convenience of those likely to be touched by this legislation. That is all I am concerned about and, I am sure, all that my right hon. Friend and my hon. Friend are concerned about. On that basis, could the Financial Secretary see whether it might be possible to give a concurrent right of appeal, and to both tribunals rather than exclusively to the General Commissioners? [column 173]

5.45 p.m.

Dr. Gilbert

I am prepared to look at the point made by the hon. and learned Member for Dover and Deal (Mr. Rees). As I understand it, he is suggesting that the life office should have an alternative right, in its own standing, as it were, to appeal to the General Commissioners. I am certainly prepared to look at that. I do not see how that right could be granted before a policy had been issued as a test case, but I do not think that that creates any difficulty. I was seized of the hon. and learned Gentleman's point before he made it, that one might expect the life office rather than the individual to be better able to handle a case. I understand that. But there is nothing to prevent a life office arranging, shall we say, who appears before the General Commissioners, and how the individual policyholder is represented. But I do not seek in any way to dig my heels in on this. I shall be happy to look at the matter if that is the wish of the Committee.

Mr. Ridley

In view of that assurance, I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Mr. Ridley

I beg to move Amendment No. 36, in page 40, line 18, leave out “75” and insert “50” .

The Chairman

With this we may take the following amendments:

No. 38, in page 40, line 29, leave out “75” and insert “50” .

No. 39, in page 40, line 43, leave out “75” and insert “50” .

No. 40, in page 40, line 47, leave out “75” and insert “50” .

No. 41, in page 41, line 4, leave out “75” and insert “50” .

Dr. Gilbert

On a point of order, Mr. Crawshaw. It might be for the convenience of the Committee to take at the same time Amendment No. 37, in page 40, line 23, after “payable” , insert:

“except that if, at the beginning of that term, the age of the person concerned exceeds fifty-five years, the capital sum so guaranteed may, for each year of the excess, be less by 2 per cent. of that total than 50 per cent. thereof, the person concerned being, if the capital sum is payable on the death of the first to die of two persons, the older of them if on the death of the survivor of them, the younger of them and, in any other case, the person on whose death it is payable:” .

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The Chairman

If the hon. Member for Cirencester and Tewkesbury (Mr. Ridley) agrees and it is the wish of the Committee, I have no objection.

Mr. Ridley

I am happy with that arrangement. Amendments Nos. 38, 39, 40 and 41 are consequential upon Amendment No. 36. Amendment No. 37 is slightly different, but it would suit me quite well to discuss it with this group. I shall come to it in a moment when I have put forward the reason for the change from 75 per cent. to 50 per cent.

I propose this as a slight relief to those who engage in life assurance. It is in no sense to do with tax evasion or tax avoidance. I cannot accept for one moment that anyone will make a fortune out of what is hereby proposed. The legislation surrounding life assurance is becoming increasingly complex and onerous. I believe that we could make a small concession here without doing any damage at all.

Rather than say that the capital sum payable on death in a life endowment policy

“must not be less than 75 per cent. of the total premiums that would be payable if the death occurred at the age of seventy-five” ,

I am suggesting that it could be reduced to 50 per cent.

The present situation is that the 75 per cent. appertains. It is in the original legislation. Indeed, the 75 per cent. rate relates to endowment policies as well as to whole-life policies. A small concession here would be of some value and would not in any sense provide a loophole for those seeking means of tax avoidance.

With the present rate of inflation, the value of life policies is greatly reduced. If one takes out a 15-year life policy, although the sum insured may be £10,000, which sounds quite a lot of money at this time, it may be worth no more than a packet of cigarettes in 15 years. The value of the saving is constantly diminishing. Admittedly, the value of the later premiums diminishes too, but it can nevertheless be presented as in some ways a much less advantageous bargain to a would-be policyholder than it was in times of lower rates of inflation. This small concession will at least help him on his way, and I do not understand why it has to be 75 per cent. in the first place. I suggest to the Committee that this is one way to make life assurance slightly [column 175]more attractive as well as benefiting policyholders.

The other point contained in Amendment No. 37 is that the marginal relief for those aged 55 and over should apply to whole-life policies as well as to endowment policies. At present for every year over age 55 the percentage is reduced by 2 per cent., so that when the 75 per cent. is changed to 50 per cent., a person of 65 years has to produce only 30 per cent. This privilege is extended to those who take out life endowment policies and it could without any difficulty be afforded to those who take out whole-life policies.

If the amendment is carried, the sentence in the Taxes Act will become one of the worst in legislation—it is about 40 lines long and contains a large number of commas and semi-colons. Nevertheless, the fact that some of their legislation is unintelligible has never inhibited the Government, so I do not see why it should inhibit me. With that admission of guilt, I hope that the Financial Secretary will concede the point as being of substance and accept the amendment.

Dr. Gilbert

The reason I suggested we took Amendment No. 37 with this group was that it seemed to me that it was very much based on the other group becoming effective. That at any rate, is how I read Amendment No. 37, which is intended to modify the 75 per cent. standard for whole life policies.

If it were not taken on the assumption that the other amendments in the name of the hon. Member for Cirencester and Tewkesbury (Mr. Ridley) were incorporated into the Bill, the effect of taking Amendment No. 37 on its own would be to produce a situation that for someone of 55 years of age the standard would be 75 per cent., but for a 56-year-old person it would drop immediately to 48 per cent., because it specifies that when the age of the person concerned is over 55, the standard may be less by 2 per cent. than 50 per cent., whereas we need the amendments tabled in the name of the hon. Member for Cirencester and Tewkesbury—if they are accepted by the Committee—to reduce the previous standard to 75 per cent. So it is convenient for the Committee to take them together.

I am not able to advise my hon. Friends to accept this group of amendments. We understand the point made by [column 176]the hon. Gentleman, particularly in respect of older persons taking out policies. We have ourselves implicitly accepted in the Bill that the 75 per cent. rule can set too high a standard in some of these cases.

Paragraph 4(7) of Schedule 2 eases the rule that provides that where the age of the person concerned at the start of the policy is over 55, the 75 per cent. rule may be reduced by 2 per cent. for each year over the age of 55. In other words, we accept the 2 per cent. gradient, but we start at the 75 per cent. level rather than the 50 per cent. level that the hon. Gentleman suggested.

At 65, we would be down to a level of 55 per cent., if my arithmetic is right, whereas the hon. Gentleman would be down to a level of 30 per cent. It is again a question of line drawing. I think that these provisions are quite generous. The 75 per cent. standard has proved satisfactory in the past, except in relation to the small exception for which we are providing tapering relief. I shall leave the matter there, unless the hon. Gentleman has any other observation. We accept the need to make it easier for old people to insure themselves, but the hon. Gentleman's relief is over generous.

Mr. Ridley

I do not think that the hon. Gentleman has given any good reason for his opinion; nor did he deal with one point, to which I shall come later. First, he has to justify the 75 per cent. standard. If we can go to 50 per cent. without there being abuse, I do not see why we should not do so. If the Committee can make a concession to people who are saving by insuring their lives—these are worthy people, not tax evaders—why do we not do so?

Secondly, the Financial Secretary accepted the need for age relief in relation to endowment policies; but there is no relief on whole-life policies. Amendment No. 37 is designed to bring in relief for whole-life policies. If the Committee were to insist on the 75 per cent. standard, would the Financial Secretary agree to accept an amendment at a later stage introducing age relief for whole-life policies reducing from the figure of 75 per cent?

There is much to be said for making a helpful concession here, particularly as life insurance is being made more onerous in the rest of the Bill. I am not so far [column 177]convinced that there is any good reason why this should not be done. The Financial Secretary did not say that it would cost anything, or that there would be abuse. He said that it was a question of line-drawing and he preferred his line to mine. I prefer my line to his, if that is the sort of argument we are to have.

Unless the Financial Secretary can produce better reasons than he has so far, I do not feel disposed to withdraw the amendment.

Dr. Gilbert

The hon. Gentleman knows the reason for the 75 per cent. rule. I was taking that as understood between us. It is to prevent people converting what is ostensibly a life insurance policy into a medium for investment and savings and getting what we would consider—and what his Government considered—excessive tax relief by that means. That is why the 75 per cent. rule was introduced in the first place. It has been on the statute book since 1968. At that time it was introduced only with respect to endowment policies—if I may have the attention of the hon. Gentleman.

Mr. Ridley

You have.

