House of Commons
Wednesday 30 June 1999
The House met at half-past Nine o'clock
PRAYERS
[Madam Speaker in the Chair]
Pensions
Motion made, and Question proposed, That this House do now adjourn.--[Mr. Mike Hall.]
9.33 am
Mr. Steve Webb (Northavon): As I look around the Chamber, I see several hon. Members who obviously spent substantial parts of their childhood playing "Monopoly". They will recall landing on "community chest" and hoping either to get a "Get out of jail free" card or, failing that, a card that says, "Your annuity has matured, collect £100"--that was in the days when £100 was worth something. When I used to play Monopoly, neither I nor any of my fellow players had a clue what an annuity was--and, in some respects, not a lot has changed. Yet The Observer newspaper recently pointed out that annuities are no longer something that appear only in Jane Austen novels but have replaced house prices as a topic of dinner party conversations in certain circles.
How has that come to pass? I suspect that I am not the only hon. Member who has received a growing number of letters from constituents who are concerned about the annuities problem. They are worried about low annuity rates and about being forced to buy an annuity at age 75. One example is my constituent from Thornbury, who is in his early 60s. He wrote to say that he had a self-invested pension plan from which he was drawing income in the manner allowed by the Inland Revenue up to the limits, leaving the capital largely intact. My constituent was concerned that, in a decade--the people of Thornbury are very far-sighted--he might be forced to buy an annuity with that pension pot, which would result in the loss of all his capital and leave him with a relatively poor pension. He writes:
In this context, what makes the Government the bad guys on first examination is that they force people at age 75, against their will, to convert their personal pension pot or similar into an annuity. Why is that a problem? It is well known that annuity rates are now relatively low--certainly compared with their level at the start of the decade. At the beginning of the 1990s, annuity rates were
about double their present value. That obviously means that the pension that one can buy with a given personal pension pot is substantially less than it was in nominal terms. One could point out that the stock market has done relatively well during the same period and that therefore the pension pot would have grown. That would partly offset the difference--but only partly. There is a general perception among people in their 60s and early 70s that they are being forced to buy a product that will yield a relatively poor pension and cause the loss of all their capital.
Why is there a problem with forcing people into annuities at age 75? A typical strategy for money in a pension pot is that it begins life invested in high-risk, high-return, or middling-risk, high-return assets such as the stock market. Towards the end of one's working life, it is shifted into lower-risk assets such as gilts. When one converts to an annuity, for the rest of one's life, one buys a product that is backed by gilts--which are very low-risk but low-return assets. If one does not take out a pension particularly early in life, one could find that half the time one's money is invested in shares and the other half it is invested in low-yielding gilts. It is far from easy to see how, in a rational world, that is a sensible way to invest pension assets. It is difficult to see why, over a lifetime, one would want to invest half the time in low-risk, low-yield gilts. That is not a rational strategy.
Sir Robert Smith (West Aberdeenshire and Kincardine):
That problem will not go away because, if the strategy of containing inflation is successful, gilts will continue to be low yield.
Mr. Webb:
My hon. Friend is quite right: nominal yields will continue to be very low--although there is obviously a problem with perception. We have yet to generate a low-inflation culture. We recall that inflation rates were 10 per cent. at the beginning of the decade and I remember when inflation rates were 25 per cent.under the previous Labour Government. Against that background, nominal rates matter to people's perceptions of whether they are getting a good deal. Stable inflation over a long period would clearly be welcome. I am grateful to my hon. Friend for that intervention as I was about to turn to inflation.
As well as low annuity rates, a second reason for concern is the effect of inflation on people's incomes when they buy annuities. There are annuity products containing escalation that take some account of future inflation. When surveyed before retirement, most people tend to say, "Yes, I would probably get an annuity with some sort of indexation; I would not want my income to be eroded". However, that is not what people actually do because four out of five of them buy level annuities. In other words, they see how much less they would get in the first year and in the next few years if they bought an indexed annuity and say, "Hang on a minute, I would rather have 75 per cent. more in the first year and I'll take a gamble on inflation". While, in theory, one might think that indexed annuities are a good thing, in practice, most people do not buy them. Therefore, we are forcing people to buy a product that is likely to be eroded by inflation.
Inflation of only 3 per cent. for a decade would knock a quarter off a pensioner's real income. That means that as people get older--as they reach 80 or more--their living standards may fall dramatically. That issue will be
increasingly important as the Government force people who buy stakeholder pensions to convert them into annuities and as more occupational schemes move towards defined contributions. That is why I initiated this debate.
