§ 'In section 648A Taxes Act 1988, paragraph (1) after the words "approved personal pension scheme", add "or an approved retirement annuity contract within the meaning of section 620 Taxes Act 1988".'.—[Mr. Edward Davey.]
§ Brought up, and read the First time.
8.30 pm§ Mr. Edward DaveyI beg to move, That the clause be read a Second time.
Mr. Deputy SpeakerWith this it will be convenient to discuss the following: Government amendments Nos. 83 and 84.
Amendment No. 145, in schedule 13, page 294, leave out lines 15 and 16.
Amendment No. 146, in page 294, line 18, at end add—
'(3) Subsection (1) shall not prevent the approval of the scheme which contains no requirement to purchase an annuity by a certain age.'.Government amendments Nos. 85 and 86.
§ Mr. DaveyThis group contains some significant amendments. Government amendments Nos. 83 to 86, which cover pension contributions to pension plans running concurrently, are incredibly important. I believe that the hon. Member for Arundel and South Downs (Mr. Flight) raised the matter in Committee. Amendments Nos. 145 and 146 cover the annuity issue. I do not intend to cover those two important issues. I shall leave them to my hon. Friend the Member for Northavon (Mr. Webb), who is far more eminently qualified than I am to cover them in detail.
I wish to speak to new clause 8, which is more modest. Again, it takes up the issue of unnecessary bureaucracy and the way in which that hits low-income pensioners. It makes a practice that is permitted by the Inland Revenue into a statutory requirement to help pensioners.
In specific detail, new clause 8 deals with the way in which retirement annuity income is administered. At the moment, tax on retirement annuity income is deducted at source at the basic rate, with a non-taxpayer option for gross payment on submission of form R89. That is different from the way in which other sources of pension income are administered for income tax.
I do not know how familiar tight hon. and hon. Members are with the amazing number of different ways in which different forms of pensioner income are administered for income tax purposes. I am grateful to the 301 low incomes tax reform group of the Chartered Institute of Taxation for the way in which it has set that out in its paper entitled, "Older people on low incomes. The case for a friendlier tax system." It bears reference to because it shows how complex the administration of income tax has become for pensioners, who often rely on a wide variety of often very small income sources.
Some sources of pensioner income are tax exempt: premium bonds, national savings certificates and, for National Savings bank ordinary accounts, the first £70 of interest. There are sources of pensioner income that are taxable, but paid without tax deducted at source. Those include National Savings bank ordinary accounts where the interest is more than £70, investment accounts, income bonds, capital bonds and pensioners bonds. There is a source of pensioner income that is taxable, but paid with tax deducted at source at 20 per cent: first option bonds.
When we go into the wider general investment market, we see another set of tax administrative arrangements related to pensioner incomes. Personal pensions and occupational pensions are taxable and paid with tax deducted by the pay-as-you-earn code number. Retirement annuities—the subject of the new clause—are taxable and paid with tax deducted at the basic rate of tax, with the non-taxpayer options that I have described. The income element of the return from purchased life annuities is taxed in yet another way: tax is paid and deducted at 20 per cent. The non-taxpayer has the option to ensure that the income is paid gross upon submission of yet another form: R89.
Building society and bank interest is taxable. The tax is paid at 20 per cent. at source. The non-taxpayer can apply to have it paid gross, but he has another form to fill in to do that: R85. United Kingdom company dividends are taxable and paid with a repayable credit of 20 per cent. The taxation on many overseas pensions and interest from overseas deposits is administered in yet another way. They are taxable, but received without tax deduction at source, because it is from an overseas source. I have not even begun to mention PEPs, TESSAs and ISAs, which we know are not taxable. We see from that long litany of examples what a complicated tax administrative system faces the ordinary pensioner.
The result of all that is that pensioners often pay too much tax, because they are faced with forms that they do not understand, so they do not apply to have the income and interest paid gross, and with a system that is so complex and such a minefield that they are made anxious by it. That complexity does not serve the Inland Revenue. It increases its administration costs, so the Government do not win by that minefield.
Let us look at different financial products for pensioners, be they ordinary pensions or other types. The administrative arrangements are so different, with some tax taken at source, some not, some taken at different rates and some with non-taxpayer options for payment gross. That complexity reduces transparency in comparing the returns from different financial products. Each marketing of each different product must try to explain the different tax arrangements to pensioners.
There is absolutely no reason for the system that we have. It has just grown. It has been given to us by history. It is time that it was reformed. New clause 8 is a small 302 step in reforming that over-complex system. It relates just to the tax on retirement annuity income. It seeks to enshrine in statute law and to make mandatory something that the Inland Revenue already permits. It ensures that retirement annuity income can be paid through the PAYE system, so that the correct amount is taken and so that pensioners who do not owe any income tax on that retirement annuity income do not have to fill in forms. It ensures that they do not have to pay tax that is not due to the Exchequer. It is simple.
I am delighted that the Government were relatively positive when I raised the matter. In response, the Paymaster General said that the Government were
in discussions with the industry on how to simplify the system and make it much more responsive to pensioners.—[Official Report, 9 June 2000; Vol. 351, c. 618.]I was grateful for that reply. I hope that those discussions with the industry have taken place, or are soon to take place, and that soon we can get a bit more logic in the system, so that poor pensioners—we are talking about non-income tax paying pensioners; some of the poorest pensioners—do not pay tax when they are not supposed to.I hope that the Government can make that relatively simple administrative change as a first step to reforming completely that bizarre aspect of the income tax system. If they do, pensioners throughout the country will applaud them.
§ Mr. FlightI believe that the debate on this group is one of the more important this evening. It covers several territories related to pension arrangements.