Dr. Gilbert

I am so glad. Maybe the hon. Gentleman, too, needs to take advice. Perhaps he would like to put his hand up when he would like me to sit down. At least he has shown that we are all mortal and frail, except the hon. and learned Member for Dover and Deal (Mr. Rees), who is not now with us.

There are reasons, with which I am sure the hon. Gentleman is familiar, why in certain circumstances endowment policies with guaranteed surrender values can be written as whole-life policies that give virtually the same result. It is possible to write a whole-life policy, securing it by writing in term assurance with an unnaturally long term to it, and that again would produce consequences against which we seek to guard and which were originally intended to be guarded against by the 1968 75 per cent. rule. That is why the 75 per cent. rule is being extended to cover other types of situation.

We think that there are generous tapering provisions. We are at one with the hon. Gentleman on that point. If we were to go as far as he wanted to go, we should be giving tax relief for what is just a sophisticated investment scheme. The hon. Gentleman may seek to advance [column 178]that as an admirable proposition, but it does not commend itself to myself and my hon. Friends.

6.0 p.m.

Mr. Ridley

I am grateful to the Financial Secretary for responding again. I do not agree with him that investment is something one does not want to support. I feel that it is something the Committee should wish to support. Nor was his justification of the rejection of the 50 per cent very convincing.

He was not entirely clear about my specific question whether he would accept the age relief for whole-life policies if it were based on the 75 per cent. starting figure. It is a specific question that I wish to press strongly with him. The compromise which I suggest is that we should accept the figure of 75 per cent. for a little longer if the Government would agree to give the old-age relief to the whole-life policyholders. That would be a good way out of the dilemma.

I prefer to have both points met, but I do not want to be unreasonable and I do not want to make the Government depart from their policy. But they have not yet justified why the old-age relief should not be available to those who take out whole-life policies.

Dr. Gilbert

I have no doubt that I shall not satisfy the hon. Gentleman, but at least I can persuade him that we have some reason on our side.

We are not proposing a tapering relief for a whole-life policy because where a whole-life policy is taken out by a relatively elderly policyholder, there is no savings element as distinct from that in an endowment policy. That means that, other things being equal, the premiums payable on a whole-life policy are lower than those of a corresponding endowment policy. Therefore, the 75 per cent. limit would be easier to meet.

That is why we do not think it appropriate to have a tapering provision for the 75 per cent. I do not know if the right hon. Lady or the hon. Gentleman wants to put a hand up, but that is why we do not believe the tapering provision to be appropriate.

I do not know whether the hon. Gentleman's attention has been distracted. I quite understand the need to take advice. If he would like me to go [column 179]over that again, I shall be happy to do so.

Mrs. Thatcher

This series of exchanges could take a long time, but I shall try to avoid that.

If the Government allow for endowment policies, that is, policies linked to investment, why do they not allow similar relief for whole-life policies which can be similarly linked to investment?

Dr. Gilbert

We are talking about a whole-life policy regardless of whether it is linked to investment. Clearly, inspiration comes the more the further one is down the Thames.

I do not know whether I can address myself to the right hon. Lady in the present circumstances—at least her spirit is among us, although she is now sitting at the far end of the room.

The point is that true whole-life assurance, which is what we are discussing here, does not contain a savings element, as does an endowment policy. Therefore, the older a person becomes, the higher the level of premiums is likely to be.

The trouble is that when there is a somewhat elderly policyholder, the level of premiums will be that much higher, and therefore the 75 per cent. standard will be that much easier to satisfy. That is why we do not believe it necessary to include the tapering relief in respect of whole-life policies, although we have included it in respect of endowment policies. I submit that that meets the right hon. Lady's argument, which is that the tapering provision exists when there is a genuine element of savings in the policy.

Mrs. Thatcher

I hope that the John GilbertFinancial Secretary will not misunderstand me, but I think that if we went into a huddle, we might get more satisfaction.

The hon. Gentleman has not fully answered the point that a large number of whole life policies are investment-linked. I do not see why those policies should not attract the relief. If the hon. Gentleman will not go further now, we might return to the subject on Report when our advisers and his advisers might get together and perhaps arrive at a mutual compromise for recommendation to us.

[column 180]

Dr. Gilbert

I should be delighted to go into a huddle with the right hon. Lady, or any other hon. Ladies on the Committee, with or without the lights on, in or out of the Committee room, at any time of night or day. Whether that would add illumination to the issues we are discussing I could not say. But I think that it is perfectly——

Mrs. Thatcher

I hope that the hon. Gentleman is not going to upset me.

Dr. Gilbert

It might generate more heat than light.

Clearly, it is open to Opposition Members to come back to the matter on Report. Perhaps we should leave the matter there.

Mr. Ridley

We should like to return to the issue on Report, but, in the interests of continuing our rapid progress, we shall not press the matter now. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Mr. Ridley

I beg to move Amendment No. 286, in page 43, line 11, leave out “twentieth” and insert “tenth” .

The Chairman

With this we may take the following amendments:

No. 287, in page 43, line 13, leave out “nineteen” and insert “nine” .

No. 288, in page 43, line 13, leave out “twentieth” and insert “tenth” .

No. 291, in page 43, line 37, leave out “twentieth” and insert “tenth” .

Mr. Ridley

This part of the schedule is of great importance as it brings in a totally new set of rules for charging tax on policies for life assurance of all sorts when withdrawals or surrenders are made.

Reverting to the debate when we started proceedings this afternoon, I point out that here is another section of legislation that was not foreshadowed in the 26th March Budget. It has not been referred to, so far as I am aware, in any speech by the Chancellor. I am sure that hon. Members on both sides of the Committee will agree that this whole section of the Finance Bill on life assurance could well have formed the subject of a separate Bill. It is so complicated and important that that might have been done. I am sure that the Committee feels that it would be doing a disservice if it raced through the schedules in which major changes are contemplated, in order to make progress [column 181]towards the subject of the capital transfer tax.

Paragraph 9 brings in the new system, namely, that an allowance is made each year of an amount of one-twentieth of the sum assured, and the allowances are cumulative in a strange way, so that it is not a straightforward linear growth of allowance. As the allowances become cumulative, so the amount that may be withdrawn from the policy by any means increases. It is only if the total of the withdrawals exceeds the total of the allowances that a chargeable event takes place and a tax charge arises.

I have some examples of how this works. I think I understand it, but the point I want to make is that the allowance of 5 per cent. of the sum insured is small. I do not think the Committee would take exception to a man who bought a bond of £10,000 and withdrew £500 from that bond every year tax-free. That is not excessive. I am merely suggesting that he should be allowed to withdraw £1,000 which is not a large amount of money. Nor is it a very large percentage, for we are talking about investment when we are talking about these bonds, such as single premium bonds.

The investment will yield a rate of 5 per cent. under the Bill, whereas I am suggesting that that should be increased to 10 per cent. As one can receive 14 per cent. on Government stock, it does not seem to be an excessive percentage to allow to be withdrawn without attracting tax penalties. The life of the bond is strictly controlled by the schedule and therefore it is not possible to vary it from year to year. I suggest merely that, since we are meting out pretty savage treatment to these bonds, an investment medium with nothing wicked or tax-evasive about it, we should be as generous as we can with the conditions which we lay down.

Instead of an initial allowance of 5 per cent., the Committee should agree to an annual allowance of 10 per cent. The other amendments which have been selected to be discussed with this are all consequential upon the first.

Dr. Gilbert

This is an unusual circumstance in which I have to say to the hon. Member for Cirencester and Tewkesbury (Mr. Ridley) that I am not sure he has understood either the schedule or the effect of his amendment. He was talking all the time in terms of a proportion of [column 182]sums assured. The example he gave referred to a policy for a sum assured of £10,000, and he gave a fraction of that, whereas the Bill deals with allowances calculated with respect to a proportion of premiums paid, which may throw the hon. Gentleman's calculations out. I know only too well the difficulties the Opposition have in dealing with technical matters, and I do not make a point of that. If he wishes to come back to it, the hon. Gentleman might bear that in mind.

The point of these provisions is not to produce an offset for any given yield, as though to say “You can have this amount of investment income” . The “appropriate proportion” is not intended as a measure of investment income. It is intended to provide a sort of de minimis limit below which people should not be bothered with making unnecessary calculations.

I recognise that the hon. Gentleman will say that we could save even more calculations if we raised the limit from one-twentieth to one-tenth. We could save more if we raised the limit even higher. The exercise could be continued indefinitely. If one wants to relieve people from paying tax, there is no problem in reducing the number of calculations that people have to make. We are basically seeking to establish a de minimis limit.

