HL Deb 18 October 2004 vol 665 cc156-63GC

There shall be no requirement for a holder of a stakeholder, personal, occupational or other defined contributory pension to take the pension in the form of an annuity by a specified age."

The noble Lord said: This amendment is, in effect, a peg on which to hang a trailer, in the sense that it seemed worthwhile to have a preliminary debate on the issue but we will no doubt wish to return to it on Report. I suspect that the amendment is defective, but the noble Baroness may be assured that I shall seek to deal with that problem by Report. The position of the Conservative Party is clear: we are committed to abolishing the obligation to take an annuity at the age of 75 and wish instead to require people only to ensure that they have sufficient income to avoid relying on means-tested benefits.

The noble Baroness will know that we have debated the issue on several occasions. On at least two occasions your Lordships' House has decided that in essence it is in favour of the position that I have just described, but that decision has then been reversed in another place. We remain strongly of the view that it is right to make such a change, not least because people are forced to take an annuity at a moment when it may be that, if they were to defer taking it, they could gain a better rate of interest. I referred earlier to the immense amount of borrowing that the Chancellor is carrying out at present. He is likely to have to increase interest rates and, in the longer run, annuity rates, as a result of having to fund that requirement. Therefore, those who must take out an annuity today will find that they would have been better off if they had not taken it immediately. There are wider issues regarding inheritance and so on, which we can no doubt pursue again on Report.

Although the matter had been debated for a very long time, suddenly in the Finance Act the Chancellor, who hitherto had been remarkably obstinate on the issue—I could express it in more forthright terms but "obstinate" will do for the moment—came up with an extraordinarily complex scheme. His passion for means-testing and complexity is one thing, but this was a strange scheme—I must confess that I am not sure whether I fully understand it. The reason why he came up with the scheme seems even more bizarre than its complexity. The Chancellor came up with what was known as an alternative secured pension—I will not bore Members of the Committee by explaining exactly what it involves—apparently as a result of representations from the Plymouth Brethren, who felt that, if he did not do something about it, people would be taking a bet or gambling on someone's life. It seems that, if he accepts that argument, he will come out against life insurance altogether. Is that the case? If so, we should all get a little worried, as it would have radical effects on the entire pensions industry, apart from those taking out such insurance.

In any event, the previous Finance Act does not abolish compulsory annuitisation; it merely provides for this very strange animal, the alternative secured pension. It is argued by some that that will enable people to get round the requirement to take an annuity at age 75. I take no view on that at present. Perhaps the noble Baroness can tell us how many people the Treasury expects will take out this form of secured pension. It is not the same as a nice straightforward, very clean break. The only thing is that there is no reason why you should suddenly find that individuals spend all the money and end up on social security benefits.

This is a very important issue, to which we will certainly return on Report. I wanted to give the noble Baroness and the Government notice of our intention. This has been going on far too long. The bizarre solution provided by the Chancellor is absurd. We should make a clean break and take a clear-cut decision on the issue as soon as possible. I beg to move.

Lord Oakeshott of Seagrove Bay

We are very sorry that the Government seem to be in favour of simplicity on almost every issue of principle apart from this one. We are in favour of simplicity and the removal of the rule requiring people to buy an annuity.

Baroness Dean of Thornton-le-Fylde

At Second Reading I expressed the view that government policy on annuities is completely out of date and unfair to many people. But I am not in favour of people being able to use the money that they receive tax-free and then fall on the state for support in old age. Having made contributions throughout one's life and built up a pension, you should be required to protect the part of that pension that would ensure you do not fall back on the state for welfare benefits. It would be helpful if the noble Lord. Lord Higgins, could confirm whether that is the view put in the amendment. The requirement to take a pension at an age beyond which the average person lives longer is out of touch.

Lord Higgins

I am grateful for the noble Baroness's support. I assure her that the amendment is simply a peg on which to hang the debate and to act as a trailer for what we propose to do on Report. We thought that that was the appropriate approach. As I said, the amendment is defective in this respect, and possibly in others. We hope to return to the House with an amendment that covers exactly the point that the noble Baroness made. As she rightly points out, the thrust of Turner and others, as regards the obligation at 75, is that everything is getting later and later. I hope very much that the Government can stop waffling around on frankly silly alternatives and give a clear-cut answer to our position. We want to ensure that there is no obligation at 75, but at the same time that individuals have sufficient income not to rely on state benefits and the taxpayer.

Baroness Hollis of Heigham

Will the noble Lord confirm whether, when he refers to "taxpayer", he just means state benefits?

Lord Higgins

Yes, I was referring to state benefits. Individuals who have not taken the annuity should not end up spending money and relying on state benefits instead. That is a well established position and without undue complexity. Unlike the government scheme, it is very straightforward.

Baroness Hollis of Heigham

The reason that I intervened on the noble Lord, who was gracious enough to allow me to do so, is the distinction between IRBs and tax relief. That is why I asked what weight the word "taxpayer" would carry in the debate.

Lord Higgins

The moment I said that last word I thought, "Plonker!".

