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Pensioners (Annuities)

5. Mr. George Osborne (Tatton): What plans he has to abolish the rule requiring pensioners to purchase an annuity by the age of 75 years. [28141]

The Secretary of State for Work and Pensions (Mr. Alistair Darling): It is important that pension funds built up with the support of tax relief are used to provide pensioners with a secure income in retirement. For the majority, buying an annuity is the best way of ensuring that they have a secure income throughout their retirement. We have no plans, therefore, to change that rule. The principle will underline the approach in the forthcoming consultation paper on annuities which was announced in the pre-Budget report last year.

Mr. Osborne: Millions of pensioners will be disappointed with that answer and dismayed if the consultation paper rules out any reform of annuities. If the Government want people to save for their retirement, why do they not trust them to invest their savings in retirement? Will the Secretary of State and the Government support the private Member's Bill on annuity reform that received the overwhelming support of the House on Second Reading?

Mr. Darling: The Tories certainly turned up in force—that is true. The problem with the Bill's proposals and those which I suspect that the hon. Gentleman supports is that they would benefit only a minority of people who have retired. The average pension fund is at present some £30,000. Indeed, in the year 2000, the average amount used to buy an annuity was only £23,000. The proposals in the private Member's Bill and those commonly espoused by the Conservatives tend to be aimed at people who have pension funds of something like £250,000.

The forthcoming consultation document will consider options to make the annuity market work better than it does, but we must have regard to anything that we do so

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that it does not adversely affect the general level of annuity rates. We need to ensure that we prevent any tax avoidance becoming commonplace because of changes that might be made. We also need to ensure that if tax relief is given to people to save for their retirement, that is what they use the money for, rather than avoiding using the money for their pension and relying on state benefits instead. The hon. Gentleman will see the consultation document in the not-too-distant future, but it is worth bearing in mind how many people would benefit from any proposal. We would not want only a few people to benefit, which is what I suspect the Conservatives have in mind.

Mr. George Mudie (Leeds, East): Does the consultation paper deal with the bizarre and unfair situation whereby, on the death of the annuity holder, the remaining capital reverts to the institution and not the family? If the Secretary of State believes that to be a matter for the insurance companies, will he, in the short term, take steps to change the rule under which the tiny number of schemes that enable people to allow an inheritance to pass to their family can operate only when the money is invested abroad? That seems quite wrong.

Mr. Darling: I shall not go into the detail of what the consultation paper proposes, for obvious reasons. The House will see it in the not-too-distant future. However, if we were to change the rules, with the result that more and more people, on their death, could pass the remaining part of their pension fund on to their children or whoever, there would be less money in the system, which would adversely affect annuity rates for people who are currently pensioners. That is why it is important that any changes that the Government make benefit the majority of people. It would be wrong for us to put in place changes, which I think are supported by the Conservative party, from which only a tiny minority of the population would gain.

I repeat that in the last year for which we have figures, the average amount used to buy an annuity was only £23,000. A very small number of people—something like 5 per cent. of the population—will have pension pots of £250,000 or so. It would be disastrous if we made changes that benefited only a tiny minority of people, making the majority worse off. We certainly do not want to get into such a situation.

Mr. David Willetts (Havant): But will the Secretary of State answer this simple question: why should a pensioner be obliged to buy an annuity if he or she has enough income to ensure that they will not be dependent on means-tested benefits? Provided that condition is met, what business do the Government have forcing them to buy an annuity?

Mr. Darling: The reason that people receive tax relief during their working life is to make sure that they can build up a pension for their retirement. Our concern is that if changes were made along the lines that I think that the hon. Gentleman supports, the majority of people would lose out because annuity rates would fall as a result of his proposals. That would not be a desirable course of events because it would mean—all other things being equal—that the state would have to pick up the bill for that change.

No matter what changes we may contemplate in the future, it is important that we bear in mind the fundamental principle that tax relief is given to people so

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that they can save for their retirement. We do not want to change the rules and find that a majority of people are actually worse off.

Mr. Willetts: It is no good the Secretary of State hiding behind this tax relief. Let me quote from a letter from the former Economic Secretary, who wrote:

The Secretary of State cannot hide behind the Treasury to explain the policy, any more than Treasury Ministers can hide behind the Department for Work and Pensions to do so. This policy is one on which the Government suffered their biggest defeat in the House since 1997. That suggests that the policy is wrong and that it is about time the Government promised to give a fair wind to the Bill that received its Second Reading only a fortnight ago—aBill which would tackle, with no losers, a well- acknowledged grievance.

