Lords amendment: No. 2, in page 1, line 20, leave out
("or section 176 of the Pension Schemes (Northern Ireland) Act 1993")
§ Mr. Rooker
I beg to move, That this House agrees with the Lords in the said amendment.
Mr. Deputy Speaker
With this, it will be convenient to discuss Lords amendments Nos. 3 to 16, 83, 89 and 97 to 101.
§ Mr. Rooker
The Government disagree with Lords amendment No. 3. We agree with the others.
I am not sure what issues the House may wish me to discuss in relation to these amendments. The key issue is probably the purchase of annuities before the age of 75, a matter on which the other place spent some time. I shall concentrate on that matter, but, given the constraints of the guillotine, I shall be happy to deal with any points to do with the other amendments, some of which are technical. I hope that the House will be able to make quick progress so that we may move on to deal with bankruptcy, war widows, pension sharing and bereavement allowances before the guillotine comes down.
Lords amendment No. 3 removed the need for annuity purchase under a stakeholder pension scheme. I hate to say so, because when in opposition I always used to think that it was a lame excuse, but we disagree with the amendment because it is technically flawed. Tax legislation requiring annuity purchase before 75 is unaffected by Lords amendment No. 3. There is no mechanism by which a member can draw benefits beyond the age of 75 from a tax-approved pension scheme or stakeholder scheme other than through an annuity purchased before he or she has reached that age. The amendment refers to the wrong area of the law. Nevertheless, I sense the mood of the House. During one of my brief visits to the House of Lords during the passage of the Bill, the noble Lords were discussing this very point.
The primary purpose of a pension scheme is to provide a secure income in retirement. Valuable tax privileges are accorded to pension arrangements. The grand total of tax relief—which is essentially the Government's contribution to pension schemes in this country—stands at £11 billion a year. That is the Government's contribution to the pension scheme kitty and it makes the general public value saving for a pension. [Interruption.] I do not agree with the hon. Member for Havant (Mr. Willetts), who can make his point from the Opposition Front Bench. These valuable tax privileges are not available to people who are not contributing to pension schemes.
§ Mr. Willetts
The Minister refers to "valuable tax privileges". Contributions to people's pensions are, admittedly, tax exempt as they come from pre-tax income. However, that income is taxed on receipt—the right point at which to tax it, since any other arrangement would lead to double taxation. The regime is perfectly fair and symmetrical; it is not a special tax break.
§ Mr. Rooker
One reason why it is tax free is that the income stream is taxed. I do not seek to hide the fact that a balance is struck during a person's lifetime. However, the tax reliefs are conditional on the fund being used for pensions. That is the key issue.
377 Annuities provide a reliable lifelong income. There have been many debates about annuities, and I will share with the House an article about annuities that I read the other day—I have read a considerable amount about annuities in the past three months. I refer hon. Members to an excellent report from the Association of Unit Trusts and Investment Funds written by my friend and one-time colleague in this place, Dr Oonagh McDonald. I have met Oonagh to discuss the matter—I know that she has also talked to the Treasury—and she makes a valuable contribution to the debate. One paragraph caught my eye recently. It states:Imagine the scene: a man in a sharp suit asks you to save regular amounts for 30 years so that you can build up a nice big pot of money for your retirement. It sounds hugely sensible, so you follow his advice. But when you retire he insists that you give him all of the lump sum you have saved. You get back a very small part of your savings, he pockets the rest and pays you a pitifully low income to compensate. When you die, he keeps the pot of money for himself and your family gets nothing.That quote comes from the first paragraph on page 49 of the September 1999 edition of Sainsbury's magazine. The article is headlined "Twilight Robbery", and it was drawn to my attention by a family member who said, "You've been talking about annuities and reading up about them, so you had better read this".
