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Mr. Field: It may be an issue that will grow in importance.

Mr. Webb: I agree, for some of the reasons given by the hon. Member for Arundel and South Downs, but I wonder how quickly it will grow and for how many people. The hon. Member for Arundel and South Downs said that 70 per cent. of those with money purchase pensions who are now retiring are living on incomes above the threshold recommended in the AUTIF report. However, that is not the test of whether draw-down would be attractive to someone. If one had a combined income just above the guaranteed threshold and had £1,000 left in the pot, one would not gain very much by drawing down £1,000, which one might just as well convert, given the costs of fiddling around with that sum. Seventy per cent.

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of people with money purchase pensions may be above that threshold, but I would have thought that the number who are sufficiently above it to want to start fiddling around with draw-down is still quite limited.

I know that stakeholder pensions have not yet started, but I would have thought that those who will get such pensions and for whom this will be a serious issue will not be affected by it for a long time, as the target market is people who will struggle to get clear of the first guarantee, let alone the second. Clearly, there is a drift to money purchase schemes, which are affected by the issue, which will grow in importance. I believe that I have had three letters about the matter which, multiplied by the number of Members, is about 2,000. Perhaps I do not attract letters about annuities--I am sure that the hon. Member for Arundel and South Downs does--but I wonder whether the scale of the problem has been overstated.

The problem is, however, significant, and we support the general stance of the hon. Member for Arundel and South Downs. This morning, a worry was expressed to me, and I am concerned about risking another mis-selling. We talked about mis-selling and forcing people to invest in gilts for the last 20 or 30 years of their life, which is not an optimal strategy. However, will people end up with draw-down policies that are not right for them? Again, Evergreen Retirement Assurance tells me that it has surveyed the investment strategy of those draw-down policies. It turns out that a good chunk of the investment strategy of a draw-down policy--about a third, Evergreen told me--is in gilts. Therefore, if people try to get hefty returns from the remaining 70 per cent, a good chunk having had to be left in the fund to cover the double guarantee level, one starts to wonder how they will make the sort of returns that are being talked about.

A point made to me that has some force is that it is wrong to look at the issue of annuities in isolation and say that it is just about an age limit of 75. I am sure that the hon. Member for Arundel and South Downs does not do that. However, it was pointed out to me that the matter involves an age limit of 75, the open-market operation and long-term care. Why cannot one buy an annuity which, if one has to go into nursing care, can be converted into a much higher annuity to cover the fees? At present, that is not allowed. There is a danger that, if we pick at bits of the matter in amendments, we shall miss the big picture, which takes me back to my starting point of simplicity.

We welcome the amendment on concurrency as far as it goes, as it is a step in the right direction. However, it is a symptom of a messy system, which is messier than it was three years ago. We generally sympathise with the point on annuities, but we want the matter to be responded to in the round, as more issues are involved than just compulsion at 75. I am grateful for the chance to put my concerns on the record and I hope that the Minister will respond specifically to the point about the open-market option and put a rocket under the FSA.

Miss Melanie Johnson: I should like to thank right hon. and hon. Members on both sides of the House for their thoughtful contributions to our debate and the knowledgeable points that they have all made.

May I start by responding to new clause 8 before turning to the amendments? I shall do my best to cover the points that Members have made in the course of our

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debate. I thank the hon. Member for Kingston and Surbiton (Mr. Davey) for his clear exposition of the reasoning behind new clause 8. I have recently corresponded on this very issue with his colleague the hon. Member for Northavon (Mr. Webb). However, for the reasons that I shall outline, I hope that it is a probing proposal that will be withdrawn.

The problem is of long standing and has been reviewed on several occasions by the Government in office. On the last occasion, in 1995, the Institute of Chartered Accountants in Scotland put forward a proposal that was very similar to the new clause, but it withdrew it after talking to various Scottish annuity providers, who suggested that switching to schedule E would be an onerous administrative task for insurers. As drafted, the new clause would impose the requirement to tax annuities arising from retirement annuity contracts under schedule E from the date of the Bill's Royal Assent. That is--hopefully--only days away.

So, there is no provision for agreeing later implementation dates with the Inland Revenue, as was allowed when the schedule E requirement was placed on providers of personal pension annuities. The new clause would therefore place a considerable burden on financial institutions, which would be particularly difficult for them at the present time and within the time scales about which I have spoken.