The effect of the hon. Gentleman's proposal would be that virtually nobody taking partial surrenders would be chargeable at the partial surrender stage. The only person who would be caught would be the person who, out of his norm, is forced into taking a quite large single surrender. I do not think that is the hon. Gentleman's objective, and it certainly is not the objective of the Bill. For these reasons, I hope that he can accept, while it is an exercise in line-drawing again, that our line is at least as good as his.

6.15 p.m.

Mr. Ridley

I apologise for having got slightly muddled at the beginning of the amendment. The hon. Gentleman is right to say that it deals with such things as a single premium bond. The 5 per cent. should have been 5 per cent. of the premium paid.

I do not see why a partial annual surrender is such a wicked thing. The Financial Secretary seemed to be against partial surrenders of any size. If, by going to 10 per cent., we leave out a lot of people, I do not think that we are doing [column 183]anything wrong. I cannot see why the Financial Secretary is so unhappy to allow a higher rate of surrender taken year by year. After all, these surrenders are cumulative. On his principle, one might get to the point where one could take a major surrender because one had accumulated a lot of allowance after, say, year 10. But somebody who may have fallen on hard times earlier may want to make a larger surrender earlier, because he needs the money, and he will be penalised because he has not accumulated a sufficient allowance after a certain period. It is all very well to say that he can get the money back at the maturity of the bond or the policy. So he can, but that is 15 years later. He may need the money much earlier than that.

While on the point, I wish to refer to losses. It is perfectly possible that these bonds ultimately will show losses. It is possible that a bond which ultimately shows a loss will have had surrenders taken from it during its life, and the taxpayer will have paid tax under the new paragraph in the schedule. He has no means whatsoever of reclaiming the tax he has paid if, at the end of the policy, there is a minus instead of a plus.

A lot of firms have drawn attention to this matter. Unfortunately, Mr. Crawshaw, you have not selected the amendments dealing with it. These rules are unnecessarily harsh. We should be well advised to increase the allowance to one-tenth instead of one-twentieth.

The Financial Secretary said that very few people would be caught. Is that not a very happy result? Why do we want to catch people for it? What is the offence of which he is complaining? I know that he is trying to make the single premium bond so unacceptable that people will not do it, but we must remember that this legislation applies to bonds already in existence. We are catching people retrospectively.

I suggest that on this occasion the line that I seek to draw is perfectly reasonable and fairer to the taxpayer than the one that the Financial Secretary seeks to draw, which would make it virtually unprofitable for this sort of policy to be used at all. It has been said about this schedule that to the extent that life assurance is a medium of saving and investment, which it is, the schedule discriminates against life assurance to a great extent, and that [column 184]anybody wishing to save and invest will find it more advantageous to place savings in other forms of investment media. I seek merely to improve this part of the schedule so that it is not quite so severe. I hope that the Financial Secretary will look at it again.

Dr. Gilbert

I do not think that the hon. Gentleman and I are coming any closer together on this matter. What we are talking about is that under the Bill chargeable sums in respect of partial surrenders will be chargeable only to the extent that the trigger mechanism, as it were, will operate only to the extent that the surrenders run ahead of the allowances. These allowances are expressed as appropriate portions of the premiums which have been paid. We say that an appropriate portion is one-twentieth, and the hon. Gentleman says that an appropriate portion is one-tenth.

If we did it the hon. Gentleman's way, fewer people would be caught, and he asks why we are trying to catch people. He knows the answer to that perfectly well. Possibly “catch” is an unnecessarily provocative word, but he knows very well, and has agreed, that this clause and the schedule we are discussing with it, is an attempt to get round sophisticated schemes of tax avoidance. That is the reason for it, and I am sure that he is not really seeking to undermine our objectives. We have the same objectives in common, as he has said so many times himself. All we are talking about here is the level at which a relief should be taken, and it is our proposal, as I have said, that the figure in the Bill should be regarded as a de minimis limit that will save calculations in a lot of very small situations.

The hon. Gentleman asked a question with respect to what happened if a bond produced a loss. I have not studied the matter with great attention because this was the subject of a group of amendments which you, in your wisdom, Mr. Crawshaw, decided not to select. Perhaps the hon. Member will bear with me if I read out from the brief that I have not looked at for that reason. I hope that he draws enlightenment from it. If, on the final termination of a policy, there is what the Revenue charmingly calls a “negative” gain over the life of the policy—that is to say, the proceeds of the policy plus any previous cash [column 185]withdrawals are less than the premiums paid——

Mrs. Thatcher

Slowly, please.

Dr. Gilbert

I am sorry—slowly, but it will not help—the proceeds of the policy plus any previous cash withdrawals are less than the premiums paid plus sums previously treated as chargeable gains when cash withdrawals were taken—that amount will be deducted from the total income of the person concerned for the final year.

I have in fact helped the hon. Gentleman by punctuating it. I think that he will find that the situation that was causing him concern need cause him concern no longer. That is as it appeared to me as I read that to him.

Mr. MacGregor

May I ask the Financial Secretary a question, if it will not complicate the matter? As I understood it, the refund will be in the form of a tax deduction in the final year. If the policyholder has been paying tax in the earlier years, let us say years 1 to 7, and if we have inflation proceeding at the present rate, it is clear that the refund given to him will be worth a very great deal less than the tax which he has earlier paid. Will the Financial Secretary look into that?

Dr. Gilbert

Yes, I am happy to look into it. It is a point that I have not taken account of, Mr. Crawshaw, because you did not choose this as a subject for discussion, but I am certainly happy to do so.

Mr. MacGregor

Will the Financial Secretary also confirm that this applies to guaranteed bonds and others of the sort taken out before 26th March?

Dr. Gilbert

I shall look at that, too.

Mr. Ridley

I thought that the answer to the amendment which I have not moved was more satisfactory than the answer to the amendment that I have moved. Because of that lucky dividend which turned up at the end of our short debate it would be wrong to press the amendment, and I therefore beg to ask leave to withdraw it.

Amendment, by leave, withdrawn.

Mr. Ridley

I beg to move Amendment No. 636 in, page 43, line 17, after “sum” . insert “each year” . [column 186]

This is a probing amendment. I should like the Financial Secretary to tell us what the sum referred to is. The meaning is not clear to many people. It could be interpreted in several different ways. We think it means the sum each year of the value calculated under subparagraph (5), but it could mean something else. I should like clarification.

Dr. Gilbert

The hon. Gentleman has asked a question which is not immediately relative to his amendment, as I read it. However, I am happy, as always, to try to give him the information.

As I understand it, the amendment is not necessary, and could be misleading. Subparagraphs (5) to (7) of paragraph 9 of this schedule are concerned with calculations for the purpose of paragraph 9(1)(b) as at the end of each policy year of any possible excess of partial surrenders from the policy over a de minimis level of allowances. So we are talking about the calculations as at the end of each policy year.

Again, paragraph 9(1)(b) makes clear that the calculations are to be made by reference to the end of any year, and paragraph 9(9) defines the year as a policy year. Accordingly, in subparagraphs (5) to (7) of paragraph 9, which embrace line 17 about which the hon. Gentleman asked the question, the component parts of the excess calculation are set out without the need to emphasise at any point that these elements arise each year. I hope that that is satisfactory to the hon. Gentleman.

Mr. Ridley

I think that I am as perplexed by that as the Financial Secretary himself is, so perhaps we can rest as one on that.

Mrs. Thatcher

If I understood the hon. Gentleman correctly, his answer was “Yes” .

Dr. Gilbert

Yes, I think so.

Mr. Ridley

I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Dr. Gilbert

I beg to move Amendment No. 209, in page 43, line 35, leave out “commencement” and insert “passing” .

This is purely a drafting matter.

Amendment agreed to.

[column 221] Second extract

Clause 11

Extension of tax exemption for certain savings certificates

Question proposed, That the clause stand part of the Bill.

Dr. Gilbert

Clause 11 implements the Government's intention that the proceeds of their forthcoming index-linked savings scheme shall be wholly free of income tax and capital gains tax. I hope that the Committee will forgive me if I read out a short statement on that subject.

The Government intend to issue in the spring or early summer—the exact dates remain to be decided—two index-linked savings schemes. The first, reserved for retirement pensioners, will be a form of national savings certificates, with a separate issue for Northern Ireland. They will be available at the minimum purchase price of £10, with a maximum holding of £500. The certificate will have a five-year life, and its capital will be linked to the retail prices index. No interest will be payable before maturity. At maturity, in addition to an index-linked increment there will be a small terminal bonus.

