HC Deb 28 January 2002 vol 379 cc10-2
5. Mr. George Osborne (Tatton)

What plans he has to abolish the rule requiring pensioners to purchase an annuity by the age of 75 years. [28141]

The Secretary of State for Work and Pensions (Mr. Alistair Darling)

It is important that pension funds built up with the support of tax relief are used to provide pensioners with a secure income in retirement. For the majority, buying an annuity is the best way of ensuring that they have a secure income throughout their retirement. We have no plans, therefore, to change that rule. The principle will underline the approach in the forthcoming consultation paper on annuities which was announced in the pre-Budget report last year.

Mr. Osborne

Millions of pensioners will be disappointed with that answer and dismayed if the consultation paper rules out any reform of annuities. If the Government want people to save for their retirement, why do they not trust them to invest their savings in retirement? Will the Secretary of State and the Government support the private Member's Bill on annuity reform that received the overwhelming support of the House on Second Reading?

Mr. Darling

The Tories certainly turned up in force—that is true. The problem with the Bill's proposals and those which I suspect that the hon. Gentleman supports is that they would benefit only a minority of people who have retired. The average pension fund is at present some £30,000. Indeed, in the year 2000, the average amount used to buy an annuity was only £23,000. The proposals in the private Member's Bill and those commonly espoused by the Conservatives tend to be aimed at people who have pension funds of something like £250,000.

The forthcoming consultation document will consider options to make the annuity market work better than it does, but we must have regard to anything that we do so that it does not adversely affect the general level of annuity rates. We need to ensure that we prevent any tax avoidance becoming commonplace because of changes that might be made. We also need to ensure that if tax relief is given to people to save for their retirement, that is what they use the money for, rather than avoiding using the money for their pension and relying on state benefits instead. The hon. Gentleman will see the consultation document in the not-too-distant future, but it is worth bearing in mind how many people would benefit from any proposal. We would not want only a few people to benefit, which is what I suspect the Conservatives have in mind.

Mr. George Mudie (Leeds, East)

Does the consultation paper deal with the bizarre and unfair situation whereby, on the death of the annuity holder, the remaining capital reverts to the institution and not the family? If the Secretary of State believes that to be a matter for the insurance companies, will he, in the short term, take steps to change the rule under which the tiny number of schemes that enable people to allow an inheritance to pass to their family can operate only when the money is invested abroad? That seems quite wrong.

Mr. Darling

I shall not go into the detail of what the consultation paper proposes, for obvious reasons. The House will see it in the not-too-distant future. However, if we were to change the rules, with the result that more and more people, on their death, could pass the remaining part of their pension fund on to their children or whoever, there would be less money in the system, which would adversely affect annuity rates for people who are currently pensioners. That is why it is important that any changes that the Government make benefit the majority of people. It would be wrong for us to put in place changes, which I think are supported by the Conservative party, from which only a tiny minority of the population would gain.

I repeat that in the last year for which we have figures, the average amount used to buy an annuity was only £23,000 A very small number of people—something like 5 per cent. of the population—will have pension pots of £250,000 or so. It would be disastrous if we made changes that benefited only a tiny minority of people, making the majority worse off. We certainly do not want to get into such a situation.

Mr. David Willetts (Havant)

But will the Secretary of State answer this simple question: why should a pensioner be obliged to buy an annuity if he or she has enough income to ensure that they will not be dependent on means-tested benefits? Provided that condition is met, what business do the Government have forcing them to buy an annuity?

Mr. Darling

The reason that people receive tax relief during their working life is to make sure that they can build up a pension for their retirement. Our concern is that if changes were made along the lines that I think that the hon. Gentleman supports, the majority of people would lose out because annuity rates would fall as a result of his proposals. That would not be a desirable course of events because it would mean—all other things being equal—that the state would have to pick up the bill for that change.

No matter what changes we may contemplate in the future, it is important that we bear in mind the fundamental principle that tax relief is given to people so that they can save for their retirement. We do not want to change the rules and find that a majority of people are actually worse off.

Mr. Willetts

It is no good the Secretary of State hiding behind this tax relief. Let me quote from a letter from the former Economic Secretary, who wrote: there is no tax revenue reason why pension schemes should have to buy annuities. The Secretary of State cannot hide behind the Treasury to explain the policy, any more than Treasury Ministers can hide behind the Department for Work and Pensions to do so. This policy is one on which the Government suffered their biggest defeat in the House since 1997. That suggests that the policy is wrong and that it is about time the Government promised to give a fair wind to the Bill that received its Second Reading only a fortnight ago—a Bill which would tackle, with no losers, a well-acknowledged grievance.

Mr. Darling

To put the hon. Gentleman's latter point in its proper perspective, we are talking about a private Member's Bill and it is certainly true that many Conservative Members happened to find themselves in London at about 2.30 pm on that particular Friday. Such things happen; successive Governments have had that experience and we live with it, as the hon. Gentleman well knows.

On the central point, the Bill's proposals would mean that a 65-year-old man would need a pension fund of about £72,000 to derive an income that would put him above the minimum income guarantee. I remind the House that the average amount used to buy an annuity is nothing like £72,000; it is actually £23,000. The result of the proposals in the Bill that the hon. Gentleman clearly supports would mean that although some people—a minority|—might find that they were better off, the majority might very well find that their annuity rates fell. That would not be desirable.

The principles are clear. If people receive tax relief to save for their pension, we expect them to accumulate sufficient to live on in their retirement. We do not want people to avoid using that money for their retirement so that they can pass it on; nor do we want a situation to arise in which the majority of people would be worse off due to the changes that had been made. The consultation document will be put before the House and the general public in the not-too-distant future. No one should be in any doubt that the principle of annuitisation is important for the future of pension provision