§ Order for Second Reading read.9.34 am
§ Mr. David Curry (Skipton and Ripon)
I beg to move, That the Bill be now read a Second time.
When I was re-elected to the House, I made three serious, early mistakes. The first was to apply for a private Member's Bill, the second was to be successful, and the third was to choose probably the most complicated subject on offer. I regret that burst of intellectual vanity which led me to decide to choose a measure about which I knew nothing but which I thought would represent an intellectual challenge. At least I was not disappointed in the challenge that it represented, but the lesson to be learned is not to try to accommodate the Whips, because that leads to an enormous amount of additional work and effort.
I have also had to learn not merely a new language, but a new science. Not being a mathematician, I have encountered the science of stochastics. Hon. Members may not be immediately familiar with the word stochastics, but I am told that it means the assessment of probability against standard deviations, which ought to be a mandatory discipline for anyone aspiring to serve in any Whips Office or to be Leader of the House.
I acknowledge the enormous support of the Retirement Income Reform Campaign, in particular Mr. Stephen Lock, who must have wondered what he had got stuck with when the first question he received from me was, "What is an annuity?".
Many hon. Members will have received an enormous amount of mail on this subject. Some people are seriously concerned and I could easily spend an hour relating hardship cases and the anxieties of individuals, but I shall not do so because we need to get to the substance of this business. I could have brought a series of bulging ring binders into the Chamber, all of which would have provided evidence of the urgency of the matter that I wish to address.
It is not a startling insight to say that the pensions industry is in flux. Employers are retreating from final salary schemes, partly because of the impact of the new accounting requirement FRS 17, which requires companies to state their pensions assets and liabilities.
790 The Government are attempting to create accessible private pensions for people on modest earnings, but there is evidence that they are having only faltering success. Nicholas Timmins in Wednesday's Financial Times—that excellent newspaper for which I worked for 10 years—wrote an article with the headline "Compulsory pensions draw closer." We all know that the structure of pensions provision is in flux and is likely to move towards greater obligations on people to make provision to give them security in their old age.
Today, we have the final vote on what may bring to a close the Equitable Life debacle, which has affected the confidence of and faith in the insurance industry. On top of that, there is recognition of the fast-approaching crisis in private pension provision, because of the impact of changing circumstances on the annuity rules.
§ Richard Ottaway (Croydon, South)
My right hon. Friend mentions Equitable Life. Does he agree that, if he is successful with his Bill, a crisis such as has occurred with Equitable Life could not happen?
§ Mr. Andrew Dismore (Hendon)
I am interested in what the right hon. Gentleman said about Equitable Life. I declare an interest as an Equitable Life policyholder—in many ways I wish I was not—and I know that many other hon. Members are also policyholders. The right hon. Gentleman has just asserted that his Bill would prevent a repeat of the problems that have occurred in Equitable Life. Will he expand on the reasons why?
§ Mr. Curry
I am sure that the hon. Gentleman will listen attentively to the two and a half hours that remain of my speech, during the course of which he will receive a full explanation. If he is not satisfied then, the obvious answer is to take the Bill into Committee, where we will have a much greater opportunity to debate those issues.
The annuities crisis is commonly acknowledged. There have been parliamentary attempts to reform the rules, court action on human rights grounds, and the promise of a Government consultation paper on reform, which we are always told will turn up next week. I think that this time it may be next week, and we will wait with interest to see what it says.
There is a choice. We can try to squeeze a bit more performance out of the old banger. We can put in a new set of plugs, tighten the fan belt, put some new tyres on it, replace the cassette player with a CD player, and hope we can get another 10,000 miles on a wing and a prayer; or we can seek thoroughgoing reform.
I have doubts about how much more performance we can squeeze out of the existing system: because the difference between the best and worst annuities is 0.5 per cent. of yield, the extent to which achieving a better performance would deliver the long-term benefits that people are concerned about remains to be seen, so my Bill sets out a radical reform and I make no apologies for that. However, I emphasise equally that it does so in a deliberate spirit of seeking co-operation with the 791 Government, unashamedly setting out to meet their legitimate concerns. Indeed, it specifically requires Government action to achieve its full architecture, notably the introduction of certain tax measures, which would give it complete effect.
I have no ideological fixation—that has often been one of the accusations levelled against me—and my interest is in achieving reform that will work. If better and more achievable ideas emerge, I shall recognise them, but I am offering the Government a partnership in Parliament to secure the reform that we all know is necessary.
Why does the current crisis exist? Because people are locked in a one-off no-escape mechanism that no longer serves the purpose for which it was devised. People buy private pensions and receive tax relief on those contributions before the age of 75, but, with the exception of the tax-free lump sum of 25 per cent., they must then commit the whole fund to annuities. The purpose is to secure income in old age to keep the pensioner free of state benefits or welfare.
I agree with that proposition. I do not dispute that it should be central to the legislation. I reject completely the notion that, having benefited from support from the public purse, the pensioner should be acquitted of any obligation to make provident provision for old age, so let the first accusation not be that I am merely seeking to exploit a tax break without repaying the benefit of it.
The problem is not theory or principle, but practice. There is only one source of absolutely secure investment—Government stock. The vast majority of pensioners invest in an annuity that provides a flat-rate return, which cannot be inherited by a spouse, and is ravaged by inflation. Even in the benign environment of 3 per cent. annual inflation, an annuity's value halves over 20 years.
§ Mr. George Osborne (Tatton)
Is my right hon. Friend aware that many hon. Members have received letters from constituents urging them to support his Bill, which is one reason for so many of us being present? I have received a letter from my constituent Mr. Desmond Williams, who says:Would you please give Mr. Curry's Bill your support. This reform is very overdue as it is very unfair that those people such as myself who have saved and put money into pensions should be forced to take an annuity at very low rates. If I should die, my wife will receive no benefit.That is exactly my right hon. Friend's point.
§ Mr. Curry
I am grateful to my hon. Friend, because he has given a single example of the predicament in which people find themselves that could be multiplied thousands of times.
If annuities yield about 12 per cent., the problem is manageable. Such rates were available when the rule was devised following the introduction of the Income and Corporation Taxes Act 1988, but the situation has changed dramatically. The House of Commons Library points out that gilt yields have fallen sharply over the past decade with nominal yields on 10-year gilts falling from 10 per cent. throughout the 1990s to 7.5 per cent. in 1996 and 4.5 per cent. in 2000.
792 The reason for that is obvious. First, the structure of Government debt has changed. I remember the debates when the Chancellor decided that the revenue from the so-called 3G mobile phone auction should go towards eliminating debt. People said, "Is this wise? What will it do to liquidity in the gilts market?" The Government chose to reduce their debt, however, which means that there is less debt to purchase and the supply has shrunk.
Secondly, demand has grown. The Treasury estimates that 4 million people are in personal pension schemes, with 1.4 million in occupational money purchase schemes. The size of the annuities market stood at £8.5 billion in 2001, but it is estimated that it will hit £12 billion in 2005 and £35 billion plus in 2035. People are living longer, both men and women. However, from a starting point of 60 years of age rather than birth, life expectancy is much closer between the two sexes, which means that annuities become more expensive as dependence on them as life support schemes increases.
§ Mrs. Angela Browning (Tiverton and Honiton)
I support my right hon. Friend's Bill, but I have one concern, which may simply be a matter of clarification. The principle of equality between men and women in annuity rates is worthy, but in actuarial terms men end up subsidising women because of the differential in life expectancy.
§ Mr. Curry
That is a perfectly valid point, but we made a deliberate decision to have a system that, to use an abbreviated term, may be described as unisex, because women suffer much more severely than men. [Interruption.] They may live longer, but that is not a sin, I hope, although it does mean that they receive much worse benefit from the schemes. We have anticipated the trend of international law, which is constantly against such differentiation between men and women. We deliberately built that aspect in, so, although I plead guilty, I am unapologetic over my hon. Friend's charge.
§ Mr. John Greenway (Ryedale)
My right hon. Friend pleads guilty unnecessarily. Although current actuarial tables show that life expectancy for those in their 20s is greater for women than for men, once people reach 65, which is the age we are discussing, there is little difference between the life expectancy of both sexes.
§ Bob Spink (Castle Point)
My right hon. Friend has indeed pleaded guilty before being found guilty. The point made by my hon. Friend the Member for Tiverton and Honiton (Mrs. Browning) is a good one, but it is mitigated by the Bill's excellent inheritance clauses.
§ Mr. Curry
I am grateful for that anticipatory applause, which I shall be happy to receive again when I reach the appropriate point in my speech. Furthermore, when my hon. Friend the Member for Tiverton and Honiton intervened, I was about to say that those factors add to the sharp fall in gilts, which particularly hits women as they pay a premium owing to longer life expectancy.
The substantive point is that the rules are no longer delivering the security to the pensioner or the guarantee to the state for which they were designed, so while the 793 pensioner is trapped, the state is equally trapped owing to the looming requirement to provide welfare for people who may no longer be able to meet their own welfare needs. The Government admit that. The hon. Member for Newcastle upon Tyne, Central (Mr. Cousins) asked aboutthe size of a pension fund which would generate an annuity capable of establishing eligibility to an element of pension credit on its introduction in 2003".—[Official Report, 5 December 2001; Vol. 376, c. 431W.]The Government replied that the sum required in a single flat-rate scheme, which is the most common, is £36,000 for a man and £39,000 for a woman. The figures for an index-linked single life fund rise to £48,000 and £52,000. That again shows the differential between what men and women must pay to secure equivalent benefit.
The Government have also given figures to show that a 40-year-old woman would need £100,000 to buy an annuity at 65 and stay off income support, even with the state pension. The pension credit will of course alter benefit entitlement, but it will not reduce the volume of savings required to keep off benefit. Equally, a single man with £100,000 in savings in annuities will be eligible for income support by 2017, sooner for women.
There is no real difference in the analysis of the problem. Change is needed, and the Government recognise that. The Inland Revenue has approved a scheme to overcome some difficulties—the so-called London and Colonial scheme, which provides for a fund that may be inherited. The problem is that the fund is offshore, high cost in its fees and requires a minimum of £250,000, so if any Labour Members are thinking of saying that I am engineering a scheme designed purely for the better-off, I hope that they will pause for thought before levelling that accusation.
§ Mr. Nigel Waterson (Eastbourne)
On that point, does my right hon. Friend agree with my constituent Mr. B. L. Harris of Willingdon Road that many of the people who are suffering are those on lower and middle incomes? He asks why people like him should start making provision in their 20s and 30s and take the risk that, some 50 years on, they will be caught by a very low rate of annuity.
§ Mr. Curry
That is precisely the point. When my hon. Friend's constituent began his scheme it would have been indexed in the expectation that it would keep him in a relatively comfortable, but not exaggerated, lifestyle in his old age, but he may well find himself slipping towards income support, and that is the nub of the problem that we are trying to address today.
My scheme is aimed at the middling saver and at achieving a pot of between £80,000 and £150,000, but I include specific suggestions to allay the Government's concerns and to prevent abuse of the scheme, such as its use to promote tax evasion. My scheme would provide an option. If people wished to remain with the scheme provided by existing legislation, they would be able to do so, with one exception. I am not requiring a change; I am making a change available to those who want it.
My scheme would retain the 25 per cent. tax-free lump sum. There are intellectual arguments about whether the lump sum is sensible, but many people depend on it to pay off an endowment mortgage, and I doubt that any 794 politician in the House has the courage at the moment to suggest that the option should be removed. I put down an intellectual marker that, at some stage, logic may require scrutiny of that.
By the age of 65—I repeat, 65—people would have to buy an annuity to keep off welfare, taking the state pension into account. The Government have to fix that level annually, so I am not pretending to do that. Today, making a reasonably generous calculation, we estimate that the amount would be about £140 a week, again including the state pension. The fund needed to generate that would be about £55,000, and the Bill describes that as the minimum retirement income. The annuity would be indexed, and it would be unisex. The key point is that what was left—not everybody would have anything left—could be invested in a retirement income fund. In other words, people could break out of the obligation to invest the whole sum in low-yielding bonds delivered in what is, in practice, a monopoly marketplace.
There are of course alternative mechanisms. One could prescribe the size of the fund to deliver the minimum income. We chose income rather than capital so that it would be easier for regulations to bring together the pensions pot, benefit under SERPS and defined benefit pensions. We thought that it would be easier, administratively, if we had the same genus, as it were, of provisions.
Under these proposals, drawdown schemes, in which people take income and capital from a fund up to the age of 75, when the fund is annuitised, would no longer be possible, although existing arrangements would run their course. If people were given the freedom over their funds, they would have first to satisfy the obligation to provide for support to remain free of benefit. That is one of the underlying principles of existing provision, and I would retain it. I am sure that there is common accord that that is necessary.
§ Mr. Steve Webb (Northavon)
We shall support the Bill, but I am concerned that those who have a small pot and who now simply buy an annuity of their choice would be forced to buy an indexed annuity. Does the right hon. Gentleman accept that that would restrict choice, as compared with arrangements at present?
§ Mr. Curry
I accept that it is a restriction, but I would argue that it is a wise move to make in any event. I am trying to move the debate on a little. I accept that there will be elements of the Bill that people will dispute, and that is another reason for the Committee stage. In Committee, we can discuss precisely those modalities, to use, rather riskily, a word imported from the European Union.
§ Mr. Curry
Few of us thought that pension annuities were a subject so redolent of humour. I hope that it continues.
It should already be clear that I am not inventing a permissive wheeze to let rich people get away with tax murder. The constraints that I have built in are obvious, but the Government should also build in stringent tax provisions—provisions for which I have been attacked on the grounds of, for example, bending over too far 795 backwards to meet the Government's needs. Once again, I am unapologetic. I think that people must provide for their old age, and I do not intend to resile from that and give people a further benefit when they would already have received a benefit in the form of tax concessions. They should not be able to pocket that benefit without making reciprocal arrangements to protect their position in old age.
I suggest the following tax regime. First, there would be an exit tax on the fund of 35 per cent. at death, unless it was passed on to the spouse, partner or dependent children. The residual fund would be counted towards the estate for the purposes of estate duty, which of course the spouse does not pay. That would be double taxation, and people may want to criticise that, but I am trying to acknowledge the Government's need to make sure that people make adequate provision and to address, in anticipation, the fear that a lot of new money would be going into schemes that would qualify for tax benefit and from which the Government would have no clawback.
I am suggesting measures to prevent the fund being wrapped up into a trust. The Bill seeks to make the trust incapable of assignment, which should effectively close off that option. I suggest that the Government may want to change the rules on gift or inter vivos donations, again to prevent the possibility of exploitation of the scheme to benefit dependants outside the former rules that I explained.
Who would benefit? Aberdeen Asset Management argues that 1.2 million people, or 7.5 per cent. of people between 35 and retirement age, would be assisted. It is estimated that someone starting a scheme today would need to save 11.4 per cent. of net average earnings to reach the minimum income through the annuity—less than the existing arrangements demand.
What would the Government get out of this? I keep emphasising what the Government would get out of my proposals, and I am becoming almost ashamed of how much I am trying to help them. [Interruption.] I am delighted to hear that murmur of dissent. First, the Government would get continued annuitisation to get the minimum income, with a kick-off point at age 65 not 75, and therefore the possibility of more taxable income from the payment of the retirement income fund. Secondly, the drawdown scheme, which can diminish the capital available for annuitisation, would end. Thirdly, the Government would get a tax resource to recover their investment, although there may be a time lag. The Treasury should applaud the Bill, and even the dour Scottish spirits at the Department for Work and Pensions should toast me in a wee congratulatory dram.
What are the criticisms of the scheme? The first is that only the rich would do well; the poor would still have to invest in an annuity that mopped up all their savings. But that is what happens now. It is an inevitable consequence of the Government's demand that a fund accumulated for tax benefit should deliver the income for which it is intended. I agree with that. Almost everyone with modest funds buys an annuity at age 65 in any case, and the existing provisions would remain for those who wanted to invest using that vehicle.
The second charge is that the Bill is just tinkering. It is not. It is a radical option. Tinkering would be simply to move the age 75 cut-off point to 80 or 85, but then people 796 would be encouraged to consume even more capital and head with greater certainty towards benefit dependency. The third criticism is that the scheme is a recipe for tax avoidance. I have spent some time explaining the measures that I propose to ensure that that is not the case.
The fourth accusation is that if pensions are made more attractive or, to use the Government's word, the "disincentive" of the present scheme is mitigated, there would be a flood of new money waiting to pour into pension schemes, claiming tax relief and escalating the cost to the public funds. That is the Inland Revenue's nightmare. That claim is exaggerated for three reasons. First, it is not clear that the amount of disposable income is as great as the Revenue fears, especially if the definition of disposable income includes housing cost. There is an argument about what disposable income is. The Treasury and the Department for Work and Pensions do not employ the same definition.
§ Mrs. Jacqui Lait (Beckenham)
I am following my right hon. Friend's argument very closely. Does he agree that part of the reason for the apparent failure of the Government's stakeholder pension policy is that the very group of people who may save £30,000 or £40,000 towards an annuity are precisely those who do not have the disposable income to invest in a stakeholder pension? My right hon. Friend's proposals would be a much better way of dealing with people in the middle income bracket.
§ Mr. Curry
I am grateful to my hon. Friend for discovering new reasons for me to approve of my own proposals.
The second reason why I believe that those fears are exaggerated is that it would be plain daft for people to over-invest in a pension given the rigorous fiscal regime that I propose to build around it. To use one of the current in-words, it would be counter-intuitive.
Thirdly, even if there is an increase in costs, the tax rules give the Government the eventual clawback on their investment. It is a crucial issue on which economists disagree—but when did economists not disagree? The Institute for Fiscal Studies argues that 75 per cent. of savings is not generated in lieu of consumption but by movement of funds from one investment to another. This is based on the operation of the so-called 401(k) scheme in the United States. So I do not believe that there is a footloose wad of new money waiting to cascade into pensions and claim tax relief.
§ Mr. John Butterfill (Bournemouth, West)
Does my right hon. Friend agree that the statistics show that the existing availability is wholly underused, even by those who have surplus expendable income that would enable them to do that, and that if the rich wished to have vehicles for this purpose, the enterprise investment scheme or venture capital trusts provide a far more tax-efficient vehicle and do not have the long lock-in of pensions?
§ Mr. Curry
My hon. Friend makes an extremely valuable point and I am grateful to him for that additional information. In any case, it is evident that people are cautious about locking up capital in pension schemes when they may have emergency needs such as unemployment or divorce. To quote a personal example, 797 two of my children are getting married this year. That could be described as an asymmetric financial shock. [HON. MEMBERS: "Are they girls?"] One is a girl and one is a boy, so there is clearly some negotiation ahead. I put some money by in the Skipton building society, but I am afraid that the Chancellor has made sure that the return on that is much less than anticipated at the time of the investment. No doubt my children will benefit, but the old man is now having to scratch around in a fairly urgent way to finance these extraordinarily happy events. Certainly I would not have wished to lock up too much of my savings against such eventualities.
If the Government are really kept awake by fears of a new demand for rebate, they have the means to address it. They can simply set limits on the amount of income tax rebate on contributions which are lower than the limit on the contributions themselves, and they will have turned the trick in tax terms.
The Bill seeks to solve a real, growing problem, particularly for people of modest means. Moreover, the changes to the way in which businesses deal with pension entitlement accelerate the urgency of that problem. The Government have a legitimate concern: they have a legitimate demand and a real problem. Pensioners, too, have legitimate expectations and an acknowledged grievance. The Bill invites the Government to engage in a necessary debate and challenges them to adopt this solution or to offer a more effective one.
This is a private Member's Bill, so the Government have the whip hand. They can kill the Bill dramatically or they can engineer death by 1,000 amendments. I urge them to take on the challenge of addressing the issue and working to produce a reform in order to free a growing generation of elderly people from the fear that a civilised old age will descend into a struggle for survival.
§ 10.3 am
§ Ms Gisela Stuart (Birmingham, Edgbaston)
I know that it is customary for me to congratulate the right hon. Member for Skipton and Ripon (Mr. Curry) on winning the opportunity to present a private Member's Bill, but I can assure him that my congratulations are genuine. I congratulate him both on his luck and on choosing a subject that, as he admitted, many people deem to be fiendishly difficult. The danger of making such a choice is that many people do not engage in the debate but switch off—a dangerous temptation that we have a duty to resist.
Many hon. Members will not have to make a decision on annuities. Several trustees of the parliamentary pension fund are in the Chamber today. We are some of the few lucky people who participate in schemes with defined benefits, so we do not have to take such decisions. However, some of us have policies from previous occupations and many of us have constituents who have written to us with problems.
The caveat to my congratulations is that I have some reservations about private Members' Bills as a vehicle for legislation on complex issues. I share the view of some hon. Members that the House should not fall into the same trap as other organisations and mistake activity for achievement. We should not assume that the more we legislate, the better we are. I am something of a minimalist on legislation. If legislation is important, the Government should introduce it, and if it is not important, they should not legislate. Private Members' Bills can fulfil an 798 important function if they are short, to the point and address an oversight in an earlier measure. In the last Parliament, I took forward such a Bill that had been introduced by the then Member for Wealden. The Government accepted that Bill, which clarified the powers of the health service commissioner.