It will be possible to cash the certificate at short notice, and provided it is being held for more than one year, repayment will include any appropriate index-linked additions.

The second scheme is to be a contractual savings scheme on SAYE lines, with monthly contributions from savers being revalued in line with the retail——

Mr. Mark Hughes

Could my hon. Friend indicate what the employment effects might be in my constituency of Durham, which may well be organising this index-linked bond? Clearly, in terms of the Hardman Report and other matters concerning dispersal of the Civil Service, it is essential that we in Durham know [column 222]what increase in the number of civil servants there may be in our city if there is an expansion of index-linked geriatric bonds. [Interruption.]

The Chairman

Order. That was a most interesting contribution, but it cannot possibly be in order in this debate on Clause 11.

Dr. Gilbert

My hon. Friend has so interrupted my train of thought that I shall have to start again.

Mr. Graham Page

On a point of order, Sir Stephen. When a document such as this is read by a Minister, surely a copy should be before the Committee in complete form. It should be distributed so that we may study it. It is very difficult to take in a statement of this kind if it is read out and a copy is not put in front of us.

Mrs. Thatcher

On a point of order, Sir Stephen McAddenSir Stephen. It is customary, if a statement is made, to let the Opposition spokesman have a copy.

The Chairman

It is true that if a statement is to be made a copy is provided for the Opposition spokesman as a courtesy. I am sorry that it has not happened on this occasion. There is nothing I can do about it now. I remind the Committee that we are supposed to be discussing the Question “That Clause 11 stand part of the Bill.” So far as my hearing goes, I have not yet heard a word in support of such a Question. I am waiting to hear it.

Mr. Lawson

On a point of order, Sir Stephen. Is there any reason why we should not suspend the sitting for five minutes to enable photocopies of the statement to be circulated?

The Chairman

That is an interesting point but not a point of order. There is no reason why we should not suspend the sitting so that photocopies may be printed. I do not now think it necessary so to do. Let us hear the statement. Having heard it, we can decide whether it is necessary.

Dr. Gilbert

I am certainly seized of the point made by yourself, Sir Stephen, that it would have been a courtesy to the right hon. Lady. I apologise without reserve that the statement was not available to her before this.

Could I start again? Last August the Government announced two experimental index-linked savings schemes for small [column 223]savers. The first scheme will be an index linked savings certificate for persons of national retirement pension age only, that is 65 years and over for men, 60 years and over for women. It will be sold in units of £10, with an upper limit of £500, and have a life of five years.

The limit of £500 will be reviewed in the light of the working of the scheme. Repayment will be at short notice: before the first anniversary of purchase the nominal value only will be repayable; thereafter, certificates repaid will be revalued on a monthly basis from the date of purchase in line with the general index of retail prices, and from the fifth anniversary a fixed bonus equivalent to 4 per cent. of the purchase price will be added. The scheme will guarantee that the saver will never get back less than the purchase price exclusive of any fixed bonus due.

The purpose of this clause is to free those certificates from United Kingdom income tax and capital gains tax. Retirement certificates will be on sale at post offices and banks from 2nd June 1975. A person making a first purchase will be required to complete a simple form of declaration of age.

The Chairman

Order. I am sorry to interrupt the hon. Gentleman, but it is my responsibility as Chairman of the Committee to try to conduct it in the proper manner. I do not think it right that that statement should be made at this stage without advance notice being given to the right hon. Lady.

The correct course for me to pursue—I do it on my own initiative—is to suspend the sitting for 10 minutes. I proposed to suspend the sitting for 10 minutes to give the right hon. Lady a chance of reading the statement which is about to be made so that there can be a proper and orderly discussion upon it.

Mr. Joel Barnett

On a point of order, Sir Stephen. There was no intention to be discourteous in any way to the right hon. Lady. Indeed, there is nothing new here except to tell the public how Clause 11 will work. That is all we are talking about It is part of Clause 11, and there is nothing new except to give a little information to the public. I should have thought that that was entirely acceptable to the right hon. Lady.

[column 224]

Mrs. Thatcher

With all respect, there is something new. We did not know about the 4 per cent. before—I have the previous statement with me—and neither did we know when the bonds will be issued. I am not sure what there will be new after this.

The Chairman

Order. I am anxious to advance the business of the Committee. Our business of the Committee would be advanced much more quickly if the Chief Secretary would take my advice. I suspend the sitting for 10 minutes.

9.45 p.m.

Sitting suspended.

9.55 p.m.

On resuming—

Dr. Gilbert

These things are sent to try us, and I am grateful for the understanding of the Committee on this little local difficulty. I believe that the last sentence I read was to the effect that a person making a first purchase will be required to complete a simple form of declaration of age. I shall continue from there.

As usual, Northern Ireland will have its own certificate.

The second scheme will on 1st July 1975 replace the present Save-as-you-earn second issue and will be open to all persons over 16 years of age. Holders of existing contracts may, of course, continue their contributions to maturity in addition to entering into contracts under the third issue. Monthly contributions, with a minimum of £4 and a maximum of £20, will be payable over a period of five years at the end of which a saver will be entitled to withdraw his payments, each payment being adjusted in line with the general index of retail prices. Alternatively, he may leave his contributions invested for another two years at the end of which they will be further adjusted in line with the index and a bonus equal to two monthly contributions also will be payable. This scheme will guarantee also that the saver will never get back less than the sum total of his contributions. The scheme will be free of United Kingdom income and capital gains tax.

If a saver fails to complete his contract, his contributions will be repaid with interest at the rate of 6 per cent. per annum, but no interest will be [column 225]payable on contributions repaid within the first year. Contracts which are interrupted by death will qualify, after the first year, for repayment plus any due indexation or bonus.

The Department for National Savings is issuing a Press release of these details tomorrow.

It may help the Committee if I identify the elements in the statement which I believe are becoming public information for the first time. They are, as the right hon. Lady was quick to spot, the fact that a fixed bonus equivalent to 4 per cent. of the purchase price will be added; second, the starting date of 2nd June 1975; third, the fact that a person making a first purchase will be required to complete a simple declaration of age; and the fact that Northern Ireland will have its own certificate.

The date for the second scheme, 1st July 1975, is new also, as is the new minimum monthly contribution of £4, and the fact that a bonus equal to two monthly contributions will be payable.

I hope that that statement will be of assistance to the Committee in its deliberations on Clause 11.

Mrs. Thatcher

I am most grateful to the John GilbertFinancial Secretary for his kind co-operation after the original problems were pointed out. It seems to me, after a quick look at the statement, that the retirement bond will be index-linked for only five years, that at the end of that time the index-linking will cease, and assuming that there is a considerable rate of inflation after that, the person will have to take it out and start another bond if need be. But he cannot leave it in, happy in the knowledge that after a further five years it will remain index-linked.

The second point is that it appears that the Save-as-you-earn bond gets a terminal bonus only after seven years, and not after five years, but on the whole more can be put in than for the retirement bond.

The third point is that in the original statement published on 6th August 1974 it was pointed out that the building societies and the trustee savings banks, which also have the present Save-as-you-earn scheme, could join in this new bond scheme. We know why, because if there is a saving scheme specially [column 226]advantageous to one form of saving it tends to remove savings from the building societies, and we are all most anxious that that should not happen. The new statement makes no reference to the building societies or to the trustee savings banks. I assume that they, too, can join in this scheme. But if they do, who finds the money to retain the value of the bond at its current real value and to add the terminal bonus? Is it found by the building society?

10.0 p.m.

Mr. Norman Lamont

Perhaps one ought to begin by saying how much one welcomes this move. One welcomed it before when the Paymaster-General made his previous announcement, the details of which have now been at least partly filled in. There is no doubt that the details of the scheme are extremely attractive. Not only is there a guarantee to keep pace with inflation, but there is freedom from income tax and capital gains tax. I think it will be extremely attractive to all the people for whom it is designed.

The only point that seems rather curious is this. I should have thought that the need for this kind of savings scheme—many of us have argued for it for a long time—was particularly acute among the elderly and retired. It seems strange that there should be a limit of £500 on the amount that an elderly person can place in it, whereas someone in the successor to the Save-as-you-earn scheme can, on my calculations, put in as much as £1,600 if he goes for the seven-year period, or £1,200 in the five-year period.