I entirely support new clause 8, which addresses a practical issue. I cannot see why there should be any objections to it. I greatly welcome Government amendments Nos. 83, 84, 85 and 86, which, as kindly acknowledged, broadly address the issue of concurrent membership, which we discussed in Committee. I think that there will be some practical problems in establishing the demarcation level at £30,000. Although that figure will cause some injustices, at least it is a practical solution to the problem. It will be interesting to see how it works out, especially in relation to concurrent membership of final-salary occupational pension schemes and stakeholder schemes—which had previously been deemed not to be practical.
I shall, however, use my time to speak to amendments Nos. 145 and 146. Amendment No. 145 deals with a straightforward issue. I confess that, when first trying to get my brain round schedule 13, I had not taken in the fact that paragraph 9 will remove section 633(2), so that a pension scheme cannot provide insurance covering contributions that have not been made because of a member's illness or temporary redundancy. There will, however, be a grandfather provision for those who already have such arrangements.
I do not think that a case has ever been made why such a provision should not be part of the new tax rules covering stakeholder and other personal pensions. The removal of such a provision seems to be a bad idea. Surely it is thoroughly desirable that people have insurance to ensure that they are able to accumulate an adequate pension. I therefore ask the Minister at the very least to explain the logic behind removing the provision. Amendment No. 145 deletes that change.
303 The major chestnut to crack is the issue of ending the obligation to buy an annuity by the age of 75. The Government seem to be burying their head in the sand. The official Opposition's policy on the issue has been clear for the past two years—to abolish the obligation subject to individuals having in place pension arrangements that will deliver a pension ensuring that they will not qualify for the pension guarantee. Therefore, we suggest—as the report commissioned by the Association of Unit Trusts and Investment Funds suggested—that the obligation should be abolished, subject to lesser annuities being taken out, when required, to deliver a pension up to a set level.
Ministers must be aware that millions of people are concerned about the issue, and that we are living in an age in which there is an explosion in demand for money purchase pensions. Additionally, the Government's stakeholder measures will have a major impact in increasing the number of companies that end final-salary schemes and create money purchase schemes.
In many ways, schedule 13 is extremely useful in providing a tax framework that encompasses both group personal pensions and occupational money purchase pensions. Many companies and their consultants have been waiting to see what the final stakeholder arrangements and obligations would be before taking the decision.
§ Mr. Steve Webb (Northavon)The hon. Gentleman said that this is an issue of importance to millions of people. However, one of the issues that I have wrestled with in our debates on this matter is whether that is so. Does the issue matter only to those who have whopping great pension pots? If there is a floor below which people will not be allowed to draw-down, and if stakeholder pensions will be targeted at those who are on modest earnings, will many people ever be affected by those income levels?
§ Mr. FlightI thank the hon. Gentleman for his question, which I shall deal with in detail in a few moments. However, the quick answer is that the issue has to do not only with a well-pensioned elite. As money purchase provisioning works its way through—it started only in the 1980s—the number of those who will be obliged to buy an annuity will run into the millions. Within the arrangements that I have discussed, they would not have to put all their pension money into an annuity. The issue affects not only a narrow body of people. However, I shall revert to that in a moment.
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The key point is that the next few years will see a huge explosion in the number of people with money purchase pensions. Final-salary schemes operate essentially with a revolving pot of money—with accumulated pension assets usually invested predominantly in equities, although the equity-bond mix depends on the maturity of the scheme—out of which the pension is paid. Therefore, the capital that provides the final-salary pension should be prudently invested with scope to increase in capital value, and should not be locked into an exposure to bonds.
The key investment problems with an obligation to buy an annuity is that an overwhelming number of people will be buying a guaranteed annuity; that most of the assets 304 funding the annuity will be invested in bonds; and that, even at 75, one or other spouse will live for another 20 years. The Government's legislation forces annuity managers to invest all the capital available for pension provisioning in fixed-interest securities. As I have said in the House before, if a financial adviser had put all someone's capital into fixed-interest assets for 20 years, he or she would be hauled up by the Financial Services Authority for negligence and mis-advice. Investment only in gilts is simply inappropriate for the length of time that that pension capital has to provide an income.
As the House will be aware, the combination of a Budget surplus, the subsequent repayment of national debt, increasing demand for money purchase pensions and—following the passage of the Pensions Act 1995—increasing demand for fixed-interest products by mature pension schemes have all created essentially a false market in long-dated gilts. In the past 12 years, not only has the nominal interest rate decreased with lower inflation, but the real interest rate has almost halved. The real interest rate has been close to 4 per cent. for quite a long time, but, now, it is down to 2 per cent. and a bit. So what is happening elsewhere is creating a false market and, as the law stands, people are being forced to buy investment pension products based on that false market. If and when that changes, irrespective of any change in inflation, such individuals will be seen to have been grossly unfairly—and I would argue negligently—treated by the law.
I am pleased that many annuity providers have produced new products but, as the Minister will be aware, there are tax inflexibility problems associated with equity-linked annuities. In short, if an equity-linked annuity consistently performs well, the beneficiary is unable to take the full return. If the product performs poorly, investors face considerable problems if they wish to change their fund manager.
Canada and Ireland have addressed the problem—Canada did so 10 years ago and Ireland has done so in the past two years—along the lines of the recent report by the Association of Unit Trusts and Investment Funds Committee which broadly envisages the creation of a pension account into which the capital goes. Everything that comes out of the account is taxed as income. Within that pension account, the beneficiary can determine the investment policy within sensible parameters analogous to those laid down for ISAs.
§ Mr. Barry Gardiner (Brent, North)I have been listening carefully to the hon. Gentleman. Does he accept that, just as tax relief is initially given on a pension fund in order to provide certainty and security in old age, an investor may wish to diversify the application of their fund at an early stage into other ways of financial management that do not attract the same tax relief, but are not subject to the same limitations? While the hon. Gentleman is considering that point, will he also say how he sees investors who are in the fortunate position of being able to consider their financial future and think of diversifying their fund in that way in light of the remarks of the hon. Member for Northavon (Mr. Webb) about the number of people involved?