I have some difficulty with this Bill because it raises an issue of political debate that is also extremely technical. I recall Parliament considering pension splitting on divorce. There was no political disagreement, but we all recognised that getting it right would be complicated, so in 1997 the Labour Government set up a Select Committee to give the matter pre-legislative scrutiny and take advice. Annuities are desperately in need of review and may require a broader vehicle to bring that about. Having said that, the Bill gives us the opportunity to consider what areas to focus on.
§ Mr. Butterfill
The hon. Lady described the Bill as politically controversial, but I am not sure that she is correct. I am chairman of the all-party group on occupational pensions, which for many years has taken the view that this reform should take place. The difficulty is with the Inland Revenue, not party political groups in the House.
§ Ms Stuart
The hon. Gentleman is right in some respects, but the right hon. Member for Skipton and Ripon referred to the erroneous assumption that is often made that any reforms to annuities will ultimately help only the better-off. There may be some political difference on priorities rather than on the need for reform.
§ Mr. Mark Prisk (Hertford and Stortford)
This debate is assumed to be primarily of interest to those who are already retired. I have received many letters from constituents who are still in work, but nearing retirement. Only yesterday, Mr. Jeffrey Sharpe, from Sawbridgeworth in my constituency, wrote to say that he would love to retire but cannot afford to. Does the hon. Lady agree that we must recognise that the debate affects a much wider group in our communities?
§ Ms Stuart
The hon. Gentleman is right. The debate affects everyone because the financial decisions that have to be made on the point of retirement depend on the tracks that have been laid as soon as we start working, or even earlier. We need a longer period for taking advice. Decisions on retirement should not have to be taken at 65 but could be spread over a broader time scale so that advice can be taken, leading to the right decision being made. At present, decisions on annuities are irreversible, whatever changes in circumstances may arise.
In his pre-Budget statement, my right hon. Friend the Chancellor announced a review of annuities. I hope that my hon. Friend the Minister will say when we can expect that. Whether the Government give the Bill a fair wind or condemn it to death by 1,000 amendments, I hope they will take note of the issues that are raised today and include them in the review.
Returning to annuities, it should be simple to provide for one's old age. The theory is straightforward. During a working life of some 40 years, we put aside money for our old age. The state collects taxes to provide a state retirement pension. When the Labour party took office in 799 1997, one of its priorities was to help those who were perceived to be the worst-off pensioners. It introduced legislation to allow those of working age to make better provision for their old age, and I commend the Government on what they have done for existing pensioners and their determination to help the poorest pensioners as a top priority.
Last night, I re-read the report of the pension provision group, "We all need pensions: the prospects for pension provision", published in 1998 under the chairmanship of Tom Ross. It still provides a valuable and comprehensive analysis of the future of pension provision, but I was struck by the fact that the word "annuities" did not even appear in the index. It was not deemed to be an issue of great importance then, but it is. So although I commend Labour's achievements on pensions, I warn my hon. Friend the Minister that, in those famous words, much has been done but much more needs to be done.
Decisions about annuities are often difficult. I offer the House a working definition of "annuity" as a policy purchased, usually from an insurance company, to provide a regular income from a lump sum. Anyone who has paid into a money purchase scheme—one in which the benefits are not defined as a percentage of the final salary—converts the pot of money accumulated into an annuity which then provides the pension. The great virtue of the scheme is that people are in no danger of running out of money simply because they live for too long.
None of us knows in advance for how many years we will have to provide, although actuarial forecasts provide us with an indicator. It is clear that people now tend to live longer, and by pooling the risk with others, we can provide much more reliably for ourselves. It has been mentioned that women live longer, and current evidence supports that. I do not know why that is the case; we could have an interesting debate on that. I wonder whether the size of the gap is sustainable. Our actuarial forecasts assume that, even after 65, that gap will not widen, but the German Government, in a recent life expectancy forecast, have assumed that it will widen increasingly.
§ Mrs. Browning
The latest figures produced by the Government show that children born last year will have a life expectancy of 74.91 years for men and 79.86 for women. There is still a five-year difference.
§ Ms Stuart
That is one way to look at the ultimate figures, but if we consider what is happening by 10-year age groups, the figures are different. Longevity is determined by such factors as infant nutrition, so the post-war generation, born between 1945 and 1955, will probably have a profile different from that of later generations. We need to segment the figures more carefully.
The principle of insurance is pooling risks. Separating out various groups is the start of a dangerous tendency. I declare a generic gender interest, and I am delighted that clause 1(4)(c) provides that annuities purchased to provide the proposed minimum retirement income should be provided on a unisex basis. We should not undermine the principle of pooled risk by separating provision for the genders. [Interruption.]The Conservative Front-Bench spokesman appears to doubt that. We are equalising 800 pension age and I declare a further interest because I am in the first group of women—born in 1955—whose retirement age will be the same as men's.
§ Mr. Dismore
Is there not a difference between the pooling of risk between the genders by the state, which carries it across the whole economy, and the pooling of risk between individuals who happen to be men or women? It is clear that it is part of the state's responsibility to consider the issue, but does my hon. Friend agree that, as matters stand, we could run the risk of robbing Peter to pay Jane?
§ Ms Stuart
We may, but, on balance, it is a risk that I am prepared to run. I support the concept of annuities, but they have their drawbacks, one of which is that the Government force everyone with a defined contribution pension to buy one. We do not have a choice. It is also the only financial decision that is irreversible. Once an annuity has been bought, one cannot make any changes.
The decision is not a simple one. There are many different types of annuity: capital protected, single-life, joint-life, level, impaired-life, escalating, investment-linked. I will not go on and I certainly will not try to explain the various types. Despite the huge variety available, the choices that people make are limited. In his explanatory document, the right hon. Member for Skipton and Ripon says:We have also rejected trying to create 'fancy annuities"'.We do not need to offer a wider range of products, because people already find it difficult to choose. Rates available vary frequently, with daily changes by many providers. A company that gives the best deal on a Monday may well no longer be the best buy on Friday. Continuing, long-term, high-quality financial advice is therefore crucial. Usually that is least likely to be available to those with small capital sums available—the least well-off. That is one reason why I urge the Minister not to approach the Bill with the view that it will assist only the better-off. Far from it: some changes to annuities will help those with smaller capital sums, because the evidence suggests that they make the worst decisions. For example, only about a third of people use the open-market option, and it is those with larger pension pots who do so, but that represents more than half the total value of annuities purchased. The open-market option is invariably the better option and it should be chosen more often by those with smaller pension pots.
§ Mrs. Browning
Does the hon. Lady agree that many companies do not disclose as openly as they might that policies are subject to an open-market option? It appears in small print and is not always pointed out to policyholders.
§ Ms Stuart
I agree, and the option should be made clearer. Most estimates suggest that more than 50 per cent. of those purchasing annuities do not get the best rate. The market for annuities is growing rapidly. In 2001, it was estimated to be worth some £8 billion. I expect the market to grow, not least because more and more company pension schemes are moving to defined contributions, rather than the more traditional defined benefits system. Government policies that encourage personal and stakeholder pensions will further that trend. Some estimates suggest a growth rate of 20 per cent. a year.
801 I support annuities as a vehicle for providing income, but we must make them work better. That will not benefit only the better-off as is often argued, but will improve annuities to help the less well-off. One improvement that may not require legislation is the provision of much better advice. I have already said that once a decision has been made, it is irreversible. Many people reach retirement age and are faced with complex decisions that they are simply not equipped to make. We should make it mandatory to take advice before final decisions are made. Ideally, such long-term decisions should be reached after lengthy consideration of options, but I accept that only those with larger sums of money available will have long-established relationships with financial advisers.
It is essential that forms are more easily understood and standard forms must ask the essential questions that will enable individuals to obtain the best rate available for their chosen annuity at the time of purchase. The present forms vary greatly in the language that they use. Many do not spell out the facts, and the language used is not uniform. The Association of British Insurers made a first step in the right direction when it proposed that all pension providers should clarify the availability of the open-market option. We should go further. For example, the proposal still does not ensure that members of occupational defined contribution or group personal pension schemes are choosing the right annuity or getting the best rate.
We need to ensure that before the final decision is made, everyone has answered the important basic questions to determine what kind of annuity is best for them and how they can obtain the best rate available for their chosen annuity at the time of purchase. That raises the question of how the advice is to be paid for. Currently, annuities carry an initial commission of, on average, 1 to 1.4 per cent. but in some cases it can be as much as 2 per cent. For an annuity of, say, £25,000, a sum of at least £250, or as much as £500, is deducted by the annuity provider even if—as is often the case—no advice is provided at all. For those who do not use an independent financial adviser, such a sum would be available to pay for advice. People in the industry say that for fairly straightforward settlements, a two-hour session would be sufficient. I accept that, at present, there are not enough advisers to meet the potential demand, but I see no reason why that should not change. As more people require the advice, the market will respond.
How do we ensure that the best rate is available? IFAs already use services that provide essential information. We need an extension of the database, with some safeguards, to ensure that rates quoted are reliable. That should not cause great technical difficulties. Close consultation with insurance companies and annuity providers is essential, but I cannot see any major problems. We need a commitment by the industry to have an annuities exchange and to provide the database so that people can access it and get up-to-date information. Again, I see no reason why that could not be policed by the Financial Services Authority.
To make annuities work better, we need to move towards a standard form of wording to help everyone to understand their options and a requirement to take advice before a decision is made. That must be combined with the pooling of information on annuities and the returns available at any given time in a way that is easily accessible and reliable. Those suggestions would improve the workings of the annuity system.
802 In the long term, the Government ought to be far more radical in overhauling the system. First, there are far too many different and often conflicting rules governing the annuities of different parts of one's pension. Rules need to be harmonised to provide a single set of rules for the various elements of an annuity.
The insurance industry itself has to improve its administrative systems. It often takes months for providers to transfer sums. The ABI initiative in this context is welcome, but it should be a mandatory requirement to prevent unnecessary delays and cumbersome administration. As I said, sometimes the best open-market rates available on a Monday may not be the best on Friday. However, companies sit on any request for months on end. That means that it is not only difficult to find the best deal but difficult to implement it practically.
We must establish a system that enables people to keep track of their old pension entitlements. That must strike a chord with everybody in the Chamber. If we all stopped to think, we would find that we have accumulated an array of pension entitlements during our working lives. I see no reason why we could not consider a system for updating the record of entitlements together with the issue of the P45.
In the long run, a process that makes it clear to people that they need to start planning early, and that the company that provides the saving vehicle during their working lives is not the same company that then pays their pension, is essential. That must be addressed by the Government, employers and the industry collectively. Far too many people assume that because their savings have been made with one company during their working lives, that company will also be the best provider of their annuity; far from it. However, no one agency can do that alone.
Income drawdown charges are far too high and investment-linked annuities should be made transferable. I welcome the thinking behind clause 1(7), particularly the provision that money may be withdrawn from the retirement investment fund at any time. I am attracted by the argument that once basic provisions have been made—for example, the requirements for a minimum retirement income; we can have endless arguments about how that is determined, and there are mechanisms by which we may do that—there should be a greater freedom on how the rest of the capital is used and invested.
The current age limits for retirement are increasingly out of step with people's wishes and lifestyles. Some people want to stay in work longer, or combine working and partially drawing on their pensions. For example, I see no reason why we should not allow people to take the lump sum separately from the rest of the pension. People could partially retire and live on the capital from the tax-free lump sum at first, and then annuitise the rest of the pension later when they finish earning altogether. That is currently not possible. Much greater flexibility at the point of retirement is needed to reflect people's wishes.
§ Ms Stuart
The option is available in some schemes, but it ought to be made far more widely available. Take-up is low, despite the use of the phrase "a flexible decade in retirement". People do not consider it as a matter of course.
803 I hope that the Minister, in considering her response to the Bill—with which I broadly agree—will consider some of these suggestions. I ask her for help on one issue on which I have not had an answer and which was also raised by the right hon. Member for Skipton and Ripon.
We all like to quote our constituents, and my constituent Mr. Bellamy wrote to me just after Christmas. He said that, all his working life, he had planned ahead and tried to make the best financial provisions for his and his wife's retirement. He behaved and acted in exactly the way that the Government wish to encourage: he has planned, provided and thought ahead responsibly. He outlined the difficulties that he foresaw in being forced to purchase an annuity once he reaches the age of 75. He cannot see any rational reason for fixing it at the age of 75, and asked me why that age was chosen. I, too, cannot see what is so magic about 75.
I note that the right hon. Member for Skipton and Ripon said that he rejected the idea of deferring the obligation to take an annuity from 75 to a later age; there may be good and rational reasons for that. I fail to see a rational reason for the age of 75, and I would be grateful for any indication from the Minister as to the thinking on that matter.
We need to review the rules relating to annuities to allow more people to get the best possible deal. Administration needs to be simplified, and more and better advice is needed. This will not, as is so often and erroneously said, help a small handful of people who are better off, but a great many people—and disproportionately those with smaller funds.
The Bill proposes some positive changes to the current regime. If the Minister does not feel able to support the Bill today—something which, on balance, I would regret—I hope that she will take the speeches today into account in the review that was promised in the pre-Budget report. Despite the fact that this subject is sometimes difficult to understand fully—I accept that it is technically difficult—it affects all our constituents.
The rules no longer serve the original purpose of annuities or our constituents. Changes are necessary, and I hope that the debate today—even if the Bill goes no further—will contribute significantly to work on the subject.
§ Mr. Howard Flight (Arundel and South Downs)
I congratulate my right hon. Friend the Member for Skipton and Ripon (Mr. Curry) on securing the debate. This is a subject on which Conservative policy for the last four years has been to abolish the obligation to buy an annuity and to propose legislation broadly similar to the Bill. Personally, I have campaigned for four years on this matter, and I have worked with Dr. Oonagh Macdonald of the Retirement Income Reform Campaign. As everyone in the House knows, there is broad cross-party support here for change.
I should probably also declare an interest, as I have a money-purchase pension. If Members of this House found that their pension scheme was a money-purchase one, there would be a rather more acute interest in the subject than there has been.
804 I very much hope that there will be a positive response from the Minister today in the light of the Inland Revenue consultations. It seems that the ship of state may at last be turning on this issue and that the Government have heard many of the good points made by the Retirement Income Reform Campaign.
I do not believe that a more flexible annuity is the correct answer. The Government and the Financial Services Authority have, in all other territories, campaigned vigorously against the unnecessary costs of insurance wrapping of savings. To tell people that they had to pay extra insurance company charges for a product that they manifestly wanted would be a travesty in this crucial area.
There is already an approved annuity scheme that permits people to select a choice of unit trusts and to pass balances on to their heirs at death. The problem is that the costs are 1.5 per cent. per annum and the front-end charge is 3.75 per cent. Again, I cannot think that the Government or the Inland Revenue would want to encourage such charging when, in all other areas, they are campaigning vigorously against it.
I echo the point that some of the things that the Minister for Pensions has said show him to be out of touch. About 1.5 million people will benefit from the changes proposed and many more will do so in the future, given the 8 million or so with personal pension savings who will be eligible. In addition, a recent Winterthur survey showed that only 13 per cent. of people believed it fair to force people to buy an annuity. The Government should realise that a major reason for the disappointing sales of the stakeholder pension has been that people object to the Soviet-style requirement to buy an annuity. They know that annuities are not good value and they do not want their pension savings to get locked in.
§ Richard Ottaway
The Minister for Pensions said that the measure would benefit only the wealthy. He went beyond the position that my hon. Friend has deftly described and introduced the politics of envy into the debate.
§ Mr. Flight
I thank my hon. Friend for his comments. That is the point; I was endeavouring to be polite, but the right hon. Gentleman is mistaken in thinking that in this case the interest is limited to the better-off.
Canada has pension arrangements that are not dissimilar to ours. Some 14 years ago, it introduced changes permitting those with regulated retirement savings plans, which are rather like stakeholder pensions, to have the choice of putting the money into a pension account as an option for buying an annuity on retirement with, of course, everything drawn out of that being taxed as income. The Government will be interested to know that since that change, the number of people participating in those schemes has doubled to 40 per cent. of the work force. The powerful message from that experience is that if we want the stakeholder type of arrangement to succeed, there needs to be a package that people find acceptable.
It is clear that many people simply do not like having to surrender their pension savings for a bad-value annuity. The cost of annuities has virtually doubled over the past decade. Part of the cause has been the fall in inflation, but it is crucial to realise that real long-term yields on which 805 annuities are based have virtually halved as well. That has essentially been the result of fiscal surpluses, partly from licensed sales—in other words, a contraction in the supply of gilts available—at a time when demand has been rising dramatically. That demand is partly from maturing money-purchase pension schemes—£8.5 billion last year, £12 billion in two years' time—growing at roughly 20 per cent. compound. In addition, the remaining mature final-salary schemes now have a growing demand for gilts—we need only look at what Boots has done. So there is a complete mismatch in supply and demand which has, not surprisingly, driven down real yields and is making annuities relatively bad value.
§ Mr. Butterfill
Does my hon. Friend agree that legislation has played its part? The introduction of the minimum funding requirement, the requirement for improved reserving regimes for insurance companies and, most recently, FRS 17, which no doubt motivated Boots, have all meant much more institutional demand for these same financial instruments.
§ Mr. Flight
Indeed, yes. The Governor of the Bank of England has acknowledged that it is unhealthy for the imbalance between the supply of and the demand for gilts to worsen.
How an annuity yield is calculated is a mixture of the long-term redemption yield, the life expectancy and what the insurance company's book looks like. The biggest single factor is the long-term yield. People who retire and have to buy annuities have, to some extent, subsidised low-cost Government borrowing, for which the Chancellor has no doubt been pleased to claim credit in the national interest. People are not stupid; those forced into buying annuities know that they are paying.
The problem is worsening. Final salary participation has fallen to levels as low as those of the 1950s. There has been a major shift to money-purchase schemes across companies. In the past five years, 24 per cent. of firms moved to money-purchase schemes. Last year alone, 46 major companies, including Sainsburys, BT, ICI and Lloyds TSB, closed their final salary schemes. I repeat the point made by the hon. Member for Birmingham, Edgbaston (Ms Stuart) that Members of Parliament, civil servants and everyone in the public sector are in a privileged cocoon, with indexed final salary arrangements. If, dare I suggest, Inland Revenue officials had money-purchase pension schemes, I feel that the issue would have been addressed long ago.
§ Mr. Peter Lilley (Hitchin and Harpenden)
I am grateful to my hon. Friend for giving way and for supporting this excellent Bill. I confirm that from the social security point of view there has never been any opposition to these proposals. Indeed, I strongly supported moves of this kind when in government. The opposition has always come from the visceral opposition of the Inland Revenue to any measure that defers payment of tax even if, at the end of the day, extra tax more than compensates for that deferral. If there is Government opposition to the Bill and we cannot get it through today, my hon. Friend's proposal that Inland Revenue officials have money-purchase pensions would allow us to make a lot of progress.
§ Mr. Flight
I thank my right hon. Friend for his support. However, I do not think that I would want to be labelled by the Inland Revenue as the person who introduced that measure.
On investment, most people buy guaranteed annuities which are not index linked because they get a better immediate yield and because index-linked annuities are even more expensive. Most people buy them at 65. Average life expectancy at 65 is now, if we take the combination of two spouses or partners, up to 25 years. Buying an annuity amounts to putting all one's savings for a 25-year view into gilts. I repeat my earlier point that if someone went to a financial adviser and said, "I want to do something sensible and prudent with my capital for the next 25 years to ensure that I have a reasonable income and return to live on" and the adviser said, "I would put the whole lot in gilts if I were you," the FSA would attack that adviser for giving unwise and negligent advice. No one knows what might happen to inflation over the next 25 years. It is safe in nominal terms but it is a highly risky approach in real terms.
Unless people protect themselves with inflation-linked annuities, which in general they do not, there is a major risk for those who retire now when inflation and interest rates are very low that, at some stage in the next 20 years, factors may conspire to raise the level of inflation significantly and destroy the value of the annuities.
§ Mr. Barry Gardiner (Brent, North)
In the light of his remarks about gilts, is the hon. Gentleman prepared to venture any comment on the decision of the Boots pension fund?
§ Mr. Flight
I could bore the House for a long time on that subject. Boots had little choice, but I would enjoy a full and frank exchange on that subject in another arena.
The Bill addresses two crucial concerns. First, the changes should not offer some tax-advantageous schemes for people to save in pension schemes and then pass them on to their heirs. There is a withdrawal tax as well as inheritance tax and the proposals involve tightening arrangements that may exist if one is lucky enough to die before 75 and have a drawdown from which one has drawn nothing. Secondly, there is a necessary requirement for people to purchase an index-linked minimum annuity. Pricing for those should be equal for men and women; once people are over 60, the difference in life expectancy between the two sexes is now less than two years, and it is likely to become even less. That would be a sensible arrangement, even if marginally unfair.
§ Mrs. Browning
I am sorry to be pedantic, but can my hon. Friend see that actuarial questions of equalising the annuity for men and women could have implications in other areas? For example, might not there be an equalisation of the cost of life insurance for smokers and non-smokers? What about women, who can sometimes obtain favourable car insurance because we are better drivers and have fewer accidents? Would not the industry see equalisation as a precedent to be used to our disadvantage?
§ Mr. Flight
I thank my hon. Friend, but I believe that the market is more flexible than that. In view of my record on cigarette smoking, I am one of the few people who could buy an attractive annuity because of the reduction in my life expectancy.
