|Pension Annuities (Amendment) Bill
Ruth Kelly: If the hon. Lady thinks that it is bad value for money, I am sure that she will invest her money in other savings vehicles. I am glad that she is taking a sensible economic approach to these matters and, if she wants greater flexibility in the use of her retirement fund, under current rules that is what she should do.
Mrs. Browning: Additional voluntary contributions were a good way of getting people to maximise their pension input. They are bad value for money only because of the compulsory element of having to take out an annuity.
Ruth Kelly: I thank the hon. Lady for her contribution. One of the principles behind the Bill is precisely that annuities are bad value. I dispute that argument and I shall return to it. Under the Bill money could be switched from AVCs to another savings vehicle to take up the headroom available for extra tax relief and allow the money to be used for something other than purchasing an annuity. A significant number of people would like to take advantage of the current tax rules to save in traded bonds and, if the right hon. Member for Skipton and Ripon asks who they are, I can point to one.
Mr. Flight: I am sure that my hon. Friend the Member for Tiverton and Honiton was about to tell me that it would come from her ISA account. Is the Minister advancing the £34 billion or £8 billion potential tax cost as a serious argument or debating point? She said that more money might flow into pension saving and less into ISAs and that people may vary the way in which they save. Is her hypothesis that the overall level of savings would rise, or merely that there would be some changes? If there are changes, the tax benefits must also be considered. If people save less
Column Number: 28in ISAs and more in pensions, the tax calculation will work in one way or vice versa. I make the point forcibly that from my observation people increasingly prefer to save for their old age via ISAs because a tax-free income in retirement is often perceived as even more attractive than money being tax deductible when it goes into a pension scheme. Both ISAs and pension saving enjoy a tax-free roll-up while the money is being saved.
The Chairman: Order. The hon. Gentleman may make a contribution, but not during an intervention.
Ruth Kelly: Thank you, Mr. Stevenson. I was enjoying the hon. Gentleman's points. He will remember that we recently had lunch together and discussed such issues with members of PIMA and the ISA Managers' Association who argued for greater flexibility in an ISA system. I thank him for his comment about the attractiveness of the current ISA facility, which is another route for people who want to save but need greater flexibility. The hon. Gentleman asked me whether the £34 billion referred to people moving between different savings vehicles, such as moving money from ISAs to pension funds or to new savings. I understand that the figure refers to both and does not differentiate. It is the unused and available tax relief headroom within the current tax rules. The argument then moves to the point made by the right hon. Gentleman in his Bill: who are those people?
Lynne Jones (Birmingham, Selly Oak): Whether annuities offer good value is, perhaps, a moot point. One of the problems is that there is a perception that they do not. Is not the Government's policy to encourage more people to take out stakeholder pensions? Do not the Government want people to take up some of the £34 billion of unclaimed tax relief that is available? Will not the Government's policies fail if people do not?
Ruth Kelly: Of course we want to increase pension savings, but for income in retirement. We do not want to increase the notional value in pension funds because people want to use the money for bequests or in order to avoid paying tax or to do other, perhaps good, things with that money. Other vehicles exist for saving for such purposes.
We want to provide a real incentive for people to think long term about their pension needs and to have appropriate vehicles such as stakeholder pensions, which are transparent, easy to understand, available in large quantities from employers and suitable for the majority of people on low incomes. We need the correct choice of savings products in order to increase general take-up and ensure that people are provided for in their old age. That is not to say that we should increase total savings in pension vehicles as opposed to other vehicles, or that people should invest merely with the intention of receiving more tax relief from the Exchequer and using that tax relief to do things other than provide an income in retirement.
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Mr. Cousins: I draw to my hon. Friend's attention the tax rules surrounding stakeholder pensions, which are in effect a tax-free hosepipe for £2,808 a year to pass from the pockets of the very wealthy to those of their non-earning partners, children and grandchildren ad infinitum.
Ruth Kelly: As usual, my hon. Friend makes an interesting point, although I do not necessarily agree with his conclusion. Stakeholder pensions are in the early stage of development. Only in October was it made compulsory for employers to offer stakeholder pensions, and it is perhaps not surprising that previously people other than current employees were the first to take advantage of the new savings vehicle. In future, as stakeholder pensions become more widely available and are better publicised, and as their inherent attractiveness becomes clear, the take-up by individuals who choose to save for their retirement will be much greater.
I believe that the target group of people who are likely to find a stakeholder pension attractive is those who earn between £9,000 and £23,000, although I stand corrected if those figures are wrong. Clearly we have a lot of work to do to ensure that people understand the need to save for their retirement. We must work closely with the Financial Services Authority to ensure that people understand what products are available, save appropriately and make correct savings choices, whether for their retirement, long-term care or other needs
The Chairman: Order. I understand that the amendments relate to the draw-down rules. It is right to refer to the cost of those rules and to changing them, but I am slightly worried that we may be moving into a general debate on pensions policy. I hope that we shall return to the amendment.
Ruth Kelly: Thank you, Mr. Stevenson. That provides me with the opportunity to return to the point made by the right hon. Member for Skipton and Ripon about the £34 billion and the cost of scrapping current income withdrawal rules. He asked who
Mr. Curry: The answer is that the Minister does not know.
Ruth Kelly: We know of one person who is likely to be affected by the scrapping of the rules. No doubt there are many others. However, it is clear that people paying the higher rate of tax of 40 per cent. tax are likely to have greater disposable income that they could save than those who are not paying higher rate taxes. That is a conservative way of considering the issue However, even if we consider only higher rate taxpayers, there is headroom of £8 billion of unused tax relief under the current tax rules. That could be taken advantage of through new savings or by moving savings from one vehicle to another.
I have no doubt that some will take advantage of the new rules to save in pension vehicles, although that will be a minority of personsI can point to one. Their intention is to save not to deliver a secure income in retirement, but for other purposes, some of which may
Column Number: 30be unforeseen. They may also intend to build up an estate that may be transferred on their death to a spouse or a child. Even if only 10 per cent. of people took their full allowance under the tax-free rules, and 90 per cent. of people used none of the extra headroom available, it would cost the Exchequer £800 million to abolish the rules. That significant sum was based on conservative assumptions. The right hon. Member for Skipton and Ripon may dispute those figures, but I explained why I believe them to be conservative.
These are not the only potential costs to the Exchequer. I tried to explain on Second Reading why the cost of the right hon. Gentleman's proposals could run into billions of pounds, but I was interrupted and I never got the chance. A 65-year-old male with a pension fund of £600,000 is the sort of person whom one might expect to benefit from the right hon. Gentleman's proposals. About £150,000 of that sum, which has been built up through the assistance of generous tax relief, can be taken tax free if the rest of the fund is used to provide an income for life for the scheme member.
Lynne Jones: Have the Government considered why such generous relief should be given to people to accumulate funds that will provide an income in retirement far in excess of average earnings?
Ruth Kelly: My hon. Friend may be proposing that we restrict access to pension income for the wealthy. I do not agree. There should be a level playing field between people of different incomes, provided that they are prepared to lock up their income for retirement, and we should grant them the same tax relief. My hon. Friend raised the important point that the current system provides such a level playing field. However, we are considering simplifying the tax system and the relationship between defined benefit schemes and defined contribution schemes, and we will come up with proposals that my hon. Friend may find attractive.
Mrs. Browning: I am encouraged by the Minister's response to her hon. Friend. We are discussing higher taxpayers having to put yet more money aside, perhaps more than the average wage, but those are the people who end up paying their own nursing home fees. The Minister should look holistically at the expenditure of old age and on what the money is spent. It does not all go on cruises, but on the essentials.
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