Mr. Darling: To put the hon. Gentleman's latter point in its proper perspective, we are talking about a private Member's Bill and it is certainly true that many Conservative Members happened to find themselves in London at about 2.30 pm on that particular Friday. Such things happen; successive Governments have had that experience and we live with it, as the hon. Gentleman well knows.

On the central point, the Bill's proposals would mean that a 65-year-old man would need a pension fund of about £72,000 to derive an income that would put him above the minimum income guarantee. I remind the House that the average amount used to buy an annuity is nothing like £72,000; it is actually £23,000. The result of the proposals in the Bill that the hon. Gentleman clearly supports would mean that although some people—a minority—might find that they were better off, the majority might very well find that their annuity rates fell. That would not be desirable.

The principles are clear. If people receive tax relief to save for their pension, we expect them to accumulate sufficient to live on in their retirement. We do not want people to avoid using that money for their retirement so that they can pass it on; nor do we want a situation to arise in which the majority of people would be worse off due to the changes that had been made. The consultation document will be put before the House and the general public in the not-too-distant future. No one should be in any doubt that the principle of annuitisation is important for the future of pension provision.

Departmental Accounts

7. Mr. Richard Bacon (South Norfolk): If he will make a statement on the extent of and reasons for the irregular expenditure by his Department which has caused the Department's current financial statements to receive a qualified opinion from the Comptroller and Auditor General. [28145]

The Secretary of State for Work and Pensions (Mr. Alistair Darling): The Department's accounts have been qualified since 1988 for two main reasons. The first is fraud and error. Despite the first-ever reductions in fraud and error, the levels remain unacceptably high.

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The second problem is the poor state of the Department's information technology, which makes it impossible to track payments through the system. That problem is being addressed by a multi- million pound investment programme that will steadily replace the Department's out-of-date computer systems.

Mr. Bacon: I am grateful to the Secretary of State for his reply. Will he tell the House whether he has a target date for the publication of a set of accounts that are not qualified because of fraud? Does he understand how much hard work goes into earning the money paid in tax that his Department then loses? If he takes fraud extremely seriously, as he said in an earlier answer, will he explain why he has still not answered my written question of 8 January?

Mr. Darling: In relation to the written question, I shall certainly make inquiries to see what has happened.

On the more general point, I have said repeatedly this afternoon that the level of fraud and error in the system is unacceptably high, and has been so for many years. As I said, the accounts of the former Department of Social Security were qualified from 1988—indeed, according to the criteria used by the National Audit Office, they should have been qualified from 1948.

The replacement of our IT systems, now under way, will enable us to track payments more accurately than we have done in the past. We have introduced other measures that have brought about a reduction in fraud and error of 18 per cent. in income support and the jobseeker's allowance. Those measures will be spread across the whole Department and we shall steadily bear down on fraud. But I have to tell the hon. Gentleman that I fully expect the next set of accounts to be qualified, and they are likely to be qualified for some time to come, until that investment and those improvements are fully put in place.

Mr. Peter Pike (Burnley): My right hon. Friend has rightly said that none of us condones fraud. Does he think that there is full compatibility between computer systems in local authorities and various Departments using national insurance numbers to ensure that fraud is cut to an absolute minimum, by using those systems far more effectively than perhaps we have done in the past?

Mr. Darling: I agree with my hon. Friend. The short answer is no, the information technology systems are not compatible at the moment, but that will improve year on year. That is particularly important with regard to housing benefit for local authorities, but we are replacingthe Department's entire IT system. That should have happened at least 10 years ago; it is now well under way, and it will have a significant impact on our ability to control fraud and error in the system.

Mr. Patrick McLoughlin (West Derbyshire): Does the Secretary of State understand that no one will think his Department is acting properly so long as we receive letters from Ministers that include paragraphs and sentences such as this:

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Mr. Darling: I hope that I did not sign that letter. If I did, I shall have another look at it. I do not understand it either, so I shall cause inquiries to be made.

The hon. Gentleman raises a serious point, to which I attach some importance: in the past, too many letters from the former Department of Social Security, and I dare say other Departments, have not been written in a way that people would readily understand. We are making determined efforts to try to improve that, but just occasionally the odd letter slips through the net, and I hope that he will forgive us.

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