807 Somewhere in government, there seems to be an objection in principle to the idea that people should be able to pass on to their children anything from their pension saving. I see no logical or fair grounds for that. Whatever is passed on should be fairly taxed and should not provide some sort of scheme for tax saving. However, in principle, passing something on is surely a good thing. If people choose to take less pension with a view to passing something on to their children, they are surely entitled to do so.
The Treasury has expressed concern that if the Bill's reforms were introduced, there would be a huge increase in pension saving with a substantial tax cost. I thought that the Government wanted to increase pension saving. The more there is, the lower will be the massive future cost of the minimum income guarantee and pension credit.
There is no evidence to support the Treasury's assertion. Parliamentary questions from Opposition Members have obtained the response that the Government have no central data on pension contributions. Generally, people save what they can afford for their pension. They may at present save slightly less than they can afford, particularly in the case of stakeholders, but it is unrealistic and unfounded to think that people would leap into saving massive amounts if no tax advantages were offered for assets passed on to one's heirs.
There is a particular problem for Plymouth Brethren, a minority whose faith does not permit them to buy annuities. The Bill does not solve all their problems, but it goes some way to doing so. It is reasonable that a deeply held, politically inoffensive religious belief should not be ignored.
§ Ms Stuart
I have a problem with the hon. Gentleman's point about inheritance. The basic assumption underlying our tax structure of savings is that the Government want people to put away money for their old age and to use it for their old age. There must be some safeguard on that principle. People cannot have their cake and eat it. When people buy an annuity that will provide for them for however long they live, they cannot say that if they die early, someone can inherit it. We must make up our mind what we want.
§ Mr. Flight
With respect, I do not believe that the hon. Lady is looking at the point clearly. First, it would be fair if the tax benefits of the savings were returned to the state and taxpayers. Secondly, many people are saving for their old age through individual savings accounts—formerly through personal equity plans—and there are no problems with passing those on. Thirdly, people who are able to take tax-free lump sums from their pension savings may pass those on. The point is that there should be fairness as far as tax is concerned, not that there should be a principled ban on passing on money to one's heirs.
I shall close where I began. I worry that the Government will seek to answer the problems by proposing more flexible annuities. That would, to some extent, succumb to the interests of the insurance industry as well as being contrary to the general FSA and Treasury principles to discourage people from incurring the unnecessary costs of insurance wrapping of savings.
It is time to allow people to manage their pension savings on retirement if they wish to do so. Most people would continue to buy annuities, but Soviet-style 808 compulsion is not acceptable to our society. If the Government do not bite the bullet in the near future, there will be growing problems. Private sector pension savings will increasingly decline and near-term annuity yields could decline further with costs rising higher.
A rising tide of maturing money-purchase pensions will come to the market over the next few years as post-war baby boomers of my generation retire. Why cannot Britain follow Canada and Ireland, which addressed these points, respectively, 14 and four years ago? Nothing of what the Revenue fears has resulted from that. Those fears are false bogeys. The Government should stop prevaricating and get on with addressing what the majority of people of all shades of political opinion have campaigned for. I have had more letters on from my constituents on this matter than on any other, and my right hon. Friend the Member for Skipton and Ripon has pointed out that the Department for Work and Pensions has also supported change.
Will the Government bite the bullet? The Opposition fully support my right hon. Friend's excellent Bill.
§ Mr. Mark Hendrick (Preston)
I congratulate the right hon. Member for Skipton and Ripon (Mr. Curry) on coming so high in the ballot and on having the opportunity to introduce his Bill.
The Bill is aimed at amending the Income and Corporation Taxes Act 1988, which obliges personal pension scheme operators to acquire pension benefits for their members by the purchase of an annuity by the age of 75. That is a strange age, and I am not sure why it was chosen. I shall return to that point.
The Bill would require annuity purchase to the extent necessary to secure what is referred to as a minimum retirement income. That is desirable from everyone's point of view. That income would be set annually by the Chancellor of the Exchequer. Quite how the Chancellor would set that figure, I am not aware, but I am sure that there are some talented people in the Treasury who would give guidance. I hope that the Bill would result in incomes for pensioners greater than the current minimum income guarantee while not increasing the burden on the state. By its nature, I do not think that it would increase the burden on the state.
The Bill would also abolish the rule that requires that the whole of an accumulated pension fund, after deduction of the tax-free lump sum, be used to buy an annuity for the pension scheme by the time the pensioner reaches 75. The age of 75 seems fairly arbitrary to me, and probably a good deal more flexibility should be allowed. If hon. Members asked me what the age should be, I would be honest and say that I do not know. Perhaps the proposed consultation will throw a little more light on that. The House can probably find some consensus about whether the age should be fixed or there should be some flexibility.
The Bill will also allow residual funds on death to be passed to the member's estate, subject to what the right hon. Member for Skipton and Ripon refers to as an exit charge, except where the beneficiary was a spouse or partner of the scheme member, when it would be passed on tax free. That is an excellent idea, which will bring confidence and certainty to people investing in such schemes. In the past, pensioners had doubts and lost confidence because they did not know whether they 809 would receive the full benefit of their investment. Those doubts could be offset by the knowledge that a spouse or partner would benefit if they did not.
The Bill will also provide for the residue of the pension fund to be invested through a tax-exempt retirement income account, of which I am in favour.
As I said, the Bill will remove pensioners' obligation to use all their pension savings to buy an annuity by the age of 75. It will substitute for the existing annuity purchase rule a requirement to buy an annuity sufficient to provide an income above envisaged income support levels by age 65—again, a laudable aim. The annuity is to be index-linked. I and other Labour Members support that, and I shall be interested to hear what the Minister has to say on that point.
The aim would be to buy an annuity to meet the minimum income requirement. The current rules take away any option that pensioners currently have and force them to buy an indexed annuity. One or two hon. Members have mentioned the case of people with smaller funds. Independent financial advisers will not be able to give the same guidance as in the past because a minimum retirement income would be obligatory. That is an interesting scenario, and again I shall be interested to hear the Minister's comments.
I accept that the scrapping of income withdrawal will be beneficial. The current flexibility to draw an income of 35 to 100 per cent. of annuity income will no longer exist. In addition, any funds not required for the annuity purchase would be reinvested in a retirement income fund from which people could withdraw at will as much or as little as they wished. The retirement income fund will, I hope, be allowed to grow tax free. Again, I shall be interested in the Minister's comments.
Obviously, the setting up of such a fund would need cautious deliberation to establish which was the best institution to manage the fund and what were the best financial products in which to invest it. Clearly, that would involve risk analysis and consideration of all the individual's financial and personal circumstances. There will be a need for continuing advice until the pensioner's death.
As one would expect, any withdrawals from the fund during the life of the pensioner will be treated as income and subject to income tax, but the mechanism for applying a tax on withdrawals needs to be clarified. After the consultation, there should be some debate about how the tax mechanism would work.
It is intended to amend the Bill so that any funds left in the retirement income fund on the death of a pensioner should be taxed at 35 per cent. unless, of course, any sum remaining is to be transferred to a relative, the member's spouse, partner or dependent child, when no tax will be levied.
I understand from the figures that the tax yield on death between the age limits for drawdown is expected to be up to £100 million this year. If the amount of funds in drawdown remains static and funds pass immediately to families on the death of a scheme member, a similar annual sum will probably go to the Exchequer, which I am sure will please the Treasury.
An important issue is the pensioner's access to residual funds and the fact that funds could be inherited beyond the age of 75. Another is the issue of tax exemptions. 810 I believe that those measures will possibly give an incentive to people with large pots to move savings from other sources into pension products that would be subject to considerably more tax relief.
The Bill will also provide for annuity purchase only to the extent of the MRI. If that was set at the level of the current minimum income guarantee, the cost of an annuity that would pay an equivalent income would be about £54,000 for a man aged 65. Assuming that people would take their maximum tax-free lump sum, the necessary fund size would be about £72,000. If it were index-linked, about £95,000 would be needed.
§ Richard Ottaway
Is the hon. Gentleman taking into account the value of the personal pension fund in those figures?
§ Mr. Hendrick
Yes, I understand that it is included.
Most of those who retire have pension funds of far less than the amounts that I have cited. The average is about £30,000. The changes proposed in the Bill would benefit—and I have heard what Opposition Members have said—wealthier sections of the population who can build up larger pots, but in practice the majority of ordinary people would still be required to use the whole of their fund to buy an annuity and so would not gain anything from the change. The right hon. Member for Skipton and Ripon mentioned that that was currently the case, and I accept that, but I would have hoped that some attempt would be made to help poorer pensioners. Clearly, that is not the aim of this Bill.
§ Mr. Greenway
I am listening closely to the hon. Gentleman's speech. He speaks knowledgeably about a complex issue, but does he recognise that contribution limits are laid down by statute? Admittedly, many of the limits are not used to the full by individuals, but they prevent the so-called wealthy from taking advantage.
§ Mr. Hendrick
I accept the hon. Gentleman's point, but my concern was more for poorer pensioners than about the limitations placed on the wealthy.
I look forward to the consultation document whose publication is expected in January 2002. I understand that the consultation period will run until April 2002. It would probably be a good idea not to force changes to the Bill until the outcome of that consultation is known, but I await the Minister's advice on that point.
§ Mrs. Cheryl Gillan (Chesham and Amersham)
Does the hon. Gentleman agree that in the period leading up to the consultation some people will be disproportionately affected, including one of my constituents who will have the misfortune to reach the age of 75 on Sunday and for whom there is no escape without dispensation from the Minister? Incidentally, the Minister has not replied to my letters—two in December and one this month—on this issue as it affects my constituent. Does the hon. Gentleman agree that it would be more equitable if the Minister now froze the current requirement for those people immediately affected, until the outcome of the consultations and the pending court case?
§ Mr. Hendrick
Obviously, I sympathise with the hon. Lady's constituent, but many people have reached the age 811 of 75 in the two years before the introduction of the Bill. If legislation is to be drafted properly, the consultation period is important, so the Bill should be neither hurried nor delayed on account of one pensioner, however worthy.
The clear aim of a pension scheme is to provide a satisfactory income to last throughout the whole of the pensioner's retirement. It is hoped that the substantial tax relief given to schemes will encourage and support people in that aim. Currently, the only way that a pension scheme that cannot pay a pension to its members from its own resources can guarantee to provide a lifelong income is through the purchase of an annuity. As many Members have pointed out, that is especially important given recent increases in longevity. The proposals could form the basis for the provision of a satisfactory income for the whole of retirement.
To some, annuities are currently seen to represent poor value owing to low interest rates and changes in the markets for financial products in the run-up to the purchase of annuities. That stems from the higher cost of annuities compared with the costs a few years ago. However, that higher cost arises from several factors that do not necessarily bear on value. Increased longevity has been mentioned. Low inflation and interest rates have pushed down the returns on Government bonds and gilts so that providers have had to purchase more gilts in order to maintain the same steady stream of income.
The Bill would mean that the real value of an annuity will not be eroded as it was in the past. I am sure that is what the right hon. Member for Skipton and Ripon intended. Furthermore, as we have heard, the pooling of risks that underlies an annuity—whereby those people dying early in effect subsidise those who survive the longest—will diminish with time, for the reasons given by the hon. Member for Chesham and Amersham (Mrs. Gillan). The early death of a pensioner should no longer be seen as providing a bonanza for the insurer. I look forward to the progress of the Bill.
§ 11.3 am
§ Mr. Steve Webb (Northavon)
I congratulate the right hon. Member for Skipton and Ripon (Mr. Curry) not only on securing this important debate but on the unprecedentedly entertaining way in which he discussed annuities. We all enjoyed it. He was right to pay tribute to the work of the Retirement Income Reform Campaign, which has gone about its work in a well-informed and effective manner. Its work is to be applauded.
The hon. Member for Arundel and South Downs (Mr. Flight) brought these issues to the fore many times during the last Parliament, as I have also tried to do on some occasions. The purchase of annuities has become more important owing to the growth of stakeholder and personal pensions and is even more significant because of the increasing trend for occupational pension coverage to move towards a money-purchase basis. We might argue about whether we are discussing only the rich or the nearly rich, but even if that were true at present, it will become less true over time. The issue is important.
The hon. Gentleman referred to Stalinist compulsion. If my memory serves me correctly, the whole personal pensions regime was introduced in 1988 by that 812 well-known Stalinist Chancellor, Nigel Lawson. The Conservative party has had an opportunity to deal with that Stalinist situation, but has so far failed to do so. Perhaps today will see a change in that.
§ Mr. Flight
The point is that in the 1980s, annuities were good value and attractive products. During the 1990s, it became apparent that that was no longer true, but the obligation to buy an annuity goes back even further than the 1980s.
§ Mr. Webb
As I said earlier, the Liberal Democrats are broadly supportive of the Bill. We certainly believe that the general principle of annuity reform is sufficiently important for the Bill to receive a Second Reading. Some of the detailed concerns that I shall raise should be understood in that context.
In the past, the Government have made two objections to the principle of relaxing compulsory annuity purchase at the age of 75. The first is that the well-off older person—the woopie—will blow it all on a world cruise, and then be thrown back on the mercy of the state. The poor Department for Work and Pensions would have to pick up the tab.
The second objection is that the taxpayer has provided the incentive to save throughout a person's working life and unless the money—with the exception of the lump sum—is converted into an annuity to provide a pension on retirement, the taxpayer will have paid out without return. As the right hon. Member for Skipton and Ripon pointed out, taxpayers will have given a subsidy but received nothing back.
Both arguments are fatally flawed. The objection that the Department for Work and Pensions will have to pick up the tab merely argues, like the Bill, for a minimum level of annuity. It would provide a minimum income from the pot, not that the whole pot should be spent on an annuity. There are two distinct points. As long as the person does not throw themselves on to the mercy of social security subsequently, what they do with the rest of their pot is no concern of the Department for Work and Pensions.
§ Mr. Dismore
I follow the logic of the hon. Gentleman's remarks. One of the issues that I want to raise later—if I catch your eye, Madam Deputy Speaker—is the interrelationship between the Bill and pension credit. I fully accept the point on the minimum income guarantee, but there are some difficult and complex arguments as regards the fact that pension credit might come into operation before the Bill takes effect. Will the hon. Gentleman give us his views on that point?
§ Mr. Webb
The hon. Gentleman is right. I agree with him. If he will allow me to follow the logic of my remarks, I shall deal with that concern later.
It is an entirely proper principle that people should be required to ensure that they do not throw themselves on the mercy of the Department for Work and Pensions. To put that into operation is difficult, however, and I shall return to that matter. The hon. Gentleman is right that the pension credit makes things much more complicated.
As regards the argument about tax relief, the nature of tax relief on pensions is often misunderstood. It is sometimes presented as a huge middle-class perk, but, in 813 essence, it is deferred taxation: instead of paying tax when we earn the money, we pay it later when we draw a pension. That is a cost to the Exchequer in terms of deferral and of the lump sum. There is also a potential cost in that, on average, people probably pay tax at a lower rate when they retire than when they contribute. In principle, the process avoids double taxation; it is not a big £10 billion or £12 billion middle-class tax perk designed to encourage us all to save for our old age. Clearly, it is about timing—the Government get the money eventually. That is an important point.
§ Mr. Greenway
Does the hon. Gentleman agree that the real cost to the Exchequer is when people do not make provision and fall on the state from the age of 60 or 65, as we have seen in recent years?
§ Mr. Webb
That is true, although it would apply only to a subsection of the saving population. Many of those who receive the highest tax relief would probably find saving mechanisms that would ensure that they did not fall on the state. Only some of the amount spent on tax relief saves the Exchequer money. If those things are true—
§ Mr. Butterfill
The hon. Gentleman says that it is all right as long as the Government get the money eventually. The problem is that under the present system, they do not always get the money eventually. If annuity purchase is deferred to age 75 and the person approaching 75 has three or six months to live because they have terminal cancer, the insurance company gets the money eventually, not the Government.
§ Mr. Dismore
I question whether the previous intervention was accurate. I have read a little about the subject in the Library briefing and elsewhere. The Library's view is that while the view of the hon. Member for Bournemouth, West (Mr. Butterfill) might be the perception, it is not the reality, because the insurance industry pools the risk across the board, which takes into account the fact that some people live longer than they are expected to and others do not. The net result is a pooling across the risk. The winners-and-losers, swings-and-roundabouts arrangement means that the money does not go to the insurance company but is redistributed among other annuity holders.
§ Mr. Webb
Perhaps I should ask the hon. Members for Bournemouth, West (Mr. Butterfill) and for Hendon (Mr. Dismore) to continue the discussion between themselves. I suspect that we are talking about a relatively small group, but the key is that pooling is taking place, so that if the insurance company gets a greater return because a person dies early, that money is available to be paid out in annuities to other people, on which they would be paying tax, and that is reflected in the annuity rate. That is my understanding of the latest intervention, but perhaps I should move on.
Provided that we ensure that the Exchequer gets its tax, and that the Department for Work and Pensions is not burdened, there is a positive argument for reform. If it is possible to make a reform whereby no one loses but 814 someone gains, why not make it? If it is possible to require people to buy a pension that takes them beyond benefit levels and leave them a choice about what they do with the rest—subject to the caveat about the Exchequer getting its share—they would be better off. We would be giving them a choice that makes them better off, at no cost to the Exchequer because we would have ensured that the tax was coming. If we can increase the welfare of older people without such losses, which the Bill would allow us to do, I can see no reason why we would not want to do so.
For those reasons I am sympathetic to what the right hon. Member for Skipton and Ripon is trying to achieve. However, I have several concerns, which might be worth voicing briefly but which could be explored at greater length in Committee if the Bill should reach that stage.
The specific tax proposals are not yet in the Bill but it is envisaged that they will be brought in at a later stage. It is envisaged that, on the death of the person with the pension pot, bequeathment to a spouse would be entirely tax free. I wonder whether that provision would deviate from what the right hon. Gentleman called fiscal neutrality, by which he meant no net loss to the Exchequer. If we allow people to save with tax relief, to have tax relief as the fund rolls up and to spend only part of that fund on the annuity, and if we allow the whole of the balance of that tax-free fund to be passed on tax free—
§ Mr. Webb
If we allow the whole of the balance of that tax-free fund to be passed on tax free, I am not sure that the Exchequer has had its share at any point. The individual has had tax relief on the way in and tax relief in the fund. The part that has gone out as annuity is obviously taxed, but the balance of the fund, if bequeathed to a spouse, also goes tax free, if I understand it correctly.
§ Mr. Boswell
Is not the hon. Gentleman overlooking the fact that the spouse in turn must pass on, and at that point the remaining fund falls into tax?
§ Mr. Webb
But if the spouse goes on the world cruise, no tax is ever paid, unless I misunderstand the point. Normal bequests between spouses out of taxed income should of course be tax free. However, something that has been tax-privileged on the way in and all the way through, and is then passed on tax free and can be spent without any payment of tax, with the result that the Exchequer never gets anywhere near it, goes too far.
§ Mrs. Browning
But is it not the case that if the fund was substantial in the first place, it would not be £100,000 to £150,000 sitting in a building society account earning 4 per cent.? It might have been invested in property, and the Exchequer could receive tax on rental income.
§ Mr. Webb
I accept that point, but I am not certain of the number of people affected and the amount of money involved. It is true that the balance of the fund could be invested in a tax-efficient manner. One would imagine that the folk whom we are talking about might have access to advice, and there are plenty of tax-efficient ways of using the fund that would ensure that little tax was paid. It seems to me that the incentive would be to blow the lot. We are talking about an elderly widow who has just 815 received a lump sum, who may well be tempted to blow the lot. Good luck to her, one might say, but I question whether that should be done at the taxpayers' expense. If I have misunderstood, I am happy to take further interventions.
On the benefits issue, the hon. Member for Hendon raised a crucial question—how should one define the amount that must be bought to bring the individual up to the minimum retirement income? My understanding is that that is a residual amount, so it is not necessary to provide the whole £140 a week; it takes account of the person's basic pension and other pensions. A person who had a decent occupational pension and another pension pot might already have £140 a week and be free to do what they liked with the fund. That seems fine to me. That seems the sort of flexibility that we would want.
The difficulty is how to specify that level. Discussions about that issue and about not having recourse to the taxpayer appear to show a mental amnesia about housing and council tax benefits. The sort of people whom we are talking about are probably not renters, so housing benefit may not be relevant, although it will be to some; but millions of pensioners are entitled to or receive help with their council tax. The span of income over which that help is available goes beyond even the reach of the pension credit. In fact, by introducing the pension credit, the Government have bumped up the thresholds for housing and council tax benefit so that even further up the income scale people are still getting means-tested help. Although we are talking modest sums—perhaps £200 or £300 a year of council tax benefit—there remains an issue in principle about relying on the taxpayer. The higher that threshold is raised, the fewer people benefit from it, so there is a trade-off, but I remind the House that millions of pensioners are entitled to help with council tax.
§ Mr. Dismore
The hon. Gentleman is talking about relatively modest sums, but in London, the sums involved with those benefits are substantial. I refer again to the Library briefing. To produce the sums that one would need to ensure that that minimum was covered would require a substantial lump sum of investment in the first place—way beyond what most people seem to have available at the moment.
§ Mr. Webb
I do not wholly accept that. First, the predominant tenure of the people we are talking about is outright ownership or ownership with a mortgage, so housing benefit is not an issue. For those who rent, I would imagine that they would on average tend to be better-off renters. London is an issue, because of high rents and so on. I am trying to say that we should be aware that a significant number of pensioners draw means-tested benefits other than the minimum income guarantee and the pension credit; I put it no more strongly.