Baroness Hollis of Heigham

That is all right; I agree.

Lord Higgins

We are talking about not relying on state benefits.

Baroness Hollis of Heigham

This amendment would remove the requirement on members of money purchase schemes to secure an income, usually through an annuity, by 75. I fully understand why people would like their money-purchase pension pots to do three things at once: to provide an income flow, a savings pot and a potential legacy. The reason is that the money-purchase pot has benefited from, and been inflated by, a uniquely generous tax regime, so that a product designed for one purpose—securing an assured retirement income—becomes available for other purposes as well. The arguments need to be looked at carefully and we must ask ourselves whether that would wise.

There is academic evidence that the requirement to secure an income produces a welfare gain, as people are poor judges of their own life expectancy and would therefore tend to consume capital at the "wrong rate". For example, although average life expectancy of men at age 65 is 81.7 years, men now have a 25 per cent chance of living until 90. None of us knows when we will die, but an annuity provider can pool this mortality risk—my note says "morality risk"; one should be so lucky at the age of 85 or 90—and therefore get better value overall.

4.45 p.m.

So let me indicate three of the possibly unintended consequences that would follow from such an amendment. First, unrestricted removal of the need to annuitise could have a huge destabilising effect across the whole pension structure. For example, an employer's DB pension promise will not for many seem as attractive as taking 100 per cent of entitlement as a single lump sum on retirement and on very favourable tax terms. So it would be quite possible for large numbers of DB schemes and scheme members to switch across to personal pensions in order to take advantage of these new regimes. Do we want that?

If we do not—and I believe the noble Lord would not want that because I know he is a strong advocate of DB schemes—mechanisms would have to be devised which would prevent switching. These restrictions would, in turn, lessen the attractiveness of being a member of a DB scheme and possibly worsen the situation.

In the same way—this is my second point—it would be necessary to ensure that individuals who cashed in their money-purchase pension pots did not gain from exceptional tax privilege or, as all noble Lords have so far agreed, become reliant upon the state. For these individuals it would be necessary to ensure that they had an income stream which meant that they did not have to rely on income-related benefits.

I want to put a health warning on this example because it depends considerably on what assumptions we are making, as I will go on to show. Let us assume for illustrative purposes that the sum required to do this safely and over an extended period—to float off IRBs, accrued pension credit and so on—is between £120,000 and £250,000, depending on whether the individual had a full BSP, and therefore whether the moneys had to make good that, had a single or joint life annuity, had a level or rising annuity, or had any other retirement income, and depending also on what assumptions one makes for income-related benefits in regard to inflation and earnings. For the purposes of today's discussion I shall take the middle figure in that range as a sum with which to do this safely, and knowing that it would be required for a possible 20–year life after 65. So, from between £120,000 and £250,000, which is the kind of range we could be talking about, let us take an amount of £180,000, which is near enough mid-point.

Legislation would be needed to ensure a minimum annuity purchase for this purpose. In addition, however, to remove the exceptional tax privilege that this amendment would create, an appropriate rate of recovery for previous tax relief would have to be applied. So if someone had a pension pot of £500,000—that would not be inconceivable if there were a big movement away from DB to DC schemes, although they are still at the moment very much a minority—by the time we had taken off the first £180,000, the £500,000 would have decreased to £320,000 remaining after the purchase of a minimum annuity.

It would then be subject to, on average, a 55 per cent recovery charge. In other words, it is precisely because the tax benefits make the pot so generous, so attractive and so large, that stripping those out would reduce the pot significantly. This would be an appropriate rate of recovery, I am assured, from the better off in order to create a level playing field with other forms of saving.

It would need to take account of an individual's tax relief, the national insurance relief on the employer's contribution and tax-free returns on contributions during the accumulation period. I have worked through how the 55p in the pound figure builds up. Given the size of the pot, it would be reasonable to assume that the people concerned are higher-rate taxpayers.

Following recovery, a balance of £144,000 out of that original £500,000 is available to the individual. Of course, that £144,000 will have to work harder and harder to ensure that the saver does not lose out substantially as a result of not having the annuity which the £320,000 could have purchased.

So I do not think that this would be an attractive option. Indeed, as the requirements around our alternatively secured pension make clear, any alternative approach to annuity purchase is likely to be profoundly unattractive—except to those who have very strong religious beliefs—in financial terms, if we are not to create highly tax-privileged savings vehicles for inheritance purposes. We do not expect very many people to take this up. So even for the well-off—the beneficiaries of the amendment the—outcome might not be as desirable or attractive as first thoughts might suggest.

We must ask ourselves how many of those who have money-purchase pension pots would benefit from the amendment. I fully accept that it will change over time, given what we know will happen, but it may be worth sharing the figures. More than 80 per cent of pension pots are valued at less than £30,000, which is why the bonus of rolled-up increments in terms of a lump sum could prove so attractive. I am slightly taken aback that adding to choice in that way was not necessarily thought desirable.