§ Mr. FlightI thank the hon. Gentleman for his intervention, but I am not sure what point he is making. Could he please sharpen it up a little?
§ Mr. GardinerI do not want to make a speech on the subject. As the hon. Gentleman is aware, quite simply, tax relief is given to help provide security and certainty of provision from the point of retirement until death. I accept the problem that the hon. Gentleman has outlined as it affects many people approaching retirement. Somebody seeking to achieve better returns than they were likely to get from an annuity could have made alternative provision that did not attract the same level of tax relief.
§ Mr. FlightWith respect, the hon. Gentleman's intervention reflects completely wrong thinking. Tax relief is provided to help build up the maximum assets to create adequate provision for retirement. As the hon. Gentleman will be aware, a final salary pension scheme will have an appropriately balanced portfolio of equities and possibly some fixed interest investments, depending on the maturity of the scheme. That is an entirely sensible arrangement that maximises both the pension accumulation and, in due course, the tax take. Even with money purchase pensions, there is clearly an argument that the tax take would ultimately be greater to the Revenue if the assets were invested on a basis that would create better returns because everything that is drawn out is taxable as income.
Under the present rules, if there is anything left when both spouses are dead, it suffers a 30 per cent. rate of tax and then becomes subject to inheritance tax as well. The rules can be changed if the Revenue wishes, but if the hon. Member is arguing that the correct moral price for the tax benefit must be that all the money should be invested in gilts for the last 20 years of someone's life, I do not see any logic here either in terms of maximising revenue to the Treasury, or in terms of doing the best for pensions in people's old age.
I now turn to some of the issues that have been raised this evening and some of the alleged reservations by the Revenue and Treasury in respect of adopting the proposals from the AUTIF committee. It has been suggested that the AUTIF report reflects the vested interests of the investment management industry—I should declare an interest here as a member thereof—but that is a completely outdated view as the life offices that provide annuities are also substantially part of the fund management industry. Indeed, most of them would welcome the proposed changes as they provide ISAs, unit trusts and so on. There is no longer an investment management industry and a separate insurance industry. That is not how the industry is structured.
The argument has been made about the interaction between the supply of gilts and the growing volume of pension funding that will eventually have to buy annuities. The arrangements that we propose would ease that problem because people would be free to buy guaranteed annuities if they wanted to, but everyone would not be forced down that route. Therefore, it should lead to real interest rates which are more normal and not the result of a false market, as they are at present.
Some people have made the point that this territory largely involves only the better off. The average annuity purchase from each life office is between £25,000 and £30,000. The average has fallen largely because more people are using draw-down to postpone annuity purchase. I am afraid that the statistics are not particularly reliable. I might add that the Government's statistics go back to 1995. However, personal pensions have been in 306 existence only since 1988 and most of those now retiring may not have held a personal pension for all of that time. So the numbers of people with reasonable amounts in personal pension schemes will rise.
A survey recently conducted for the AUTIF study group found that more than 70 per cent. of annuitants had an income in excess of the proposed minimum. In other words, more than 70 per cent. of people with money purchase pensions would have capital with which they would not need to buy an annuity to take them up to a minimum pension income level. So the subject affects not just a narrow group of people but the overwhelming majority.
§ Mr. WebbI broadly agree with the hon. Gentleman on this point, so I hope that he does not think that I am being critical. Which minimum is he referring to—the minimum income guarantee or the minimum in the McDonald proposals, which as I recall is roughly double the minimum income guarantee?
§ Mr. FlightI was referring, as I think I mentioned, to the minimum in the AUTIF report led by Dr. Oonagh McDonald. That is where the 70 per cent. figure bites. The hon. Gentleman will find that in the report.
Of equal importance is the point that the percentage will change over time as people build up more in money purchase pensions. The proposals are aimed not at the wealthy but at all those who will be able to purchase the minimum income and will have some capital to invest thereafter. Such individuals would greatly appreciate the freedom so to do.
A good case can be made for abolishing the obligation to buy annuities, at least for stage 1 because the Government's pension guarantee virtually requires abolition to be along the lines of the AUTIF report.
The argument has also been levelled that the proposals would be a threat to defined benefit final salary schemes. My response is that they are already under threat as a result of the rising costs of final salary schemes, of companies trying to save money and, indeed, the attractions of the simple stakeholder schedule 13 legislation. In 10 years, I estimate that at least half of the existing final salary schemes will be closed. The shift to money purchase will be far greater than many realise. The Towers-Perrin survey of money purchase pension arrangements in the United Kingdom suggests that at least half the direct contribution money purchase schemes are associated with the closure of final salary schemes. That is a telling statistic.
There has been some false concern within the Revenue, if not the Treasury, that the proposals in the AUTIF report would lead to people wanting to transfer in their last year or so from a final salary scheme into some form of money purchase pot, and that employees of the Government, in particular, would want to do that because their pensions are often not funded. It is argued that the proposals would create a funding problem. The answer is that it would be extraordinary if public sector pension schemes have rules to permit that. Most do not. If others do, the rules should be changed. This option is not the norm within a final salary pension scheme in the private sector. Revenue concerns that a wide range of civil servants would want to, and be able to, switch to a money pot are wrong. They would be much better off staying in their final salary 307 schemes and receiving generous inflation-linked pensions. In terms of the rules of the scheme and the motivation, there is a false concern. Often, pension arrangements for spouses are considerably better within public sector schemes.
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We are dealing with a major issue that has been under debate for two years. A great deal of work has been done. The Government said that they would respond to the AUTIF report, and there has been no response. Yet about two thirds of the electorate are 46 or older and are either focusing on their pension arrangements as they are about to draw them, or are already drawing them. The Government would be most unwise in their own interests to underestimate what has become a major issue. People are aware that standard guaranteed annuities are now extremely poor value. They do not want to be locked in whether the amounts involved are large or small, and there is no logical reason why they should. There need be no loss of revenue as a result of the changes and the revenue could be greater.
