§ 6.51 p.m.
§ Lord Banks rose to ask Her Majesty's Government whether they will review their policy with regard to the treatment of the capital element in a purchased life annuity when assessing income for housing benefit purposes.
The noble Lord said: My Lords, I beg leave to ask the Question standing in my name on the Order Paper. The Question asks Her Majesty's Government whether,
they will review their policy with regard to the treatment of the capital element in a purchased life annuity when assessing income for housing benefit purposes".
§ That is the Question, and I should like to thank the noble Baroness, Lady Turner of Camden, for taking an interest in it. I look forward to the reply which will be made in due course by the noble Baroness, Lady Trumpington.
§ I must begin by declaring an interest as I am an insurance broker specialising in life assurance and pensions and therefore dealing with annuities. When an individual decides to use some of his capital to purchase an annuity, the annuity may be either an annuity paid for a fixed period of years or it may be an annuity which is paid for the life of the annuitant until the death of the annuitant. If the annuity is paid for a fixed period, the life office providing the annuity calculate the amount that is to be paid every year by taking the capital sum and working out the interest which they anticipate they will get over the term of 958 years. They add the interest to the capital sum, take off an amount for their own expenses and divide the remainder by the fixed term of years. The result is the amount which is paid out each year. It will thus be seen that it is part capital and part interest.
§ But where the annuity is a life annuity—that is to say, is paid throughout the life of the annuitant—the life office have to look to their mortality tables, discover the expectation of life of the individual and work out the interest which they would receive on the capital sum if the individual lives to the normal expectation of life for a person of his age. They then add the two together, take off an amount, again, for expenses, and divide the remainder by the number of years to the expectation of life. It will thus be seen that there is a notional capital and interest element in each annual payment.
Since the division between the capital element and interest element in a life annuity is notional, it is argued that according to law a life annuity is to be treated as income rather than as a return of capital by instalments plus interest, which is the case with a fixed term annuity. However, the committee on the taxation treatment of provisions for retirement, which reported in 1953, the Millard Tucker Committee, considered the argument that a division of a life annuity into the two elements is unreal. They came to the conclusion which they expressed in these words:
We cannot accept this argument as valid".
I commend their supporting arguments to all interested in this question. For the sake of brevity, I shall not read them all out now but I should like to read out just one sentence. It is this:
The mere fact that capital invested in a life annuity is in effect averaged out over the future years of life and so made available for spending if required does not therefore in our opinion provide a valid ground for treating it as income as and when it becomes so available, especially as the original capital invested in the annuity was itself always available for such a purpose".
Suffice it to say that the Millard Tucker Committee came to the conclusion in paragraph 503 of their report that:
The part of each periodical annual payment representing the estimated capital content should be exempted from tax".
§ This report resulted in the passing of Section 27 of the Finance Act 1956, now Section 230 of the Taxes Act 1970. As a consequence of that the estimated capital element is exempted from tax and the life office issuing the life annuity certifies the income element contained in payments to the annuitant. Perhaps I should say that an annuity which is derived from an approved pension scheme is treated differently. The whole of that is treated as income for tax purposes and that is because the capital when it has been accumulated has enjoyed various tax reliefs already.
I turn to housing benefit. A new housing benefits guiding manual has been issued by the Department of Health and Social Security this year. Section 722 of the manual provides:
In assessing income for housing benefit, while the capital element in a fixed term annuity is disregarded, the whole of a life annuity counts in full as income".
§ Here we have an anomalous situation. There is different treatment for taxation purposes and for housing benefit purposes. If the Millard Tucker argument is to be accepted as correct, then it must 959 apply equally to housing benefit as to taxation. The present situation would appear to be grossly unfair and that is why I am asking the Government if they will reconsider their present practice with regard to housing benefit.
§ The current practice in regard to housing benefit affects, in particular, home income plans. In these plans elderly people with a low income but owning their own house—that house being unencumbered by any mortgage—raise a mortgage on the house and use the proceeds of that mortgage to purchase an annuity. From the annuity they pay the interest on the mortgage and the balance left over provides them with additional income. The whole object of the exercise is to provide that additional income for the annuitant. In this case, part of the annuity goes to pay interest on a mortgage and is never actually in the hands of the annuitant because the insurance company deducted it before they paid the balance to the annuitant. Yet the whole of the annuity counts as income for housing benefit purposes.