The hon. Member for Arundel and South Downs drew attention to the Plymouth Brethren's concerns about compulsory annuity purchase and private pension provision generally. I am not convinced that the Bill helps them at all. It takes a compulsory annuity purchase approach so I do not see that it addresses that concern. As it is a conscience issue, I hope that the Minister might tell us whether the Government have had any other thoughts about how their concerns might be addressed. 816 The hon. Member for Tiverton and Honiton (Mrs. Browning) made some incisive interventions on unisex annuities. I find myself in a strange position. When I saw in the Bill the provision thatSection 45 of the Sex Discrimination Act 1975 shall not apply",I thought that it was the Tories trying to get out of the Sex Discrimination Act, but they were trying to debar the bit that stops it applying, to bring annuities into the scope of the Sex Discrimination Act. I approve of that for a reason entirely different from that of the right hon. Member for Skipton and Ripon. I consider that the hon. Member for Tiverton and Honiton, who intervened on him, is right: there is no argument for equalising in terms of economics or efficiency. It is a case of state redistribution. That looks great from where I am standing. I can imagine what the Conservatives would have said had the Liberal Democrats introduced the Bill.
Essentially, the argument about whether the gap between the sexes might be closing is a red herring because if it is closing, there would be no need for such provision in the Bill because the market would equalise. Such provision is needed only when there is a differential. There is likely to be a difference in the foreseeable future, so what should we do about it? The pure free-market argument is that women live longer so they should get less.
The redistributionist in me says that women get an awfully bad deal in pensions—a lifetime of injustice in many ways, which manifests itself in their income in old age. If the dear old state can step in and do a bit of meddling at the end, it is a good idea, but that is not the motivation of the right hon. Member for Skipton and Ripon.
§ Mrs. Browning
My free-market thinking does not suggest that women get less simply because they live longer. The hon. Gentleman knows about all the computations involved in actuarial calculations. He rightly says that women get less, but they usually reckon that they will be paid for longer. The guarantee is that, if they live longer, the payments will still be made, so there is a certain equalisation. I am concerned that we may allow sex equality, of which I am usually totally in favour, to get in the way of a more objective way to analyse risk.
§ Mr. Webb
I appreciate the point that the hon. Lady makes, but the pot from which the annuities are bought will be substantially smaller, on average, for women to begin with, for all sorts of historical reasons, such as the amount that they have paid and the sort of pension schemes of which they are members. I am happy to do a bit of meddling at the end to redistribute some of the injustice or unfairness that has not been picked up when women are of working age. All I am saying is that I am sympathetic to the provisions on sex discrimination for an entirely different reason from that of the right hon. Member for Skipton and Ripon.
§ Mr. Flight
Aside from a measure which, for whatever reason, is marginally favourable to women for so long as the age gap differs, the other concept is to have a simple standardised product in the minimum income annuity and, therefore, something that is as cheap as possible, with overhead costs as low as possible, and so forth.
§ Mr. Webb
I suspect that the complexity introduced by different rates for different genders is minimal compared with some of the complexity that the industry itself delights in introducing, but I understand the point.
Choice is critical, and I am concerned that, for some people, the Bill would restrict it. In an intervention, I mentioned people with small pension pots, who may not want to buy an indexed annuity, but would be forced to do so under such rules. A better example may be the impaired life category. If people hit 65 and all the signs are that they will not live until 70, they do not want to have indexed annuities. They do not want to protect themselves against 20 years of inflation, because they will only live for five years, but the Bill would force them to have a lower income for the rest of their lives than would otherwise be the case.
§ Mr. Webb
I think that that undermines the right hon. Gentleman's point. I am sympathetic to the Bill, but if people had to annuitise at 65 and they were lifelong chain-smokers with cancer, they would not want to have indexed annuities. Lifelong chain-smokers who are 65 and thinking about buying annuities would want to buy impaired life or non-indexed annuities, but they would be forced to buy indexed annuities, so their incomes would be reduced for the rest of their lives. I think that I am right in saying that.
§ Mr. Gardiner
This is an interesting part of this debate because the very compulsion to annuitise at 65 would increase the competition on gilts, which, in turn, would drive down the annuity rates. Therefore, insistence that people annuitise at 65, instead of 75, far greater pressure would be put on annuities to sustain even the very modest rates available at the moment. I hope that the right hon. Member for Skipton and Ripon (Mr. Curry) will respond to that central point, perhaps later in the debate, because it is one of his Bill's defects.
§ Mr. Webb
There is a lot in what the hon. Gentleman says, and one of my concerns is that, to the extent that the Bill deals with a new form of compulsion, funnily enough, it may restrict choice and have knock-on effects, such as that on the gilt market, all of which need to be explored, although I remain of the opinion that reform is sufficiently necessary that we should take the Bill further.
§ Mr. Webb
I hope that the hon. Gentleman will forgive me but I do not want to hold up those who want to make 818 their own contributions, and I have spoken for a considerable time. I want to raise a couple of other issues before giving other hon. Members a chance to contribute.
We have not discussed at any length the requirement to buy indexed annuities. I sympathise with the point that the right hon. Member for Skipton and Ripon made that many more people should buy those products than at the moment, although in these days of low and stable inflation that may not be as much of an issue as it once was, but that is slightly difficult politically. If the Bill were ever to come into force, he would require everyone to have smaller incomes at 65—because they would be indexed—than they could have chosen if they had been given a free choice to have level annuities. Indeed, they would have lower incomes at 66, 67 and 68, until the cross-over point, which may occur in their early to mid 70s. Pensioners may not respond well to that suggestion being forced on them. The question on my mind is how far such things should be compulsory and how far there should be choice.
I want to mention a couple of other quick thoughts. I worry about how the Bill fits in with the financing of long-term care. We increasingly need to think about people's old age holistically—for want of a better phrase—and a percentage of those folk, perhaps a quarter, will eventually need to pay for long-term care. That is essentially an insurance product. I am concerned that we should be thinking about income in old age, lump sums and what happens to them in the round, rather than in a fragmented manner. We have suffered too much from fragmenting the way in which we consider such issues, and we should consider how they interact with one another.
§ Mr. Webb
I had better not, for the reason that I stated.
I want to make a final observation on whether this is a Bill for the rich. The hon. Member for Preston (Mr. Hendrick) cited the typical £30,000 spent on annuities, but, first, that does not take account of the fact that people may buy several such products, so it is the combined value of their funds that matters, not the fact that the typical sum is only £30,000. Secondly, it does not take account of the fact that those figures will increase as time goes by. Those concerns will increasingly not just be the preserve of the very well-off; they will spread down the income scale, so it is good that the right hon. Member for Skipton and Ripon has introduced the Bill.
The issue of annuities is technical. Although the Inland Revenue has given a nod and a wink to certain products, the Government's response is to say, "Let the market produce the right products." My worry is that the Government are obsessed with complexity. They talk the language of simplification, but their deeds reveal the contrary. This Government introduced the individual pension account—yet another complexity that seems to have achieved nothing so far as I am aware.
If such things are left to the market, we shall end up with a proliferation of products—the hon. Member for Birmingham, Edgbaston (Ms Stuart) produced a long list, and she could have continued for longer—and people will become even more bewildered and at risk of making the wrong pension choice. That is why intervention of this sort is necessary; we cannot just leave things to the market, so I ask my colleagues to encourage the House to agree to the Bill's Second Reading.
§ Mr. John Greenway (Ryedale)
In introducing the Bill, my right hon. Friend the Member for Skipton and Ripon (Mr. Curry) began by outlining his early days and his good intentions when he and I were first elected to the House in 1987. One of my early resolutions, which remains intact, is never to be afraid of one's past, so I have always been proud of my working-class background and the fact that I was a grammar school boy and a London policeman. However, I am not quite sure, today of all days, what I should say about the fact that, for two years, in 1970–71 I worked for Equitable Life at its Epsom office. I have made that confession on previous occasions, particularly in debates on Equitable Life in Westminster Hall. I am sad about what has happened, but I make that point to show that I have an interest to declare as well as more than 30 years' experience of advising people on personal pensions.
I shall refer to my experience to address the issue of what motivates people to invest in pensions at all. That point is relevant to the Bill. Like my hon. Friend the Member for Arundel and South Downs (Mr. Flight), I declare an interest as a policyholder.
I congratulate my right hon. Friend the Member for Skipton and Ripon (Mr. Curry) not just on his success in the ballot, but on his choice of subject to promote. Colleagues can choose what subject they wish, but they often choose narrow issues that do not always seem too relevant to our constituents. This is one of the most relevant issues to society today. That fact is reflected in the attendance in the Chamber and especially in the number of Conservative Members present.
The all-party group on insurance and financial services, which I have been fortunate to chair for 10 years, has examined the issue on numerous occasions and, most recently, in December. I gladly offer to any colleague present or who reads the Hansard report a copy of the brief that we were given. It complements the Library brief, which is also excellent.
One or two members of the all-party group are present, so I am sad that the Economic Secretary has left the Chamber because I wish to refer to its considered view. For some time, we have recognised that the Treasury is right to insist on proper safeguards to ensure that pensioner policyholders do not retain investments at the expense of state benefits. The hon. Member for Northavon (Mr. Webb) spent some time explaining that this is a difficult problem that the Bill, if it reaches Committee, will need to address. The Treasury is also right to say that the state must have an opportunity to recoup the tax reliefs that have been granted not just on the contributions but on the tax-free fund throughout the life of the policy. However, it would be wrong to conclude that that can be done only by the retention of an annuity requirement at whatever age it is decided that a compulsory purchase must be executed.
It would also be wrong for the Treasury or anyone involved in the debate to conclude that the Bill would benefit only the rich or—this argument has been made before—that very few policyholders would benefit. Reference has often been made to the argument that the average size of pension policies is not sufficient to justify the measure, but I want to stress a point that has not been made in the debate. That argument ignores the fact that many people have several policies.
820 I have several policies with several life offices but, thankfully, Equitable Life is not among them. Someone asked me the other day why I, with my experience as an insurance broker, was not an Equitable Life policyholder. I said, "You'd expect an insurance broker from Yorkshire to say that I was too mean to give up the commission."
§ Shona McIsaac (Cleethorpes)
I am intrigued by the hon. Gentleman's point about the average annuity. Could he tell us what the average is? I appreciate that he has said that people may have more than one policy, but how many of those who would be affected does he estimate have more than one policy? I am concerned that the average purchase seems quite low and possibly would not achieve what the right hon. Member for Skipton and Ripon (Mr. Curry) wishes to achieve. People would have to make a substantial annuity purchase to obtain the minimum pension guarantee that he mentioned.
§ Mr. Greenway
The hon. Lady seizes on a technical aspect of the Bill that we shall have to consider in Committee. It is no use addressing the issue by arguing that a person with a pension policy is in the same position as Members of this House who are fortunate enough to belong to the occupational pension scheme for parliamentarians.
At the last count, I probably had about 10 or 11 policies. Collectively, I would guess that, when I am 60 or 65, the combined value of my policies, many of which pre-date my coming to the House, would probably be about £250,000. However, I suspect that the most valuable is the one that has been in force for the longest time. It is with the National Provident Institution and is probably worth no more than £70,000 or £80,000. Therefore, the requirement for people to make sufficient purchase of annuities to avoid falling on the state would have to apply to all the policies that they have. That is the thrust of my argument.
§ Mr. Greenway
No, I will not, because I assume that the hon. Gentleman will be seeking to catch your eye later, Madam Deputy Speaker, and I know that other colleagues wish to speak.
One cannot argue that people would not benefit from the Bill because their policies are not large enough. Collectively, they would, but we must examine the interface between the value of their policies and their not relying on the state.
My right hon. Friend the Member for Skipton and Ripon set out the arguments extremely well, and I congratulate him on his grasp of his brief. I agree wholeheartedly that a reform of the present arrangements is both justified and overdue. When my hon. Friend the Member for Arundel and South Downs said that he was not in favour of flexibility, I think he meant that he did not simply want yet more flexibility about when one took an annuity. Overall, I believe that people need more flexibility beyond the age of 75, not least because of the issue of long-term care that may affect the widow rather than the main annuitant who had the pension plan.
We all tour old people's homes at this time of year, and we know that people now live long beyond previous expectations. That suggests to me that there is great 821 advantage in ensuring that people have the flexibility to put more money aside for the future and beyond the age of 75 rather than having to convert it all into an annuity at that age.
I wish to concentrate on a couple of important points. The House should address the issue not by means of adversarial argument—we have not entirely had one—but from the point of view of the public interest. We should determine where that lies, and that involves examining what is best in the long run for the public purse.
In two fundamental respects, the Bill is advantageous for the public purse. In the first instance, there is a growing crisis in pension provision that will get worse unless the Government recognise the shortcomings of more and more pension products being funded for cash rather than for defined benefit. They include not just the old retirement annuities or personal pensions, but the money-purchase occupational pensions that are becoming much more the vogue and, of course, the new stakeholder pensions.
The problem is not that people are saving too much but that they are not saving enough. In my experience, tax relief on contributions is no longer on its own a sufficient incentive for personal pension investment. It is a crucial element, but policyholders and investors are increasingly interested in the final result—a point that my hon. Friend the Member for Bournemouth, West (Mr. Butterfill) made in a telling intervention on my right hon. Friend the Member for Skipton and Ripon.
Pensions are infinitely less flexible than other types of investments—not just TESSAs and ISAs, but the venture capital trusts that are available to many. This relates to the point about Equitable Life that was made earlier. Problems have arisen because of the requirement to convert the funds into annuities at such low rates when others have the guaranteed rate.
Resolving the annuity issue, as the Bill attempts to do, would greatly assist the Government in their efforts to persuade more people to provide adequately for their old age. Let us remember that the money that goes into pension funds is locked into those policies until retirement age. It is therefore important that it is available at that time. We are not talking about people getting tax relief from contracts that allow them to remove the money and go on a world cruise before they retire.
My second point is that there is great advantage in the Government ensuring that annuitants arrange their affairs in a way that reduces or, better still, if possible eliminates the risk that someone with a reasonable pension fund at 65 ends up needing state benefits in later life, which might be 30 or 35 years or more ahead. Low interest rates are forcing annuitants to opt for the biggest annuity at the start, an issue that has arisen frequently in the debate. The value of level annuities erodes over time with inflation, while the newly introduced minimum income guarantee rises in line with inflation. Pensioner credit and housing and council tax benefit entitlements are also relevant.
§ Mr. Greenway
Eventually, the MIG entitlement will pass the level of the annuitant's income because he opted for the level annuity. That cannot make sense in public policy terms, and I believe that that is the key trade-off in reaching a 822 resolution between the proposals of my right hon. Friend the Member for Skipton and Ripon and the Treasury. The requirement for an index-linked annuity would be a huge benefit, both to the Government and to future taxpayers, as well as to the annuitant and his or her widow or widower in the years to come.
§ Mr. Greenway
No, because I know that other hon. Members want to speak and I am anxious about the time.
In conclusion, the Government have sought the help of the insurance financial services industry to find solutions to a range of issues that affect it, from regulation to product type. They have encouraged, by consultation, the development of products such as stakeholder pensions and ISAs. They have not always got it right, but their approach should be acknowledged.
As is clear from the debate, the Bill is very much an industry response to the intractable problem of annuities. It has been thought through for several years. It may not be a perfect solution, but the problem will not go away and has to be addressed. The Bill is an excellent opportunity for the Government to demonstrate their determination to do something about it. Their response today is eagerly awaited by many annuitants, who I hope will not be disappointed.
§ Richard Ottaway (Croydon, South)
I congratulate my right hon. Friend the Member for Skipton and Ripon (Mr. Curry). He said that he thought he had made a mistake when he applied to promote the Bill. If so, it was a fortuitous mistake that is to the benefit of us all. The way in which he presented it and its technical implications is much appreciated by the House. I have no hesitation in giving him my full support.
The fact that the Bill is needed is illustrated not only by the number of hon. Members present, but by the growing concern among constituents and people in the financial services sector that although the world has moved on, financial services products have not. May I pay tribute to the Retirement Income Reform Campaign and the energetic chairmanship of Dr. Oonagh McDonald who, as the driving force behind the debate, has made such an important contribution?
It is important that we do not knock annuities too much. They are unique to this country and have provided long-term stability to a generation of elderly and retired people. However, there is a definite need to adapt to changing circumstances. Those of us who were here a few weeks ago to hear the debate on ageism are in no doubt about the fact that working patterns are changing. We have ageing populations. The ratio of people in work to those out of work is shifting and, as a result, in a few years' time we will have skill shortages. People will work beyond the age of 65, which affects the whole dynamic of when people take their pension and how they use it. The Treasury and the Inland Revenue have been a bit slow off the mark. The marketplace and lifestyle patterns are changing, but the products are not.
§ Mr. Heald
Does my hon. Friend agree that there is a conflict of interest in respect of the Treasury? At the 823 moment, it is able to get very cheap borrowing because of the high demand for gilts, which are in short supply. Does he share my concern that that conflict of interest is one factor that may mean we get a slow response from Government?
§ Richard Ottaway
Yes, and my hon. Friend anticipates my remarks.
There are two key factors to consider. The first is the growth of life expectancy. Owing to better nutrition, better medical facilities, a reduction in the number of smokers and better long-term care—despite the state of the national health service—people are living longer. As a result, they have to make decisions at 65 or 75 when—my hon. Friend the Member for Arundel and South Downs (Mr. Flight) put this most eloquently—they have no idea what will happen 15, 20, 25 or even 30 years hence. That uncertainty is a problem.
The second factor, which relates to the point made by my hon. Friend the Member for North-East Hertfordshire (Mr. Heald), is the fact that returns are now poorer because of interest rates. We have no idea what future interest rates will be, but my hunch is that they will stay at about the level they are now. They might go a little higher, but I do not believe that we will have the double-figure interest rates that we saw in the 1960s and 1970s.
§ Richard Ottaway
Time does not permit me to get into that sort of political badinage.
The important point is that we have falling interest rates and a reduction in the supply of gilts. The Treasury is well aware of the consequences of that, but it is not responding.
§ Richard Ottaway
No, I am sorry but many hon. Members want to speak and time is getting short. I do not intend to take any more interventions.
People feel that they are worse off. In 1990, an annuity with a 3 per cent. escalator and 50 per cent. provision for a spouse would produce £10,000–10 per cent. on a £100,000 annuity. Today, the same annuity would produce £5,500. That is the killer. My hon. Friend the Member for Ryedale (Mr. Greenway) said that he has a pot of £250,000, which today would produce an income of only £12,500. I suspect that when he started out he did not expect such a return.
We have an obligation to buy an annuity before the age of 75. As many people said, it is an arbitrary figure. The onus is on the Government to say why the figure should not change. It is affecting the way in which people conduct their personal finances. The Government have to justify their decision. As many people have said, the remarks of the Minister for Pensions have not been helpful. I suspect that there is a touch of the old Labour politics of envy in his remarks when he says that it is only the better-off who will benefit from such proposals. The people who benefit are the thrifty: those who place no burden on the state and on society. Any reform will have losers and gainers, but these proposals have been carefully 824 designed to be cost-neutral and to have little impact. They will help people. Why should we oppose an idea that improves people's personal prosperity?
These proposals are sensible, and they meet the Government's concerns. When my right hon. Friend the Member for Skipton and Ripon introduced the Bill, he was right to address their concerns and to try to make the proposal fiscally neutral. I believe that the minimum retirement income is absolutely essential. There is no question of this reform imposing extra burdens on the state. It is important that people have the right to put the rest of the money in a residual income fund.
I want to make a constructive suggestion to my right hon. Friend. Perhaps he has allowed too much flexibility. The hon. Member for Northavon (Mr. Webb) raised a point about inheritance and whether it can be tax-free when it comes out of the fund, but that was not fully addressed. I would be concerned if it were possible to blow it. Perhaps my right hon. Friend might like to look at the Trustee Investments Act 1961 regarding recommended investments for trustees of other people's income.
I have no difficulty in supporting the proposal in the Bill that there should be greater flexibility and the power to pass money on through generations if necessary, provided that it places no burden on society and no extra burden on the Treasury.
§ Dr. Vincent Cable (Twickenham)
I want to reinforce the view of my hon. Friend the Member for Northavon (Mr. Webb) that the Bill has cross-party support. As a Liberal Democrat, I strongly support what the Bill is trying to achieve. It protects the interest of annuitants in a way that has not happened before, and it takes the political risk of trying to address the Government's two fundamental concerns about the blowing away of lump sums and the problem of tax yield, which the right hon. Member for Skipton and Ripon (Mr. Curry) addresses through his exit charge. As my hon. Friend explained, these are complex issues, and the Bill may need some refinement, but it is an excellent measure and probably the most sophisticated attempt we have ever had to address these central problems. As such, it deserves support and success.
The problem of annuitants is growing rather than declining. The problem of annuities first surfaced politically in 1998–99. It is probably a temporary problem because bond yields have fallen quite heavily in the market, from 10 per cent. to 4.5 per cent. Clearly, that is a big hit for the people whose annuities depend on them. It is a temporary problem because inflation expectations, which had fallen, will eventually translate into lower inflation, so there is a bit of a money illusion. Those people who have lower annuities will eventually benefit, and the real value of their annuities will be preserved over time, so it does not matter too much.
