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Mrs. Browning: That option is already available in many pension schemes.
Ms Stuart: The option is available in some schemes, but it ought to be made far more widely available. Take-up is low, despite the use of the phrase "a flexible decade in retirement". People do not consider it as a matter of course.
I hope that the Minister, in considering her response to the Bill—with which I broadly agree—will consider some of these suggestions. I ask her for help on one issue on which I have not had an answer and which was also raised by the right hon. Member for Skipton and Ripon.
We all like to quote our constituents, and my constituent Mr. Bellamy wrote to me just after Christmas. He said that, all his working life, he had planned ahead and tried to make the best financial provisions for his and his wife's retirement. He behaved and acted in exactly the way that the Government wish to encourage: he has planned, provided and thought ahead responsibly. He outlined the difficulties that he foresaw in being forced to purchase an annuity once he reaches the age of 75. He cannot see any rational reason for fixing it at the age of 75, and asked me why that age was chosen. I, too, cannot see what is so magic about 75.
I note that the right hon. Member for Skipton and Ripon said that he rejected the idea of deferring the obligation to take an annuity from 75 to a later age; there may be good and rational reasons for that. I fail to see a rational reason for the age of 75, and I would be grateful for any indication from the Minister as to the thinking on that matter.
We need to review the rules relating to annuities to allow more people to get the best possible deal. Administration needs to be simplified, and more and better advice is needed. This will not, as is so often and erroneously said, help a small handful of people who are better off, but a great many people—and disproportionately those with smaller funds.
The Bill proposes some positive changes to the current regime. If the Minister does not feel able to support the Bill today—something which, on balance, I would regret—I hope that she will take the speeches today into account in the review that was promised in the pre-Budget report. Despite the fact that this subject is sometimes difficult to understand fully—I accept that it is technically difficult—it affects all our constituents.
The rules no longer serve the original purpose of annuities or our constituents. Changes are necessary, and I hope that the debate today—even if the Bill goes no further—will contribute significantly to work on the subject.
10.28 am
Mr. Howard Flight (Arundel and South Downs): I congratulate my right hon. Friend the Member for Skipton and Ripon (Mr. Curry) on securing the debate. This is a subject on which Conservative policy for the last four years has been to abolish the obligation to buy an annuity and to propose legislation broadly similar to the Bill. Personally, I have campaigned for four years on this matter, and I have worked with Dr. Oonagh Macdonald of the Retirement Income Reform Campaign. As everyone in the House knows, there is broad cross-party support here for change.
I should probably also declare an interest, as I have a money-purchase pension. If Members of this House found that their pension scheme was a money-purchase one, there would be a rather more acute interest in the subject than there has been.
I very much hope that there will be a positive response from the Minister today in the light of the Inland Revenue consultations. It seems that the ship of state may at last be turning on this issue and that the Government have heard many of the good points made by the Retirement Income Reform Campaign.
I do not believe that a more flexible annuity is the correct answer. The Government and the Financial Services Authority have, in all other territories, campaigned vigorously against the unnecessary costs of insurance wrapping of savings. To tell people that they had to pay extra insurance company charges for a product that they manifestly wanted would be a travesty in this crucial area.
There is already an approved annuity scheme that permits people to select a choice of unit trusts and to pass balances on to their heirs at death. The problem is that the costs are 1.5 per cent. per annum and the front-end charge is 3.75 per cent. Again, I cannot think that the Government or the Inland Revenue would want to encourage such charging when, in all other areas, they are campaigning vigorously against it.
I echo the point that some of the things that the Minister for Pensions has said show him to be out of touch. About 1.5 million people will benefit from the changes proposed and many more will do so in the future, given the 8 million or so with personal pension savings who will be eligible. In addition, a recent Winterthur survey showed that only 13 per cent. of people believed it fair to force people to buy an annuity. The Government should realise that a major reason for the disappointing sales of the stakeholder pension has been that people object to the Soviet-style requirement to buy an annuity. They know that annuities are not good value and they do not want their pension savings to get locked in.
Richard Ottaway: The Minister for Pensions said that the measure would benefit only the wealthy. He went beyond the position that my hon. Friend has deftly described and introduced the politics of envy into the debate.
Mr. Flight: I thank my hon. Friend for his comments. That is the point; I was endeavouring to be polite, but the right hon. Gentleman is mistaken in thinking that in this case the interest is limited to the better-off.
Canada has pension arrangements that are not dissimilar to ours. Some 14 years ago, it introduced changes permitting those with regulated retirement savings plans, which are rather like stakeholder pensions, to have the choice of putting the money into a pension account as an option for buying an annuity on retirement with, of course, everything drawn out of that being taxed as income. The Government will be interested to know that since that change, the number of people participating in those schemes has doubled to 40 per cent. of the work force. The powerful message from that experience is that if we want the stakeholder type of arrangement to succeed, there needs to be a package that people find acceptable.
It is clear that many people simply do not like having to surrender their pension savings for a bad-value annuity. The cost of annuities has virtually doubled over the past decade. Part of the cause has been the fall in inflation, but it is crucial to realise that real long-term yields on which
annuities are based have virtually halved as well. That has essentially been the result of fiscal surpluses, partly from licensed sales—in other words, a contraction in the supply of gilts available—at a time when demand has been rising dramatically. That demand is partly from maturing money-purchase pension schemes—£8.5 billion last year, £12 billion in two years' time—growing at roughly 20 per cent. compound. In addition, the remaining mature final-salary schemes now have a growing demand for gilts—we need only look at what Boots has done. So there is a complete mismatch in supply and demand which has, not surprisingly, driven down real yields and is making annuities relatively bad value.
Mr. Butterfill: Does my hon. Friend agree that legislation has played its part? The introduction of the minimum funding requirement, the requirement for improved reserving regimes for insurance companies and, most recently, FRS 17, which no doubt motivated Boots, have all meant much more institutional demand for these same financial instruments.
Mr. Flight: Indeed, yes. The Governor of the Bank of England has acknowledged that it is unhealthy for the imbalance between the supply of and the demand for gilts to worsen.
How an annuity yield is calculated is a mixture of the long-term redemption yield, the life expectancy and what the insurance company's book looks like. The biggest single factor is the long-term yield. People who retire and have to buy annuities have, to some extent, subsidised low-cost Government borrowing, for which the Chancellor has no doubt been pleased to claim credit in the national interest. People are not stupid; those forced into buying annuities know that they are paying.
The problem is worsening. Final salary participation has fallen to levels as low as those of the 1950s. There has been a major shift to money-purchase schemes across companies. In the past five years, 24 per cent. of firms moved to money-purchase schemes. Last year alone, 46 major companies, including Sainsburys, BT, ICI and Lloyds TSB, closed their final salary schemes. I repeat the point made by the hon. Member for Birmingham, Edgbaston (Ms Stuart) that Members of Parliament, civil servants and everyone in the public sector are in a privileged cocoon, with indexed final salary arrangements. If, dare I suggest, Inland Revenue officials had money-purchase pension schemes, I feel that the issue would have been addressed long ago.
Mr. Peter Lilley (Hitchin and Harpenden): I am grateful to my hon. Friend for giving way and for supporting this excellent Bill. I confirm that from the social security point of view there has never been any opposition to these proposals. Indeed, I strongly supported moves of this kind when in government. The opposition has always come from the visceral opposition of the Inland Revenue to any measure that defers payment of tax even if, at the end of the day, extra tax more than compensates for that deferral. If there is Government opposition to the Bill and we cannot get it through today, my hon. Friend's proposal that Inland Revenue officials have money-purchase pensions would allow us to make a lot of progress.
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