There are also two small points that I would like to add to what is really the final debate on schedule 13. First, I referred earlier to the Myners report. As the Minister said, the final report is not out, but the consultative paper is. The Minister will be aware that this is all about encouraging investment in venture capital by pension schemes. Under the rules of all forms of personal pension schemes and the provisions in schedule 13, such schemes cannot invest in unquoted shares. If the Government wish to encourage greater venture capital investment by pension funds, this is an issue to be dealt with potentially within the terms of schedule 13.
Since we discussed schedule 13 in Committee, the individual pension accounts announcement has been made by the Government, I think outside the House. We welcome that announcement, but I do not understand the logic of why an IPA has to be purchased via some form of money purchase pension scheme. There is more than adequate protection within financial regulation and potential investment rules to cut out the unnecessary costs of the pension scheme umbrella and to permit IPAs to operate on an entirely analogous basis to ISAs. We would then have specific rules about who could buy an IPA and how, and who could not. Why have the Government concluded that the IPA is simply to be a method of managing money for a form of money purchase pension scheme and not a pension packet in its own right, as it easily could be?
I have strayed because, although those matters relate to the key schedule 13, they are not the key points raised by our amendments. I encourage the Government to bite the bullet and to follow Canada and Ireland, broadly to follow the AUTIF report, and to get a move on. There are hundreds of thousands of people, if not millions, who are now coming up to 75. They are extremely concerned about being forced to buy a bad annuity product. All of us receive letters from these people. The Department of Social Security is well aware of the issue, but it is ultimately a Treasury matter when it comes to reform. I fail to understand why the Government have not yet bitten the bullet.
§ Mr. John Butterfill (Bournemouth, West)I should like to support the principle behind new clause 8, which is a well conceived proposal, but, in particular, to speak on amendments Nos. 145 and 146, to which my hon. Friend the Member for Arundel and South Downs (Mr. Flight) has just referred.
If there is any justification at all for requiring those who are retiring to use their pension pot to buy an annuity, it can only be that tax relief has been given on the accumulation that provides that pot, so it is argued that it is not unreasonable for the Revenue to require such people to buy an annuity to make sure that they are no longer a burden on the state. The compact with the state is that the purchase will guarantee, or, hopefully, will go some way to guaranteeing, that such people will not be a future burden.
But annuities are the only type of investment for the future, or virtually the only one that anyone would seriously contemplate, that carries that burden. The Government have introduced individual savings accounts, which have all the tax advantages that a pension product has, but without the disadvantages—without the requirement to buy an annuity at the end of it; without the requirement to lose one's capital at the end of the day. For the more sophisticated investors, to whom the hon. Member for Kingston and Surbiton (Mr. Davey) referred—those with large pots of money—there is the enterprise investment scheme or the venture capital trusts—much more sophisticated, perhaps more risky—in which they can invest and have even greater tax advantages.
One is puzzled to know why successive Governments have continued to lay this particular burden on those who have prudently saved for their old age, who are doing a service to society by so doing, and yet are forced into purchasing an end product, the annuity, which, as my hon. Friend the Member for Arundel and South Downs said, is probably the worst investment that people could make for their on-going retirement future. People are living much longer now than they were.
Something on the lines of the AUTIF report is not desirable but essential. The competition for the purchase of gilt-edged investments is becoming greater every year—in fact, every month. In a previous speech in the House I explained how the operation of the minimum funding requirement is creating a black hole. As gilt yields go down, so the minimum funding requirement requires institutions to purchase more gilts. By purchasing more gilts, they drive the yields down further, and so on. We have a downward spiral of gilt yields, which is becoming unstoppable.
There is a way to remedy that, at least partially, and I know that the Government are considering the minimum funding requirement to see how it can be amended. There is a suggestion that, in addition to gilts, some corporate bonds might be added as appropriate investments. I still do not think that that will solve the problem because fewer gilts are still being produced and a limited amount of money can be issued through corporate bonds, yet, as I have explained, the demand is insatiable.
What we should be doing in terms of the minimum funding requirement is what almost every other sensible fund does, which is to have a balanced portfolio where—prudently, of course—one makes sure that the appropriate ratios are maintained and looks at the total return on 309 investment and not simply at what can be obtained from gilts. The people who are really suffering are those who are forced to purchase gilts at the time of retirement in a market that is going further and further against them, month by month, year by year.
If we follow the suggestion in the AUTIF report, we can release people from at least part of that problem. If they are required to purchase a minimum income that will ensure that they are no longer liable to be a burden on the state—it will have to be on an indexed basis—we fully justify the tax relief; if indeed it needs justifying, because in the other forms of investment it is not required to be justified. They can then invest their money in any way they think prudent.
At present we have a ludicrous situation, shown at its most perverse by a self-administered scheme. This applies usually, though not exclusively, to people with a larger pot. There are people who have bought property into a self-administered scheme and now at the end of the day have to sell the property, which gives them a secure and reliable income, and convert it into gilts. If anyone were advised to do that it would be blatant mis-selling, far worse than any scandal we have seen in any other area. Yet we in this House and successive Governments require people to behave in that way. At some time somebody will say "Let's sue the Government for making us do something so perverse and foolish". They might have a point, although I do not think it is possible to do it. Perhaps it should be.
The best thing we can do this evening is to say that we have got it wrong, that we need to change the basis on which pensions are dealt with when they come to maturity. I hope that the Government will accept the amendment.
§ Mr. Frank Field (Birkenhead)I also wish to speak to amendments Nos. 145 and 146. It was in the last Parliament that the first letters came from my constituents asking why they were forced into a financial arrangement that they thought was not the most beneficial that they could undertake to protect their retirement and possibly, as the hon. Member for Bournemouth, West (Mr. Butterfill) said, hand on wealth when they died. Although there has been a very important change since then—the election of our Government—I do not find it easier to answer that question when it comes from my constituents.