It has also been said that circumstances were slightly artificial two or three years ago. Annuities were particularly depressed, while the stock market was doing extremely well and people were making a lot of money in shares and were frustrated because they could not translate their savings into equities. Now that the stock exchange has taken a hit as well, that argument has disappeared.
825 One could argue that some of the problems with annuities were temporary and caused temporary grief. I would argue that, for reasons that have already been explained, it is a more systemic and serious problem, which is why the Bill is particularly important. The hon. Member for Arundel and South Downs (Mr. Flight) said that the move to money-purchase policies is growing rather than diminishing. There are good reasons why it is growing. It is partly because employers are not willing to take the cost element in defined contribution systems, and because people are becoming more mobile and want the flexibility of those policies.
All the evidence suggests that, despite the innovations in the market, people with defined contribution policies are not able to access flexible schemes. Only 16 per cent. of people with defined contribution schemes have got into the income drawdown. People with such schemes are faced with the most severe problem: when they retire and start drawing their pension they are obliged to take the annuity.
There is an additional dynamic to this problem. As more and more people get into defined contribution schemes and are required to take annuities, the pension funds that back them up are having to buy more gilts in the market, which drives up the bond price and drives down the yield. That vicious circle makes the problem worse, and it will continue to do so. That is why we need to address it as a systemic problem, not as the temporary problem which it was viewed as a couple of years ago.
There are two problems with annuities. As I have explained, the returns are poor and are poor value for money, and there are problems associated with that. More fundamental than that, however, is the issue of principle concerning people's right to a basic entitlement to use their savings as they judge prudent. Families are of different sizes and have different expectations, and the population is increasingly mature and educated, so why on earth should we have a paternalistic philosophy dating from 1921? It was not Lenin who was responsible: it was a combination of Gladstonian Liberals and Conservatives. None the less, it is a rather paternalistic idea. Subject to the Inland Revenue being protected, which is crucial, why should a paternalistic view of the world prevail, and why should not people have greater choice?
The irony of this exercise is that, if the Government succeed in blocking the Bill, they may be humiliated in the courts. A human rights case is now being brought—I think by Cherie Booth QC—challenging the Government on the basic principle that the right to dispose of one's retirement income is fundamental. That, in essence, is what the Bill is about, and it is one of the fundamental reasons why I support it.
§ Mrs. Angela Browning (Tiverton and Honiton)
I shall be brief, because I agree with much of what has been said. I shall not labour the point that I have made. Hon. Members on both sides of the House have been generous in giving way to me on the issue of equality of annuities for men and women. I have put on the record my concerns about departing from the analysis of risk merely on the ground of equality. In many other areas of life I would not make that argument, but I have concerns about the read-across to other areas where it could be to the detriment of women to use such a formula.
826 I congratulate and wholeheartedly support my right hon. Friend the Member for Skipton and Ripon (Mr. Curry) on the Bill. Conservative Members campaigned in the general election on the issue of abolishing the compulsory annuity. It is right that the matter has not just been left, and that my right hon. Friend has brought it forward now. All of us have received constituency correspondence from people who are very concerned.
Many hon. Members have drawn attention to the poor annuity rates that prevail. At the grand age of 55—[HON. MEMBERS: "Never!"] Hon. Members are too kind. During my lifetime, I have seen times when annuity rates have been very attractive. Although I accept all the reasons given by hon. Members for annuity rates being low, my view is that legislation should not be changed simply because of the state of the market at a given point. That is not my motive for supporting the Bill, because, over a lifetime, one sees that the market is cyclical, and it will always be so.
Pensions are lifelong investments, particularly for those who are wise enough to start investing when they start work. They do the right thing and put a bit away every year until they reach 60 or 65, but most of us never imagine that we shall reach such an old age. We do not save in our 20s and 30s when we are funding mortgages and children, then we shovel in every penny we can in our 40s and 50s. That is not the way to do it, but that is the reality and it concentrates people's minds.
A lot of attention has been drawn to money-purchase schemes in personal pensions, which are addressed by my right hon. Friend's Bill, but those schemes apply also to additional voluntary contribution schemes, which offer no opportunity to draw down a lump sum at the policy's end. Of course, younger people who have opted out of the state earnings-related pension scheme have their money in money-purchase schemes and they, too, have no opportunity to draw down a lump sum.
Although there are many types of pension vehicle for people with many years of working life ahead of them, they are confronted with the fact that they will be forced to purchase an annuity. Those who defer taking that annuity up to the age of 75, when it becomes compulsory, often do so in the hope of getting a better rate, but, as Members on both sides of the House have said, that, too, is a cause for concern.
I say to my right hon. Friend that I hope the Government see the sense in supporting the Bill and give it their backing. He wants to introduce one or two points in Committee about which the Government may have concerns, but he has introduced the Bill most constructively both to benefit the pensioner policyholder and to take on board the Treasury's concerns. On people who have deferred taking an annuity—those over the state retirement age—the Minister should bear in mind the point made by my hon. Friend the Member for Chesham and Amersham (Mrs. Gillan). I hope that many people will be able to make use of any new regulations that may be introduced in the near future, but they are hanging on, waiting to see whether the Bill receives support.
There has been some discussion of when such policies were introduced. Retirement annuity contracts were introduced in 1956 for the self-employed and those whose employers did not provide an occupational pension 827 scheme. The personal pension legislation was enacted in 1988, so a great many working people with a variety of pension policies may benefit from flexibility.
I agree with the hon. Gentleman who spoke from the Liberal Democrat Benches. [Interruption.] No, not the hon. Member for Northavon (Mr. Webb), I am sorry to say. It is interesting to see two book ends sitting on the Liberal Democrat Benches today: the hon. Gentleman, who sits on the Front Bench, espouses the classical socialist philosophy while the hon. Member for Twickenham (Dr. Cable)—the free marketeer who sits behind him and with whom I agree—says that people should be allowed the flexibility and responsibility to make more choices about how the money that they have earned and saved is ultimately used.
I do not want to labour the point, because Conservative Members agree wholeheartedly with the thrust of my right hon. Friend's Bill, although I should perhaps declare a modest interest, which has become even more modest since I entered the Chamber—I have heard the rates. I have money-purchase policies, which I want to transfer to something more useful in due course. There is a lot of support for the Bill, not only in the House, but out in the country, and I hope that my right hon. Friend will be successful.
§ 12.2 pm
§ Mr. Nigel Waterson (Eastbourne)
As always, it is a great pleasure to follow my hon. Friend the Member for Tiverton and Honiton (Mrs. Browning), and I, like her, should declare an interest: I have private pension provision, which I suspect is wholly inadequate not only for the lifestyle to which I have grown accustomed but for my own aspirations to life expectancy.
I commend my right hon. Friend the Member for Skipton and Ripon (Mr. Curry) for introducing this important Bill—I know what it is like to come near the top of the private Members' Bill ballot; one is never lonely—and my right hon. Friend has widespread support throughout the House and the country.
I have two reasons for making this brief contribution: many of my constituents in Eastbourne have written to me over recent years about this very problem and I am co-chairman of the all-party group on older people. My hon. Friend the Member for Tiverton and Honiton will be relieved to hear that we now consider anyone over 50 as falling in that category—I thought that she would want me to make that clear—and, like other Members, I pay tribute to the excellent work of the Retirement Income Reform Campaign.
What we are debating, stripped of all the complexities and the impenetrable language, is a betrayal of people who have sought to provide for their retirement—those who do not want to depend on the state. The Bill seeks to address that problem. These are people who want to be independent and who want their financial provision to come from their own efforts.
The past few years have not been a happy time for people of retirement age. Almost the first of the Government's acts after the 1997 general election was to abolish tax relief on private medical insurance premiums for people over retirement age. I secured a debate very early in the last Parliament on that subject because of the 828 problems that it caused many of my constituents. There was also the £5 billion smash-and-grab raid by the Chancellor on pension funds early in the last Parliament. We have heard about the demise of final salary schemes. One colleague referred to the fact that today is the last day for members of Equitable Life schemes to vote on the company's proposals. In addition, we continually hear that companies in the business are cutting their bonuses and, therefore, the amount that people will ultimately have in their pension fund.
These have, then, been rather dismal times for pensioners. As my hon. Friend the Member for Croydon, South (Richard Ottaway) made clear, there seems to be an element of the politics of envy in all this—it is claimed that pension arrangements are designed only to help rich people. We have heard about the downward pressure that has for some time been exerted on annuity rates as a result of higher life expectancy and lower returns on investment. The nub of the problem is that people are locked into an annuity rate that applies when the annuity is bought, which may be as long as 50 years after their decision to start putting money by. It is a purely arbitrary cut-off.
Among many examples that have been brought to my attention is that of a constituent, Mr. B. L. Harris, who wrote to me the other day. He made several points, and I shall mention two or three of them. He pointed out that people using ISAs as pension plan substitutes have complete flexibility with their investment proceeds. He says, and I am sure that he is right, that the UK is the only major industrial democracy to insist on this rigid need for annuitisation. He adds that the present annuity system prevents many people such as him from being able to provide for their own long-term care, which is an ever more pressing issue for all of us in the House. Mr. Harris makes it clear that people such as him, who are on lower or middle incomes, are not in the business of investing money in pensions primarily to get tax relief. They do so, and mostly on the basis of only standard tax relief, predominantly to providefor personal security in old age.He adds that there has been discrimination against the lower and middle-income groups.
We can all accept the Treasury view on this point at least: if people have received tax relief to help them make contributions in the first place, there should be an obligation on them to ensure that they do not become a burden on the state purse if they take money from their pension funds unwisely. My right hon. Friend the Member for Skipton and Ripon has tackled that danger very successfully in the Bill. As he said, it would require people to buy an annuity at age 65 rather than 75. They would still be able to take the 25 per cent. tax-free lump sum, and the remaining savings could be invested in a retirement income fund.
We have had some debate about the concept of the minimum retirement income, and we will debate that further in Committee if, as I hope, the Bill receives a Second Reading. It is important that the MRI is set at the right level. An attractive level would be that representing income produced by the basic state pension and the state earnings-related pension scheme for someone who had formerly been on national average earnings. That strikes the right balance, as the Library briefing seems to agree, between flexibility and certainty.
829 The Bill is not designed to give rich people tax breaks. It is designed to produce fairness and flexibility for people who have been on a whole range of incomes during their working life and who now find that much of their effort to put money by has been reduced to nought by the vagaries of the annuity market. I have one final point on the minimum retirement income. As I understand the Bill, it gives the Chancellor the flexibility to set the MRI on an annual basis, so if the initial amount turns out to be inappropriate, the Government can always change it.
Inaction is not an option for the Government. The Singer case is going to court fairly soon with no less a figure than Cherie Booth QC representing the pensioner. The Bill is cost neutral to the Treasury, so what is the problem with it?
I return to the human aspect—the cases of people such as my constituent Mr. Harris. Why should someone in their 20s or 30s, perhaps 50 years in advance of purchasing an annuity, have to trust themselves to the vagaries of the current annuity system? That is the unfairness. It is a practical, human problem, which the Bill addresses effectively.
§ Mr. Barry Gardiner (Brent, North)
I congratulate the right hon. Member for Skipton and Ripon (Mr. Curry). I have always found it strange that hon. Members congratulate each other on securing a high place in a ballot, because that does not seem to be a matter for congratulations. However, my right hon. Friend has raised an issue of concern to many of our constituents all over the country and I pay credit to him for the work that he has done and the good-natured way in which he introduced the debate with a good deal of clarity. I am happy to contribute to the debate. I also congratulate the Retirement Income Reform Campaign on continuing to lobby for changes to annuities. I should also declare an interest in that I have modest pension provision that will obviously be subject to the provisions if they become law.
There has been considerable debate about the wider reform of annuities not only in the House but at conferences widely reported in the media. Indeed, the debate has sharpened over time and as the results of the Government's shrewd economic management of the economy have taken hold. Obviously, the economic benefits of low inflation and low interest rates have meant that investing in annuities does not deliver the results that it did under boom and bust.
I quote the Secretary of State for Trade and Industry, who was then Economic Secretary to the Treasury, in her response to an amendment tabled by the then Member for Guildford to the 1999 Finance Bill:The move from an era of boom and bust … to an era of macroeconomic stability and low inflation creates problems of adjustment. This country has not been used to a period of sustained low inflation and low interest rates—with all the benefits that that brings for business investment—for a very long time. Neither were elderly people used to it, therefore they had not planned for their retirement on that assumption. Although low inflation brings real benefits to elderly people—directly, because their income and capital is not eaten away by inflation, and indirectly, because of the greater economic benefits that it brings—low inflation and low interest rates bring with them the problem of low annuity rates,"—[Official Report, Standing Committee B, 22 June 1999; c. 744.]That sets out in crystalline form the problem that the House seeks to address today.
830 Of course people want to be confident that annuities are efficient investment vehicles. Naturally, they are concerned at the fall in annuities in the past 10 years, but that decline must be set in context. The most obvious reason for the decline is the fact that increasingly stable and low inflation has driven down interest rates. The second reason is the dramatic increase in life expectancy. Forty years ago, when inflation was last running at its present rate, life expectancy for a man was only a further 12 years after retirement at 65. Today I am happy to say that that figure is 17 years. That, too, has a dramatic effect on reducing the annuity rates that companies are prepared to offer. Companies now have to pay out 40 per cent. more than they did 40 years ago. If the annuities purchased are index-linked, which they increasingly are, the increases are even greater.
The third element that influences the annuity rates on offer is the demand for long-term gilts and bonds. It is those that underwrite the security that annuities provide. The demand for gilts is boosted by the ageing profile of the present population. The yield on long bonds has therefore often been lower than the yield on short and maturing bonds. I mentioned in an intervention that I hoped that the right hon. Member for Skipton and Ripon would address that issue, and perhaps he will in his concluding remarks. He will, of course, appreciate keenly that the measures contained in his Bill that would insist that annuities were purchased at the age of 65 would increase that pressure on bonds and gilts. In and of itself, that provision would tend to drive down annuity rates.
§ Mr. Gardiner
I appreciate the point that the right hon. Gentleman makes only too well. Current legislation provides that people can defer purchase of an annuity until 75, but he suggests that the annuity must be purchased at 65. I agree with his point but I am sure that he will agree that many annuity purchasers do not have the extra income to do what he suggests. Many people also find it difficult to understand the issue and simply put their money immediately into an annuity.
§ Mr. Flight
The overwhelming majority of people already buy an annuity at 65. The issue that the hon. Gentleman raises could be covered in much greater depth in Committee, but it is not correct to argue that the Bill would result in a massive increase in the amount flowing into annuities at 65.
§ Mr. Gardiner
I look forward to further debate on these matters. I do not think that the picture is quite as the hon. Gentleman paints it, but we need to take seriously the effect that the Bill might have on gilts. Nobody wants a perverse effect under which annuity rates would be driven down even further by these proposals. I am sure that we would all agree on that point.
The three factors that I have outlined are good things, in and of themselves. It is good that people live longer. It is good that inflation is low, and I hope that we would all agree that it is good that the Government can borrow cheaply. The problem is that those three factors combine to reduce annuity rates. That does not mean that annuities 831 are, in today's market, bad value. In fact, indexed annuities are relatively cheap, and annuities are still arguably the most efficient way of using pension capital to ensure financial security in retirement. Also, the substantial growth in the equities market over the past 20 years has increased substantially the value of the individual's pension fund as people retire. That rise has offset the decline in annuity rates that we have seen over the past decade for most pensioners as they retire. The contrast with the historic situation of pensioners is not as stark as some of the often-quoted statistics would suggest, and as some of the remarks made in the Chamber today might lead one to believe.
Having made that argument, I want to acknowledge a central agreement with the right hon. Member for Skipton and Ripon. The real issue for all of us, both the Government and the Opposition, is not whether annuities are a worse investment than they used to be, but whether we are enabling people to make provision for their pension in the best way possible. Obviously, if there are changes that we can make to legislation or regulations that allow people better to provide for their old age in security, it is incumbent on us to do so. It is very much in that spirit that I join the debate today.
The debate centres around a number of issues relating to annuities: the requirement to purchase one with money-purchase pension funds before the age of 75; the perception that they are poor value for money; the belief that they do not allow money to be inherited on someone's death; and the fact that they are inflexible and cannot cater for the different monetary needs that arise at different points during the ever-increasing retirement period.
The Bill attempts to address some of the issues by adopting the Retirement Income Reform Campaign proposal to allow, on retirement, an index-linked annuity purchase to meet a minimum retirement income to ensure that state support is avoided. The Bill seeks to give greater freedom in using the remainder of the residual fund to re-invest in the retirement income fund, which will be unrestricted in terms of when and how much income could be withdrawn from it.
If we are to examine these proposals' ability to deliver the reform of annuities, it is necessary to understand what the Government's response to date has been, as there has been little consideration of what criteria the Government should use in evaluating alternative options for reform. To date, Ministers have yet to give a single definitive announcement of the criteria that they would like to use. As observers of the Government's every move—as we are on the Labour Benches—it is possible to deduce two of the main criteria, based on announcements already made by Ministers and Departments.
At a fringe meeting at the TUC conference in September last year, the Minister for Pensions publicly rejected some of the alternative proposals related to the Bill on the basis that only the rich would benefit. It is important to quote what he went on to say:Some of the arguments being pressed on the Government are valuable only to the very wealthy. I would resist such a change. I have nothing on my table that suggests to me we should be damaging the concept of providing a lifetime income for people.832 Similarly, the Secretary of State for Work and Pensions said in the House:I am not against change and the Government will consider alternatives if they are better, but we cannot embark on a course of action that might benefit a few people, some of whom are substantially well provided for, at the expense of the majority."—[Official Report, 15 October 2001; Vol. 372, c. 906.]Her Majesty's Treasury, in responding to calls for reform from the Retirement Income Reform Campaign, concentrated, as might be expected, on the costs of reform. Any reforms are likely to need to avoid significantly increased costs to Government, including increases in tax relief. That was clearly underpinned in the pre-Budget statement on 27 November, when the Chancellor again spoke of the Government's support for annuities and the secure income, through retirement, that they provide. He also pointed to the continued development of the product range, which I trust Members will agree has occurred, and which has resulted in pensioners having more choice.
The Chancellor went on to announce his plans to consult on how better to promote competition in this market and thereby improve benefits to customers. The poor use made of the open-market option facility was specifically raised.
Without the privileged insider knowledge of a Front Bencher, it is only possible to draw conclusions from those announcements. It therefore seems that the main Government criteria for successful reform of the annuity system are twofold—the protection of Government revenue and an improvement in the situation of all annuity buyers. I wholeheartedly support those criteria and I urge right hon. and hon. Members to do so as well. In practice, there will be two aspects to protecting the Government's fiscal position—ensuring the payment of tax on the proceeds of pension funds and keeping pensioners' incomes above means-tested benefits levels.
One area that I do not wish to cover is the further impact on Government revenue if the changes in annuity rules result in changes in patterns of saving behaviour. For the sake of today's debate, I will assume that there will be no change in that behaviour, and conduct my analysis accordingly. However, that is another factor to be addressed, perhaps in Committee. The second-order effects are difficult to measure, particularly as they are likely to be affected by other changes in pension policy, such as the introduction of the pension credit.
I shall concentrate on the impact on Government revenue and reform of the whole annuity system, assuming that no change in savings behaviour would result from the Bill. Commendably, the proposals in the Bill and those of the Retirement Income Reform Campaign have been promoted as specifically trying to avoid loss of tax revenue on pension funds. The proposals allow for all the pension fund that is not annuitised to be taxed on withdrawal; they will therefore balance any imbalance that may occur to the Treasury. The campaign's working paper says:The Campaign does not believe that its reforms will cause any long-term net tax loss to the Treasury. In fact, we believe that increased income tax payments by pensioners and inheritance tax receipts would actually come to exceed income tax rebates paid on contributions.The Bill also takes into account the means-tested benefits system by requiring the purchase of an index-linked annuity to provide a minimum retirement 833 income. The level is rightly set to ensure that, on reasonable assumptions, individuals will not have an income below the means-tested level during their retirement. Otherwise, the individual would become dependent on state benefit and the proposal would fail the test.
The Retirement Income Reform Campaign, in a communication referred to in House of Commons Library research paper 0118, has suggested that MRI would be pegged at £140 a week. That level represents the income produced by the basic state pension and SERPS for someone formerly on national average earnings—£140 a week at the time of that communication, and from next year around £160. That option was recommended on the grounds that it struck a suitable balance between flexibility and certainty and because it marked a link between the income produced from contracting out of SERPS and the income which would have been produced by staying contracted in.
That figure was first suggested in March 2000, when the minimum income guarantee was £75. The MRI would have to be much higher than the MIG because the Government, commendably, intend that MIG should be uprated in line with earnings. Most other income sources in retirement will increase in line with prices.
From April 2003, the MIG will be £100 a week. From October 2003, the Government will introduce the pension credit, a reward for private saving that will extend means-testing to those with incomes in retirement of £135. In future, it has been suggested, the upper limit is likely to rise faster than earnings as the gap between the MIG and the basic state pension increases. That suggests that if the MRI is to ensure that individuals do not fall back on means-tested benefits, it will have to be much higher than £140.