9.30 pm

In the past, the insurance industry was against operating tax codes for annuities from retirement annuity contracts because some companies had paper-based systems that were not up to the task. That is not a reason for never making changes. As computerised systems are increasingly replacing older systems, the matter could usefully be looked at again. I hope that the hon. Member for Kingston and Surbiton will accept my assurance of interest in the topic and of the value of the points that he has raised.

I am asking officials to discuss the matter further with the Association of British Insurers and to report back to me. I am grateful to the hon. Gentleman for raising the issue. I appreciate his comments about on-going discussions, but they will be given a further ministerial boost. For the reasons that I have given, I hope that he will feel able to withdraw the motion.

Government amendments Nos. 83 to 86 are all connected with the issue of concurrency. I acknowledge that they are the result of the very helpful and constructive series of discussions with representatives of employers, employees and the pension industry. In particular, my thanks go to the ABI, the National Association of Pension Funds, the Trades Union Congress, the Confederation of British Industry, AUTIF and the Pensions Management Institute for their contributions.

There was very much a partnership between the Treasury and the Department of Social Security in trying to find a way forward on concurrency with the industry and interested groups. I hope that hon. Members accept that that is a fine demonstration of effective cross- departmental work in government in partnership with the private sector.

At the moment, a member of an employer's pension scheme cannot normally contribute to a personal scheme. The amendments will change that. They will allow

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someone who is not a controlling director and who does not earn more than £30,000 a year to pay up to £3,600 into a stakeholder or personal pension in any one of the subsequent five years assessed.

Perhaps I should at this point reply on the issue of the £30,000 limit; it is easiest to address that question at this moment. We picked the figure of £30,000, after some considerable thought, to try to strike the right balance between cost, ease of administration and coverage. A lower figure would increase complexity by excluding more individuals, whereas a higher figure would reduce complexity but increase Exchequer costs. We decided that £30,000 struck the right balance. It will reach nearly 90 per cent. of those in occupational schemes, which seems good coverage, and will cost £150-odd million by 2010.

I should like to make several responses on the issue of simplicity, but perhaps that would take too long. I should like to tax the remarks of the hon. Member for Northavon on simplicity by saying that I believe strongly that we have simplified several matters, not least tax arrangements for stakeholders. Indeed, the concurrency arrangements themselves make matters much easier. It is true that the £30,000 limit is in the Bill, as the hon. Gentleman said, but that is not say that it will not be reviewed from time to time. Indeed, we have no intention of lowering the figure.

We have not index-linked the figure partly because it gives people a degree of simplicity in their arrangements. Once a person has earned under the £30,000 limit in one year, they know that they will for five years be able to pay in on a concurrency arrangement. Therefore, the provision has the built-in simplicity that the hon. Gentleman was demanding and that we have succeeded in delivering in a number of changes since we came to government.

Stakeholder pensions have been extended to about 8 million more people, 90 per cent. of whom are in occupational pensions. Many of those employees do not expect to receive a large pension, but they are currently putting off making further provision because they consider existing AVCs and FSAVCs to be complicated and inflexible. They also worry about those products because of past pension mis-selling. We are offering those employees the opportunity to use a new, good value stakeholder pension to increase their retirement savings. It is worthwhile remembering that 40 per cent. of those who have AVCs are currently below the £30,000 income level. It is not the case that those with incomes of less than £30,000 do not already pay into AVCs.

Some have argued that we should allow concurrency for everyone, but such an approach would not be focused and would not represent good value for money. We therefore worked with the pensions industry earlier this year to produce the more focused approach set out in the amendments. We have followed the points made to us during those discussions. The proposal will help more individuals to save more money for their retirement, but it will also remove some of the practical problems that might otherwise have arisen when people change jobs. Again, simplicity is important.

The proposal should help pension providers to offer lower-cost pensions by increasing the benefits of scale. That will help to open up the pensions market, and it will offer consumers more choice and better value products. It has had an excellent reception, and therefore we are

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confident that we are right to believe that there is merit in the open approach that we have adopted and in the details of the changes that we propose to make.

I turn next to some of the issues raised under amendment No. 145. It is worthwhile saying that that amendment deals with points made in Standing Committee under what was then amendment No. 181, which Opposition Members tabled but then withdrew. They are returning to the matter under cover of a technically deficient amendment. I hope that I shall persuade them not to press it to a Division for two reasons. Up to 25 per cent. of pension contributions can be used to insure future contributions against sickness and incapacity. That reduces the amount of contributions going into pension funds.