Only 3 per cent are valued at between £100,000 and £250,000. Only 1 per cent are worth more than £250,000, at which point the advantages of floating off IRBs and having some left over after the extraction of tax privileges come out. Those seeking to gain from the amendment would be few in number. We should be pretty careful not to allow wholesale disruption to an industry that provides annuity income to more than 250,000 people and contributes more than £7 billion a year to the savings market, for the sake of people who, if they chose the option, would be far less than 1 per cent of those who had pots, I suspect.

The Government are already making savings simpler by enabling people to save in more liquid assets earlier on, and in pension savings vehicles as they near retirement. The open-market option allows people to shop around for the best annuity. The FSA is bringing new transparency to the market. We are making annuities more flexible through limited-period annuities, value-protected annuities and the alternatively secured pension. We have made it easier for pension savers to commute small entitlements—up to £15,000, which we expect again to help women.

The Government's approach of enabling consumers to make choices and encouraging motivation in the market is the right one. There is a wealth of savings vehicles available to people, from ISAs and unit trusts to more complicated financial products. Some people push us on the matter, as Members of the Committee have done today, precisely because pensions are so tax-privileged that the pot rose far faster courtesy of the taxpayer, whom the noble Lord invoked, than any other savings vehicle. Because the pot therefore looks so substantial, not surprisingly, people eye it and would like more of the same, for other purposes such as personal savings and inheritance. They are not wrong to want that, but it might be wrong of the Government to respond to that pressure.

The relatively rich can already leave, in their inheritance pot, their home free of capital gains, their other financial assets—bonds, equities and the like—and other non-financial goods, from fine art to fine wine. They can consider trusts. Is it reasonable that they should leave part of their pension as well? With the pot reduced by the need to float off benefit and by the requirement to extract tax gains, would they still want to? The Government cannot accept the amendment.

Lord Oakeshott of Seagrove Bay

I congratulate the noble Baroness on that excellent exposition of why means-tested benefits produce ever more of a problem for middle-income savers and people. She is able to come to those figures because of floating off income-related benefits. Perhaps she can hear the tectonic plates shifting in attitude towards the state pension, with even the new Secretary of State thinking seriously about the citizens' pension proposals of the Liberal Democrats. That is not a joke; it is very serious. Once we move to a flat-rate, non-means-tested citizens' pension or basic state pension paid at a higher level, all her arguments about the cost of having to keep back and floating off income-related benefits go away, and one then sees that the amendment would be very useful to many millions of people. That is why we support it.

Lord Higgins

I am grateful for the noble Baroness's reply. It is helpful for her to rehearse her arguments in advance of Report stage, but I am not persuaded by them. I found some of them slightly strange. She invoked the attraction of ISAs as an alternative form of saving income, but she has seen the figures for what has happened to ISAs in the past few years. They have plummeted as a result of the Chancellor's handling of dividends.

Baroness Hollis of Heigham

The other explanation might be that people are now aware, for the first time, that the stock market does not endlessly ascend.

Lord Higgins

That is part of the consideration, but certainly the far more definite feeling is that one invests in ISAs for the long term. The stock market may well recover over the next 20 years or so—I should certainly hope so; if only in terms of money as against real values—but the Chancellor has clobbered ISAs. At a time when Turner is saying that we must save more, and when ISAs were specifically designed to attract savers, it is absurd to make a change that seriously undermines ISAs. However, I leave the ISAs point on one side. The noble Baroness should not have thrown in that argument. It is a very dull argument.

The noble Baroness then went on to deal with homes. She believes that the strength of her argument about annuities is that people will inherit some of the proceeds, but, my goodness, many people also inherit homes. For many people, the extent to which inheritance tax levels have not kept in line with house prices far outweighs any kind of benefit they may gain on annuities. We are therefore not persuaded.

Perhaps I may raise a third point now on an impromptu basis. The Government argue that people have received tax relief to provide for their retirement. People certainly need to have enough to keep off means-tested benefits, subject to a point made just a moment ago by those on the Liberal Democrat Benches. However, people are receiving far less income from annuities than they were expecting because annuity rates have plummeted under this Government. People thought, "I ought to save for my retirement. I will get tax relief. I am likely to get such and such an income", but then found that their income was far less than expected because annuity rates have plummeted. They may well have been persuaded by the tax relief, but, on the noble Baroness's assumption, they lose both ways.

Baroness Hollis of Heigham

Does the noble Lord accept that, were the Government and society to move in the direction of his amendment, one would in equity have to strip out the tax relief? Does he accept that the combination of an annuity to float up IRBs and tax relief would reduce the amount available to quite modest sums for a very few people?

Lord Higgins

I think that that is a point to which we should return on Report. I myself do not accept the argument and I want to give a detailed reply. We are having a preliminary run round the track. One is to some extent doing it off the top of one's head, though the arguments are pretty well ingrained in one's soul. A couple of the noble Baroness's arguments had not previously been extensively adduced. The Government are obviously trying very hard to find additional arguments.

Overall—in marketing terms—I believe that this is a product whose time has come. It is in fact long overdue. We will return to it on Report. I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Lord Skelmersdale moved Amendment No. 334:

Before Clause 284, insert the following new clause—