Take the example of someone who purchases an annuity at 65 and has a life expectancy of 15 years, the figure in the Government Actuary's interim life tables. With real earnings growth of 1.5 per cent. a year and an income increasingly in line with prices—currently 2.5 per cent. a year—the MRI would have to be around £195. That would ensure that people, on average, did not fall back on the state, but those who lived longer than 15 years would do so, and the MRI might therefore have to be even higher.
The MRI would also have to increase over time. The income at which pension credit is payable would be higher for those retiring in later years. Even assuming no increase in life expectancy, they would need a larger MRI to ensure that they did not fall back into means-testing. Consider someone who retires five years after the pension credit is introduced. That person would need an income of more than £350 a week 15 years later. That would mean an index-linked income of almost £250.
An MRI at such a level, which is needed to protect spending on means-tested benefits, would obviously have a significant impact on the number of individuals who would be able to take advantage of the Bill's proposals. Assuming receipt of a full basic state pension in 2003—£77 a week—and an index-linked MRI of £200 a week, a fund of £95,000 would be required. That is significantly higher than the funds for the vast majority of annuity purchases.
Although income from SERPS and occupational pensions will reduce the amount needed from annuity income—though not for the self-employed—evidence 834 from the Aberdeen Asset Management retirement income survey suggests that few of those who retire over the next 20 years with annuities will have retirement income at that level. In fact—a killer fact as far as the Bill is concerned—fewer than 5 per cent. of those who retire will have that income, assuming that there is no increase in the MRI.
The Bill therefore fails to protect Government revenue, unless it is increased greatly above the level proposed by the Retirement Income Reform Campaign. It also fails to deliver an improvement for all annuity buyers since it would benefit only 5 per cent. of them.
Further implications in respect of the impact of the Bill can be seen when working through the income generated in retirement and the amount of capital remaining for one individual with a pension fund of £25,000 on retirement. Let us contrast the two options.
Under the existing system of annuities, let us assume that the individual buys a level annuity and receives a nominal return on capital of 6 per cent. Let us compare that with what would happen under the Bill, which is based on a retail prices index-linked minimum retirement income of £140 a week. No allowance is made for any state benefits.
The answers that unfold are simply staggering. The income in retirement for individuals with smaller pension funds is initially lower under the proposals made by the right hon. Member for Skipton and Ripon. That is because the Bill requires the pension purchase to be index linked. That suggests that, at least initially, Government expenditure on means-tested benefits could rise. The index link does not mean that there may be savings in later years, but the individual is undoubtedly no better off and may even be worse off. A level annuity may give them income above the level of means-tested benefits, to which they then become entitled as inflation erodes their income. With an index-linked annuity, they may receive a lower income initially and still end up on the same income provided by means-tested benefits later in life. That could be exacerbated by differential mortality rates. Those with low incomes are also more likely to die at younger ages.
In the example that I have given, the right hon. Gentleman's proposals do not provide a capital sum that could be used other than the existing tax-free lump sum. So, in summary, the attempts in the Bill to protect revenue make his proposal applicable to only a small number of people. Perhaps fewer than 5 per cent. of those retiring will have an income above the revised MRI levels. Even with an MRI, there may still be extra Government expenditure on means-tested benefits.
The difficulty in meeting the apparently contradictory objectives suggests that, rather than requiring substantial reform of the annuity regime, the answer may lie in a better understanding of annuities, better access to advice on retirement income and the introduction of small reforms to the pension system as a whole.
Like many hon. Members, I am happy to claim credit for many things, but this morning I acknowledge my profound debt to an article written by Julie Stark and Chris Curry, which is to be published next week. It provides an industry view of the weaknesses of the Bill 835 as well as the proposals made by the Faculty and Institute of Actuaries and the Tenon proposal. Therefore, I do not claim credit for all the analysis that I have just used.
§ Mr. Gardiner
No, it is from a discussion with the Association of British Insurers yesterday. It would be an injustice if I did not pay credit to Julie Stark and Chris Curry for their work in highlighting what could have been a dangerous flaw in the legislation.
Perhaps I might also outline some of the proposals that have been made as other ways of resolving the problem. In the pre-Budget report, the Chancellor expressed concern that individuals might not be exercising their open-market option. Pensioners are entitled to shop around when their fund matures. The FSA's proposed rule on disclosure of the open-market option is one way in which the problem is being addressed. It is a real problem for the annuity market. There is a great deal of choice, but unfortunately it is not a choice of which consumers are aware. Many believe that they have to purchase an annuity with their fund provider and do not shop around, and therefore do not take the benefits that the market has to offer.
The ABI has already taken steps to address that problem with its "Statement of Good Practice on Pensions Maturities", which came out in August last year. That statement requires ABI member companies to explain to consumers their entitlement to purchase an annuity from a company other than the one that has provided the pension. The proposed FSA rule will extend that requirement to all pension and annuity providers.
The ABI statement goes further, however, by recommending that companies spell out the range of options available on retirement—including the different types of annuity product; setting minimum standards for the timing and content of letters to policyholders whose pensions are reaching maturity; and encouraging the use of consistent terminology across the industry. I am sure that hon. Members on both sides of the House will agree that those recommendations are welcome, because we want to promote the greatest clarity among consumers in what is inevitably a complex and convoluted but important aspect of their future financial planning.
It is important that we alert consumers to the fact that there is an open market with a range of products available to them to provide security in retirement. To take advantage of that range, consumers need access to advice. At present, they cannot always obtain that advice in a way, and at a price, that suits them. A recent report for the ABI, "The future regulation of UK savings and investment—targeting the savings gap", prepared by Oliver Wyman and Company last September, found—in the context of the savings market—that a complex mix of conduct of business and product regulation has actually rendered it uneconomic to offer advice to a large and growing number of consumers, especially those at the lower end of the income scale.
The right hon. Member for Skipton and Ripon will be as concerned as me and many hon. Members that the report showed that, yet again, those in the poorest position to secure their retirement and their future financial provision are less likely to be able to procure the advice that they so desperately need.
836 The report also found that advice was a critical element in persuading people to save, so by inhibiting access to advice, regulation inhibited saving. Regulation may similarly be inhibiting access to affordable advice for pensioners who need it in order to make a decision on how to turn their savings into adequate income for retirement.
The Government should certainly consider tackling the advice system as one way of increasing competition in the market, as that would equip consumers to choose from a much wider range of products with a greater sense of their own needs and how to provide for them.
Providing better access to advice will not be easy. The range of types of consumer will need to be taken into account. Different types of advice will be appropriate for different people. I have already referred to the large number of people with extremely small pension funds on retirement, but such people may, of course, have other—perhaps much larger—pension funds, or other savings. For people with a range of savings, it is not necessarily appropriate to consider their pension fund in isolation when deciding how best to turn it into retirement income. That relates to points made by hon. Members on both sides of the House about the fact that the number of funds and the relative value of each one does not necessarily reflect the status of a pensioner who is approaching retirement. There is no direct correlation between the value of funds and the total sum possessed by an individual.
An holistic approach should be taken to retirement planning, taking into account all the savings of a consumer. Only a financial adviser—indeed, an independent financial adviser—is in a position to take such an approach. There may be some room for generic advice. There is no doubt about that. It could be through a helpline for those with small pension funds and no other savings. Such people need to find an annuity that will give them the best possible rate according to their circumstances.
In a recent article in Financial Adviser, Peter Quinton of the Annuity Bureau made several suggestions that he hoped could make pensions as a whole more attractive and efficient. He argued that the debate should not be about annuities in isolation, but about the pensions system as a whole, making it more attractive to young people and more efficient for retirees. Some hon. Members may be horrified by one of the conclusions that he reached—the suggestion that the age for retirement should be raised. Other suggestions were to improve links with long-term care packages and make retirement more flexible.
The main proposal, however, was that the retirement age should be raised to 70. That would address the problem of increasing longevity, which policy makers are struggling with and which Members on both sides of the House have this morning acknowledged as one of the primary reasons why annuity rates have come down to their present level.
An increase in the retirement age would of course reduce the amount payable by the Government under the state pension, which I am sure would gain favour in some Government Departments, and it would prevent a reduction in the amount payable as a pension, as one hopes that it would encourage people to stay in work longer.
837 Any reform of the current system should benefit everyone, not just the wealthy, and should prevent people from falling back on means-tested benefits. It should also be as simple as possible; that is another hurdle that some of the current proposals fail to clear.
Recently, some ideas have been advanced that might meet those tests alone or as a package. At the fifth annual annuities conference, entitled "Delivering Flexibility and Choice in the Open Market for Retirement Income", held in Westminster and the City on 16 October 2001, Peter Carter of Canada Life suggested that 25 per cent. of the pension pot could be taken as a tax-free lump sum now; 25 per cent. could be taken as a taxable lump sum or transferred into an account to accumulate tax free and could be withdrawn as required; and the remainder could be used to purchase an annuity. Obviously, the withdrawals would be taxable. There would be no minimum withdrawal and the entire amount might be withdrawn if desired because the tax had been paid on it. Anything left in the account could be left to beneficiaries on death.
That solution is simple. It would address inheritability—another of the issues about which Opposition Members expressed great concern today. It would certainly provide extra flexibility to everyone, at little extra cost in lost tax revenue to the Exchequer. It could also be further developed to address issues such as long-term care—for example, by allowing 25 per cent. of the taxable amount to be paid tax free if it was to be used for long-term care. In that way there would be a similarity with purchased life annuities.
The danger that that proposal poses is that people might withdraw the 25 per cent. taxable amount, spend it and then fall back on state benefits more quickly than they might otherwise have done. The annuity income generated in retirement might also be reduced by up to a third, meaning that more people might qualify for means-tested benefits at the point of retirement or later in life.
A further proposal is to pay annuities gross once a retiree requires long-term care. That concession already applies to income payment from purchased life annuities, provided that the income is paid directly to a recognised long-term care provider. An alternative would be to link long-term care insurance to Peter Carter's proposal to allow a taxable lump sum to be taken, by allowing the otherwise taxable sum of 25 per cent. of the pot to be paid gross if used to purchase long-term care insurance.
The Government may not be enthusiastic about these ideas from a cost perspective, but they have said that they are keen to increase sales of long-term care insurance, and these ideas would certainly help to achieve that aim. A variation would be to re-introduce what was known as the Cannon Lincoln product. [Interruption.] I see that the hon. Member for Arundel and South Downs (Mr. Flight) recalls it with glee.
In 1991, Cannon Lincoln—an insurance company—proposed that it should be possible to take, for example, a 10 per cent. reduction in income in return for getting three times that income at the age of 85, or at earlier disability. For example, a person might have the option of giving up £1,000 of a £10,000 income to have an enhanced income of £30,000 at age 85, or at earlier disability. Of course, that could substantially help to increase the costs of residential care. That proposal was refused by the Revenue because it was outside the current 838 rules. An amendment to those rules may be a desirable way to accommodate such flexibility now, given that we want to improve stability and security of income in retirement.
It would also be possible to allow occupational pensions to be withdrawn while a person was still employed with the same employer. That would allow people to opt for partial retirement. Again, hon. Members have mentioned that provision earlier in the debate. At the moment, to start drawing occupational pension while working part-time, the member has to leave the employment of the occupational scheme provider and work part-time for someone else. I cannot understand the rationale behind the enforcement of that rule. I have no doubt that the Treasury has one, but I am afraid to say that it has escaped my powers of comprehension. We should consider that proposal as yet another way to enable people to have greater flexibility in their retirement funds.
In the United States, 401(k) pensions allow people to withdraw pension savings that suffer tax charges to meet emergency payments, or for specific uses such as housing and education. Arguably, such flexibility could encourage people to save more in pensions because it would overcome their fear of tying up their money until retirement age and not being able to get at it in an emergency.
As we heard earlier, in the past few years PEPs, ISAs and TESSAs have provided the sort of tax-free savings inducement that makes similar provision. However, that is another example of the way in which different Administrations and jurisdictions approach this problem and can enable people to prepare better for their retirement.
Further incentivisation would provide another way to encourage people to save more in their pensions, especially if the incentive could be targeted at employers. Early evidence from stakeholder pensions shows that take-up increases to about 85 per cent. if employers make contributions. The Government would do well to take note of that statistic.
The behavioural effect is borne out by the ABI's recent report "The prospect for stakeholder pensions", which it prepared in July last year. If employers were further incentivised to contribute to pensions, particularly stakeholder pensions, perhaps through a tax credit or similar direct incentive, employee take-up would be likely to increase substantially. Again, 401(k) plans provide an incentive for employers to contribute on behalf of what they call rank and file workers, by denying full tax reliefs to the pensions of highly compensated workers, unless a specific proportion of workers are in the company's scheme and benefit from a specified employer contribution.
The idea of allowing annuitants to switch provider after they have purchased their annuity—particularly investment-linked annuities, which people view as akin to income drawdown products that allow for switching between providers—has been suggested recently by a number of commentators. It is designed to allow individuals to move from poorer performing providers, so increasing competition and performance. However, that would also be very expensive and would be likely to lead to reduced annuity rates as actuaries then factor additional costs and risks into the price of the original annuity.
839 There would also be the risk of selection by annuitants. For example, if an annuitant contracted cancer, he could transfer out of his current annuity, in which the benefits are based on his expected mortality when he took it out, to an impaired life annuity from which he would receive increased benefits owing to his reduced life expectancy. To avoid that, a charge or adjustment would have to be levied on the transferring annuitant to be fair to the remaining annuitants in the mortality pool. Again, the increased costs of administration, which would be factored in by the companies, would tend to reduce the returns yet further.
Effectively, annuitants would strike a deal with the transferring annuitant whereby, if one of them died early, the transferring annuitant and others would benefit, via a cross-subsidy, from the fund remaining on his death. The hon. Member for Northavon (Mr. Webb) went into the issue, and it is important to appreciate the point that the hon. Gentleman who chairs the parliamentary pension scheme made. I am sorry, but I have forgotten the name of his constituency. [HON. MEMBERS: "Bournemouth, West."] Indeed. It is a shame that the hon. Member for Bournemouth, West (Mr. Butterfill) is not here at present. I am sure that he will rejoin the debate, because he is an assiduous attender of such debates. I also welcome the way in which he guides pensions affairs in the House.
The hon. Gentleman made the point to the hon. Member for Northavon that the money reverted to the company and not to the Government. However, as my hon. Friend the Member for Hendon (Mr. Dismore) pointed out, a proper analysis of the issue shows that this money goes back to the other annuitants because it is part of the actuarial considerations that the company took when it entered into the contract. Under such a deal, if the transferring annuitant died early, the remaining annuitants would benefit, via the cross-subsidy, from the fund remaining on his death. Transferring out early would mean that that annuitant had disadvantaged the other members of the fund. Therefore, there are disadvantages to the proposals.
I could go on for much longer. I am sure that many other Members wish to speak, and I have had a good crack at the debate. The right hon. Member for Skipton and Ripon has alighted on an important issue and his Bill has sought to address it in an extremely responsible manner based on the work that has been done by the industry and by many in the voluntary sector. He has led the debate with great tact and diplomacy.
I am sorry that I cannot support the measures in the Bill, but I hope that this debate and any debate in Committee, should the Bill reach that stage, will be used to inform Government thinking. It is vital that certain changes for pension provision are made, so I look forward even more to hearing the remarks of my hon. Friend the Economic Secretary.
§ Mr. Mark Field (Cities of London and Westminster)
May I also congratulate my right hon. Friend the Member for Skipton and Ripon (Mr. Curry) on raising this important issue? There is some disappointment that Labour Members are trying to talk out the Bill.
§ Mr. Field
No, the hon. Gentleman has had more than enough time.
840 Although the Labour party makes a great fuss about its role as the friend of the pensioner, Labour Members' constituents will realise that its position is weak.
Nothing is more likely to induce a glaze across the eyes of most hon. Members than a detailed analysis of pension-related policy. I wanted to say much more, but I shall keep my comments brief because time is tight.
There has been a healthy consensus within the United Kingdom political spectrum over the past couple of decades about encouraging individual saving for retirement. An integral part of that policy has been the generous taxation treatment of such personal contributions. I accept that the principle of an enforced annuity has been a quid pro quo for the generous taxation treatment. However, the element of compulsion lies in a bygone era.
Over the past few weeks and months I have been trying to conduct a small focus group—perhaps I am heading the same way as Labour Members. I asked people in one ward of my constituency about their views on pension-related issues. Having received 25 or so responses, I can only describe my research as qualitative rather than quantitative. There was universal opposition to the idea of an enforced annuity provision. Indeed, the pearls of wisdom from my Knightsbridge-based constituents include: no one should be forced into schemes that are provided by insurance companies; annuities are an outrage; we should allow any pension fund to be moved by a pensioner with transparency and full rules of reporting.
It was also the view that annuities are a strong disincentive and put people off saving for their retirement because the yields have recently fallen to such a low rate, as many hon. Members have commented. Above all, there was an overwhelming desire on the part of many of the constituents who got in touch with me that we encourage people in their 20s and 30s to start saving now. However, the problem with Equitable Life and other companies has affected confidence in the savings and pensions industry.
The final word from my constituents is a little more depressing. One local resident wrote to me and simply said:The Tories are as much to blame as Labour for the mess of the pensions industry—the entire issue is much too complicated for the average voter.I hope that we all play our part, not just in this debate, but in the months and years ahead. Only if the pensions industry is made much safer can we possibly contemplate compelling people to place their trust and their hard-earned cash and savings into it. If legislation forces us to hand over hard-earned cash to the incompetent, there is little incentive for anyone to save. Amid the debate on this issue and the worthy objectives of the Bill, which many of my hon. Friends addressed, we need to realise that no amount of new legislation will overcome the fact that, as Labour Members have said, many of our fellow countrymen are too poor to save adequately for their retirement.
§ Mr. Adrian Sanders (Torbay)
On a point of order, Mr. Deputy Speaker. Too much time is being taken by Labour Members as they attempt to block future Bills. I wish to move the closure.
§ Mr. Eric Forth (Bromley and Chislehurst)
Further to that point of order, Mr. Deputy Speaker. Although I do not in any way challenge your ruling—nothing could be further from my mind—may I point out the problem that has arisen? It is obvious that at least one other Labour Member wants to speak, to say nothing of the Minister, who has not yet tried to catch your eye. The Children with Disabilities (Play Areas) Bill follows this Bill, and I understand that it has widespread support. If we are not careful, we will be in some difficulty. As a result of the Government's obvious tactics at this stage, it is perfectly possible that we will get to 2.30 pm without that second excellent Bill having any opportunity for debate.
You will be as aware as I am, Mr. Deputy Speaker, of the pronouncement from the Chair—admittedly some years ago—in which the Speaker said:It is not unprecedented for a Bill to go through all its stages on a Friday. However, I repeat that that practice is always deprecated by the Chair. Even small measures should never go through the House of Commons without debate."—[Official Report, 14 April 1989; Vol. 150, c. 1163.]If we are to pay proper account to parliamentary process, debate and accountability, the second Bill is in jeopardy, because it will not get even a brief debate as a result of the Government's tactics.
I make that point, Mr. Deputy Speaker, while in no way challenging your ruling, because we are in a certain difficulty.
§ Mr. Deputy Speaker
The right hon. Gentleman is a seasoned Member of the House, and he will know the pattern of Friday business over the years. Many alternatives are still open to us in the 85 minutes remaining for this debate. He should wait and see what may yet happen.
§ Mr. Gardiner
On a point of order, Mr. Deputy Speaker. The right hon. Member for Bromley and Chislehurst (Mr. Forth) suggested that Labour Members had been blocking the Bill. May I ask you to point out that Labour Members who have spoken in the debate have delayed the House for less time than Conservative Members?
§ Mr. Deputy Speaker
The hon. Member is making a point of debate, and he had 49 minutes in which to do so.
§ Shona McIsaac
On a point of order, Mr. Deputy Speaker. As a co-sponsor of a Bill that is third on the Order Paper, I want to assure you that I am certainly not trying to delay this Bill.
§ Mr. Deputy Speaker
I was not aware that the hon. Lady had made any contribution so far that would give rise to that accusation.
§ 1.6 pm
§ Mr. Andrew Dismore (Hendon)
I preface my remarks by declaring an interest: I have four money-purchase policies, so I would be affected by the Bill.
I am shocked by the allegation that I would take part in any attempt to talk out the Bill. The remarks of the right hon. Member for Bromley and Chislehurst (Mr. Forth) are 842 extremely misplaced. We have had an informed debate on an extremely important issue. The contribution of my hon. Friend the Member for Brent, North (Mr. Gardiner) was extremely erudite and well informed. In fact, it was so well informed that I had great difficulty following some of the technical arguments in answer to the detailed points that arise from the Bill. I hope that, as my remarks progress, we will get back to a more level playing field, as suggested by the hon. Member for Ryedale (Mr. Greenway), who commented on the fact that the debate had been non-partisan, and that issues had been discussed sensibly across the Floor. I hope that my observations will be taken in that context.
I congratulate the right hon. Member for Skipton and Ripon (Mr. Curry) on securing his place in the ballot and introducing a Bill dealing with this extremely important subject. However, I question whether a private Member's Bill is the correct vehicle to bring in these complex, although badly needed, reforms to annuities, with all their tax consequences. In that context, I agree with the remarks of my hon. Friend the Member for Birmingham, Edgbaston (Ms Stuart), who is not present at the moment.