You will be pleased to know that I am not about to launch into a general debate about annuities, Mr. Deputy Speaker. However, many questions must be asked about that system. The fact remains that there is an age limit of 75. When I first came to the Department, I asked naively, "If a person finishes work at 65, what does he or she live on until age 75?" I was told that such people would have capital or other investments. I do not claim that it is about fat cats and the rich only; this is a serious issue about people's future pension provision and I intend to consider it seriously during my time with the Department. In the meantime, I ask the House to assist me in reversing the Lords amendment regarding stakeholder pension schemes.
I have read—and people have argued—that annuities are a bad deal. That is what the paragraph I quoted implies, but it is not necessarily always the case. Current annuity rates are somewhat less than their previous levels. However, if we can assure the public that we are entering a period of long-term low inflation, the purchasing power of annuities will be maintained far better than occurred during the 1970s and 1980s when there was fairly high inflation under Governments of both political persuasions. Inflation reached 16 per cent. or so under the previous Government and—before anyone corrects me-25 per cent. under the previous Labour Government. It is best to get such matters out of the way at the start. If there is a period of long-term, reliable, low inflation, annuities will maintain their purchasing power far better.
The income draw-down facility provides some flexibility for those who wish to defer annuity purchases. The danger is—this is not a nanny state—that, if income draw-down increases with age, the pot might be dissipated, leaving no money and recourse to state funds. That is why there is an age limit of 75: people are forced to acquire a secure income for the rest of their lives.
We continue to monitor the position. The Inland Revenue is engaged in an exercise to assess how the income draw-down arrangements are working in practice, and Dr. McDonald's contribution in that regard has been 378 extremely helpful to the Government. We will assess in the round whether there is a need to change the rules on income draw-down in light of the current exercise.
At this stage, however, bearing in mind that the Bill introduces the new stakeholder pensions, it would be wholly premature to make that change only for stakeholder pensions. As I said, the amendment is, in any event, defective. The change would bring about two sets of rules for different money purchase schemes, and I therefore ask the House to disagree with Lords amendment No. 3. If necessary, I will be happy to explain our position on any of the other amendments.
§ Dr. Lewis Moonie (Kirkcaldy)
I did not expect to speak quite so early in the debate, so I am all the more grateful to you for calling me, Mr. Deputy Speaker. I am sure that my hon. Friend the Minister of State will be pleased to know that I do not intend to oppose him on Lords amendment No. 3—I note the look of relief on his face—but I want to speak briefly in favour of the important principle enshrined in the amendment, and I urge him to take careful note of that principle.
My hon. Friend said that the money from a pension scheme must be used to fund a pension. To be exact, in this country the money from a pension scheme must be used to fund a pension by the purchase of an annuity. That is not the case in other countries. There are plenty of examples available, and it is not beyond the wit of this country to devise alternative methods of providing for secure income draw-down so that funds are not dissipated by wasteful excess and people are not a burden on the state in later life. I know that the Minister and his Department are sympathetic to the idea of reform, and in the Inland Revenue there is at least now the will to make that change, however defective amendment No. 3 may be.
I want to draw the Minister's attention in particular to the position of thousands of members of the Christian Brethren in this country who are debarred, by their sincerely held beliefs, from taking out an annuity. What recourse do they have? They cannot receive the tax advantages that everybody else receives by saving for a pension, because they cannot take out an annuity. They do not believe in doing that because it is a gamble on their life. Those people work hard, pay their taxes, and honour their duty to the Government and the country, but they are given rights inferior to those that the rest of us have to provide for old age.
That position is grossly unfair, and the fact that it applies only to a minority of people in this country does not alter the fact that they are being discriminated against. I therefore urge the Minister to consider their case sympathetically and to add his voice to the clamour that is now arising in the press for the annuity system to be made much fairer.
§ Mr. Michael Trend (Windsor)
If amendment No. 3, which was introduced in the Lords by the Government, is defective, I wonder whether amendment (a) in my name is doubly defective. However, I shall seek to persuade the Minister that the age-75 rule should be abolished for all money purchase pensions, and not only stakeholder pensions, as the Lords amendment suggests.