When the Department of the Environment was responsible for rate rebates it recommended to local authorities that the income from home income plans should be the amount of the annuity less the amount paid in mortgage interest, which was never actually in the hands of the annuited. However, the Department of Health and Social Security's housing benefits manual states in Section 7.23:
In the case of home income plans the whole of the payment, including the proportion which is deducted as a mortgage repayment, will count as income".
I direct the attention of the House to the phrase,
including the proportion which is deducted as a mortgage repayment".
§ That is a misunderstanding of the way in which a home income plan works. In fact, there is no mortgage repayment under such plans until the death of the annuited. It is interest on the mortgage that is deducted from the annuity and which the annuited never actually handles.
§ Nevertheless, the meaning of the intentions of Section 7.23 is clear; the intention is that the whole of the annuity should count as income. So the concession that was given by the Department of the Environment when it had responsibility has been removed. Also, the capital element in the annuity is taken into account as income. That has meant a significant reduction in the extra income obtained for many home income plan annuitants, and there are about 10,000 of them altogether. There seems to be an overwhelming case for treating annuities for housing benefit in precisely the same way as they are treated for tax. I hope that the Minister, in answering this Question, will be able to reveal that that is what the Government intend to do.
§ 7.2 p.m.
§ Baroness Turner of Camden
My Lords, I am grateful to the noble Lord, Lord Banks, for raising this issue. I must say that when I saw his Unstarred Question on the Order Paper it led me to view this matter from a rather different angle and to consider the whole question of surrender values, capital assessments, and so on, in respect of means-tested benefits. In particular, I am concerned about the whole 960 area of supplementary benefits because it seems to me that it is difficult to consider housing benefits separate from the supplementary benefits argument.
At present, as I understand it, supplementary benefits are subject to a capital cut-off of £3,000 and the surrender value of life assurance policies is one form of capital counted towards that. In the social security review, the Government have proposed that a capital cut-off should be applied to housing benefit; that the cut-off should be common with that for supplementary benefit; and that the cut-off should be raised.
The proposal was made that the cut-off should be £6,000 but that an income of 40p per £100 should be assumed for capital between £3,000 and £6,000. Those proposals followed the recommendation of the housing benefit review except that they recommended a higher level cut-off and not a sliding scale. So as I understand it, and indeed as is stated in the DHSS handbook on supplementary benefits, the present regulation on life assurance policies is that:The first £1,500 of the total surrender value of life assurance policies held by the assessment unit"—that is, the family unit that is applying for benefit—is disregarded. Any amount over £1,500 is treated as capital".Up until November 1983, there was no £1,500 disregard and the entire surrender value was taken into account; but there was a change in 1983. I understand that the Life Offices Association asked for surrender values to be ignored altogether but welcomed the change made in 1983 as it was recognised that the complete absence of a limit might be exploited.
On the other hand, we are not talking here about people with large capital resources. We are talking very much about people who, perhaps for the first time in their lives, are having to face the problem of applying for means-tested benefits. Increasing numbers of people are becoming long-term unemployed in middle life. Those with some thought for the future have purchased for themselves policies, often with an endowment element. If they are halfway through the policy's term, the surrender value may well be more than £1,500—which is not a large sum nowadays. The unfortunate applicant for means-tested benefit may have to choose between surrendering his policy for ready cash and then allowing himself to become sufficiently impoverished to be eligible for means-tested benefit or giving up altogether his claim for such benefit.
From inquiries I have made, I understand that the number of cases of surrendered policies is not very great. That is probably because there is a substantial loss to the policy holder in opting for the policy's surrender value. On the other hand, it means that many people may be in the position of not having benefits to which their situation may entitle them because they have invested in an endowment or similar policy but from which they will not get any benefit until it reaches maturity.
I have probably misunderstood what the noble Lord, Lord Banks, was about, because his was a rather different Question. On the other hand, his Question does refer to surrender values and the capital element in policies. It struck me that here was an opportunity to make to the House certain points which it seems to me are worthy of consideration.
§ 7.6 p.m.