The changes that we have included in the Bill will directly boost money entering peoples' pension funds, rather than subsidising insurance contributions. That is achieved by stopping tax relief up front, but giving it when the payment arising from a claim under the insurance policy is paid into the pension fund. In effect, that involves recycling.

Like all other contributions, tax at the basic rate will be added to the payment into the pension fund. In turn, that means that a lower sum can be assured. The change in the tax treatment of waiver insurance will not increase what is paid overall for the insurance cover, and some companies have suggested that it might reduce the premiums. Similarly, because tax relief is given on the use of the proceeds of the insurance, there is no need for restrictions on what can or cannot be insured. So providers can extend the insurance to cover situations that they could not cover before, such as unemployment and not just ill-health. I hope that I have fully explained the attractiveness of those arrangements. Many people accept that they represent a more flexible, better deal.

Overall, the changes that we have introduced will improve the existing arrangements. We know from questions addressed to the Revenue that companies are already engaged in imaginative product design based on our proposals. We cannot therefore support amendment No. 145, under which the existing arrangements would be re-introduced.

Under amendment No. 146, the requirement for the holder of a tax approved pension plan to purchase an annuity with the proceeds of the plan not later than age 75 would be removed. I assume that the intention is to permit income draw-down arrangements to continue indefinitely. Amendment No. 146 is flawed, but I do not place much weight on that, because it would not amend the section in the existing legislation that requires income draw-down to cease by age 75. The result would be that the holder of a personal pension could not continue income draw-down, but would be compelled to buy an annuity so that benefits could cease altogether. I am sure that that is not what is intended.

Many people have raised general concerns about whether annuities are good value. That was discussed in the Budget debate, and I recall hearing the hon. Member for Bournemouth, West (Mr. Butterfill) discuss the minimum funding requirement and I know of his connections with the topic. We have also discussed these matters in the Standing Committee. I shall explain why the amendment would not provide a solution, although I accept that many interesting issues relating to points raised in debate remain to be explored fully.

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The main purpose of a pension scheme is to provide secure income for scheme members for the whole of their retirement. It is worth highlighting that point because the hon. Member for Bournemouth, West suggested that the principal purpose might be recouping tax relief. A key feature of annuities is that they provide income for the remainder of a pensioner's life. Variations on the basic product, such as with-profits annuities, already exist, but they all have that essential core characteristic.

Tax rules therefore require personal pensions and other money purchase pension schemes to buy out their benefits as annuities to guarantee a continuing income, no matter how long the scheme members may live. To give flexibility, the tax rules allow members of money purchase pension schemes to take an income from their pension funds from 50 and to defer the annuity until they are 75. People are familiar with the detail of those arrangements.

Income draw-down is theoretically available to all members of money purchase pension schemes. However, the perceived wisdom is that it is suitable only for those with larger funds--at least £100,000--who can afford to bear associated risks. Depending on the investment returns achieved, someone who chooses to take maximum income from his or her fund might see a substantial reduction in income at age 75 in comparison with what he or she might have been able to secure by buying an annuity at, say, 60. The age limit of 75 strikes a balance between flexibility in the timing of the annuity purchase and the increasing danger of the fund being exhausted as the person continues to draw on it as he or she grows older.

Particular issues have been raised and I shall try to address the main ones. First, my right hon. Friend the Member for Birkenhead (Mr. Field) commented on inheritance and the defence of the status quo. It is not clear that the underlying value of annuities has in fact fallen once all other factors are taken into consideration. We could have a lengthy debate about that, but other factors should be taken into consideration. [Interruption.] Notwithstanding the mutterings of the Treasury Whip about my ideas of a lengthy debate, we accept that those factors exist.

We have sustained low inflation, which looks set to continue, and that is one factor in enabling annuities to retain their real purchasing power far better than did higher headline annuity rates paid in a higher inflation environment. We all know that life expectancy is increasing, and, as it is the hon. Member for Northavon's birthday, we can hope that that will affect him. People can expect to draw an annuity income for longer in their retirement. The value of a guaranteed income for life should not be underestimated. Many pensioners will still enjoy secure income as they grow older. The Oonagh McDonald report accepts that annuity arrangements work well for many people.


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