Therefore, I make a plea to the Economic Secretary to address specifically, in replying to the debate, what is the defence of the status quo and to what extent the Government are thinking and moving and in what direction.
The simple point that my constituents put to me, which I happen to agree with, and on which I have not been able to obtain a more sensible view from either the previous Government or the present one, is as follows. They accept that they have built up pension arrangements which have been supported by fellow taxpayers, and that therefore some restraints can be put on the way in which they spend the income, so that they do not receive a second injection of public funds to underpin their livelihood. In other words, they do not believe that they should be able to blow their capital and become dependent on welfare. But 310 what they ask is this: if they make sure that they are in no way a responsibility on the state, why should the state lay down how they should behave with the capital that they have built up?
In a sense my constituents' questions preceded the questions posed in the report that a previous Member of the House, Dr. Oonagh McDonald, recently successfully steered to publication. I am anxious to learn from the Government what their defence of the status quo is. All of us, on both sides of the House, can see that people should not be paid twice for doing the same thing, but if they are careful enough, or enter into specific arrangements, to ensure that some of their capital is put aside so that they in no sense become dependent on welfare, why should they not be able to spend the remainder, which probably, as the decades pass, will become a larger and larger proportion, in a way that suits them?
My constituents' final point is that they have built up their capital, have been pleased to do so and believe that it is their duty to do so. They believe that they were advantaged in being able to do that. They are not being cocky and understand that other people have not been as advantaged and may not have been able to do so. They also believe that, if at all possible, it is a good idea to hand on capital to children and grandchildren. I must ask the Government whether that is the view that we hold. Do we believe that wealth is not something to be gobbled up by companies or Governments but, as far as possible, should be spread as widely as possible, through the entire community? If that is so, should we not be thinking—this has been debated by those on both sides of the House—along the lines of reforming the strict rules that govern the purchase of annuities?
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The hon. Member for Bournemouth, West gave us a macro-debate on what is happening in the gilts market. He explained why it is a bad buy to purchase annuities now. Many of my constituents understand that argument. They are distressed by it and are fully aware of what is going on in the money markets in that respect. They believe that the debate involves a question of fairness in that they have done everything required of them as good citizens and wonder why the Government stop them from being even better citizens by not letting them become dependent on welfare. They want the freedom to choose how they spend their capital and, if possible, they want to pass it on to members of their extended family.
After hearing my hon. Friend the Economic Secretary's reply, I hope that I will be able to write letters to my constituents that are different from those I have had to write since they began writing to me on this topic about five or six years ago.
§ Mr. WebbHad I been asked a few years ago how I wanted to spend the evening of my 35th birthday, discussing the finer points of annuities might not have been at the top of the list. However, it is a privilege to contribute to the debate.
I want to touch on Government amendment No. 83 and the associated amendments and amendment No. 146. On the concurrency amendment, like the Conservative party, the Liberal Democrats welcome the concessions that the Government have made. It would be churlish to describe 311 this as a victory for the Department of Social Security over the Treasury—I am sure that it was a partnership—but as such victories are rare, one could describe it as such anyway.
I have some questions about the detail of what is proposed in Government amendment No. 83, specifically the £30,000 threshold. It may be that I have missed it, but I wonder whether there has been a specific explanation for why £30,000 was chosen. Will the Economic Secretary clarify why that was chosen. Is it because it is something akin to the higher-rate threshold and that, therefore, higher-rate taxpayers are more likely to try to abuse concurrent membership of two pension schemes, or was the figure plucked from the air?
I notice that the £30,000 figure is in the primary legislation. Does that imply that it will be capped? There is no suggestion that it is to be prescribed in regulations and then to be indexed. What is the thinking behind that? Given that earnings are rising each year, is there an attempt to clamp down? It is not clear why that figure has been chosen.
My abiding impression of the concurrency issue is the recollection that, when I pressed the Financial Secretary at Social Security questions, in his halcyon days as the Minister responsible for pensions, as to whether he regarded simplicity in pensions as a virtue, he answered with a confident yes. Now that he is at the Treasury, I do not know whether he still holds that view.
It is clear that we have a dog's breakfast, and concurrency with thresholds is just another aspect of that dog's breakfast. We have completely different tax regimes for personal pensions, occupational pensions and stakeholder pensions and we have different regimes for additional contributions. Far from getting simpler under the present Government, the options have got wider and the complications have increased. I fear that people will continue making the wrong choices. Concurrent membership certainly helps to prevent one wrong choice, and to that extent we welcome the amendment.
I wonder sometimes whether the Government have lost the big picture. They probably came into office believing in simplicity, and it may be that the realities of office mean that simplicity will never be delivered. I hope to find that out for myself at some point, but in the interim I would be interested to learn whether the Economic Secretary still holds to the goal of simplicity. I wonder whether, with hand on heart, she can say that the strategy that the Government have adopted has created a simpler pension regime for the investor who, in the world envisaged by the Government, will receive less advice, not more. The stakeholder pension purchaser will probably have to get by, at best, with a decision tree, but often it is suggested that the person seek advice. Government amendment No. 83 moves in the right direction of clearing up a mess that the Government have created, but I wonder whether the big picture has been lost.
On amendment No. 146, the hon. Member for Arundel and South Downs (Mr. Flight) has become associated with this issue in this Parliament and I praise his efforts and persistence in keeping it before the House. The Liberal Democrats broadly sympathise with his concerns, but I had an informative conversation this morning with Evergreen Retirement Assurance, a company which has 312 written to several hon. Members and met some of them. It raised some significant issues that are germane to amendment No. 146.
The first is the issue of the compulsory purchase of annuity, but the question is whose annuity is purchased. Is it the annuity provided by the company with which a person has saved or is it the best annuity on the market? The point that the company, and others, make is that choosing the wrong annuity can cost one 10 per cent. of one's income for the rest of one's life. That could be hundreds, if not thousands, of pounds a year and potentially tens of thousands of pounds over a lifetime. However, the issue appears to have received almost no attention.