§ The Parliamentary Under-Secretary of State, Department of Health and Social Security (Baroness Trumpington)
My Lords, when I first saw the Unstarred Question of the noble Lord, Lord Banks, I felt that he deserved a prize for combining in one sentence two of the most complicated issues I have ever come across—housing benefits and life annuities. Having listened to his speech I feel that, instead, his prize must be for the very clear and coherent way in which he has presented his arguments to your Lordships. I was also most interested, as always, to listen to the noble Baroness, Lady Turner of Camden, I believe that this is her first appearance at the Dispatch Box. I congratulate her and wish her very well in the future.
I welcome this chance to explain the background to the department's current guidelines on the treatment of life annuities in housing benefits assessment. I hope that I may deal with both speeches together. I begin by reminding your Lordships of some of the special features of the housing benefits scheme which make it rather different from the other benefits for which my right honourable friend the Secretary of State for Social Services is responsible.
The most important distinction is that responsibility for the scheme's administration lies with independently-elected bodies—the local authorities. The relationship between the department and the people running the scheme is therefore very different and very much more indirect than the relationship between our headquarters' office and our network of local offices.
The second distinction between housing benefit and, say, supplementary benefit is that the housing benefit regulations go into considerably less detail about matters such as how people's income should be assessed. Your Lordships may find that paradoxical because housing benefit is a notoriously complicated benefit. As one who has only recently had to come to terms with its confusing jargon of needs allowances, tapers and supplements, I can certainly vouch for that. Even so, there is only one fairly short regulation covering the crucial question of the treatment of income in the housing assessment.
In fact, that does not necessarily make this aspect of the scheme any easier to administer. The people running the scheme have to decide how various types of income should be treated in the absence of any specific reference to them in the regulations. The answer is, in many cases, to look outside the housing benefit scheme; for example, to case law which has arisen in other contexts. In the first instance, that is a job for local authorities because of their responsibility for running the scheme and for determining entitlement to benefit in individual cases. But the department has always been willing to assist them in that task in the interests of goodwill and of greater consistency up and down the country.
In the three years since housing benefit was first introduced the department has issued many circulars and has responded to many individual queries. Earlier this year all this was drawn together into a comprehensive guidance manual which was issued to all authorities. This manual represents the department's 962 view, based on legal advice, of how the law should be interpreted when calculating people's entitlement to housing benefit. It has been widely welcomed by local authorities. The manual contains a whole chapter on the treatment of income, including two paragraphs relating to the subject of the Question of the noble Lord, Lord Banks; in other words, life annuities.
The guidance manual is not a statement of the law. Its purpose is to amplify the Acts and other instruments relating to housing benefit which Parliament has approved over the years. Its contents are, as I said, based on legal advice. It follows that we could not simply change the manual if we wanted to change our policy. We would, in fact, have to amend the housing benefit regulations and then amend the manual. Our lawyers believe that in the absence of any specific reference to life annuities in the regulations case law indicates that the money an individual receives from a life annuity should be treated as consisting wholly of income and not partly income and partly capital. The legal arguments in this highly technical area are very complex, and your Lordships will be most relieved to know that I do not intend to go into them in any detail.
The simple point I am trying to make is that the guidance in our manual on the treatment of life annuities is not a statement of policy in the normal sense of the word. No one has taken a conscious decision to treat income from life annuities wholly as income in the housing benefit assessment. It is simply that no one has ever taken a conscious decision to include any special provision relating to life annuities in the housing benefit regulations. In the absence of this, it is case law outside the scheme which determines how they should be treated.
If it is not impertinent for me to put words into the mouth of the noble Lord, Lord Banks, what his Question amounts to, as I see it, is a request that we amend the housing benefit regulations. He pointed out very eloquently that the tax treatment of life annuities is different and suggested that housing benefit should be brought into line. The reason the tax position is different is because there is a specific provision within income tax legislation to the effect that income from life annuities is treated for the purposes of income tax as having separate income and capital elements. As the noble Lord pointed out, this provision dates back to the mid-fifties and resulted from the recommendations of the distinguished Millard Tucker Committee which was set up in 1950 to review the tax treatment of life annuities, among other things.
