LORDS AMENDMENT (Hansard, 17 November 2004)

§ Baroness Hollis of Heigham
My Lords, I beg to move that the House do not insist on its Amendment No. 359 to which the Commons have disagreed for their reason numbered 359A. This is, so to speak, the "biggie" for today.
The amendment relating to the removal of the requirement to annuitise by the age of 75 has been reversed in another place as it relates to financial matters, in which we in this place do not have a role to play in either initiating or amending. The amendment was rejected on several financial grounds, including that: it reduces the extent to which the member benefits from the income from the pension fund and therefore increases the amount of lost revenue; it allows a member who defers vesting to continue to make tax-privileged contributions to his pension fund until he draws an income; and, if the member dies and has not taken out an income from their pension pot, the pot reverts on a tax-free basis to their heirs. Removal of the restriction at the age of 75 extends that tax-free fund to everyone who has a personal pension pot.
1536 That is the thinking behind the statement that the other place disagrees to the amendment because it would alter the area of taxation. It deems that reason sufficient. We now have an amendment which proposes to increase to 85 the maximum age before which an annuity must be purchased.
The intention of the amendment appears to be twofold. First, as championed on Report by the noble Lord, Lord Higgins, the effect would be to prevent people being forced to buy an annuity at a lower rate than they believe they might secure at a later date. Secondly, it would enable the privileged few who can afford to delay taking an annuity until 85 the possibility that their nominated representatives can inherit a tax-free lump sum which has in part accumulated as a result of generous tax relief.
Annuity rates would certainly rise the later one took one's annuity. That is obviously true, because there is less lifespan to cover, but it is important to qualify it. If someone decides to start taking benefits from his pension savings, and instead delays buying an annuity and draws income from his fund, part of his fund remains invested. After a period, he could use the residual fund with any investment growth to buy an annuity at the rate then prevailing. In other words, he could time-shift when he had turned it into an annuity.
However, the residual fund will need a strong growth rate if it is to allow pensioners to buy the same level of income as they could have achieved if they had bought an annuity when they first started drawing benefit from the fund. There are two reasons for that. First, the residual fund does not benefit from mortality cross subsidy until it is used to buy an annuity. The eventual annuity income of people who use drawdown gets less benefit from the early deaths of people born at the same time because less of their capital is ever pooled.
Secondly, life expectancy increases with age. For example, a man of 65 might on average expect to reach 82, but if he survives to age 75, he can expect to reach 85. People between 65 and 75 who have early mortality have already died and as a result the life expectancy of those left floats upwards. As regards the implications for annuities, an Inland Revenue consultation document published some years ago suggested that those deferring annuity purchase at age 60 would need to receive returns on their unannuitised funds of 1 per cent above return on fixed interest securities to keep pace with the better returns they could receive from annuities.
By age 85, this has gone up to around 10 per cent for men and around 7 per cent for women, so those not dying would have lost out from deferring. In passing, I should mention that these figures are based on the GAD projections for 2000, just in case I am suddenly challenged on them either in this House or in the press. However, it perhaps matters little because those deferring to the age of 85 are going to be the wealthiest to whom mortality drag matters less because their real focus is on tax planning.
I now turn to a related statistical matter. Much to my disappointment, it has been suggested in this House, in another place, and in today's press—including the Times 1537 in a column I normally respect—that I have provided inappropriate statistical information on life expectancies to this House. I am surprised and disappointed that a more inquiring approach was not adopted, in particular by the noble Lord, Lord Oakeshott, before he published the issue so widely, including in the press, because we are all aware—are we not?—that different statistical methodologies exist and that they are designed to serve different purposes.
It may therefore be helpful to the House if I clarify the position for those who need clarification. I will support what I say both in written correspondence and by a technical statement which I will arrange to have placed in the Libraries of both Houses. However, and in a nutshell, the difference between the Pensions Commission figures that are being quoted by the noble Lord, Lord Oakeshott, which say that male expectancy is 19 years at 65, and the figure of 16 years quoted by me are entirely due to the common usage in this field of two different methodologies. I and I am sure your Lordships have used—and I cannot believe that the noble Lord, Lord Oakeshott, is not aware of this—what is called the "period" measure of life expectancy, whereas the Pensions Commission has used the "cohort" measure.