I asked the company what was needed to resolve the problem, because it appears that too many people, out of inertia, condemn themselves to too low an income for the rest of their lives and, potentially, cost the taxpayer money by ending up on the minimum income guarantee or housing benefit. The answer I was given was that the problem could be addressed if the Financial Services Authority were to say that the letter to those who had accumulated a pension pot and were about to purchase an annuity had to include the statement in great big bold capitals, "You have a choice and it may be that your provider does not provide the best product, " before any mention of the product of the company that had provided the pension. Or perhaps companies could be obliged to include a freephone number for an Inland Revenue helpline that would provide the telephone numbers of five annuity bureaus. That could make a big difference to the incomes in retirement of many people.
I asked why those solutions had not been tried and the answer was that the FSA would be keen to do so, but it has not been pushed by the Treasury. I hope that that is wrong and the Economic Secretary will tell us that she has taken a stick to the FSA and it will act. If that is not the case, I hope that she will assure us in her response to the debate that those people who have taken out annuities are getting better value for them. One of the legitimate concerns expressed by the hon. Member for Arundel and South Downs was that the annuities are bad enough value as it is for many people and if they buy one that is not the best available, it is a double whammy.
I do not wish to go too deeply into the question of how important the issue is and to how many people, but I wonder whether its importance to the general public is overstated.
§ Mr. WebbI agree, for some of the reasons given by the hon. Member for Arundel and South Downs, but I wonder how quickly it will grow and for how many people. The hon. Member for Arundel and South Downs said that 70 per cent. of those with money purchase pensions who are now retiring are living on incomes above the threshold recommended in the AUTIF report. However, that is not the test of whether draw-down would be attractive to someone. If one had a combined income just above the guaranteed threshold and had £1,000 left in the pot, one would not gain very much by drawing down £1,000, which one might just as well convert, given the costs of fiddling around with that sum. Seventy per cent. 313 of people with money purchase pensions may be above that threshold, but I would have thought that the number who are sufficiently above it to want to start fiddling around with draw-down is still quite limited.
I know that stakeholder pensions have not yet started, but I would have thought that those who will get such pensions and for whom this will be a serious issue will not be affected by it for a long time, as the target market is people who will struggle to get clear of the first guarantee, let alone the second. Clearly, there is a drift to money purchase schemes, which are affected by the issue, which will grow in importance. I believe that I have had three letters about the matter which, multiplied by the number of Members, is about 2,000. Perhaps I do not attract letters about annuities—I am sure that the hon. Member for Arundel and South Downs does—but I wonder whether the scale of the problem has been overstated.
The problem is, however, significant, and we support the general stance of the hon. Member for Arundel and South Downs. This morning, a worry was expressed to me, and I am concerned about risking another mis-selling. We talked about mis-selling and forcing people to invest in gilts for the last 20 or 30 years of their life, which is not an optimal strategy. However, will people end up with draw-down policies that are not right for them? Again, Evergreen Retirement Assurance tells me that it has surveyed the investment strategy of those draw-down policies. It turns out that a good chunk of the investment strategy of a draw-down policy—about a third, Evergreen told me—is in gilts. Therefore, if people try to get hefty returns from the remaining 70 per cent, a good chunk having had to be left in the fund to cover the double guarantee level, one starts to wonder how they will make the sort of returns that are being talked about.
A point made to me that has some force is that it is wrong to look at the issue of annuities in isolation and say that it is just about an age limit of 75. I am sure that the hon. Member for Arundel and South Downs does not do that. However, it was pointed out to me that the matter involves an age limit of 75, the open-market operation and long-term care. Why cannot one buy an annuity which, if one has to go into nursing care, can be converted into a much higher annuity to cover the fees? At present, that is not allowed. There is a danger that, if we pick at bits of the matter in amendments, we shall miss the big picture, which takes me back to my starting point of simplicity.
We welcome the amendment on concurrency as far as it goes, as it is a step in the right direction. However, it is a symptom of a messy system, which is messier than it was three years ago. We generally sympathise with the point on annuities, but we want the matter to be responded to in the round, as more issues are involved than just compulsion at 75. I am grateful for the chance to put my concerns on the record and I hope that the Minister will respond specifically to the point about the open-market option and put a rocket under the FSA.
§ Miss Melanie JohnsonI should like to thank right hon. and hon. Members on both sides of the House for their thoughtful contributions to our debate and the knowledgeable points that they have all made.
May I start by responding to new clause 8 before turning to the amendments? I shall do my best to cover the points that Members have made in the course of our 314 debate. I thank the hon. Member for Kingston and Surbiton (Mr. Davey) for his clear exposition of the reasoning behind new clause 8. I have recently corresponded on this very issue with his colleague the hon. Member for Northavon (Mr. Webb). However, for the reasons that I shall outline, I hope that it is a probing proposal that will be withdrawn.
The problem is of long standing and has been reviewed on several occasions by the Government in office. On the last occasion, in 1995, the Institute of Chartered Accountants in Scotland put forward a proposal that was very similar to the new clause, but it withdrew it after talking to various Scottish annuity providers, who suggested that switching to schedule E would be an onerous administrative task for insurers. As drafted, the new clause would impose the requirement to tax annuities arising from retirement annuity contracts under schedule E from the date of the Bill's Royal Assent. That is—hopefully—only days away.
So, there is no provision for agreeing later implementation dates with the Inland Revenue, as was allowed when the schedule E requirement was placed on providers of personal pension annuities. The new clause would therefore place a considerable burden on financial institutions, which would be particularly difficult for them at the present time and within the time scales about which I have spoken.
