Pensions: Annuity Requirement (Hansard, 26 April 2001)

§ Lord Davies of Oldham
My Lords, as the Government have repeatedly made clear, it is important that pension funds built up with the support of tax relief are used for their intended purpose; that is, to provide pensioners with a secure income in retirement. The Government welcome the wider diversity and choice now available in the annuity market and remain open to proposals for workable and affordable alternatives.

§ Lord Northbrook
My Lords, I thank the noble Lord for that reply. The requirement applies to money purchase pension arrangements. There are two reasons why it is unfair. First, annuity rates at the moment are particularly poor, and will continue to be so. Secondly, capital which has been built up will be eroded through purchasing the annuity. I ask two questions—

Noble Lords
Oh!

§ Lord Northbrook
I ask one question. Why will not the Government follow the Conservative policy of allowing pensioners to take out the capital except for a small annuity to prevent having to claim state benefits? Secondly, does not the Government's policy contravene the Human Rights Act, as evidenced by an individual who is taking the Government to court and is being advised by the Prime Minister's wife?

§ Lord Davies of Oldham
My Lords, I shall try to answer the one, two or three questions that the noble Lord asked. I believe that his main question concerned why we do not take the same line on this matter as the Conservative Party. I believe that I made that point clear in my initial Answer; namely, we consider that the purpose of annuities is to guarantee secure income on retirement. That is achieved with a substantial contribution from the taxpayer in terms of tax collection forgone on contributions. We regard the position adopted by the Conservative Party as quite unacceptable.

§ Lord Peston
My Lords, I thank my noble friend for emphasising the fact that these pensions benefit from a 314 generous tax concession. Therefore, the public interest has already been well served. Is not a pension decision a financial decision? Sometimes such decisions turn out well, but other times they are less satisfactory. It is not surprising that as the Government have been successful in dealing with inflation interest rates are lower than they otherwise would be. Apparently there is a downside to that situation for someone who becomes a pensioner at this moment in time because interest rates are lower. At other times they may be higher. They may well be higher under Tory policies. Therefore, is it not sensible for the Government to stick to their policy and not be pushed into moving towards essentially an ad hoc response to a problem which will disappear anyway?

§ Lord Davies of Oldham
My Lords, I am grateful to my noble friend for reminding the House that pension decisions are long-term decisions. Therefore, it is important for the individual to take the long-term perspective. Responsibility also rests upon all of us concerned with the public domain to take a long-term view of the arrangements to be made. As my noble friend has indicated, the reduction in inflation and the prudent management of the economy of my right honourable friend the Chancellor of the Exchequer have ensured a reasonable level of returns on payments.

§ Lord Goodhart
My Lords, does the Minister agree that allowing people to retain their pension rights as capital with no age limit at all would be entirely contrary to the purpose for which tax relief has been granted? Does he further agree that what the Conservatives are asking for is in effect a new form of tax avoidance?

§ Lord Davies of Oldham
My Lords, I am most grateful to the noble Lord for that contribution. I make the obvious point that we are talking about considerable sums. Only 18 months ago the tax relief amounted to £14 billion. That sum is rising due to changing patterns of employment and the increasing numbers of people who adopt this strategy to prepare for their retirement. But, of course, as the noble Lord has indicated, the billions of pounds of public support provided at present would be as nothing to the sum required under a completely open-ended annuities provision. Such provision would negate any incentive for people to save at modest levels as best they can and would constitute an enormous subsidy to wealthy individuals.

§ Lord Saatchi
My Lords, in explaining the Government's reluctance, will the Minister accept a slightly different version of his Answer to my noble friend? Are not the Government saying to the 3 million people who have pension savings, "We, the Government have a massive borrowing. We need to borrow £34 billion over the next four years. Therefore, we want your savings. Therefore, here is a rule which forces you to hand them over"?

§ Lord Davies of Oldham
My Lords, let me make the obvious point. It is not a rule invented by the present 315 Administration over the past two to three years. The rule has obtained over a considerable period. That is why there should be careful thought before any emendation of the rule.
If the noble Lord wants to draw attention to the public sector borrowing requirement, let me point out how much that has been reduced on repayment of debt under this Administration. The issue he raises would be in much sharper profile if, by some ridiculous misfortune, the country had voted a different way in 1997.

§ Lord Lipsey
My Lords, does the Minister agree that the problem with annuities arose when we had runaway inflation? People retired in relative opulence and ended their days in penury.
Before mucking about with annuities, does my noble friend agree that many who chose to take advantage of the scheme introduced by the Conservative Chancellor, Kenneth Clarke—it enabled them to spread taking their annuities over 10 years—wish that they had taken their annuity at the rate available at the time and could now benefit from the low inflation under this Government to bolster spending power?

§ Lord Davies of Oldham
My Lords, I am grateful to my noble friend for drawing attention to the advantages for the whole community of low inflation. We all recognise that those who in retirement are on incomes with a limited capacity for growth are even more dependent upon prudent management of the economy which guarantees low and stable inflation rates.