379 I was pleased to hear the Minister mention Dr. Oonagh McDonald, because her report agrees with that view. The campaign that has been led in this House by my hon. Friend the Member for Arundel and South Downs (Mr. Flight), which has received considerable press attention, has highlighted the difficult position faced by people who are coming up to age 75, when they will be forced to take out an annuity.
The House knows that our amendment seeks to abolish the rule whereby those with money purchase pension schemes are obliged to convert their savings at age 75, and Lords amendment No. 3 would abolish that rule solely for stakeholder pensions. We have campaigned for some time for the extension of that change to all money purchase schemes. Such a change would not break new ground. In 1995, the previous Government raised from 65 to 75 the age at which an annuity had to be taken out. We believe that the policy should be developed and the age-75 rule abolished.
The Minister made the good point that we would not want pension pots to be whittled down to the point at which people were forced to rely on state assistance, and I am happy for there to remain a requirement to ensure that nobody deliberately spends, spends, spends and becomes a burden on the taxpayer. However, that would be extremely unlikely because the people whom we are discussing are almost by definition some of the most responsible and conscientious in the country and of all levels of wealth. They will have forgone some of the pleasures of life to save for old age, and they are highly unlikely to break the habit of a lifetime in retirement.
Those coming up to the moment in their life when annuities must be purchased face a bleaker prospect than they have for some time. Owing to plummeting annuity rates and to the famine of long-term gilts, a person annuitising a pension scheme in the recent past could expect roughly half the income that would have been commonplace a few years ago. Once one has struck a deal on an annuity, it is for life; and if interest rates change and prospects for annuities get better, people will feel that they have had a very rough deal.
People are living longer. Naturally, those who are today buying into a low income as a reward for lifetime saving feel aggrieved. I have received letters from many constituents on the subject, as, I am sure, have all hon. Members. It seems only just to allow people the prospect of waiting a little longer and seeing whether they can get a slightly better deal later. Yes, we want people to have a secure income in old age. We are saying that they should be given greater flexibility as to the moment when they secure it. I urge the Government to treat the problem with great attention.
The Minister forbore to mention the review that he has up his sleeve—which is the usual response to our arguments in debates on the subject—and to suggest that the matter was being dealt with. However, with every week that passes, more and more people fall into the tough trap that is the 75-year rule. Once they have fallen into it, they have fallen into it for good.
I wonder what effect the current bad publicity about the annuity question might be having on stakeholder pensions. They are money purchase schemes, and the reputation of all money purchase schemes is surely 380 tarnished to some extent if there are serious problems over the expected returns of annuities, as there are at the moment.
I agree with the Minister on one point. This is not an attack an annuities. They remain popular. They are reliable, and there are now many different ways in which one may take out one's annuity; but the 75-year rule is causing distress, and should go. I know that the Minister is looking at other ways—there are many—in which to increase flexibility, but the 75-year rule is causing more distress than anything else.
Owing to the extraordinary way in which we are doing business tonight, I shall not seek to divide the House on this matter, important though it is; but the Government should be in no doubt that this is a battle to which we shall return again and again.
§ Mr. Webb
I shall not detain the House long. I simply support the spirit of Lords amendment No. 3, while accepting what the Minister says about its technical deficiencies. The hon. Member for Windsor (Mr. Trend) is right to cite his hon. Friend the Member for Arundel and South Downs (Mr. Flight), who has pursued the issue doggedly. Some months ago, he took part in an Adjournment debate that I initiated on the subject—a full 90-minute orgy of discussion on annuities. It was a memorable way of spending a morning.
I was interested in the comments of the hon. Member for Kirkcaldy (Dr. Moonie). I, too, have been approached by Christian Brethren who are worried about this issue. Although one might argue with their interpretation of scripture, it is a sincerely held belief, and it would be unfortunate if Government policy forced them into something against their will or precluded them from making sensible pension choices. I echo what the hon. Gentleman said on that point.