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In the past, the insurance industry was against operating tax codes for annuities from retirement annuity contracts because some companies had paper-based systems that were not up to the task. That is not a reason for never making changes. As computerised systems are increasingly replacing older systems, the matter could usefully be looked at again. I hope that the hon. Member for Kingston and Surbiton will accept my assurance of interest in the topic and of the value of the points that he has raised.
I am asking officials to discuss the matter further with the Association of British Insurers and to report back to me. I am grateful to the hon. Gentleman for raising the issue. I appreciate his comments about on-going discussions, but they will be given a further ministerial boost. For the reasons that I have given, I hope that he will feel able to withdraw the motion.
Government amendments Nos. 83 to 86 are all connected with the issue of concurrency. I acknowledge that they are the result of the very helpful and constructive series of discussions with representatives of employers, employees and the pension industry. In particular, my thanks go to the ABI, the National Association of Pension Funds, the Trades Union Congress, the Confederation of British Industry, AUTIF and the Pensions Management Institute for their contributions.
There was very much a partnership between the Treasury and the Department of Social Security in trying to find a way forward on concurrency with the industry and interested groups. I hope that hon. Members accept that that is a fine demonstration of effective cross-departmental work in government in partnership with the private sector.
At the moment, a member of an employer's pension scheme cannot normally contribute to a personal scheme. The amendments will change that. They will allow 315 someone who is not a controlling director and who does not earn more than £30,000 a year to pay up to £3, 600 into a stakeholder or personal pension in any one of the subsequent five years assessed.
Perhaps I should at this point reply on the issue of the £30,000 limit; it is easiest to address that question at this moment. We picked the figure of £30,000, after some considerable thought, to try to strike the right balance between cost, ease of administration and coverage. A lower figure would increase complexity by excluding more individuals, whereas a higher figure would reduce complexity but increase Exchequer costs. We decided that £30,000 struck the right balance. It will reach nearly 90 per cent. of those in occupational schemes, which seems good coverage, and will cost £150-odd million by 2010.
I should like to make several responses on the issue of simplicity, but perhaps that would take too long. I should like to tax the remarks of the hon. Member for Northavon on simplicity by saying that I believe strongly that we have simplified several matters, not least tax arrangements for stakeholders. Indeed, the concurrency arrangements themselves make matters much easier. It is true that the £30,000 limit is in the Bill, as the hon. Gentleman said, but that is not say that it will not be reviewed from time to time. Indeed, we have no intention of lowering the figure.
We have not index-linked the figure partly because it gives people a degree of simplicity in their arrangements. Once a person has earned under the £30,000 limit in one year, they know that they will for five years be able to pay in on a concurrency arrangement. Therefore, the provision has the built-in simplicity that the hon. Gentleman was demanding and that we have succeeded in delivering in a number of changes since we came to government.
Stakeholder pensions have been extended to about 8 million more people, 90 per cent. of whom are in occupational pensions. Many of those employees do not expect to receive a large pension, but they are currently putting off making further provision because they consider existing AVCs and FSAVCs to be complicated and inflexible. They also worry about those products because of past pension mis-selling. We are offering those employees the opportunity to use a new, good value stakeholder pension to increase their retirement savings. It is worthwhile remembering that 40 per cent. of those who have AVCs are currently below the £30,000 income level. It is not the case that those with incomes of less than £30,000 do not already pay into AVCs.
Some have argued that we should allow concurrency for everyone, but such an approach would not be focused and would not represent good value for money. We therefore worked with the pensions industry earlier this year to produce the more focused approach set out in the amendments. We have followed the points made to us during those discussions. The proposal will help more individuals to save more money for their retirement, but it will also remove some of the practical problems that might otherwise have arisen when people change jobs. Again, simplicity is important.
The proposal should help pension providers to offer lower-cost pensions by increasing the benefits of scale. That will help to open up the pensions market, and it will offer consumers more choice and better value products. It has had an excellent reception, and therefore we are 316 confident that we are right to believe that there is merit in the open approach that we have adopted and in the details of the changes that we propose to make.
I turn next to some of the issues raised under amendment No. 145. It is worthwhile saying that that amendment deals with points made in Standing Committee under what was then amendment No. 181, which Opposition Members tabled but then withdrew. They are returning to the matter under cover of a technically deficient amendment. I hope that I shall persuade them not to press it to a Division for two reasons. Up to 25 per cent. of pension contributions can be used to insure future contributions against sickness and incapacity. That reduces the amount of contributions going into pension funds.
The changes that we have included in the Bill will directly boost money entering peoples' pension funds, rather than subsidising insurance contributions. That is achieved by stopping tax relief up front, but giving it when the payment arising from a claim under the insurance policy is paid into the pension fund. In effect, that involves recycling.
Like all other contributions, tax at the basic rate will be added to the payment into the pension fund. In turn, that means that a lower sum can be assured. The change in the tax treatment of waiver insurance will not increase what is paid overall for the insurance cover, and some companies have suggested that it might reduce the premiums. Similarly, because tax relief is given on the use of the proceeds of the insurance, there is no need for restrictions on what can or cannot be insured. So providers can extend the insurance to cover situations that they could not cover before, such as unemployment and not just ill-health. I hope that I have fully explained the attractiveness of those arrangements. Many people accept that they represent a more flexible, better deal.
Overall, the changes that we have introduced will improve the existing arrangements. We know from questions addressed to the Revenue that companies are already engaged in imaginative product design based on our proposals. We cannot therefore support amendment No. 145, under which the existing arrangements would be re-introduced.
Under amendment No. 146, the requirement for the holder of a tax approved pension plan to purchase an annuity with the proceeds of the plan not later than age 75 would be removed. I assume that the intention is to permit income draw-down arrangements to continue indefinitely. Amendment No. 146 is flawed, but I do not place much weight on that, because it would not amend the section in the existing legislation that requires income draw-down to cease by age 75. The result would be that the holder of a personal pension could not continue income draw-down, but would be compelled to buy an annuity so that benefits could cease altogether. I am sure that that is not what is intended.