The starting point when considering pension policy—whether annuities or other issues—is to look at the overall context. The Government's White Paper on the pension credit succinctly sets out the Government's position, which provides the context in which this debate is taking place. In the White Paper, the Government say:The Basic State Retirement Pension is, and will remain, the foundation for income in retirement. However, it has always been the case—right from the early days of state pensions—that people were expected to build up a second pension or other savings, on top of their Basic State Pension. Indeed, it is the fact that more people are retiring with good company or other personal pensions that explains why pensioner incomes have risen faster than the incomes of people in work. The task now is to encourage more people to save, and to make sure that it pays to save.The Government's reforms are based on the principle that those who can afford to save have a responsibility to do so. In return"—this is the point that the right hon. Gentleman's Bill is trying in part to address—the Government should support those who cannot afford to save, and regulate the pensions and wider savings system effectively.There is no doubt that there is a crisis of confidence in the concept of private pension provision following the mis-selling scandals of the 1980s and the Equitable Life fiasco, on which we focused at the start of the debate—before you took the Chair, Mr. Deputy Speaker. Responding to an intervention, the right hon. Member for Skipton and Ripon said that the Bill would solve that sort of problem. Furthermore, on 22 July, The Sunday Times reported:Even insurance firms are privately lobbying Labour for a change in the law. They argue that if annuities were not compulsory, the Equitable Life scandal would disappear overnight.I intervened to challenge the right hon. Gentleman to explain to me, as an Equitable Life policyholder, how his Bill would address the issue. He said, probably facetiously, that if I listened to his two and a half hour speech, I would learn the answer. He spoke for half an 843 hour, so perhaps the answer was in the other two hours, which he chose not to give us, no doubt to avoid being accused of talking out his own Bill.
§ Mr. Dismore
I am grateful for the right hon. Gentleman's intervention, but I am afraid that I am still none the wiser.
§ Mr. Gardiner
My hon. Friend is no doubt aware of the barrister who, when pulled up, gave a long explanation of which the judge said, "I am none the wiser." The barrister replied, "None the wiser, my lord, but much better informed." I trust that my hon. Friend might also be.
§ Mr. Dismore
I am not sure that I am any wiser or better informed as a result of my hon. Friend's intervention, but "Revenons à nos moutons," as Voltaire might have said.
The Equitable Life issue is quite important in this context. To inform the House, may I say that I have both guaranteed and non-guaranteed annuity rate policies, so I suppose I am both a loser and a bigger loser. I took those policies out in my late 20s as it was a requirement of my partnership to do so, although, like most people who take out pension policies, I had no idea what I was signing up to. However, I have become remarkably better informed about the affairs of Equitable Life over the past few months, and exactly what the Equitable Life policy problem is bears pointing out to the right hon. Member for Skipton and Ripon.
When I, and many others, took out policies in the early 1980s, interest rates were high, as were annuity rates, as we see from all the research information available for the debate. Equitable Life made a promise: I would have a guaranteed annuity when I retired if I kept up my contributions. The problem has arisen for Equitable Life because it cannot achieve that, and I challenge the right hon. Gentleman to say how his Bill would solve it.
Obviously, the Bill will be of no assistance to existing policyholders who have to vote by today on whether to accept the scheme, so how can the right hon. Gentleman pray in aid, both today and in publicity, the claim that the Equitable Life problem would be solved—for the future, I assume—were his Bill passed? The real answer to the Equitable Life problem is that the insurance industry has got a lot wiser and no longer sells those particular policies. We should question some of the arguments that have been advanced today because there is a lack of knowledge about the workings of the pension industry and of annuities. I suspect that if the Bill is passed it will add to the confusion. I question whether that is the best way to proceed.
I am a member of the Work and Pensions Committee and, in the previous Parliament, I was a member of the Social Security Committee. I share the blame for the fact that those Committees have always focused on state provision such as the minimum income guarantee to combat pensioner poverty, and have paid little attention to the private insurance market. I am keen for the Select Committee to conduct an inquiry into the issue of 844 confidence in the private sector annuity market, and I have been attempting, with some success I think, to persuade my colleagues to agree. That would be a good opportunity for us to examine proposals such as this in detail and to take evidence from all sides about the best way forward. We could investigate whether the right hon. Gentleman's proposals are workable and whether they solve the problem that they seek to address.
Apart from our little spat just now, today's debate has been very well informed and useful, but it has not allowed the House to take evidence from the experts, except indirectly in hon. Members' contributions, about whether the Bill's proposals are sensible. We also need to test its long-term financial implications. If the Bill gets to the Committee stage, that will be all well and good, but I would hope that an inquiry by the Work and Pensions Committee could be conducted in parallel with those proceedings. That would ensure that our debate is fully informed, which is important because many people would potentially be affected by the Bill.
One or two things need to be said about what the Bill will not do. It will not enable people to put any more money in their pension pot. There is no doubt that there is concern about annuities, and the House of Commons Library briefing puts that point rather well. It says:Today's pensioners are faced with much lower nominal annuity rates than earlier pensioners, but the expectation of low and stable inflation in the future (incorporated in the bond yields underlying annuity rates) means that they face less inflationary risk in future and that their income will maintain its purchasing power much better than has been the case in the past. Nevertheless, the perception remains that it is unfair for current annuitants to be retiring with an annuity income based on rates half those prevalent ten years ago.That is followed by an interesting graph showing a high peak in 1990 and a low peak in 2001.
The briefing goes on to make the following important point:Research from the ABI stresses the extent to which the determination of income in retirement is a two-stage process, encompassing both annuity rates and pre-retirement investment growth. While someone retiring today faces historically low annuity rates their pension fund will have benefited from historically high growth in equities in the period before retirement. The net effect of these two countervailing forces is that—for a given level of contributions relative to average earnings—an individual retiring at the end of the 1990s has a higher income in retirement than someone who retired at the start of the decade.That seems a paradoxical position, and I suspect that it is very difficult to explain to people who face the problem of purchasing an annuity today.
The Library briefing makes the point that the coincidental high pre-retirement growth and low post-retirement returns may not continue. My point is that perception and reality are not the same in this debate. My hon. Friend the Member for Birmingham, Edgbaston did the House a service by referring to the plethora of different insurance products on the market and the different types of annuities that are available.
As I said, the Bill would not put more funds into the pockets of people who are trying to buy annuities. There would be the same amount of money in circulation, so people who think that the Bill would provide a panacea for their annuity problems may be under a misapprehension. That could be wrong only if the claim in support of the Bill that it is tax neutral is also wrong. The additional money in the annuity—or the alternative 845 to an annuity—could come from only two sources. It could come from increased contributions by the person during their working life. We all know how difficult it is to convince younger people of the need to invest in their future. I made my own personal pension arrangements when I became a partner in a law firm, not voluntarily but because it was a requirement of the partnership. When I was in my late 20s, my partnership share was not sufficient for me to consider it easy to make those contributions. Tax breaks are the alternative possible source of additional money.
The right hon. Member for Skipton and Ripon has claimed throughout the debate that the Bill is tax neutral. In my opinion, we are being asked to buy a pig in a poke. The Bill makes no mention of tax provisions. Clause 1(7)(5) states:Any withdrawal from the Fund by the member under subsection (2) shall be regarded as 'income' within section 1 of this Act.—the Act in question being the Income and Corporation Taxes Act 1988. That is as far as it goes. Although the right hon. Gentleman may claim that the Bill is revenue neutral from the Inland Revenue's point of view, we have no way of knowing that other than in general terms from his speech today and his press releases.
It is all very well for the hon. Gentleman to say that he will table amendments in Committee, but those amendments will probably expand the Bill to three or four times its original size, so it is important to say on Second Reading that the Bill is only half the story so far. Either the right hon. Gentleman is overselling his Bill by suggesting that it is the panacea that will help to sort out the problem, or he may be mis-selling the Bill by suggesting that it is revenue neutral when that is not the case.
My other main observation concerns the Bill's proposal in respect of the minimum retirement income. Earlier in the debate I explored the issue with the hon. Member for Northavon (Mr. Webb) who made one or two points that I had not spotted. I was attempting to raise further points that were consequential on what he said, but he had lost patience with me by then. The hon. Gentleman is a professor and professors do not like to be interrupted.
The amount of the minimum retirement income was covered by the right hon. Gentleman's press release and by some hon. Members today. As I understand it, the purpose of the minimum retirement income is to make sure that anyone who buys one of the products that the right hon. Gentleman is promoting would not ultimately have to fall back on the resources of the state. I question that based on the wording of the Bill, which appears to be somewhat contradictory. Clause 2 states thatthe Minimum Retirement Income shall be set annually by the Chancellor of the Exchequer by order, and he shall set the amount for the financial year in which this Act comes into force".Clause 1(4)(c), which introduces a new subsection (8) to section 1A of the Income and Corporation Taxes Act, states:The income provided each year from the annuity under section (1A) must increase by reference to increases in the retail price index, so far as not exceeding 5%That is a convoluted way to describe it, but my question is how those two provisions relate, and whether the Chancellor's discretion under clause 2 would be fettered by the 5 per cent. RPI rule.
846 I am concerned that the Bill contains no provision to require the Chancellor to consult anybody about what rate he should set for the MRI. In these days of inclusiveness in politics, I am surprised that the right hon. Member for Skipton and Ripon has not included in the Bill a suggestion that the Chancellor should consult the insurance industry and pensioners' groups, some of which are very active in private sector pension provision, before deciding what rate should be set.
I am also surprised that the right hon. Gentleman suggests that the appropriate rate should be linked to the RPI. I am sure that he is serious about ensuring that the provision that people make is sufficient to ensure that they are not dependent on the state, but the Bill would not achieve that. He might not like to hear it, but the Government have been very generous to the least well-off pensioners through the minimum income guarantee, which increases every year in line not with inflation but earnings. We know that the intention is to increase it for 2003 to £100 a week and that it will continue to increase and, I suspect, overtake the RPI increase. The right hon. Gentleman and his party are not keen on the earnings link and abolished it for the basic state pension in the early 1980s. It may be that if at some remote date the Conservatives should return to government, they will not continue this Government's policy of generosity to the least well-off pensioners by maintaining the earnings link for the MIG. However, that is the present Government's policy, and the Bill in its present form would mean that pensioners would quickly find themselves falling behind and becoming dependent on the state.
The problem goes further. The hon. Member for Northavon raised the issue of housing and council tax benefits. He made the valid general point that housing benefit may not be of much interest to the sort of people who would have such policies, but I challenge it inasmuch as a number of reasonably well-off people, especially in London, choose to rent property. Luxury property in London is often only available for rent, not for sale. Those people could potentially be thrown back on state provision, and the Bill would make no provision for housing benefit, let alone council tax benefit.
The hon. Gentleman also made an impressive point about long-term care for the elderly. That is phenomenally expensive, as we all know from our debates on the royal commission reforms. We also have the additional complication that although taxation arrangements are UK-wide, different arrangements for long-term care pertain, for good or ill, in England and Wales compared with Scotland, as a consequence of devolution. In Scotland, it has been accepted that the state will meet the cost of long-term care, but that has not been accepted in England and Wales, where the means test still applies to the personal care element of long-term care of the elderly. That cost is rising, as we all know. The right hon. Member for Skipton and Ripon provided no answer to that problem and we do not know whether he believes that the cost of long-term care for the elderly should be borne by the state or by setting his MRI at such a level that individual pensioners should be able to absorb the cost.
I also challenged the hon. Member for Northavon on the pension credit. The Bill's relation to the concept of pension credit, the purpose of which is to reward savings, is complex. It rewards pensioners with a small amount of savings—whether from an occupational pension or from an annuity of the sort contemplated by the Bill—by 847 allowing a small amount from such sources to be made up by matching funds from the Government to various sliding scales, as set out in the chart at the back of the Bill.
I do not understand from the right hon. Member for Skipton and Ripon whether he perceives that subsidy from the pension credit—which is aimed particularly at middle-income pensioners—as something that should be covered by the minimum retirement income figure, or whether that figure should be set at a level whereby people who purchase an annuity under MRI should not have to make provision for that so they could maximise their entitlement to pension credit. At the moment, there is no incentive to have that sort of fiddle, when one can arrange one's affairs in such a way as to maximise one's entitlement to pension credit. Either one is entitled to it, through the purchase of an annuity, or one is not.
As it stands, the provision could enable people to have some sort of benefit planning arrangement where they can set their annuity under the MRI at a level to maximise their benefit, which is effectively potentially increasing the burden on the state in respect of the people to whom the Bill is supposed to apply. The pension credit raises complicated questions for the right hon. Gentleman which, so far, he has not answered.
The old system that we inherited from the Tories was simple; we had the basic state pension and a low level of what was then supplementary benefit, now the minimum income guarantee. However, because the present Government have been generous to the least well-off—and are about to be generous to the next band of pensioners—the problems have started to arise in terms of pension credit, long-term care of the elderly and ancillary benefits such as housing and council tax benefits. Frankly, the right hon. Gentleman has not answered those points. If the Bill is to be revenue neutral, those are important questions that he must answer.
We then come to how couples are treated in these arrangements. The difficulty that the right hon. Gentleman has to face is that taxation is done independently within a couple but benefits are assessed on a family basis. That includes pension benefits. Again, he has not dealt with this question. The Library briefing states:The treatment of pensioner couples is a further complicating issue. The MRI proposals—like the income sources which would constitute any MRI—are based on the individual. However, the means-tested benefit system which the MRI seeks to maintain pensioners above is based on the family. The interaction between individual income and family assessment of benefit entitlement raises the issue of the MRI over-providing for couples where both have pension entitlements from a defined-contribution pension scheme.That was referred to tangentially by my hon. Friend the Member for Brent, North.
The briefing continues:Both partners would be required to purchase an annuity sufficient to provide them with individual income of £140 per week, producing a joint income of £280 per week. Given that to avoid dependence on the MIG they only require a joint income of £140.55 per week, their flexibility in annuitising their pension fund may be seen as somewhat less than is intended.As has been said, £140 continues to be discussed as the likely figure, but how many people will benefit from that?
At current annuity rates, an annuity producing an income incremental of £67.50 difference between the basic state pension and the MRI would require a fund of 848 about £55,000 for a man aged 65 and about £60,000 for a woman. Given that the average annuitised fund in 2000 was just £23,000, it appears that many annuitants would not be able to meet the MRI, let alone benefit from any flexibility in the use of their remaining fund. That argument applies with knobs on if we are talking about a couple as opposed to the two halves of a couple, a husband and wife. This is a practical question how would we overcome the difficulty of people being taxed independently while the benefits system applies jointly. Should we go back to taxing husbands and wives jointly? That is a tendentious problem that raises issues that go way beyond the Bill and could open a whole can of worms.
What about the sex discrimination legislation and the double exemption? Is it the role of private sector provision to level up between Peter and Pauline, to use the example of my hon. Friend the Member for Brent, North, or is that the responsibility of the state? There is nothing wrong with the state's involvement in pooling risk between the sexes. I take the point that when each sex reaches the age of 65 the differences between life expectancy are somewhat lower. However, I question whether it is right for the private sector to adopt this position, bearing in mind how annuities are currently calculated for pooling risk.
We have discussed what happens if the annuitant dies early. It was alleged that the money goes back to the insurance company. It does not. As I said in my intervention on the hon. Member for Northavon, it is part of the pooling arrangement. If we are already arguing whether the pooling arrangements in the annuity system work fairly, those arguments will become stronger if we broaden the pooling arrangements by pooling across the sexes, for example.
Another criticism is that the Bill benefits only rich people. The Labour party has been accused of bringing the politics of envy into the debate. Frankly, I am not bothered whether the Bill will benefit only rich people; my main concern is whether it is fair between the different income groups and between the annuitant/taxpayer and the Exchequer. If the measure is genuinely revenue neutral, I am laid-back about it—that is not a problem. My concern is whether the process could penalise the less well-off, which takes us back to the relationship between pension credits and the minimum guaranteed income. I am also concerned about whether there is equity between the different income bands.
I pray in aid the comments of the Association of British Insurers that were reported in the 17 December edition of This is Money magazine under the headline "Insurers welcome pensions Bill". I must say that I am not hostile to the Bill, which contains proposals for important and necessary reforms. I simply question whether the right hon. Member for Skipton and Ripon has covered all the bases. On equity, the article in This is Money said:The Association of British Insurers said that this was a contribution to the debate on the compulsory purchase of annuities. However, association spokeswoman Emma Grainge said: 'Our general fear is that most people will have insufficient savings to take advantage of it.'She said that to get an income of more than £140 a week"—which is what we discussed earlier—people would have to spend around £50,000 on an annuity, and many people's retirement funds were less than this. 'We do welcome any contribution to the debate on compulsory annuities but any changes to legislation should enhance flexibility and choice for all consumers."'849 Has the right hon. Gentleman come up with a plan that benefits all consumers or only a relatively small number? Are we considering an inheritance tax avoidance scheme or something that provides the flexibility that people need to provide for their retirement at a time of varying economic circumstances?
The Bill takes away some current choices. It removes the drawdown provisions, although that fact is not clear from the Bill itself as one must cross-reference it with the 1988 Act. I do not have time to go through that point in detail, but drawdown would be withdrawn.
Compulsion at age 65 has been canvassed today. I believe in flexibility, and we need to work towards the flexible decade of retirement. People increasingly live longer and want to work beyond 65. We have all had letters from people who object vehemently to being forced to retire at 65. They think that that is the worst sort of ageism, and I agree to some extent. In some jobs it may be appropriate to retire at 65, but in others it may not. By specifying 65, the Bill does not provide the flexibility that the modern age requires.
Equally, I must tell the Minister that specifying age 75 in the tax scheme is also inflexible. I am with the right hon. Member for Skipton and Ripon on the need for that reform, but his Bill would create as much of an evil as that which he proposes to remove.
The Bill does not deal with multiple policies. I have four different private policies, and the hon. Member for Ryedale said that he had 11. Would one have to opt all one's policies into the Bill's system, or could one pick and choose? I foresee cunning tax avoidance schemes in which I could include one policy in the system but maintain my position in relation to annuities for the others. There could be all sorts of juggling as people bought all sorts of different policies, and that would not be sensible. Should the Bill reach Committee, I urge the right hon. Member for Skipton and Ripon to consider how multiple policies should be dealt with.
Will he also examine security of investment? The Bill refers to schedule X of the Insurance Companies Regulations 1994, which specifies permitted investments that could be quite risky. We have already discussed whether it is wise to put all a person's money into gilts. Schedule X goes perhaps too far the other way, and I urge the right hon. Gentleman to consider whether there should be restrictions on that.
Will the right hon. Gentleman also consider the transitional arrangements in his Bill? The Bill would straddle the introduction of pension credit and the growth of stakeholder pensions, and there is potential for a series of loopholes.
I have spoken for some time, and, as I promised, I am not trying to talk out the Bill. I hope that I have offered constructive points and criticisms. The right hon. Gentleman's proposals have a lot going for them, but they also contain some flaws.
§ The Economic Secretary to the Treasury (Ruth Kelly)
It is a pleasure to take part in the debate. I congratulate the right hon. Member for Skipton and Ripon (Mr. Curry) on securing his private Member's Bill slot. I also congratulate him on his application for the Bill, which, as he said, required courage, and on being successful in the ballot, which, as he said, required good luck.
850 I congratulate the right hon. Gentleman, too, on choosing the most complex of subjects, although I am not sure whether that required courage or foolhardiness. Whatever it required, I congratulate him on choosing a subject that represents a challenge to us all. We face not just an intellectual exercise, but the realisation that pensions, pension products and annuities have an impact on the lives of real people, their security in retirement and their savings behaviour. I congratulate him, finally, on the clarity with which he put his arguments. Like other hon. Members, I found his speech most entertaining.
The right hon.Gentleman has received advice from the Retirement Income Reform Campaign on the substance of his Bill. I have had the pleasure of meeting representatives of it and its chair, Dr. Oonagh McDonald, and I have discussed the proposals with them in some detail. I am grateful for their contribution to the debate. I am sure that once proceedings on this private Member's Bill have concluded in whatever way, we shall continue negotiations and debate with all interested parties. I am certainly committed to exploring workable and affordable ways of reforming the current annuity structure to improve choice and give people more control over their pension products. That is why the Inland Revenue and the Department for Work and Pensions will shortly publish a joint consultation document on how we might make the annuities market work better for pensioners. I hope that that document will deal with some of the issues that have been raised with passion and knowledge here today.
However, there are fundamental problems with the Bill—problems that are inherent in the Bill and could not be resolved by amendment in Committee. It might be useful to hon. Members if I sum up briefly some of the main problems before I go through them in more detail. I believe that the Bill would be costly, and that the cost could run into several hundred million pounds. The Bill would be counter-productive and restrict choice for the majority of pensioners. It could also drive down annuity rates further.
The Bill would reduce flexibility and would not fit well with proposals for making the retirement age more flexible. I reject the charge that we are not willing to act because in some sense we are not prepared to give greater flexibility to those with larger pension pots. Those issues are fundamental to the content of the Bill. If we accepted that, we would restrict choice and flexibility for the majority of pensioners who seek to draw annuities.