I should have thought that, for many elderly people who have been so ravaged by inflation and who have seen their savings just slip away in the last year or so, it would have been much better if the Government had reversed the amounts. Could we not have had a rather more generous amount than £500? One knows that it is an experimental scheme, but why be so mingy in the particular aspect of the scheme designed for retired people?

Mr. Lawson

It is important to know whether the elderly will be eligible for both the Save-as-you-earn bond and the special bond for the elderly, or only for the latter.

[column 227]

Mr. Lamont

I am grateful to my hon. Friend for raising that point, which had not occurred to me. Perhaps the Financial Secretary could look into that and tell us whether both could be open to the elderly.

The other matter is the question of the rate of interest. The Page Report recommended that as well as an index-linked security there should be a small rate of interest, giving a real rate of interest. While that applies to the scheme for the elderly and to the successor to the Save-as-you-earn scheme if one keeps one's money in for seven years, as my right hon. Friend the Member for Finchley (Mrs. Thatcher) said, it does not seem to apply if one keeps one's money in for only five years. That, again, was slightly disappointing.

Those are the only two points that I make, and I place the emphasis on the first. One would have liked the larger more generous scheme to be for the elderly. Apart from that, one very much welcomes the scheme. I hope that it will be a first step leading to greater indexation of other securities. Indeed, I hope that it will lead the Government to take a very generous attitude in any say that they may have in the indexation of private financial instruments.

Mr. Lawson

I echo the congratulations voiced by my hon. Friend the Member for Kingston-upon-Thames (Mr. Lamont) for this belated but none the less welcome step that the Government are taking in the matter of indexation in general and the indexation of personal savings in particular.

I am not surprised, Sir Stephen, that you could not at first see the relevance of the Financial Secretary's statement to the clause. The way in which the clause is drafted is very opaque and obscure. It is not immediately apparent, either from the wording or from the sidenote to Clause 11 that what it is all about is the index-linking of savings bonds.

I can understand the Government's coyness over it. For a long time, many Opposition Members have been arguing the urgent necessity of introducing index-linking into the system in general, and tax rates and savings in particular, while the Government advanced every conceivable argument against taking such a step. Now, at last, belatedly—we welcome it none the less—they have [column 228]taken one. But they are clearly somewhat shamefaced about it. Hence the mysterious, opaque, obscure and generally unclear drafting of Clause 11.

Again, it is interesting that in this indexation the Government have indexed according to the retail prices index. That is right, but whenever we have put down amendments on indexation, suggesting that the sensible thing, for all its imperfections, was to use the retail prices index, the Government have said that that was no good, that the retail prices index was hopelessly defective—what about the house price index, and this, that and the other, and a whole lot of poppycock.

Now we find the Government using the retail prices index. So let us have an end to the Government's objections and obfuscations in regard to indexation. I hope that we shall be able to discuss this matter in a more fruitful and fuller way on Report.

One or two specific questions arise. One relates to the intervention I made in the recent speech by my hon. Friend the Member for Kingston-upon-Thames (Mr. Lamont). We must get clear whether the two index-linked securities—I think it sensible that there should be at least two, and my own feeling is that this is too limited—or all Government savings bonds, all national savings, are to be indexed linked, with the exception of premium bonds which are a separate thing. That was the recommendation in the Page Report. Page virtually recommended that, with the exception of the premium bond and the indexing bond, all national savings should be abolished. There is a pretty strong case for that. Everybody knows, hon. Members on the Government side just as much as we do, that national savings securities have been a fraud on those who have invested in them. We want no more of that.

Will the elderly, who are eligible for the special bond that has been prepared for them—the geriatrics bond, as the hon. Member for Durham (Mr. Hughes) christened it in his timely but otherwise bizarre intervention, be eligible also to invest in Save-as-you-earn? If not, my hon. Friend's objections are very cogent. On the other hand, if they are so entitled, there is the question whether this is giving too great an advantage to the elderly. We want to encourage the young to save. This is not a party point, [column 229]and hon. Members outside the Committee, too, want to do that. It is not done by making it that much harder for them.

The next question was touched on by my right hon. Friend the Member for Finchley (Mrs. Thatcher), who made a number of important points. How much extra savings do the Government expect to attract by these bonds, and how much will be a diversion from other savings media into this? This is an important question both economically and for the future course of the Government's national savings policy. We should like to know the answer to that.

Next, why is it with an indexed bond, when everything seems to be indexed, that the bonus is 4 per cent. of the purchase price, and that is not indexed? That should logically also be indexed. Indeed the saver, who has been lured into this security on the understanding that this is all in real terms and he will know where he is, does not know what the real value of the purchase will be.

Finally, what is the true rate of interest on these two securities, when one is calculating either the terminal bonus in the one case, or the two-monthly bonus in the other? What is the true rate of interest, in real terms, in those two securities? That has not been made clear in the statement read to us.

I am not sure that any true rate of interest is needed. I suggest that we have moved out of the era of interest rates altogether and into what some people call negative interest—which seems to me to be some sort of aberration—and into what one should call a liquidity premium.

Mr. Ridley

My banker does not seem to think that we should go out of the era of interest rates.

Mr. Lawson

I am not surprised. I suspect that my hon. Friend's bank manager, like my bank manager, thinks in terms of money interest rates, as he is bound to do, whereas I was talking about real interest rates. I suggest that in real terms we are moving into an era when, instead of an interest rate, there will be a liquidity premium. If in an inflationary period people are told that the real value of their money will be retained, that will be a savings medium [column 230]attractive to them without the need for any rate of interest at all. It is difficult these days for any saver to retain the real value of his savings.

I should like to know what is the rate of interest. I hope that the Financial Secretary can answer my questions and give an indication, which we shall not regard as binding, of the Government's future policy in the area of index-linked savings bonds.

Sir John Hall

Like my hon. Friends the Members for Kingston-upon-Thames (Mr. Lamont) and for Blaby (Mr. Lawson), I welcome this rather hesitant approach to the indexing of savings. I only wish that the same happy attitude had been present when we debated in the House the amendments in indexation moved by the hon. Member for Cornwall, North (Mr. Pardoe) and myself at different times. Nevertheless it is nice to see the first step on the road to indexation, albeit, in the view of many of us, that it is incomplete. I have a number of questions to ask Sir Stephen, but I am not sure how far in order we are in debating the matter on “Clause stand part” .

On the assumption that we are in order, perhaps I might ask this question. I notice that in the SAYE scheme, if a saver fails to complete his contract his contributions are to be repaid with interest at the rate of 6 per cent. per annum, which, of course, is well below the current rate of inflation and well below the rate of inflation that many of us expect over the next few years. On the other hand, if the contract is interrupted by death, after the first year repayment will be made with due indexation of bonus.

Why the difference in treatment between the two? Why should the person who has to give up his savings, after perhaps a few years as he finds he cannot go on but needs his savings, be indexed at only 6 per cent. whereas more fortunate savers will receive the full indexation rate?

That is the only question I want to raise. The other points seem fairly clear to me, and I give a warm if slightly conditional welcome to the proposals.

Mr. John Pardoe

I add my welcome to the explanation that we have had today, and to this clause, and simply say that it has been a long time coming. [column 231]What kept it waiting so long? There is nothing really new, radical or revolutionary in the idea. When we had tithes, they were indexed to the average price of barley and grain generally. In the nineteenth century it was common practice to have all capital arrangements with gold clauses in them. Therefore, there is nothing new about indexation, and I cannot think why we have been so long getting it.

As a Liberal I cannot resist pointing out that it was in evidence to the Colwyn Committee in 1924 that Keynes recommended exactly what we have enshrined in the clause. Keynes was summarised then as saying:

“The only concrete suggestion made to us for a new form of security was by Mr. Keynes, who proposed the issue by the Government of bonds, the capital and interest of which would be paid not in a fixed amount of sterling but in such an amount of sterling as has a fixed commodity value as indicated by an index number compiled for the purpose” .

We have, therefore, at last caught up with that great Liberal philosopher and economist. It is, therefore, up to me to——

10.15 p.m.

Sir J. Hall

We have not quite caught up because we have not yet indexed the interest.

Mr. Pardoe

I shall come to that.

Mr. Lawson

If the hon. Gentleman is claiming originality for Keynes, he is mistaken, because in the nineteenth century exactly the same proposal was put forward by the great economist Alfred Marshall.

Mr. Pardoe

I was coming to Marshall, and Jevons as well. We could go on all night, but I shall not. I have the quotations from Marshall here.

