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Richard Ottaway: Is the hon. Gentleman taking into account the value of the personal pension fund in those figures?

Mr. Hendrick: Yes, I understand that it is included.

Most of those who retire have pension funds of far less than the amounts that I have cited. The average is about £30,000. The changes proposed in the Bill would benefit—and I have heard what Opposition Members have said—wealthier sections of the population who can build up larger pots, but in practice the majority of ordinary people would still be required to use the whole of their fund to buy an annuity and so would not gain anything from the change. The right hon. Member for Skipton and Ripon mentioned that that was currently the case, and I accept that, but I would have hoped that some attempt would be made to help poorer pensioners. Clearly, that is not the aim of this Bill.

Mr. Greenway: I am listening closely to the hon. Gentleman's speech. He speaks knowledgeably about a complex issue, but does he recognise that contribution limits are laid down by statute? Admittedly, many of the limits are not used to the full by individuals, but they prevent the so-called wealthy from taking advantage.

Mr. Hendrick: I accept the hon. Gentleman's point, but my concern was more for poorer pensioners than about the limitations placed on the wealthy.

I look forward to the consultation document whose publication is expected in January 2002. I understand that the consultation period will run until April 2002. It would probably be a good idea not to force changes to the Bill until the outcome of that consultation is known, but I await the Minister's advice on that point.

Mrs. Cheryl Gillan (Chesham and Amersham): Does the hon. Gentleman agree that in the period leading up to the consultation some people will be disproportionately affected, including one of my constituents who will have the misfortune to reach the age of 75 on Sunday and for whom there is no escape without dispensation from the Minister? Incidentally, the Minister has not replied to my letters—two in December and one this month—on this issue as it affects my constituent. Does the hon. Gentleman agree that it would be more equitable if the Minister now froze the current requirement for those people immediately affected, until the outcome of the consultations and the pending court case?

Mr. Hendrick: Obviously, I sympathise with the hon. Lady's constituent, but many people have reached the age

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of 75 in the two years before the introduction of the Bill. If legislation is to be drafted properly, the consultation period is important, so the Bill should be neither hurried nor delayed on account of one pensioner, however worthy.

The clear aim of a pension scheme is to provide a satisfactory income to last throughout the whole of the pensioner's retirement. It is hoped that the substantial tax relief given to schemes will encourage and support people in that aim. Currently, the only way that a pension scheme that cannot pay a pension to its members from its own resources can guarantee to provide a lifelong income is through the purchase of an annuity. As many Members have pointed out, that is especially important given recent increases in longevity. The proposals could form the basis for the provision of a satisfactory income for the whole of retirement.

To some, annuities are currently seen to represent poor value owing to low interest rates and changes in the markets for financial products in the run-up to the purchase of annuities. That stems from the higher cost of annuities compared with the costs a few years ago. However, that higher cost arises from several factors that do not necessarily bear on value. Increased longevity has been mentioned. Low inflation and interest rates have pushed down the returns on Government bonds and gilts so that providers have had to purchase more gilts in order to maintain the same steady stream of income.

The Bill would mean that the real value of an annuity will not be eroded as it was in the past. I am sure that is what the right hon. Member for Skipton and Ripon intended. Furthermore, as we have heard, the pooling of risks that underlies an annuity—whereby those people dying early in effect subsidise those who survive the longest—will diminish with time, for the reasons given by the hon. Member for Chesham and Amersham (Mrs. Gillan). The early death of a pensioner should no longer be seen as providing a bonanza for the insurer. I look forward to the progress of the Bill.

11.3 am

Mr. Steve Webb (Northavon): I congratulate the right hon. Member for Skipton and Ripon (Mr. Curry) not only on securing this important debate but on the unprecedentedly entertaining way in which he discussed annuities. We all enjoyed it. He was right to pay tribute to the work of the Retirement Income Reform Campaign, which has gone about its work in a well-informed and effective manner. Its work is to be applauded.

The hon. Member for Arundel and South Downs (Mr. Flight) brought these issues to the fore many times during the last Parliament, as I have also tried to do on some occasions. The purchase of annuities has become more important owing to the growth of stakeholder and personal pensions and is even more significant because of the increasing trend for occupational pension coverage to move towards a money-purchase basis. We might argue about whether we are discussing only the rich or the nearly rich, but even if that were true at present, it will become less true over time. The issue is important.

The hon. Gentleman referred to Stalinist compulsion. If my memory serves me correctly, the whole personal pensions regime was introduced in 1988 by that

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well-known Stalinist Chancellor, Nigel Lawson. The Conservative party has had an opportunity to deal with that Stalinist situation, but has so far failed to do so. Perhaps today will see a change in that.

Mr. Flight: The point is that in the 1980s, annuities were good value and attractive products. During the 1990s, it became apparent that that was no longer true, but the obligation to buy an annuity goes back even further than the 1980s.

Mr. Webb: Indeed.

As I said earlier, the Liberal Democrats are broadly supportive of the Bill. We certainly believe that the general principle of annuity reform is sufficiently important for the Bill to receive a Second Reading. Some of the detailed concerns that I shall raise should be understood in that context.

In the past, the Government have made two objections to the principle of relaxing compulsory annuity purchase at the age of 75. The first is that the well-off older person—the woopie—will blow it all on a world cruise, and then be thrown back on the mercy of the state. The poor Department for Work and Pensions would have to pick up the tab.

The second objection is that the taxpayer has provided the incentive to save throughout a person's working life and unless the money—with the exception of the lump sum—is converted into an annuity to provide a pension on retirement, the taxpayer will have paid out without return. As the right hon. Member for Skipton and Ripon pointed out, taxpayers will have given a subsidy but received nothing back.

Both arguments are fatally flawed. The objection that the Department for Work and Pensions will have to pick up the tab merely argues, like the Bill, for a minimum level of annuity. It would provide a minimum income from the pot, not that the whole pot should be spent on an annuity. There are two distinct points. As long as the person does not throw themselves on to the mercy of social security subsequently, what they do with the rest of their pot is no concern of the Department for Work and Pensions.

Mr. Dismore: I follow the logic of the hon. Gentleman's remarks. One of the issues that I want to raise later—if I catch your eye, Madam Deputy Speaker—is the interrelationship between the Bill and pension credit. I fully accept the point on the minimum income guarantee, but there are some difficult and complex arguments as regards the fact that pension credit might come into operation before the Bill takes effect. Will the hon. Gentleman give us his views on that point?

Mr. Webb: The hon. Gentleman is right. I agree with him. If he will allow me to follow the logic of my remarks, I shall deal with that concern later.

It is an entirely proper principle that people should be required to ensure that they do not throw themselves on the mercy of the Department for Work and Pensions. To put that into operation is difficult, however, and I shall return to that matter. The hon. Gentleman is right that the pension credit makes things much more complicated.

As regards the argument about tax relief, the nature of tax relief on pensions is often misunderstood. It is sometimes presented as a huge middle-class perk, but, in

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essence, it is deferred taxation: instead of paying tax when we earn the money, we pay it later when we draw a pension. That is a cost to the Exchequer in terms of deferral and of the lump sum. There is also a potential cost in that, on average, people probably pay tax at a lower rate when they retire than when they contribute. In principle, the process avoids double taxation; it is not a big £10 billion or £12 billion middle-class tax perk designed to encourage us all to save for our old age. Clearly, it is about timing—the Government get the money eventually. That is an important point.

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