It is important for me to start with an explanation of what the current annuity system is designed to do and what annuities are for. It is important to recognise that annuities are the single financial product that can provide a guaranteed income to people in their retirement, no matter how long they live. I hear hon. Members, including my hon. Friend the Member for Brent, North (Mr. Gardiner), suggest that we could consider other ways in which secure income for retirement could be provided, but at the moment they do not exist. Annuities are the only way in which a pensioner can be guaranteed a secure income in retirement, no matter how long he or she lives. Successive Governments of either persuasion have found the annuity system appropriate for just that reason. With people living ever longer today, annuities provide that important security.
I want to examine why the Bill would restrict choice for the majority of pensioners—choice that the Bill is supposed to be opening up. The aim of the Bill appears 851 to be that pension scheme members should be required to use their pension scheme funds for annuity purchase only to the extent necessary to secure a minimum retirement income. The annuity has to be index linked and, apart from some transitional measures for those currently in drawdown, has to be bought by the age of 65.
The minimum retirement income is to be left to the Government to set annually. I understand that the idea, which has been explored in debate today, is for the MRI to be set at an amount that would ensure that the pensioner did not fall back on means-tested state benefits. Otherwise, the Exchequer could end up paying twice—once for the costs of the pension scheme tax reliefs on a person's pension fund and a second time for the cost of state support.
Let us suppose that the annuity level was to be set at the level of the minimum income guarantee—currently £92.15 a week, or £4,790 a year. I realise that my assumptions are cautious and that other speakers in the debate have assumed a much higher figure—£140 a week or even more. However, if we assume that the amount is £92.15 a week, the cost of providing that income for a 65-year-old man—at the best annuity rates currently available—would be about £54,000. Assuming that people took their maximum tax-free lump sum, the necessary fund size would be about £72,000. If the annuity were index linked—as the Bill would require-a fund of about £95,000 before deduction of the tax-free lump sum would be needed.
That makes no allowance for those who want the minimum retirement annuity to continue to their survivor after their death. The cost of such an annuity would be significantly more, requiring a fund—before deduction of the tax-free lump sum—of more than £109,000.
Members may like to know that most people retire with pension funds of far less than that amount. The average size of pension fund accumulation is about £30,000. We are talking about the difference between £30,000 and £109,000—that is what would be required to meet the MRI. About a quarter of the fund is taken as a tax-free lump sum, leaving even less available for annuity purchase. The average amount spent on each pension annuity—as I understand it from figures provided by the ABI in 2000—was actually £23,000.
§ Mr. Webb
I may have misunderstood the Bill's provisions, but surely they would mean not that the whole of the minimum income guarantee would be replaced, but only the marginal amount above any basic pension or other pension. The amount to be replaced would not be £92 a week, but about £17 a week at current rates—a fifth of the amount suggested by the hon. Lady.
§ Ruth Kelly
The hon. Gentleman is probably aware that the rate of the minimum retirement income is left to be set by the Chancellor of the Exchequer in a yearly order. Furthermore, the right hon. Member for Skipton and Ripon has proposed, both in the debate and in his press releases, that the amount is likely to be about £140 a week. That would, of course, include the basic state pension. If that figure were not included the level would fall, but other benefits might apply, such as housing benefit—to which the hon. Member for Northavon 852 (Mr. Webb) referred—council tax benefit and so on. When we consider the other benefits that might line up, it seems extraordinary to suggest that the size of pension fund that people currently use to translate into an annuity would be anything like enough actually to buy a sensible amount of MRI, at the levels proposed by the right hon. Member for Skipton and Ripon.
I realise that some people hold more than one personal pension fund, but the Bill would benefit only a small section of the population—those people able to build up pension funds large enough to take advantage of the opportunities provided by the Bill. Under the measure, the majority of people would still be required to use the whole of their pension fund to buy an annuity. Not only would they gain nothing from the Bill: they would actually lose. I shall return to that point later in my speech.
Some people may say that an annuity of the size of the minimum income guarantee would be excessive—a point made by the hon. Member for Northavon. In addition to taking into account the benefits I mentioned earlier—council tax benefit and housing benefit—we should remember that the Government are committed to raising the MIG in line with earnings, at least during this Parliament. The value of the annuity—indexed by reference to the retail prices index and capped at 5 per cent., as the Bill proposes—together with the basic state pension would be likely to fall steadily behind a minimum income guarantee that increased in line with earnings. The annuity would not then provide the protection against falling back on state benefits for which it was designed.
For the proposal to be effective, the MRI annuity would need to be linked—like the MIG—to earnings. No such annuity product exists, and it is unlikely that the industry would ever be able to develop such a product, as there is no matching funding vehicle to back it.
People's needs and financial circumstances differ greatly. Some may not have built up an entitlement to the full basic state retirement pension, so a requirement to build an annuity to cover only the difference between the basic retirement pension and the minimum income guarantee would often be inadequate for that reason. I am sure that hon. Members would not agree that the minimum retirement income fund should be set differently according to people's individual financial circumstances and I do not believe that that is the intention of the Bill. It would be wholly impractical, as well as an unnecessary and costly intrusion which could only increase the cost of annuity purchase.
There is another issue concerning value and freedom of choice. Index-linked annuities provide the very valuable guarantee that the purchasing power of the person's pension will not be eroded by inflation, but, as with all guarantees, there is a price. In the case of index-linked guarantees, that is paid by the person's receiving a lower level of income at the start than they would from a flat-rate annuity, which pays a fixed level of income throughout. The hon. Member for Northavon made some valuable and interesting comments in that regard.
If one assumes that the average level of inflation is about 2.5 per cent., it could take about 15 years before the income from an index-linked annuity matches that of a comparable flat-rate annuity. Many people, particularly those with modest pension pots, need—or even prefer—to maximise the amount of income that they have earlier in their retirement, perhaps if they think that they will be 853 more active during the early years of their retirement, or have specific plans that they want to undertake, or if they fear a shorter life expectancy. The Bill would take away the choice that people currently have and force them to buy an index-linked annuity for each personal pension arrangement that they hold. That may not be what they want; it may not be in their best financial interests; and it certainly restricts their choice and freedom.
The opportunity, if a number of small personal pension arrangements are held, of taking a selection of different annuity types at different times can enable a person to spread risk. The Bill would remove that opportunity. For the very small minority of people who have large enough pension pots, who would perhaps benefit from the Bill, that loss of flexibility might be a small price to pay, but for the majority of pensioners the Bill would represent a significant backward step.
The important point is that people now have a choice. They can use their open-market option for annuity purchase. They have the freedom to decide which type of annuity best suits their needs. The proposals in the Bill would take away that choice.
The requirement for everyone to buy an index-linked annuity would also increase insurance company demand for index-linked gilts. The stock of index-linked gilts is limited. The present Government have been taking measures to ensure that index-linked gilts are still available up to a point, but even so the stock of index-linked gilts is limited and there are far fewer corporate issuers of index-linked gilts than fixed-rate bonds. It is not clear how that demand could be met.
I suspect that if there was a requirement for annuities to be index linked at the age of 65, current annuity rates would deteriorate. The vast majority of pensioners would then not only lose choice and flexibility but get worse rates on their annuities than people currently fear.
The Bill would force people to buy annuities not at the current age of 75 but 10 years earlier, at age 65. Most people would have no option but to withdraw all their pension benefits from age 65, whether or not they were retired, again limiting the choice that they currently enjoy. That introduces inconsistency and unfairness, in that the requirement to annuitise by age 65 would apply only to personal pensions but not to retirement annuity contracts or defined-contribution occupational pension schemes, which are left as they are.
However, there is a much larger issue in respect of flexibility and the age of 65. If people are compelled to take out an annuity at the age of 65, they cannot continue to contribute to their personal pension scheme past that age. They have to retire at the age of 65.
§ Mr. Butterfill
I am very interested in what the Economic Secretary has to say, but would not it be very simple to overcome most of her objections by tabling an amendment in Committee that would simply make the arrangement optional, rather than compulsory—as, indeed, was the case in the similar Bill that I introduced in the previous Parliament?
§ Ruth Kelly
I understand that taking annuities at 65 would not be optional under the Bill. That is certainly how the Government read the Bill. A fundamental aspect of the Bill is that people would take an income at 65 to guarantee that they would not fall back on state retirement benefits after that point.
854 Advancing the contributions stop by 10 years for personal pensions is a substantial issue that is not compatible with the need to encourage increased economic activity over the age of 50 in the light of improvements in life expectancy. I am sure that the right hon. Member for Skipton and Ripon would say that his Bill would expand people's choice if they were only compelled to use a proportion of their pension funds to buy annuities. However, as I have said, those who stand to gain under the Bill are the small minority of people who are able to build up large pension funds.
I shall consider the Bill is greater detail. I have not yet even mentioned costs, but I shall return to the minimum retirement annuity. The Bill's aim appears to be to allow people to take benefits from their pension scheme—the residual retirement income fund—in whatever form they choose, as and when they like. Under the Bill, funds could be withdrawn while sweeping away all the current income withdrawal rules that are designed to prevent the fund being under-drawn or over-depleted.
Although the Bill would appear to give wide freedom on the manner of drawing down from the retirement income fund, it would also force the scheme member to decide, by the age of 65, just how much of the fund above the minimum retirement income they want to annuitise. Under existing income withdrawal rules, which would be repealed under the Bill, the member could annuitise any portion of the fund and could do so in varying stages until the age of 75, when the remainder must be used to buy an annuity.
Under the Bill, when an annuity had been bought by the age of 65, members could only turn the balance of the fund, or any other part of it, into an annuity if they first paid income tax on the withdrawal, thus reducing the available fund by up to 40 per cent. So, effectively, the Bill would impose a penalty on people who did not make the right annuity decision at the age of 65. In that sense, too, the Bill would reduce choice and restrict flexibility.
Let us consider the proposed retirement income fund when the annuity has been purchased by the age of 65. Normal advice for people considering entering income withdrawal is that they need large pension funds for the withdrawal to be financially viable. Different firms set their own rules, but some providers will offer such withdrawals only to people with funds of £250,000 or more to ensure that their customers can cope with fluctuations in income and capital that reflect, for example, the fortunes of the equity market and the administration costs involved. Unless they have ample other income, conversion of the whole fund into an annuity is normally the best advice for people with smaller pension funds, as investment and mortality risks are pooled and costs are much lower.
As I have already said, the average fund on retirement is about £30,000. More than 50 per cent. of those who reach retirement after taking their tax-free lump sum have a remaining pension fund of less than £50,000. For women, that percentage increases to about 70 per cent., and three quarters of people have a fund less than £100,000. Only 5 per cent. of recently retired scheme members are estimated to have a pension pot worth more than £250,000, after taking their lump sum. Again, the vast majority of the relatively few people who would have 855 some remaining funds after the minimum income annuity had been purchased would be best advised not to take advantage of the freedom the Bill purports to offer.
§ Richard Ottaway
The Economic Secretary is not just opposing the Bill; she is doing a hatchet job on it, and that means that the Government will oppose its proposals in perpetuity. She claims that only a narrow group of people would benefit from the Bill, but what is the matter with that unless it is the politics of envy?
§ Ruth Kelly
I thought that I had gone to some length to explain why additional flexibility for the 5 per cent. of people who have funds worth more than £250,000 would, in fact, reduce choice and flexibility for the vast majority of pensioners who have smaller capital pots from which to buy an annuity. That is the basis of my objection to the Bill.
§ Ruth Kelly
As my hon. Friend says, it is the politics of fairness that looks after the many pensioners who try to save to protect themselves in retirement.
There is another important issue connected to the Bill to which I must try to do justice. I refer to the substantial costs to the Exchequer that could arise if the Bill became law. It is an incredibly important consideration to take into account, as hon. Members on both sides of the House know or should know. In his press release, the right hon. Member for Skipton and Ripon said that he hadspecifically designed this Bill—working with the Retirement Income Reform Campaign—to take into account Government concerns that any annuity reform should be affordable.Instead, I believe that the impact of the Bill would cost hundreds of millions of pounds at least. I had to be persuaded of that. It was not as though I came to the proposals and thought, "Gosh. These are going to be very expensive." It is a complex issue, but I seriously believe that the proposals could not be amended in such a way, unless the Bill were drastically rewritten, without costing the Exchequer hundreds of millions of pounds.
§ Mr. Boswell
The Economic Secretary has told the House that the proposals would benefit only a small minority of rich people and that they would be a disbenefit to others. How come they would cost the Exchequer a fortune as well?
§ Ruth Kelly
If the hon. Gentleman is patient, he will find that I am just about to run through all the arguments as to why the Bill would cost hundreds of millions a year. I am sure that hon. Members will realise that we must have an opportunity to debate the sizeable expense involved.
People currently use only a fraction of the possible pension scheme tax reliefs available to them. There is a potential for take-up—I put this figure in the public domain without suggesting that this is how much the Bill would cost—of a further £34 billion worth of relief each year within the current tax limits. Members have asked whether that figure takes into account the current limits and the answer is that it does.
856 People of modest means often face other demands on their income, and hon. Members have suggested that such people might not have too much disposable income to hand. That is surely the case. However, even higher rate taxpayers do not save as much as they could in tax-privileged pensions. If one asks how much of the £34 billion applies to higher rate taxpayers, one finds that more than £8 billion applies to those higher rate taxpayers who do not take full advantage of their tax reliefs at the moment. [Interruption.]Hon. Members suggest that that is hardly surprising, but that tacitly admits that higher rate taxpayers would take up the tax reliefs if they were given more flexibility over what they could use the money for.
The people with the largest pension pots are those most likely to have substantial amounts of money in other forms of savings and investments. They would need to switch only a small proportion of their savings into pension schemes for the public cost of the pension scheme tax reliefs to rise by hundreds of millions of pounds each year. Little, if any, of this extra tax relief would benefit the majority of people with modest pension funds who hold limited amounts in other forms of saving.
The right hon. Member for Skipton and Ripon proposes that his Bill should go even further than that. His press release of 17 December states that it is his intention to amend the Bill in Committee so that any money left in the fund on the death of a scheme member could be transferred to a spouse, partner or dependant free of tax. Some of these issues were explored by the hon. Member for Northavon.
Hon. Members are no doubt aware that, under the current income withdrawal rules, any funds remaining on death before the age of 75 that are not used to secure a pension income for a survivor are charged at a 35 per cent. tax.
Let us examine the possibilities. A 65-year-old man with a pension fund of £600,000 which has been built up with the assistance of generous tax reliefs—precisely the sort of person we might expect to benefit from the Bill—can take £150,000 tax free, provided the rest of the fund is used to provide an income for the life of the scheme member. Such income would, of course, be taxable in the normal way.
Under the Bill's proposals, however, the member would be able to remove a £150,000 tax-free lump sum out of the fund. He would need to use about £72,000 to buy a minimum retirement income annuity, which would leave a remaining fund of £378,000 that would continue to roll up tax free. The income and the gains of the fund, although no longer needed for pension purposes, would be exempt from tax. The scheme member would be free to withdraw from the fund at will. If he did so, it seems that the intention is for the withdrawals to be taxed as income.
The proposal is technically flawed because it is too imprecise. Although that could be resolved, the principle remains a concern. If the scheme member decided to make no withdrawals from the remaining fund for the rest of his life, it would build up with the benefit of tax-free investment income and capital gains until his death. A man at the age of 65 has an average life expectancy of 17 years. For a woman, it is 20 years. Over such periods, if the lowest long-term growth projections of about 5 per cent. a year, as recommended by the Financial Services Authority for such a scheme, were achieved, the fund size 857 would have increased to about £1 million. Under the right hon. Gentleman's proposals, the whole £1 million could be passed to the scheme's surviving members, tax free It is not clear —[interruption] Hon member say no I shall continue to explain the situation.
It is not clear whether the Bill would require the sum to be taken into account for inheritance tax purposes. If so, it would revert to the deceased member's spouse. However, there would still be no inheritance tax to pay.
§ Question put, That the Question be now put: —
§ The House divided: Ayes 139, Noes 25.858
|Division No. 128]||[2.25 pm|
|Ainsworth, Peter (E Surrey)||Davis, Rt Hon David (Haltemprice)|
|Amess, David||Djanogly, Jonathan|
|Ancram, Rt Hon Michael||Dorrell, Rt Hon Stephen|
|Arbuthnot, Rt Hon James||Duncan, Alan (Rutland & Melton)|
|Atkinson, Peter (Hexham)||Duncan, Peter (Galloway)|
|Bacon, Richard||Duncan Smith, Rt Hon Iain|
|Baldry, Tony||Fabricant, Michael|
|Barker, Gregory||Fallon, Michael|
|Baron, John||Field, Mark (Cities of London)|
|Bellingham, Henry||Flight, Howard|
|Bercow, John||Flook, Adrian|
|Beresford, Sir Paul||Forth, Rt Hon Eric|
|Blunt, Crispin||Fox, Dr Liam|
|Boswell, Tim||Francois, Mark|
|Bottomley, Peter (Worthing W)||Gale, Roger|
|Bottomley, Rt Hon Virginia||Gibb, Nick|
|Brady, Graham||Gillan, Mrs Cheryl|
|Brazier, Julian||Gray, James|
|Browning, Mrs Angela||Grayling, Chris|
|Burt, Alistair||Greenway, John|
|Butterfill, John||Grieve, Dominic|
|Cable, Dr Vincent||Gummer, Rt Hon John|
|Chapman, Sir Sydney||Hammond, Philip|
|(Chipping Barnet)||Hawkins, Nick|
|Chope, Christopher||Hayes, John|
|Clappison, James||Heald, Oliver|
|Clifton-Brown, Geoffrey||Heathcoat-Amory, Rt Hon David|
|Conway, Derek||Hendry, Charles|
|Cran, James||Hoban, Mark|
|Curry, Rt Hon David||Horam, John|
|Davies, Quentin (Grantham)||Howard, Rt Hon Michael|
|Howarth, Gerald (Aldershot)||Sanders, Adrian|
|Hunter, Andrew||Sayeed, Jonathan|
|Jack, Rt Hon Michael||Selous, Andrew|
|Jenkin, Bernard||Shepherd, Richard|
|Johnson, Boris (Henley)||Simmonds, Mark|
|Jones, Lynne (Selly Oak)||Simpson, Keith (Mid-Norfolk)|
|Key, Robert||Soames, Nicholas|
|Kirkbride, Miss Julie||Spelman, Mrs Caroline|
|Knight, Rt Hon Greg (E Yorkshire)||Spicer, Sir Michael|
|Laing, Mrs Eleanor||Spink, Bob|
|Lait, Mrs Jacqui||Spring, Richard|
|Lansley, Andrew||Stanley, Rt Hon Sir John|
|Leigh, Edward||Steen, Anthony|
|Lewis, Dr Julian (New Forest E)||Streeter, Gary|
|Liddell-Grainger, Ian||Stuart, Ms Gisela|
|Loughton, Tim||Swayne, Desmond|
|Luff, Peter||Swire, Hugo|
|McIntosh, Miss Anne||Syms, Robert|
|MacKay, Rt Hon Andrew||Tapsell, Sir Peter|
|Maclean, Rt Hon David||Taylor, Ian (Esher & Walton)|
|McLoughlin, Patrick||Taylor, John (Solihull)|
|Malins, Humfrey||Taylor, Sir Teddy|
|Maples, John||Tredinnick, David|
|Mercer, Patrick||Trend, Michael|
|Mitchell, Andrew (Sutton Coldfield)||Turner, Andrew (Isle of Wight)|
|Murrison, Dr Andrew||Tyrie, Andrew|
|Norman, Archie||Viggers, Peter|
|O'Brien, Stephen (Eddisbury)||Waterson, Nigel|
|Ottaway, Richard||Watkinson, Angela|
|Page, Richard||Webb, Steve|
|Paterson, Owen||Whittingdale, John|
|Portillo, Rt Hon Michael||Widdecombe, Rt Hon Miss Ann|
|Prisk, Mark||Wiggin, Bill|
|Randall, John||Wilkinson, John|
|Redwood, Rt Hon John||Willetts, David|
|Rendel, David||Wilshire, David|
|Robathan, Andrew||Yeo, Tim|
|Robertson, Hugh (Faversham)|
|Robertson, Laurence (Tewk'b'ry)||Tellers for the Ayes:|
|Roe, Mrs Marion||Sir George Young and|
|Rosindell, Andrew||Mr. George Osborne.|
|Barnes, Harry||Morley, Elliot|
|Caborn, Rt Hon Richard||Perham, Linda|
|Cawsey, Ian||Sedgemore, Brian|
|Denham, Rt Hon John||Shipley, Ms Debra|
|Gerrard, Neil||Skinner, Dennis|
|Godsiff, Roger||Smith, Rt Hon Chris (Islington S)|
|Harman, Rt Hon Ms Harriet||Soley, Clive|
|Hendrick, Mark||Spellar, Rt Hon John|
|Thomas, Gareth R (Harrow W)|
|Heppell, John||Twigg, Stephen (Enfield)|
|Hill, Keith||Vis, Dr Rudi|
|Hutton, Rt Hon John||Whitehead, Dr Alan|
|McGuire, Mrs Anne||Tellers for the Noes:|
|McIsaac, Shona||Mr. Andrew Dismore and|
|McNulty, Tony||Mr. Barry Gardiner.|
§ Question accordingly agreed to.
§ Question put accordingly, That the Bill be now read a Second time: —
§ The House divided: Ayes 139, Notes 27.859
§ Question accordingly agreed to
§ Bill read a Second time, and committed to a Standing Committee, pursuant to Standing Order No. 63 (Committal of Bills).