Unfortunately, the Radcliffe Committee then turned it down, but luckily the Page Committee has now resurrected it, and the Government have accepted it. I want the Government to explain two points in addition to those already raised. In his statement the Financial Secretary said, “and from the fifth anniversary a fixed bonus equivalent to 4 per cent. of the purchase price will be added.” Does he not mean “on the fifth anniversary” ? If the word is “from,” that tends to mean that it is 4 per cent. bonus added in every year [column 232]from the fifth year. We know that it is only a five-year bond. I think it must mean “on the fifth anniversary” . That is a once-for-all bonus of 4 per cent. It is not an annual bonus, and a 4 per cent. bonus on the purchase price spread over five years is not very much. If that is intended to be an interest rate, I think we could quietly forget it.

Second, why have the Government not taxed, either in income tax or capital gains tax, the bonus? I am pleased that they have not. Members of all Oppositions ought always to be pleased if bits of money remain untaxed. But I do not see the philosophy behind it. As has been said, we were only last week trying to persuade the Government to index tax rates in another sphere. We tried to do it in this Committee last year and it was always turned down. I should like to know why the Government have decided to exempt this bonus from tax. I suspect that the reason is that they say “We cannot tax something that has just been created by inflation can we?” .

But that is the whole basis of the argument that we have been making all along. If we introduce the principle here, it will not be long before the Government will have to introduce it right across the whole range of taxation.

Sir John Hall

Capital gains tax.

Mr. Pardoe

It is high time they did. Incidentally, I do not know why the Financial Secretary does not add to his statement: “The purpose of the clause is to free those certificates from United Kingdom income tax, capital gains tax and capital transfer tax” . I am not sure what people of 65 are saving for, if they are not saving to pass it on. There are not all that many who will be saving for any other purpose, so the Government might as well exempt it from that as well.

Sir John Hall

The cost of the funeral, perhaps.

Mr. Pardoe

The cost of the funeral is inflating, too. It would be interesting to hear why the Government have come to their decision on this tax. I do not expect the hon. Gentleman to tell us why they did not on other taxes, but let us hear the reasons why they did this time.

Mr. Peter Rees

May I say, with profound respect, how grateful we were to [column 233]the Chair for giving us 10 minutes to appraise the gift horse that the Financial Secretary has led into the ring. Having appraised it, I am bound to say—I am sorry to strike a divergent note—that I am less than enthusiastic about it. The teeth seem to be singularly worn and unattractive——

Mr. Ridley

Yellow.

Mr. Rees

Yellow, or green perhaps. But, whatever colour should attach to this bond, it deserves close consideration. I welcome, as do other hon. Members, this first recognition by the Government that inflation plays a part in our fiscal deliberations. Like the hon. Member for Cornwall, North (Mr. Pardoe), I hope that they will extend this principle, this recognition, to the capital transfer tax, which we shall soon be debating, to capital gains tax, which is a form of capital levy, and to the whole range of personal reliefs. I have no doubt that others of my hon. Friends could amplify the field in which this principle should be enshrined.

I refer, first, to the bond which the hon. Member for Durham (Mr. Hughes) has immortalised as the geriatric bond. That sums it up with peculiar appositeness, and it is right that it should come from the bench behind the Financial Secretary, since we on this side may be accused of a certain partisan bias against any gifts coming from the Financial Secretary. The same cannot be said of the hon. Gentleman who sits behind him.

Why should one be saving at 65 years of age or above? At that age, I should have thought, most people would be concerned, particularly in these hard times, with income rather than with capital appreciation. What has happened to the Stock Market and other events of the past few days do not lead me to modify that conclusion.

This scheme is directed to an extremely narrow class of person and, as other hon. Members have pointed out, the return is positively derisory. Not only is the return not indexed but, leaving aside that aspect—I am very bad at mental arithmetic at this hour of the night—at best, one would get about 1½ per cent. on the geriatric bond unindexed. That will really set the pulses of Throgmorton Street racing when they [column 234]read about it tomorrow. Perhaps the old-age pensioners' associations will have something to say, too. The Financial Secretary may be made an honorary member up and down the kingdom for all that he has done for old-age pensioners.

On the second scheme also, which may have appeal for a slightly wider age bracket, again, if I calculate correctly, a bonus equal to two monthly contributions will show an unindexed interest of slightly over 2 per cent.

One does not wish to be captious about these things, but if we are to have a scheme of this kind which enshrines an important advance in principle, let us have something imaginative that will capture people's attention and enthusiasm. This will fall on the financial world tomorrow with all the lightness of lead. It will sink to the bottom of the financial pool and will be forgotten, except that it is the first time that this administration has recognised that inflation has to be taken account of in financial and fiscal calculations.

For that sole reason, I go back on what I said earlier and welcome it. We shall be building on this breakthrough at a later stage in Committee, and we recognise that we have someone whose heart, underneath a flinty exterior, beats at one with ours. We are glad to welcome the Financial Secretary, although he is sitting with stony indifference at the moment with the Chief Secretary, to our side of the Committee as recognising that at last the saving class—the rentier classes, if he likes—deserve a little consideration. For that reason, I welcome the announcement, after all.

Mr. Ridley

What an extraordinary age we live in, when a bond can be floated which promises to be returned in seven years with the same real value but which will be given the princely reward of £40 in interest if it is a £20-a-month subscription, which, if I work it out correctly, is well under ½ per cent. annual rate of interest. In order to preserve the value of our money, we have to accept under ½ per cent. interest.

Moreover, we have to make sure that nobody buys too much. We must have only a tiny ration each. It is Plumstead man all over again.

Mr. Graham Page

Durham man.

[column 235]

Mr. Ridley

Durham geriatric or Plumstead man. He is allowed to have £1,200 which keeps its real value, and anything over that is allowed to diminish. If this is a good bond, why do we have to ration it? If it is thought to be desirable to save, we ought to say that the minimum of £1,200, not the maximum. Why cannot everybody buy as much as he can afford of these bonds, if they are good? Is it that we do not want savings, or are we trying to give everybody a bonus? I am reminded of the hon. Member for Cornwall, North (Mr. Pardoe), with his cheap five gallons a month: everybody is allowed a little bit, and nobody is allowed any more. It is an extraordinary way to view savings. We are not looking at the effect upon the economy of a big inflow of money saved and not consumed. We are trying to give each citizen a little fillip. It is extraordinary.

Mr. Alf Bates

Will the hon. Gentleman give way?

Mr. Ridley

Yes, with pleasure.

Mr. Bates

I am most grateful. The hon. Gentleman seems to be suggesting that it is not fair to impose on people a maximum of £1,200, but it would be most beneficial if people were able to invest more than £1,200. Yet he was suggesting that it was rather measly to allow them only 4 per cent. in addition to the inflation-proofing. Is he not quarrelling with what his hon. and learned Friend the Member for Dover and Deal (Mr. Rees) suggested? Is this not a very much better investment than any other? And should he not say so? Can the hon. Gentleman at the same time suggest that this is a good investment and then suggest that it is a bad one?

Mr. Ridley

Honestly, I should advise the hon. Gentleman to try Krugerrands, or baked beans, or olive oil or brandy. [An hon. Member: “Wine” .] Or wine. They would be very much better investments than this bond.

The Chairman

Order. I do not think that the whole Committee is paying the same rapt attention to the hon. Member as I am.

Mr. Ridley

I feel deeply aggrieved that I have not a wider audience than you, Sir Stephen. I thought that I was receiving attention from some quarters [column 236]of the Committee, particularly the hon. Gentleman, and I want to respond once again to his point.

It is extraordinary that it should be accounted a privilege to the citizen that he may preserve the real value of £1,200 of his capital provided that he is prepared to forgo interest. That is the proposition before the Committee, and one accepts it as a step in the right direction. As one who has always favoured indexing, I welcome it.

Mr. Norman Lamont

I hesitate to strike a note of disagreement, but can my hon. Friend tell us any other time when it would have been possible to purchase a security with a life of five years guaranteeing a positive return?

Mr. Ridley

Absolutely not, I agree. I say that it is a step in the right direction. But why cannot we all be allowed to retain the real value of our investments? Why should we be so stingily treated? It is true of this investment. Anybody who saves his £1,200 and gets his £40 at the end of the period will then be subject to capital transfer tax. Probably 70 per cent. will be taken away if he leaves it to his son or heir. It is a very ill wind which blows against the investor, even with this tax.

