Pension Annuities (Amendment) Bill

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The Chairman: I am in favour of considering things holistically, but there are limits even to that exercise. It is important for the Committee to consider the reasons why people may exercise the draw-down facility, and the effects of the amendments and the Bill on them doing so. However, we have explored those reasons and the cost in great detail, and should return to the draw-down issues.

Ruth Kelly: Thank you, Mr. Stevenson, but I would like to say briefly in response to the hon. Member for Tiverton and Honiton that she must recognise that it is this Government who have taken measures to open up access to care in old age—[Interruption.] We can debate that another time.

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Lawrie Quinn: I hope that you will regard this comment as helpful, Mr. Stevenson, as I would like to return to the amendments in front of us. The tour de force that we have had over the past 40 minutes has certainly confused me. We have read, and read again, about the consequences of the amendments. Is the Minister certain that the amendments would leave something meaningful, comprehensible and grammatical in the Bill? My reading is that they would not, so a technical drafting error would be built into the Bill. No Committee member would want to be party to that, so I ask the Minister for her help.

Ruth Kelly: My point was that if the Committee decided to scrap income withdrawal rules, there would be severe consequences to the Exchequer. That point must be made in Committee, and it is one that we have a real interest in debating today. Particularly, we must understand the potential cost implications of scrapping the income withdrawal rules, because they are fundamental to the Bill. If they were scrapped, people would have greater flexibility in the use of their retirement funds. The Government's argument is that that would lead to an additional flow of money into pension funds, not for retirement income but for other purposes.

I want to return to the example with which I was attempting to illustrate the point, about a gentleman with a pension fund of £600,000—

Mr. Curry: What is wrong with ''lady''?

Ruth Kelly: I gave the example of a 65-year-old male. The right hon. Gentleman may not remember, but I specifically gave that example. With your permission, Mr. Stevenson, I could refer to a 65-year-old female in my next example, although we will come to that in due course.

Under the Bill, the gentleman could take his £150,000 tax-free lump sum. He would then need to use £55,000 to buy the minimum retirement income annuity, which would leave a remaining fund of about £395,000 that would continue to roll up tax free. That is the income in gains from the fund, which, although no longer needed for pension purposes, would be exempt from tax. The scheme member would be free to withdraw from the fund at will, but if he chose to make no withdrawals from the remaining fund during his lifetime, it would build up with the benefit of tax-free investment income and capital gains until his death.

A 65-year-old male—I must be precise for the development of the argument—has an average life expectancy of 17 years. A female of 65 has an average life expectancy of 20 years. On the lowest long-term growth projection rate of 5 per cent. a year, which is recommended for administrative purposes by the FSA, the fund would have increased to about £1 million over such periods. Under the right hon. Gentleman's proposals, the whole £1 million could be passed to the scheme member's survivor tax free. It is not clear whether the Bill would require the size to be taken into account for inheritance tax purposes. Perhaps the right hon. Gentleman will use this opportunity to let the Committee know whether he

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thinks that is the case. If so and the sum reverted to the deceased member's spouse, there would still be no inheritance tax to pay.

Mr. Curry: When the Bill was drafted, the intention was to include some fiscal provisions relating to exit taxes and qualification for state duty. We were advised that that could not be done in the Bill for technical reasons. Therefore, I made it clear on Second Reading that we intended the Government to use their tax powers to introduce complementary measures that would supply the complementary part of the Bill. It is not my intention that there should be free tax roll-up. I look to the Government to provide the complementary part of the Bill. Instruments linked with the Budget would settle the issue.

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Ruth Kelly: I thank the right hon. Gentleman for that clarification. He might not disagree that if inheritance tax were introduced, the male or female who had saved for retirement could pass the savings on tax free to a spouse. I view that as the intention behind the Bill.

Mr. Curry: Or partner.

Ruth Kelly: In that case, it would open up greater implications for the Exchequer. The member will have secured an index-linked annuity of about £3,600, taken a £150,000 tax-free lump sum and passed a tax-free £1 million to the spouse on death. That is an incredible and wholly unjustified tax-free gift from the general body of taxpayers to the wealthy. It would further increase the attraction of pension schemes to those able to switch substantial amounts of their wealth to take advantage of up-front pension tax reliefs. Such behavioural change could be expected to increase the public cost of pension schemes not only by hundreds of millions of pounds, but perhaps by billions of pounds each year. I look forward to hearing whether the right hon. Gentleman agrees with my arguments.

Mrs. Browning: Will the Minister clarify an issue with a huge read-across for inheritance tax rules between spouses? Is she seriously suggesting that it is inappropriate for such a sum to be passed from spouse to spouse, even though the will is properly drawn? I can think of no other example where inheritance tax between spouses would be applied.

Ruth Kelly: I thank the hon. Lady for intervening on such an important point. The Government would never suggest introducing inheritance tax between a member and his or her spouse. However, higher rate taxpayers with considerable pension funds at their disposal—who will already have benefited from 40 per cent. tax relief and tax-free investment growth of the fund—will find this provision a highly attractive route for passing on money between spouses on death.

Mrs. Browning: Those people who had the old section 226 pension and could draw a considerable tax-free lump sum from pension policies could equally leave it to the spouse. I see no difference.

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Ruth Kelly: We are talking about a complete re-writing of the pension rules so that people can use their pension vehicles—they currently have to be used to buy an annuity by the age of 75—and face no income withdrawal rules to stop the depletion of funds. People will have much greater flexibility in deciding on the amount of money to invest in this form of pension savings. It will make current pension arrangements considerably more attractive and, if full advantage were taken, the cost to the Exchequer could be not just hundreds of millions, but billions of pounds. The Committee must understand the potential implications to the Exchequer.