The pensions Minister has mentioned several times that he is relatively new in his post. He seems to have acquired the desirable qualities of his previous boss: the Minister of Agriculture, Fisheries and Food has a knack of disarming his critics by agreeing with them. Now that we have got through the fevered atmosphere of the debate leading up to 7 o'clock, the pensions Minister has agreed with us twice in the past hour, much to our surprise and encouragement. We were encouraged by what he said on the state earnings-related pension scheme. I hope that I do not misrepresent him when I say that it is encouraging that he appears so open-minded on the 75-year rule.
There appear to be only two objections to relaxing that rule. One is that people might become a burden on the state. There are plenty of ways to safeguard against that. The other is that such flexibility could be used as a form of tax avoidance. Rules already exist about the taxation of pots of money passed on to dependants, and surely those rules could be tightened. Although the Minister's predecessor argued against my case in an Adjournment debate six months ago, that was necessary because that was the Government line then. I sense that it may not be for much longer, and welcome that development.
§ Mr. Cousins
I support the comments of my hon. Friend the Member for Kirkcaldy (Dr. Moonie).
This debate may ultimately prove to be one of the most important and significant in welfare reform. Although I take the point of Opposition Members about the general 381 nature of money purchase schemes, it is of particular meaning to raise the issue in the context of stakeholder pensions, which will extend the money purchase principle to new categories of savers who might be ill prepared and much more poorly advised than many of those who are currently taking out money purchase schemes over long periods. This is an opportunity to rethink the issue.
Some of the short-term measures that could be advised, such as extending the date on which annuities need to be taken out, could be considered. Looking at income draw-down might be another possibility. However, for people who may have very small pension savings pots, the income draw-down route could be quite dangerous and risky. We must consider a new kind of savings instrument that might combine some of the benefits of individual savings accounts with those of stakeholder pensions, allow flexibility between the two, and possibly in future also take into consideration the Government's proposals on long-term care. In short, there must be something rather more like an American 401K plan than the present money purchase schemes that current British tax law allow.
I hope that my hon. Friend the Minister will consider the matter and that proposals will be made so that stakeholder pensions, from the very beginning, will have new characteristics that are free of some of the rigidities of money purchase schemes, which small savers cannot afford.
§ Mr. Flight
I thank my hon. Friend the Member for Windsor (Mr. Trend) and the hon. Member for Northavon (Mr. Webb) for their kind comments.
Now that we have a Minister responsible for pensions who is full of such common sense, I urge him to spend more time with Dr. Oonagh McDonald and to hasten the Government's addressing of the issue. I shall cover three key points.
First, the annuity is mostly taken out as a guaranteed annuity, which must invest in gilts. People are now retired for a long time. Even if a pension were drawn at age 75, it is quite likely that one partner would live for another 15 to 20 years. Any investment adviser who recommended putting all one's money in gilts for a 20-year investment would be done by the Financial Services Authority for bad advice. That is exactly what the guaranteed annuity does. It is simply not the right investment medium for a pot of capital—albeit one that is being run down—that is needed to provide an income over 15 to 20 years.
The second crucial point is that stakeholder pensions—assuming that they get off the ground—will greatly increase the volume of money purchase pensions that are building up. The guaranteed annuity depends on adequate gilts to operate at all. If we are to have continuing fiscal virtue and Government surpluses—or at least no Government deficits—where on earth will those new long gilts come from?
The Minister may have seen advice to the Government to fund themselves less at the long end in order to save money. If there is rising demand and nil new supply, or even a reduction in supply, it is not surprising that real interest rates at the long end fall, not just nominal ones. A great increase in money purchase pensions and a balanced budget just do not make sense from an investment point of view.