I put to the Financial Secretary one question. One used to be able to have three lots of Save-As-You-Earn: one with the building society, one with the Government direct, and one geared to buy shares under an approved scheme under the Finance Act 1973. I assume that we shall all be allowed three rations of this new one. Is that right? If we are over 65, can we have one of the geriatric type as well? It would be nice to know, because that would bump up the amount of capital we are allowed to preserve from £1,200 to £3,600 plus £500, making £4,100. That is Plumstead man's capital—£4,100 which he is allowed to keep.

Mr. Russell Fairgrieve

I rise with some temerity to give a brief warning on the principle of indexation. No doubt, if I am talking a lot of rubbish hon. Members opposite, if not my hon. Friends, will be quick to tell me.

Nowadays, more and more groups of people are looking to indexation—wage agreements with a cost of living index, index-linked savings schemes such as we are discussing now, pension schemes with a cost-of-living increase written in, and [column 237]similar schemes bringing a far bigger vested interest in indexation and its implications. There is a danger of a built-in acceptance of inflation, which is a somewhat defensive policy when we could adopt a more attacking policy.

10.30 p.m.

We must remember those people who are not helped by all these pensions, wages and savings scheme increases, those already retired and people on permanent non-indexed incomes. We must take account of the effect on those who might want to be self-employed, to build up small businesses, where there can be no pensions, where there are no indexed profits or returns on capital, with the result that all could be lost.

I would give these words of warning. I have no objection in principle to indexation so long as we realise our commitment when it becomes available to a larger proportion of people—when 75 per cent. of the population are defended from their own actions by indexation. We must remember the remaining 25 per cent., because we shall have a permanent commitment to them.

Mr. MacGregor

I shall put one question to the Financial Secretary and then make a general comment. He made the point in his statement that the second scheme would replace the present Save-As-You-Earn second issue, but that holders of existing contracts could continue their contributions to maturity. Do I take it from that that holders of the second issue may convert into this new scheme?

Like my hon. Friends, I give a general welcome to the scheme, because it is the first major recognition of the principle of indexation. I differ from my hon. Friend the Member for Aberdeenshire, West (Mr. Fairgrieve), because I believe that if the scheme were applied at least to tax levels, both at basic and higher rates, it would be a helpful contribution in the battle against inflation, because it might have some effect on wage demands. However, I should be moving from the subject of the clause if I embarked further on that matter, so I shall desist from doing so.

I also wish to welcome the scheme because it is the first dawning of enlightenment by the Government on [column 238]savings since last February. I shall comment on the fact that it will be free of United Kingdom income tax and capital gains tax. Presumably, that has been done to ensure that the returns keep up with inflation.

We have a clear example of the illogicality of the Government's approach to savings. If we look at current inflation levels and the returns on all other forms of savings—whether in building societies, equities or in the managed or guaranteed income bonds we have spoken of in previous clauses—we see that in every case none of them is keeping place with current inflation levels, even in gross terms.

The hon. Member for Bebington and Ellesmere Port (Mr. Bates) said that this was a much better investment than any other. That is so, but why? It is because not only are the other forms of saving not keeping up in growth terms, but by their fiscal policies the Government are ensuring that in net terms they are very far from keeping up with inflation.

They have made a special exception for this small scheme.

I am thinking not just of the levels of direct taxation on investment income, not just of the investment income surcharge as the extra measure introduced by the Finance Bill, not just of the fact that in all these savings schemes—except building societies—capital gains tax is applied, whereas it is not in this scheme. We all recognise now that this is a classic case for indexation, because capital gains tax is often applied not to capital gains.

I am thinking that the Government have not greatly relaxed the dividend freeze that has held back over the past five years or so the returns to savers in equities. In all these ways, and indeed in some of the amendments we debated earlier today, some of the built-in bulwarks against inflation in other methods of saving have been removed.

We are thus reaching the extraordinary situation in which special Government measures are giving concessions to savers in this scheme while the Government are ensuring by all their other fiscal measures that the returns on most other forms of savings are bound to fall even further behind the levels of inflation. I hope that the Government will [column 239]take heart and learn lessons from their conversion on this scheme and, in the light of inflation, will review the returns on all other forms of savings beyond those offered by the Government and will take measures in the next Finance Bill to deal with savers in those other forms in the same way as they have those in this scheme.

Mr. Lawson

I intervene briefly in this important debate on the indexation of personal savings. I echo very much the comments of my hon. Friend the Member for Norfolk, South (Mr. MacGregor) about the evils of a system in which not only is inflation itself a form of taxation, but on top of that one is liable for extra tax on the notional gains, which are not real gains at all, that inflation has ushered in. One therefore has two extra doses of taxation through inflation, over and above the taxation that Parliament in its wisdom has thought fit to impose upon the citizen.

I should like to answer the point made by my hon. Friend the Member for Aberdeenshire, West (Mr. Fairgrieve), who was afraid that indexation might encourage the Government to inflate still more. This is a serious worry for many people. I rise to reply to him because I was sorry to see the Chief Secretary nodding in agreement when my hon. Friend was uttering those sentiments.

This issue was dealt with in rather summary form by Dr. Roberto de Oliveira Campos in a lecture to the Stock Exchange. It was also dealt with more thoroughly in the Page Report. I draw the Committee's and particularly my hon. Friend's attention, and indeed the Chief Secretary's attention, to paragraph 578 of that report where the Page Committee, after considering very thoroughly the question of whether the introduction of indexation might somehow encourage Governments to go in for more inflation, concluded that by introducing something of the sort that the Financial Secretary has been talking about now:

“The Government would thereby be admitting that if it failed to check inflation the saver will not suffer because the real value of the investment would be made up; but success in combating inflation would mean a safe (real £ for £ guaranteed) investment plus a rate of interest appropriate to a stable-money period” .

We have had discussions as to whether there should be that and what would be [column 240]appropriate, but that is another point—

“The Government would therefore be backing its confidence in its anti-inflationary campaign with the Government money. If an index-linked security were launched upon this basis it might have the reverse of an inflationary effect and might usher in an era of straightforwardly cheap borrowing” .

That was the Page Committee's conclusion. Whether a whole new era of straightforwardly cheap borrowing will be ushered in is very much in the Government's hands in their other policies, their overall financial and economic policies generally, and further steps in indexation.

But it is clear that if a bond of this kind is introduced, if the Government are then to succeed in their anti-inflationary policies, they are able to borrow money from the public very cheaply indeed, at a negligible rate of interest. They therefore have every incentive not to inflate, because there is virtually no rate of interest on this, whereas if they are borrowing in money terms, at high rates of interest—in my terms, 15 per cent. to 18 per cent.—the reverse is the case, and there is every incentive to inflate because the real burden on the national debt will steadily diminish.

I think that the Page Committee is right and that the introduction of this bond, far from encouraging inflationary tendencies in public finance, will do the reverse.

Mr. Tony Newton

I shall not add too much to the flow of oratory from the Opposition side. I shall add not to the flow of oratory, but to the spate of words. I am not attacking my hon. Friend the Member for Blaby (Mr. Lawson)—[Hon. Members: “Why not” ?] I think he is doing very well. I have three diminutive points to make amidst the general bonhomie.

First, in support of my hon. Friend for Norfolk, South (Mr. MacGregor); it is time the Government sorted out their attitude to people at different income levels in these proposals. We have seen a steady stream of measures designed, in effect, to reduce the value of savings for large numbers of people who are regarded as wealthy by the Government, although I do not want to argue that matter now. But we now have a scheme which, apart from anything else, will give significantly greater benefits to people the more tax they pay. [column 241]It is foolish that we should have this stream of inconsistent measures, with one lot doing one thing and another lot doing another.

My own belief is that we should have far more attention paid to people of all income levels at retirement age. It is very foolish and difficult for the people concerned, for the Government to have some schemes less attractive and hitting some people and then giving them direct encouragement, as far as they can, to go into another scheme that gives the higher rate taxpayers considerable additional benefits in comparison with others. I do not expect much comment on that because I suspect that it means the Government have actually learned a little wisdom in the past few months since the debates earlier in the year.

My second two points are somewhat less aggressive. Why do we have in this old persons' scheme the delay of one year before the money will be repaid with any adjustment for the cost of living? It is unrealistic to suppose—the proposals imply that the Government do not expect—that this will be a significant addition to new savings. It is in effect a scheme that enables retired people to protect some small part of their savings against the ravages of inflation. There is no reason why that protection should not be extended to the first year of the deposit just as much as to the second, third, fourth and fifth years.

