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Mr. Steve Webb (Northavon): The hon. Gentleman said that this is an issue of importance to millions of people. However, one of the issues that I have wrestled with in our debates on this matter is whether that is so. Does the issue matter only to those who have whopping great pension pots? If there is a floor below which people will not be allowed to draw-down, and if stakeholder pensions will be targeted at those who are on modest earnings, will many people ever be affected by those income levels?
Mr. Flight: I thank the hon. Gentleman for his question, which I shall deal with in detail in a few moments. However, the quick answer is that the issue has to do not only with a well-pensioned elite. As money purchase provisioning works its way through--it started only in the 1980s--the number of those who will be obliged to buy an annuity will run into the millions. Within the arrangements that I have discussed, they would not have to put all their pension money into an annuity. The issue affects not only a narrow body of people. However, I shall revert to that in a moment.
The key point is that the next few years will see a huge explosion in the number of people with money purchase pensions. Final-salary schemes operate essentially with a revolving pot of money--with accumulated pension assets usually invested predominantly in equities, although the equity-bond mix depends on the maturity of the scheme--out of which the pension is paid. Therefore, the capital that provides the final-salary pension should be prudently invested with scope to increase in capital value, and should not be locked into an exposure to bonds.
As the House will be aware, the combination of a Budget surplus, the subsequent repayment of national debt, increasing demand for money purchase pensions and--following the passage of the Pensions Act 1995--increasing demand for fixed-interest products by mature pension schemes have all created essentially a false market in long-dated gilts. In the past 12 years, not only has the nominal interest rate decreased with lower inflation, but the real interest rate has almost halved. The real interest rate has been close to 4 per cent. for quite a long time, but, now, it is down to 2 per cent. and a bit. So what is happening elsewhere is creating a false market and, as the law stands, people are being forced to buy investment pension products based on that false market. If and when that changes, irrespective of any change in inflation, such individuals will be seen to have been grossly unfairly--and I would argue negligently--treated by the law.
I am pleased that many annuity providers have produced new products but, as the Minister will be aware, there are tax inflexibility problems associated with equity-linked annuities. In short, if an equity-linked annuity consistently performs well, the beneficiary is unable to take the full return. If the product performs poorly, investors face considerable problems if they wish to change their fund manager.
Canada and Ireland have addressed the problem--Canada did so 10 years ago and Ireland has done so in the past two years--along the lines of the recent report by the Association of Unit Trusts and Investment Funds Committee which broadly envisages the creation of a pension account into which the capital goes. Everything that comes out of the account is taxed as income. Within that pension account, the beneficiary can determine the investment policy within sensible parameters analogous to those laid down for ISAs.
Mr. Barry Gardiner (Brent, North): I have been listening carefully to the hon. Gentleman. Does he accept that, just as tax relief is initially given on a pension fund in order to provide certainty and security in old age, an investor may wish to diversify the application of their fund at an early stage into other ways of financial management that do not attract the same tax relief, but are not subject to the same limitations? While the hon. Gentleman is considering that point, will he also say how he sees investors who are in the fortunate position of being able to consider their financial future and think of diversifying their fund in that way in light of the remarks of the hon. Member for Northavon (Mr. Webb) about the number of people involved?
Mr. Gardiner: I do not want to make a speech on the subject. As the hon. Gentleman is aware, quite simply, tax relief is given to help provide security and certainty of provision from the point of retirement until death. I accept the problem that the hon. Gentleman has outlined as it affects many people approaching retirement. Somebody seeking to achieve better returns than they were likely to get from an annuity could have made alternative provision that did not attract the same level of tax relief.
Mr. Flight: With respect, the hon. Gentleman's intervention reflects completely wrong thinking. Tax relief is provided to help build up the maximum assets to create adequate provision for retirement. As the hon. Gentleman will be aware, a final salary pension scheme will have an appropriately balanced portfolio of equities and possibly some fixed interest investments, depending on the maturity of the scheme. That is an entirely sensible arrangement that maximises both the pension accumulation and, in due course, the tax take. Even with money purchase pensions, there is clearly an argument that the tax take would ultimately be greater to the Revenue if the assets were invested on a basis that would create better returns because everything that is drawn out is taxable as income.
Under the present rules, if there is anything left when both spouses are dead, it suffers a 30 per cent. rate of tax and then becomes subject to inheritance tax as well. The rules can be changed if the Revenue wishes, but if the hon. Member is arguing that the correct moral price for the tax benefit must be that all the money should be invested in gilts for the last 20 years of someone's life, I do not see any logic here either in terms of maximising revenue to the Treasury, or in terms of doing the best for pensions in people's old age.
I now turn to some of the issues that have been raised this evening and some of the alleged reservations by the Revenue and Treasury in respect of adopting the proposals from the AUTIF committee. It has been suggested that the AUTIF report reflects the vested interests of the investment management industry--I should declare an interest here as a member thereof--but that is a completely outdated view as the life offices that provide annuities are also substantially part of the fund management industry. Indeed, most of them would welcome the proposed changes as they provide ISAs, unit trusts and so on. There is no longer an investment management industry and a separate insurance industry. That is not how the industry is structured.
The argument has been made about the interaction between the supply of gilts and the growing volume of pension funding that will eventually have to buy annuities. The arrangements that we propose would ease that problem because people would be free to buy guaranteed annuities if they wanted to, but everyone would not be forced down that route. Therefore, it should lead to real interest rates which are more normal and not the result of a false market, as they are at present.
Some people have made the point that this territory largely involves only the better off. The average annuity purchase from each life office is between £25,000 and £30,000. The average has fallen largely because more people are using draw-down to postpone annuity purchase. I am afraid that the statistics are not particularly reliable. I might add that the Government's statistics go back to 1995. However, personal pensions have been in
A survey recently conducted for the AUTIF study group found that more than 70 per cent. of annuitants had an income in excess of the proposed minimum. In other words, more than 70 per cent. of people with money purchase pensions would have capital with which they would not need to buy an annuity to take them up to a minimum pension income level. So the subject affects not just a narrow group of people but the overwhelming majority.
Mr. Webb: I broadly agree with the hon. Gentleman on this point, so I hope that he does not think that I am being critical. Which minimum is he referring to--the minimum income guarantee or the minimum in the McDonald proposals, which as I recall is roughly double the minimum income guarantee?