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Mr. Flight: I thank my right hon. Friend for his support. However, I do not think that I would want to be labelled by the Inland Revenue as the person who introduced that measure.
On investment, most people buy guaranteed annuities which are not index linked because they get a better immediate yield and because index-linked annuities are even more expensive. Most people buy them at 65. Average life expectancy at 65 is now, if we take the combination of two spouses or partners, up to 25 years. Buying an annuity amounts to putting all one's savings for a 25-year view into gilts. I repeat my earlier point that if someone went to a financial adviser and said, "I want to do something sensible and prudent with my capital for the next 25 years to ensure that I have a reasonable income and return to live on" and the adviser said, "I would put the whole lot in gilts if I were you," the FSA would attack that adviser for giving unwise and negligent advice. No one knows what might happen to inflation over the next 25 years. It is safe in nominal terms but it is a highly risky approach in real terms.
Unless people protect themselves with inflation-linked annuities, which in general they do not, there is a major risk for those who retire now when inflation and interest rates are very low that, at some stage in the next 20 years, factors may conspire to raise the level of inflation significantly and destroy the value of the annuities.
Mr. Barry Gardiner (Brent, North): In the light of his remarks about gilts, is the hon. Gentleman prepared to venture any comment on the decision of the Boots pension fund?
Mr. Flight: I could bore the House for a long time on that subject. Boots had little choice, but I would enjoy a full and frank exchange on that subject in another arena.
The Bill addresses two crucial concerns. First, the changes should not offer some tax-advantageous schemes for people to save in pension schemes and then pass them on to their heirs. There is a withdrawal tax as well as inheritance tax and the proposals involve tightening arrangements that may exist if one is lucky enough to die before 75 and have a drawdown from which one has drawn nothing. Secondly, there is a necessary requirement for people to purchase an index-linked minimum annuity. Pricing for those should be equal for men and women; once people are over 60, the difference in life expectancy between the two sexes is now less than two years, and it is likely to become even less. That would be a sensible arrangement, even if marginally unfair.
Mrs. Browning: I am sorry to be pedantic, but can my hon. Friend see that actuarial questions of equalising the annuity for men and women could have implications in other areas? For example, might not there be an equalisation of the cost of life insurance for smokers and non-smokers? What about women, who can sometimes obtain favourable car insurance because we are better drivers and have fewer accidents? Would not the industry see equalisation as a precedent to be used to our disadvantage?
Mr. Flight: I thank my hon. Friend, but I believe that the market is more flexible than that. In view of my record on cigarette smoking, I am one of the few people who could buy an attractive annuity because of the reduction in my life expectancy.
Somewhere in government, there seems to be an objection in principle to the idea that people should be able to pass on to their children anything from their pension saving. I see no logical or fair grounds for that. Whatever is passed on should be fairly taxed and should not provide some sort of scheme for tax saving. However, in principle, passing something on is surely a good thing. If people choose to take less pension with a view to passing something on to their children, they are surely entitled to do so.
The Treasury has expressed concern that if the Bill's reforms were introduced, there would be a huge increase in pension saving with a substantial tax cost. I thought that the Government wanted to increase pension saving. The more there is, the lower will be the massive future cost of the minimum income guarantee and pension credit.
There is no evidence to support the Treasury's assertion. Parliamentary questions from Opposition Members have obtained the response that the Government have no central data on pension contributions. Generally, people save what they can afford for their pension. They may at present save slightly less than they can afford, particularly in the case of stakeholders, but it is unrealistic and unfounded to think that people would leap into saving massive amounts if no tax advantages were offered for assets passed on to one's heirs.
There is a particular problem for Plymouth Brethren, a minority whose faith does not permit them to buy annuities. The Bill does not solve all their problems, but it goes some way to doing so. It is reasonable that a deeply held, politically inoffensive religious belief should not be ignored.
Ms Stuart: I have a problem with the hon. Gentleman's point about inheritance. The basic assumption underlying our tax structure of savings is that the Government want people to put away money for their old age and to use it for their old age. There must be some safeguard on that principle. People cannot have their cake and eat it. When people buy an annuity that will provide for them for however long they live, they cannot say that if they die early, someone can inherit it. We must make up our mind what we want.
Mr. Flight: With respect, I do not believe that the hon. Lady is looking at the point clearly. First, it would be fair if the tax benefits of the savings were returned to the state and taxpayers. Secondly, many people are saving for their old age through individual savings accountsformerly through personal equity plansand there are no problems with passing those on. Thirdly, people who are able to take tax-free lump sums from their pension savings may pass those on. The point is that there should be fairness as far as tax is concerned, not that there should be a principled ban on passing on money to one's heirs.
I shall close where I began. I worry that the Government will seek to answer the problems by proposing more flexible annuities. That would, to some extent, succumb to the interests of the insurance industry as well as being contrary to the general FSA and Treasury principles to discourage people from incurring the unnecessary costs of insurance wrapping of savings.