Period life expectancies are worked out using the age-specific mortality rates for a given period—either a single year or a run of years—with no allowance made for any later or projected changes in mortality.
Cohort life expectancies are worked out using age-specific mortality rates which allow for known or projected changes in mortality in later years. It is a more dynamic approach, if I may use that phrase which was put to me.
The approach I have used and the figures I gave in this House were based on the approach which the Government Actuary's Department describes on its website as being the one most regularly used, for example, in ONS publications such as Social Trends. The website states: In most official statistics, period life expectancies are given". The Pensions Commission report states: To some extent, the choice is expedient and reflects the nature of the data available". Furthermore, the data I gave was based on the approach adopted in the Pensions Green Paper published in December 2002. So the approach I used has been consistent, common, conventional and widely understood. More to the point, it is a measure that provides a life expectancy for the period immediately ahead, which I believe to be the most appropriate for the purpose of this debate.
By contrast, the Pensions Commission chose the cohort measure because it is in the business of looking further ahead, which is what the Government asked it to do. By definition, the cohort figures I have explained will give a higher figure of life expectancy than the "period" measure.
I hope that that explanation clarifies the matter of period and cohort life expectancy statistics. I never thought that I would need to explain it to your Lordships' House as I took it for granted that Members were sophisticated enough to be well aware 1538 of this distinction. It was a pity that I was not given the opportunity to do so before the debate about a serious technical issue was allowed to lapse into accusations of a "tendency to mislead" and of "conning the public", to which I personally take some exception as your Lordships will understand.
I will make one further point. I have previously quoted period measures based on the 2001 GAD projections. There is no material difference between the period measure for 2001 and the 2003 projections. The 2003 GAD projections gives a period life expectancy for a 65 year-old as 16.3 years as opposed to my 16 years.
As I stated, I will support what I have said tonight by correspondence with the noble Lord, Lord Oakeshott, and by a written technical statement, but I hope that what I have said will now allow us to move on.
I want therefore to go to the second effect of the amendment; that is, it will enable the privileged few who can delay taking an annuity until 85 the opportunity to leave the tax-free lump sum to their heirs. That lump sum has had the benefit of generous tax relief during the time it has accumulated. It has been said in this House and in another place that a 35 per cent tax would be levied on unspent funds when they are passed on to the member's estate. Let me clarify that this tax charge is applicable only where the member has used some of the funds by way of income drawdown. If a member has been in a financial position not to use his fund, he leaves the whole amount intact to his heirs, free of tax.
Perhaps I may remind your Lordships that independent research carried out on behalf of the ABI clearly indicates that the vast majority of people purchase their annuity when they retire or well before they reach the age of 75. They need the money from the pension provided by the annuity to ensure that they have a regular income in retirement.
It is also apparent that the only people who would benefit from deferring the purchase of annuity to age 85 are those who can afford to accommodate the loss of a regular income. They do that knowing that if anything happens to them before that date, their heirs would inherit a tax-free lump sum. Given that they can afford to be without that regular source of income, I would suggest that these are people with other forms of income, savings and resources on which they can rely.
It was also suggested in another place by the honourable Member for Havant that my right honourable friend the Member for Croydon North suggested during the debate there that it now requires the purchase of a £250,000 annuity to keep clear of income-related benefits. That is not what he said. When Members were recycling the raiding of the Third Reading speech, having failed—perfectly reasonably—to consult the Report or Committee stages, they would have known that that was never argued in this House.
I was arguing then, and was subsequently quoted as saying, that in terms of the range of annuity pot that would be required to float someone off income-related 1539 benefit, that could run anywhere between £120,000 and £250,000 according to the assumptions about the flat level, joint or single, and the level of increases in state benefits. I took £180,000, a figure common to most people as a guide, but I also went on to say that, given tax relief at 55 per cent on the rest, one would have to have a sum of well over £250,000 before one saw a clear advantage from all of this and had as a result a sum of £30,000 to leave to one's heirs. I argued, and continue to do so, that the number of people who would wish to lose the possibility of an annuity for such a sum would be very small; probably less than the 1 per cent who hold pots of that size.