I have listened very carefully to the arguments advanced by the noble Lord, Lord Banks, and the noble Baroness, Lady Turner. I have to say that I am not persuaded that simply because a provision exists in income tax legislation it should be carried through into housing benefit. Housing benefit and income tax are very different things, and there are many variations between them. To take just one example, child benefit is excluded from tax but included in the housing benefit assessment, and no one to my knowledge argues that housing benefit should follow income tax in this respect. I fully appreciate that the Millard Tucker Committee's recommendations regarding life annuities were widely welcomed at the time as a sensible recognition of the true nature of life annuities.
963 But the committee's terms of reference related solely to income tax and they were set up some 30 years before the housing benefit scheme had even been devised. I feel certain that the members of that committee would have been astonished to find some 30 years later that the taxpayers of the 1980s are being asked to fund a scheme for giving help with rent and rates to the tune of £4 billion a year.
This brings me to the second reason why we feel unable to accommodate the desired changes of the noble Lord, Lord Banks. An amendment to the regulations would cost money—it is impossible to say exactly how much, but it would certainly be several million pounds. Your Lordships are aware that the Government's stated intention is to reduce the cost and scope of the housing benefit scheme, which we believe now places too great a burden on the taxpayer. It would therefore be odd, to say the least, to introduce changes which would cost additional money. I would certainly be very reluctant to have to look for offsetting savings elsewhere within the social security system.
There is a third reason why we do not think it would be right to accept the arguments of the noble Lord, Lord Banks. At present there is no capital cut-off within the housing benefit scheme, so that the effect of treating income from a life annuity as having a capital element would be to ignore that element when calculating someone's housing benefit. But, as any of your Lordships who have studied the details of our Green Paper proposals for reforming social security will be aware, we do intend to introduce a capital cut-off into the reformed housing benefit scheme. This is part of the process of aligning the rules of all the income-related benefits in order to achieve a simpler and more equitable system.
Of course, many detailed questions, including the definition of capital under a reformed scheme, have still to be decided. But the fact that we are contemplating major changes to the scheme, including a new capital rule, would certainly make it particularly inappropriate to introduce now a change along the lines suggested by the noble Lord.
I am well aware that behind this rather technical discussion there are real people. In many cases they may be elderly people, possibly elderly owner-occupiers who have taken out a special home income plan in order to guarantee themselves a modestly comfortable life for the remainder of their days. I very much admire people who take special steps to give themselves a dignified old age, and who take pride in maintaining themselves above supplementary benefit levels. I have to tell your Lordships, though, that very many old people fall into this category: it is not confined to those who have taken out a home income plan or some other kind of life annuity. In other words, there are many pensioners who could make a special case for treating their income differently—people with small occupational pensions, for example. Once again, I am not convinced that old people with life annuities deserve special treatment over and above other groups.
There is one other aspect of this subject which was raised by the noble Lord, Lord Banks, on which I should like to comment, although I do not consider it 964 is essential to the argument. That is the fact that in 1982, when it was still responsible for rate rebates, the Department of the Environment issued letters suggesting that local authorities might treat home income plans more generously in the housing benefit assessment. We have only recently become aware of those letters, which I understand were not issued as formal circulars. We are obviously looking into the background of those letters, and I shall write to the noble Lord when our investigations are complete and when we have decided whether there is any action we need to take. However, I do not believe that old letters are relevant to the rather wider Question which the noble Lord, Lord Banks, originally asked, or to the reasons I have given on why we do not feel able to accommodate his wish to see an amendment to the regulations.
He also commented on the word "repayment" in Section 7.23 of our manual. It is the intention to amend the manual so that it simply says "payment" in future.
The noble Baroness, Lady Turner, raised a number of points about our proposals for a new capital cut-off in the new income support and housing benefit scheme. We have not yet taken any detailed decisions about the precise definition of capital under the new schemes, but when we do I shall see that the points raised by the noble Baroness about the surrender value of life policies are taken into account.
In conclusion, this debate has raised some important issues, I am sorry that I cannot promise the noble Lord, Lord Banks, that we will shortly be seeking to change the regulations to introduce special treatment of life annuities within housing benefit. I hope that, even if I have not convinced him of our case, I have at least demonstrated that our case is based on sound arguments.
§ House adjourned at twenty minutes past seven o'clock.