382 My third point is one that Dr. Oonagh McDonald has made very strongly. It may be a no-brainer for those with generous money purchase provision to limit what has to be an annuity to an amount such that they would never need to prevail on the state. The many people who need to be freed, particularly hundreds of thousands of women, are those who may have £30,000 or £40,000 in a pension scheme and may build up no more than that in today's money in a stakeholder scheme. I find it patronising to suggest that they will do better with a paltry annuity that they are forced to buy than they would by looking after the capital themselves. They will look after it much better. It will be the great nest egg for them against old age and nursing homes.
I conclude by asking the Minister to get stuck into the subject and to come up with changes quickly. The subject has been well aired and most of the arguments have been won in most forums. I am sure that Dr. Oonagh McDonald will be able to fill him in with any details that he requires.
§ 9 pm
§ Mr. Rooker
Hon. Members commented on the requirement to purchase annuities by the age of 75. I always have an open approach—I even had one before 7 pm, so I have not changed my attitude. The age of 75 struck a balance at the time when it was chosen. I have already said that the Inland Revenue has the matter under review, in the time-honoured phrase.
My hon. Friend the Member for Kirkcaldy (Dr. Moonie) made an important point. Although private pension arrangements are voluntary and one does not have to enter into them, some private pension arrangements are perceived to be a gamble on one's life, so that people of a certain religious disposition are prevented from entering into them.
I am not fully assured that there are pension arrangements suitable for such people, whereby they would still obtain the benefit of the tax advantages. It is no good suggesting that they put their money in a building society. It is possible that new financial savings vehicles that are available, such as ISAs, would be suitable. I could have suggested PEPs, but those are no longer. If one is saving for a pension, one must know that the system will continue to exist for many decades, while one builds up a pot.
The matter had not been drawn to my attention until my hon. Friend recently raised it with me privately. I shall be happy to look into it. I am taking on extra burdens every half an hour as I speak, but these are important issues and it is the Government's job to find a solution. That is what government is about. We shall try to do that.
If my hon. Friend wants to come and see me or writes to me with the details, I shall get the Department of Social Security and the Treasury to look into the matter with regard to people of a certain religious disposition who cannot take up existing schemes, although I need to be reassured that suitable schemes are available.
The hon. Member for Windsor (Mr. Trend) mentioned the bad publicity, which could cause problems. We must get the legislation on the statute book for stakeholder pensions and ensure that the Government do their job of advertising, selling and educating, while the industry promotes particular schemes to a population whom, by and large, the pensions industry has passed by on the other side of the road. People with moderate earnings of 383 £9,000 to £20,000—the target group—may only remember headlines about mis-selling and misinformation, so it is important that such schemes are not affected by a bad press.
That point was made also by the hon. Member for Arundel and South Downs (Mr. Flight). I pay tribute to the efforts that he and others have made. As a late incomer, I claim no credit for the debate. That is a result of our system of government. I have picked up the fact that an important issue is involved, arising from the Government's legislation for stakeholder pensions. There is a target group of 5 million people who, by and large, in view of their salaries, are not big savers. We have to create a system to sell them the concept of a money purchase pension scheme, which is something those people would never have contemplated previously, so the Government are obliged to get it right. We have to change the target group's perception, because we want to get as many of them as possible into stakeholder schemes as soon as possible. At the same time, we have to be careful of knock-on effects on the rest of the industry—we do not want bad publicity blowing up around specific problems with money purchase schemes to undermine stakeholder pensions.
As my hon. Friend the Member for Newcastle upon Tyne, Central (Mr. Cousins) said, it is important to be flexible. To the extent that I am allowed an open mind as a Minister, I have one. I have already said that I am making my own inquiries and asking my own questions. The issue did not come from the Box, but arose from debates in the House of Lords and from Dr. McDonald's contacting my predecessor. I shall be happy to take the matter further. That being so, and knowing that the issue will not go away, I trust that the House will agree, in this interim period, to reject Lords amendment No. 3.
§ Lords amendment agreed to.
§ Lords amendment No. 3 disagreed to.
§ Lords amendment Nos. 4 to 16 agreed to.