§ Lord Higgins
My Lords, I thank the noble Baroness for giving way. Has she noticed that in the final paragraphs in col. 1235 of yesterday's Commons Hansard, immediately before a vote was taken on the issue that we are discussing, the Parliamentary Under-Secretary of State and Mr Webb refer to the figure of 250,000, which we agree is the amount in pounds which would be sufficient to take someone off means-tested benefit? Malcolm Wicks then says: Yes. The point is that we are talking about a quarter of a million people who are way above means-tested levels".—[Official Report, Commons, 16/11/04; col. 1235.] It is an indication of the total failure to comprehend what we are talking about that he should switch from a figure of £250,000 to a figure of 250,000 people.

§ Baroness Hollis of Heigham
My Lords, that may well have been a typo, and I do not wish to comment on that. Typos can easily happen. I was just anxious—

§ Lord Higgins
My Lords, is the noble Baroness accusing Hansard of getting it wrong?

§ Baroness Hollis of Heigham
My Lords, I do not know whether Hansard got it right or wrong, but I am confident that my honourable friend's brief at the other end would have been very clear about this. I am sure that someone either spoke in error or was misheard, and I do not wish to be drawn into the debate, however teasingly, by the noble Lord opposite.
In good faith, I was trying to ensure that no one thought that I was saying at any stage—I do not think that your Lordships suggested this—that a person had to have £250,000 to be free of IRBs. The figure that we explored in much greater depth as the average within the range was nearer to £180,000.
I am near to concluding but I wanted to address some important issues that were raised at the other end as well as in this House. I want to draw your Lordships' attention to the potential costs to the Exchequer of moving the age limit from 75 to 85. It could amount to tens of millions of pounds. There is around £14 billion in unused tax relief each year, and 50 per cent of tax relief goes to the wealthiest 15 per cent of pension savers. Even a swing of 5 per cent into pension saving driven by this raise in age could cost upwards of £250 million per annum—all for the 1540 benefit of the wealthy individuals who would be using the relief afforded to pension saving as a means of passing on an inheritance to their heirs.
The UK has a long history of mandatory annuitisation of pension funds. The Finance Act 1994 increased to the current level of 75 the age by which an annuity must be purchased for occupational pension schemes. Personal pensions were introduced in July 1988 with an annuity ceiling of 75 years. In 1994, the average life expectancy for a male at age 65 was approximately 79 years. In other words, the expectancy was that people would potentially have four years to enjoy a stream of retirement income.
In comparison, on the period tables as opposed to the cohort tables, the current life expectancy of a male at age 65 is 82 years. Accordingly, raising the age by which an annuity must be purchased to 85 would mean that the majority of people who deferred taking an annuity would not benefit from any form of income stream. They would die before making that decision. By keeping the limit at 75, we are potentially offering the 95 per cent of people who annuitise before the age of 70 a further six years in which to enjoy an extra stream of retirement income.
Finally, at Third Reading, the noble Lord quoted the research into attitudes to annuities in the Watson Wyatt Worldwide study, which showed that people would prefer not to have to annuitise or to annuitise later. I think that that was repeated in the other place by the honourable Member for Havant, Mr Willetts. Again, I wonder whether the full findings might have been misquoted. The choice concerned whether to retain a lump sum of £100,000 and live off the interest or to use the £100,000 to buy an income of approximately £7,000 per year. However, what Mr Willetts did not share with us was that, of those who chose to annuitise, on balance there was a preference for annuitising earlier rather than later, the ratio being approximately 3:2 in favour. As that piece of research was quite heavily worked, I thought that it was worth seeking to contextualise it.
In conclusion, we believe that the Government's position remains, which is why we ask the House, in due course, to reject the opposition amendment. First, the Government's position is fair to all. Secondly, we believe that the cost involved in the amendment would be unacceptable, and, thirdly, we should bear in mind the burden of responsibility that it would create.
However, we recognise—this was said by my honourable friend in the other place—the underlying issues of greater longevity and demographic shifts in this country and, indeed, across the developed world, both of which have profound implications for the way that our pensions policies are put into effect. We are taking action through the Bill and in other ways to meet those and other challenges.
We set up the Pensions Commission under Adair Turner to review the regime for UK private pensions and long-term savings. His first report, published last month, provides a mine of detailed and valuable information on the demographic challenges that we face. It is a singular fact that we are debating whether 1541 to preserve one of the few elements of compulsion in our pensions structure, but the Pensions Commission was set up specifically to consider the effectiveness of a voluntary approach to pensions and whether there is a case to move to greater compulsion.
The commission is considering whether the level of compulsion within the UK pension system is appropriate. For people investing in a pension, the requirement to purchase an annuity at the age of 75, with a tax privileged saving, is a compulsory element of the existing system. Once the commission has reported on the wider issues relating to compulsory saving, the Government will wish to consider key issues, including annuitisation at the age of 75, with particular care and urgency and decide whether they remain fit for purpose.
As a result of those remarks, I hope that your Lordships will feel able to reject the amendment which is to be moved in lieu and accept the original amendment as brought back from the Commons today.