It is time to allow people to manage their pension savings on retirement if they wish to do so. Most people would continue to buy annuities, but Soviet-style
A rising tide of maturing money-purchase pensions will come to the market over the next few years as post-war baby boomers of my generation retire. Why cannot Britain follow Canada and Ireland, which addressed these points, respectively, 14 and four years ago? Nothing of what the Revenue fears has resulted from that. Those fears are false bogeys. The Government should stop prevaricating and get on with addressing what the majority of people of all shades of political opinion have campaigned for. I have had more letters on from my constituents on this matter than on any other, and my right hon. Friend the Member for Skipton and Ripon has pointed out that the Department for Work and Pensions has also supported change.
Will the Government bite the bullet? The Opposition fully support my right hon. Friend's excellent Bill.
Mr. Mark Hendrick (Preston): I congratulate the right hon. Member for Skipton and Ripon (Mr. Curry) on coming so high in the ballot and on having the opportunity to introduce his Bill.
The Bill is aimed at amending the Income and Corporation Taxes Act 1988, which obliges personal pension scheme operators to acquire pension benefits for their members by the purchase of an annuity by the age of 75. That is a strange age, and I am not sure why it was chosen. I shall return to that point.
The Bill would require annuity purchase to the extent necessary to secure what is referred to as a minimum retirement income. That is desirable from everyone's point of view. That income would be set annually by the Chancellor of the Exchequer. Quite how the Chancellor would set that figure, I am not aware, but I am sure that there are some talented people in the Treasury who would give guidance. I hope that the Bill would result in incomes for pensioners greater than the current minimum income guarantee while not increasing the burden on the state. By its nature, I do not think that it would increase the burden on the state.
The Bill would also abolish the rule that requires that the whole of an accumulated pension fund, after deduction of the tax-free lump sum, be used to buy an annuity for the pension scheme by the time the pensioner reaches 75. The age of 75 seems fairly arbitrary to me, and probably a good deal more flexibility should be allowed. If hon. Members asked me what the age should be, I would be honest and say that I do not know. Perhaps the proposed consultation will throw a little more light on that. The House can probably find some consensus about whether the age should be fixed or there should be some flexibility.
The Bill will also allow residual funds on death to be passed to the member's estate, subject to what the right hon. Member for Skipton and Ripon refers to as an exit charge, except where the beneficiary was a spouse or partner of the scheme member, when it would be passed on tax free. That is an excellent idea, which will bring confidence and certainty to people investing in such schemes. In the past, pensioners had doubts and lost confidence because they did not know whether they
The Bill will also provide for the residue of the pension fund to be invested through a tax-exempt retirement income account, of which I am in favour.
As I said, the Bill will remove pensioners' obligation to use all their pension savings to buy an annuity by the age of 75. It will substitute for the existing annuity purchase rule a requirement to buy an annuity sufficient to provide an income above envisaged income support levels by age 65again, a laudable aim. The annuity is to be index-linked. I and other Labour Members support that, and I shall be interested to hear what the Minister has to say on that point.
The aim would be to buy an annuity to meet the minimum income requirement. The current rules take away any option that pensioners currently have and force them to buy an indexed annuity. One or two hon. Members have mentioned the case of people with smaller funds. Independent financial advisers will not be able to give the same guidance as in the past because a minimum retirement income would be obligatory. That is an interesting scenario, and again I shall be interested to hear the Minister's comments.
I accept that the scrapping of income withdrawal will be beneficial. The current flexibility to draw an income of 35 to 100 per cent. of annuity income will no longer exist. In addition, any funds not required for the annuity purchase would be reinvested in a retirement income fund from which people could withdraw at will as much or as little as they wished. The retirement income fund will, I hope, be allowed to grow tax free. Again, I shall be interested in the Minister's comments.
Obviously, the setting up of such a fund would need cautious deliberation to establish which was the best institution to manage the fund and what were the best financial products in which to invest it. Clearly, that would involve risk analysis and consideration of all the individual's financial and personal circumstances. There will be a need for continuing advice until the pensioner's death.
As one would expect, any withdrawals from the fund during the life of the pensioner will be treated as income and subject to income tax, but the mechanism for applying a tax on withdrawals needs to be clarified. After the consultation, there should be some debate about how the tax mechanism would work.
It is intended to amend the Bill so that any funds left in the retirement income fund on the death of a pensioner should be taxed at 35 per cent. unless, of course, any sum remaining is to be transferred to a relative, the member's spouse, partner or dependent child, when no tax will be levied.
I understand from the figures that the tax yield on death between the age limits for drawdown is expected to be up to £100 million this year. If the amount of funds in drawdown remains static and funds pass immediately to families on the death of a scheme member, a similar annual sum will probably go to the Exchequer, which I am sure will please the Treasury.
An important issue is the pensioner's access to residual funds and the fact that funds could be inherited beyond the age of 75. Another is the issue of tax exemptions.
The Bill will also provide for annuity purchase only to the extent of the MRI. If that was set at the level of the current minimum income guarantee, the cost of an annuity that would pay an equivalent income would be about £54,000 for a man aged 65. Assuming that people would take their maximum tax-free lump sum, the necessary fund size would be about £72,000. If it were index-linked, about £95,000 would be needed.