Many people have raised general concerns about whether annuities are good value. That was discussed in the Budget debate, and I recall hearing the hon. Member for Bournemouth, West (Mr. Butterfill) discuss the minimum funding requirement and I know of his connections with the topic. We have also discussed these matters in the Standing Committee. I shall explain why the amendment would not provide a solution, although I accept that many interesting issues relating to points raised in debate remain to be explored fully.
317 The main purpose of a pension scheme is to provide secure income for scheme members for the whole of their retirement. It is worth highlighting that point because the hon. Member for Bournemouth, West suggested that the principal purpose might be recouping tax relief. A key feature of annuities is that they provide income for the remainder of a pensioner's life. Variations on the basic product, such as with-profits annuities, already exist, but they all have that essential core characteristic.
Tax rules therefore require personal pensions and other money purchase pension schemes to buy out their benefits as annuities to guarantee a continuing income, no matter how long the scheme members may live. To give flexibility, the tax rules allow members of money purchase pension schemes to take an income from their pension funds from 50 and to defer the annuity until they are 75. People are familiar with the detail of those arrangements.
Income draw-down is theoretically available to all members of money purchase pension schemes. However, the perceived wisdom is that it is suitable only for those with larger funds—at least £100,000—who can afford to bear associated risks. Depending on the investment returns achieved, someone who chooses to take maximum income from his or her fund might see a substantial reduction in income at age 75 in comparison with what he or she might have been able to secure by buying an annuity at, say, 60. The age limit of 75 strikes a balance between flexibility in the timing of the annuity purchase and the increasing danger of the fund being exhausted as the person continues to draw on it as he or she grows older.
Particular issues have been raised and I shall try to address the main ones. First, my right hon. Friend the Member for Birkenhead (Mr. Field) commented on inheritance and the defence of the status quo. It is not clear that the underlying value of annuities has in fact fallen once all other factors are taken into consideration. We could have a lengthy debate about that, but other factors should be taken into consideration. [Interruption.] Notwithstanding the mutterings of the Treasury Whip about my ideas of a lengthy debate, we accept that those factors exist.
We have sustained low inflation, which looks set to continue, and that is one factor in enabling annuities to retain their real purchasing power far better than did higher headline annuity rates paid in a higher inflation environment. We all know that life expectancy is increasing, and, as it is the hon. Member for Northavon's birthday, we can hope that that will affect him. People can expect to draw an annuity income for longer in their retirement. The value of a guaranteed income for life should not be underestimated. Many pensioners will still enjoy secure income as they grow older. The Oonagh McDonald report accepts that annuity arrangements work well for many people.
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My right hon. Friend the Member for Birkenhead said that pensioners should be able to pass on their remaining funds, at death, to their dependants. Generous tax reliefs were provided to support that. Annuities are not supposed to be tax-advantaged inheritance vehicles, however—they 318 are insurance products. One way in which they work—a point that sometimes gets lost in this debate—is as a pooling of pension funds, enabling those who live longer than the average life expectancy to go on receiving the guaranteed income because, sadly, some people do not live that long. That is an important point about the way in which annuities are structured.
Increased longevity means that annuities are paid out for longer. A number of right hon. and hon. Members have remarked on the need to purchase more gilts to maintain the same income stream to back an annuity and on the availability of long-dated gilts. The MFR review has not yet reported; we will want to consider it when it reports, which I believe is not a long way off. As the hon. Member for Arundel and South Downs (Mr. Flight) said, the outcome of the Myners review will provide another aspect to all the matters being considered.
The hon. Gentleman and others have commented on the new products that are being produced. We are very interested in those new products and in new ideas for tackling the issues that the topic raises. We are looking at the Oonagh McDonald report and also at the more recent report of the Social Market Foundation. There are a number of issues surrounding the purchase of annuities and the supply of gilts, so there are many matters to be considered. When we have got all the information together and given it due consideration, if we think that there is a new way forward, we will consult people about those arrangements. I can give no undertakings to do so, but I hope that right hon. and hon. Members will have gathered from the tone of my responses that we believe the issue to be worthy of full consideration.
We have been asked why we made the changes to waiver insurance. I believe that I have already covered this point, but let me say again that our approach is better because it is better focused by boosting income going into the pension. Rather than tax subsidising insurance arrangements, it provides better cover against eventualities, and is better value and cheaper overall.
The hon. Gentleman expressed the view that annuities lock people into bonds and that equity-linked annuities cause problems. A number of innovative non-bond-based annuities are coming on to the market. These will benefit the majority with small to medium pension pots. Removing the requirement to purchase an annuity could stifle that development. As I said, Oonagh McDonald's report recognises that an annuity will remain the best option for many people. The Inland Revenue is working with financial institutions to aid the development of equity-based annuities. We are giving all these matters our full consideration.
§ Mr. WebbPerhaps I have pre-empted the Minister regarding the open market option. Can she reassure us that she will push those who send out the letters to make sure that people are more aware of their choices than they are at present?
§ Miss JohnsonI am happy to give the hon. Gentleman the assurance that I will look at that issue. I cannot go further than that at this point, but I will in due course study in Hansard the points that have been made in the debate by right hon. and hon. Members.
319 I hope that none of the Opposition amendments is pressed to a vote, and that the House will support the Government amendments.
§ Mr. Edward DaveyThe debate has been interesting and useful. The Minister has put on record the Government's thinking on some of these matters. I am sure that hon. Members and people outside the House will want to consider her words with care. She has helped explain the direction of Government policy in this area, and I am grateful for that.
The Minister made some welcome comments about new clause 8. I hope that she will urge her officials to produce genuine solutions to the problem of how the income from retirement annuities is administered for tax, and to the related problem that pensioners face extra complexity in their tax arrangements. However, I do not want to detain the House so I beg to ask leave to withdraw the motion.
§ Motion and clause, by leave, withdrawn.