I can see the argument on the other scheme, where one is genuinely looking for new saving and one wants to give encouragement to keep the money in. But here we are talking about a scheme devised to enable people to have some part of their existing savings protected against inflation, and there is no good reason why they should not be protected during the first year, if they wish to draw on those savings, just as much as in any other year.

Finally, although I have not had an opportunity to check, I recollect that there is constructed, and has been for some years, a separate index of retail prices, other than the general retail price index, applying to the purchasing pattern of retired people. I believe there is some evidence—I speak without checking the figures—that the cost of living for retired people has risen somewhat [column 242]faster than the general index of retail prices, as would be expected at a time when food prices have been rising so rapidly.

In those circumstances it would be sensible to consider relating the old people's scheme to the index specifically related to their expenditure pattern, and not simply to the general index of retail prices applying to the population as a whole. I would appreciate some comments on that.

Dr. Gilbert

It seems an awfully long time since I rose to read that statement to the Committee. I hope that I can answer most of the questions put to me.

The right hon. Lady the Member for Finchley (Mrs. Thatcher) asked a question about the effective rate of interest for the 4 per cent. bonus after five years. I am advised that the grossed up effective annual rate is just over 1 per cent. It is a positive real rate of return. It is impossible to calculate the effective real rate of return because one does not know what the inflation rate will be over this period. That is the answer to several of the calculations that have been made by hon. Gentlemen opposite who, I am sure, will appreciate that they were dealing with a nominal rate that was on top of a constant real value for the capital. There will be a positive rate of return. That is, of course, the main point of the scheme.

The second issue the right hon. Lady raised was whether there would be a bonus after seven years. Yes, after seven years, but not after five years.

The third question was about the building societies. The building societies were invited to continue their present association with PAYE but declined, principally on grounds of cost. We are always open to consider applications from them on their merits and they will be determined if, as and when they are made by the building societies. At the moment, the initiative lies with them.

10.45 p.m.

The right hon. Lady's final question was, if they should eventually be sold through building societies or other outlets, such as trustee savings banks, who would top up the scheme. The answer is that it would be the Government.

The next question, which came by way of an intervention by the hon. Member [column 243]for Blaby (Mr. Lawson) in the speech of the hon. Member for Kingston-upon-Thames (Mr. Lamont), was whether a retirement pensioner could have both the SAYE scheme and the pensioner scheme. The answer is yes, it is possible to have both if the person is entitled to both. I believe that answers the point raised by the hon. Member for Cirencester and Tewkesbury (Mr. Ridley). I suspect it will not be long before we are all geriatrics, the way the Committee is proceeding, but that is another matter. I must not be tempted, Sir Stephen, into discussing that.

The hon. Member for Kingston-upon-Thames pointed out that there was no real return on SAYE under this scheme if it were held for only five years. That is true. On the other hand, there is no negative return, either. The capital is preserved, which is the important feature, and I am grateful to the hon. Member for welcoming that.

The hon. Member for Blaby commended the Government for linking the scheme with the retail price index and threw doubt on the application or usefulness of any other index in any other set of circumstances. His hon. Friend the Member for Braintree (Mr. Newton) has indicated the circumstances in which another index might be appropriate. The hon. Member, who was talking about a totally different set of circumstances—a totally different index—was in no way relating his remarks to the situation with which we are dealing here. He was talking about movements on the £25,000 relief for mortgage interest.

The hon. Member also asked how much new and diverted savings would be generated by this scheme. I cannot possibly give an answer to that. It is purely conjectural. The scheme is a modest one and I make no claims for its being the end of the road for index-linked savings. That is why the amounts that have been set as maximum holdings are modest, and we shall have to step carefully in this direction. There is a danger of siphoning funds away from other long-established savings institutions, as I am sure hon. Members in all parts of the Committee recognise. It is no part of our intention to try to harm traditional outlets built up over the years.

The hon. Gentleman asked me what [column 244]were the real interest rates. I have already touched on that subject.

Mr. Lawson

The hon. Gentleman has kindly answered a number of my questions, some better than others. He has given only the rate of interest on the geriatric problem. He has not given the rate of interest on the other problem. I ask him to tell us the rate of interest on both.

Dr. Gilbert

Subject to correction, I am advised that the grossed up effective annual rate would be something over 2 per cent. I say that subject to correction.

The hon. Member for Wycombe (Sir J. Hall) asked why there was different treatment in the interruption of SAYE plan whether the interruption was occasioned by death or other circumstances. The reason is that death is force majeure with which none of us can cope, as an interruption of savings or in any other respect, but we want to keep an incentive in the scheme for people to continue their contributions to it. That is why there is a difference between the two sets of circumstances. The hon. Member for Cornwall, North (Mr. Pardoe) was quite right in construing “from” to equal “on” in the context of the statement. He asked me why these schemes were not taxed, but of course the savings certificate and the old SAYE themselves were not taxed and we are introducing no new principle at this stage.

The hon. and learned Member for Dover and Deal (Mr. Rees), in an uncharacteristically ungenerous reception to the scheme, rather poured scorn on the effect that it would have on the financial world and what the reception of a scheme of this sort would be in Throgmorton Street. First, this scheme is not tailor-made for Throgmorton Street. It is intended for people of modest savings. Secondly—I should have thought that the hon. and learned Gentleman would have taken this point on board—however little he may think of this scheme it is doing a lot more for savers than any sophisticated financial genius in Throgmorton Street has ever been able to dream up for the sake of the country.

Mr. Peter Rees

I should have thought that the unit trust and investment trust savings movement did a great deal more [column 245]for small savers and is likely to do more in the future when we are through this particular problem than any minuscule scheme, geriatric or otherwise, which is likely to emanate from an administration presided over by the Chancellor.

Dr. Gilbert

That is a valid judgment but it does not address itself to the question of whether or not those people in the City managed to produce anything that is index-linked and inflation-proof for the small saver. The answer, as the hon. Gentleman knows, is that they have not.

Mr. Norman Lamont

Do I take it from that statement that if private institutions were to make proposals for index-linked savings instruments, if one can call them that, the Government would have no objection?

Mr. MacGregor

Further to that point, may I ask whether the Government would allow the same relaxation on income tax and capital gains tax as they are able to do for their own schemes? This is the element which makes a great deal of difference.

Mr. Peter Rees

Further to that point——

The Chairman

Order. I think we should allow the Financial Secretary to answer one interruption. He already has two to answer before we get to a third.

Dr. Gilbert

It is interesting for Treasury Ministers to see how many hon. Members opposite are ready to spring to their defence. The point is that this is, as has been generally recognised by Opposition Members, a totally new departure for the small saver in terms of keeping his capital intact. No other scheme, through either private or public institutions under any previous Government, has addressed itself effectively to this point, and most hon. Gentlemen have been good enough to recognise this.

Sir John Hall

The hon. Gentleman has not really answered the point addressed to him. The question was whether the Government would be prepared to give the same tax treatment to the schemes set out by private institutions as they give to their own schemes.

Dr. Gilbert

These matters of having——

[column 246]

Sir John Hall

“Yes” or “No” ?

Dr. Gilbert

No. The treatment of national savings certificates on a taxfree basis is nothing new. I am not aware that financial institutions have even offered to guarantee to members of the public that the value of their savings could be guaranteed for them before tax, let alone bring in tax inducements. The hon. Gentleman is not on to a particularly good point there.

The hon. Member for Aberdeenshire, West (Mr. Fairgrieve) pointed out that this was a defensive policy, about which he is absolutely right. I do not think we should apologise for that. It is a defensive policy against the effects of inflation. It is not intended to be directed to the causes of inflation. It can be debated perhaps at another time whether Government policies in that direction are appropriate.

The hon. Member for Norfolk, South (Mr. MacGregor) asked whether holders of the second SAYE issue could convert it to the new scheme. The answer is “No” .

The hon. Member for Braintree (Mr. Newton) asked about the restrictions in the first year. The reason why we are not making available the facility requested was that the money would flow in and out very quickly and that large administrative costs would be involved. The hon. Member's second point about the old-age pensioners' index was a good one. Of course the scheme is under way, but a consideration of that sort should be looked at for any extension of the scheme and I am grateful to the hon. Member for raising the point.

I think the Committee will be frantic to hear my final piece of news, which is that on current expectations of take-up some 300 additional civil servants may be employed in the constituency of my hon. Friend the Member for Durham (Mr. Hughes).

Question put and agreed to.

Clause 11 ordered to stand part of the Bill.