As well as low annuity rates and the effects of inflation, a concern about forcing people to buy annuities is the inevitable loss of capital. When I first heard that argument, I thought that people wanted to have their cake and eat it. I thought that they were saying, "I'd like a pension--probably the same pension that I would have got anyway--and I want to keep all my capital." That seemed to be rather like saying to a car insurance company, "I'll buy my car insurance and if, after 10 years, I haven't claimed, I'd like my premiums back." Clearly, that would be unacceptable, but people are not saying that. They want a blend of a particular level of pension income and a particular level of preservation of capital. They have saved for their old age and taken the view that they might sacrifice part of their pension income now to preserve some of their capital to pass on to their children.
In principle, there is no reason why we should notallow pensioners to do that, subject to tax and other considerations to which I shall turn in a moment. In principle, there is no reason why we should want to force pensioners to sacrifice all their capital at the age of 75 if they were prepared to forgo some of their pension income in return for keeping part of their capital. On the face of it, therefore, the Government are the bad guys because they have removed from people, or are not allowing them, a choice at the age of 75. That choice will not, by any means, be appropriate for all pensioners, but it is appropriate for growing numbers of them.
I have read the report of the proceedings of the Standing Committees that considered the Welfare Reform and Pensions Bill and the Finance Bill, and this issue was discussed twice. The Government rest their defence for the age-75 limit--which seems somewhat arbitrary--on two main arguments. First, the dreaded Inland Revenue wants its slice of the cake. The argument is that if people were allowed to keep their money in the pension pot, they might inconveniently die, so they would never get their annuity and the Inland Revenue would never get the tax.
That concern is unfounded. If people who have begun to draw down income from their pension pot die, their spouse or dependant can convert the pension into an annuity that can be taxed anyway. If that is not the case, a special 35 per cent. tax rate will apply to those funds. I suspect that 35 per cent. is much higher than the rate that the Revenue would typically receive from an annuity, so it might receive more money if a few more people popped their clogs before they took out annuities.
If draw-down has begun, tax is not a problem. The only problem seems to arise if draw-down has not begun and the pension pot has not been touched. There is no reason why the law should not state that at 75, or another age, people should take out an annuity or begin draw-down. It is not beyond the wit of the Inland Revenue to ensure that it gets its tax take, while preserving choice for pensioners.
The Inland Revenue objection does not stand, but there is one closer to home for the Minister--a Department of Social Security objection, which is that pensioners might spend, spend, spend and blow the pot on riotous living.
That might be welcomed, but the concern is that they would leave themselves in penury and throw themselves on the mercy of the stony-faced DSS.
I am not entirely convinced by that line of reasoning. First, as the Minister knows, there are strict Government rules on the amount that can be drawn down from a pot. There are clear limits on that, and one cannot simply blow a fund in one go. If we consider the sort of funds that we are discussing, we realise that draw-down will be appropriate only in larger funds. Some say that it would be suitable only in funds of over £100,000 and others say that £250,000 and over would be a suitable size. The idea that someone would blow £250,000 from a pension pot and then throw themselves on the delightful mercies of income support is pretty far fetched.
Secondly, there is no reason why there should not be further constraints on draw-down if the age limit of 75 were to be raised. Stewart Ritchie of Scottish Equitable, who is a member of the Government's pension provision group, has suggested that at age 76 or 77 there could be a slightly tighter limit. Instead of being the total amount that one could draw from a similar annuity, the limit could be a percentage of that figure. Obviously--I borrow Mr. Ritchie's example--we do not want to allow people aged 100, whose life expectancy is one year, to blow the entire pot, lest they inconveniently live to be 101. A safeguard is necessary, and that could be ratcheted in, but there is no reason for an absolute cut-off at age 75.
The final reason why the "people will just rely on the state" argument is not convincing is that most pensioners, particularly those who have carefully invested--such as my constituent, who has invested his money himself--are not about to go to the Ritz or Monte Carlo to blow all their money. They are very cautious, and they are motivated by the desire to pass on money to their children. The idea that they would spend all their money and throw themselves on the mercy of the state is implausible.
It seems that there could be little objection to allowing greater flexibility at age 75. A choice could be allowed between the purchase of an annuity and the commencement or continuation of draw-down, subject to certain restrictions.
I want to draw the attention of the House to another group of people who may also, in some sense, be the bad guys in this story--those who sell the income draw-down policies. They have not done themselves any favours in recent years. The early evidence on those policies reveals that tighter controls on the charges and conduct of those companies might be needed to go hand in hand with the reform of the age-75 threshold that I have already suggested.
"it seems unjust that I will be compelled to buy this annuity, lose my capital sum, and yet receive no additional income."
What are we to make of this issue? I am a simple man and, in my simple way of looking at the world, I like to divide it into the good guys and the bad guys--it makes life an awful lot easier. When I approached the annuities issue for the first time, it occurred to me that the chances were that Her Majesty's Government were the bad guys. That is a fairly safe working assumption.
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