I have been criticised several times for saying that we will not take measures that benefit only the wealthy, but I doubt whether any member of the Committee wants to give significant additional tax advantages for people to bequeath large sums of money on their death to their spouse or children. That is not the Bill's intention, but it is an unintended consequence. It is a very serious flaw in the way in which the Bill has been drafted. The intention would be scuppered because the provisions in the Bill cannot deal with that problem. I therefore think it essential to reintroduce the income withdrawal rules and I ask the Committee to support the amendment and the consequential amendments that will reinstate income withdrawal.

Mr. Curry: I shall begin where the Minister ended and ensure that there is no ambiguity. I said a few moments ago that I had hoped that we could have incorporated certain tax provisions in the Bill. The advice was that that was not possible and that to do so would require redrawing the long title and going into a complex procedure. Therefore, I made clear on Second Reading what our intentions were and what we would be inviting the Government to do.

I invite the Government to apply a 35 per cent. exit tax at the point of inheritance, so that £1 million is not inherited tax free and what passes on is that amount minus 35 per cent., which would be £650,000. That should eventually be rolled up into the estate, which is paid at 40 per cent. over about £242,000. If a gentleman has £1 million in a pension fund, assuming that his house is worth more than the specified amount, he will pay 40 per cent. on the residual part of that pension fund, which is, I think, about £260,000. Of the £1 million that we have been discussing, the Government will collect something in the order of £600,000. The £1 million that has gone in that wonderful way to the spouse will shrink dramatically if the Bill works as I envisage it will if the Treasury uses its budget powers to produce complementary measures.

I realise that I cannot express my intention in the Bill, but that is how I envisage it working. I do not know many people with £1 million in the pension pot and I certainly have no expectations of getting that amount myself. In Skipton and Ripon in Yorkshire, my surgeries are not besieged by people worrying about the fiscal implications of having a pension pot of that size. The Minister will have to take my intention on trust, but increasingly, what is said in Standing Committee is treated as gospel.

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The Minister said earlier that people enter a contract with the Government. We want to be a little careful about the concept of contracts where one side lays down rules. That is a Hobbesian, not a Rousseauistic contract, if I may say so, which can be nasty, brutish and short because the Government can change laws at any time. That is the fact of the matter. The Government do not go back to the other person signing the contract and say, ''Look, I think we might want to change this contract, is that OK by you?''

I understand and accept the underlying notion. I endorse it, as I said on Second Reading. However, I believe that the Government are right to say that if people receive benefits to accumulate pension funds, in return, the first call on those funds should be to maintain their independence. I have no quarrel with that, as it is a sensible notion.

I am not in fundamental dispute with the Minister about whether annuities are effective or ineffective, moral or immoral. My argument is, very simply, that once a person has made that provision for security in retirement—I even give the responsibility to the Chancellor of the Exchequer to define the amount required to deliver that security—it seems reasonable that he or she should be able to dispose of their funds. That implies, in a sense, the replacement of draw-down because the Minister said, rightly, that a person can opt to move into draw-down until the age of 75 with the exception of a 25 per cent. lump sum, which none of us is brave enough to want to abolish, although there might be an intellectual case for doing so, and which has to go into annuities.

People consider that there is an element of compulsion and they do not like it. I have not been besieged by letters from people saying, ''Actually, you've got it wrong.'' Furthermore, their letters were not drafted by their accountants. The proposal is fair. Many ordinary people have reasonable-sized pension funds. They may have changed jobs and be in receipt of a couple of pensions—a bit of SERPS and a bit of occupational pension. Those with a comfortable pension—not a generous pot of money—consider that they are on a one-way track and their expectations are at serious risk of being disappointed.

There are two hearts to the Minister's argument. In fact, they depend on each other. The contract with the eponymous pension holder means that, when a person buys a pension, he signs the contract and the only way in which to fulfil that contract is for the whole sum, minus 25 per cent. if he decides to take it out, to be used to purchase equities because that is the only sure route for a guaranteed income. We have had a long discussion about mortality drag, all of which I accept.

We do not need to be as definitive as that. People do not need to be locked in a straitjacket. It could be said that people may make the provision, but funds may be left that could be used at their discretion. That serves the same purpose as the draw-down. What do the Government get out of the proposal? I have been bending over backwards so far to help them that I am ashamed of myself. I have accepted the principles of the annuitisation and, by bringing it down to 65, I am

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giving the Government even more security that people will not draw down to the point at which they dip into welfare.

I note the Government's fear of excessive depletion, but they acknowledge the disincentive of annuities. They used the word ''disincentive'' and that is what is protecting the Revenue. It is a curious notion that the Government are deeply committed to preventing people from taking up their entitlement because if they do take it up, which has been legislated for, they may cause undue drains on the Exchequer.

Who will benefit? The honest answer is that we do not know. There is an argument in the United States and other countries about the extent to which people's funds are discretionary. To what extent do they shift from one form of pension to another? To what extent do they want to keep funds against unexpected events? We can work out an entirely respectable argument on either side of the equation. The amount of discretion must be relatively small or people would leap into new pension schemes.

Of the 56 million—or 58 million—people in this country, we have identified only one who may be willing to exercise extra discretion. I am sure that the husband of my hon. Friend the Member for Tiverton and Honiton is better placed than me in such matters, but my hon. Friend's ability to consume £34 million seems to be taxing her ingenuity even given the extraordinary high cost of goods in the United Kingdom compared with the continent. If she lived there, she would receive even more value from the £34 million, even if it were only £8 million.

Headroom has been referred to, as has not wanting people to do the right thing for the wrong reasons. The Minister said that people are entitled to take such action; the provision is legal, but the Government do not want them to take part in such a scheme because they may do so for the wrong reasons. It is because of doing it for the wrong reasons that I suggested some basic tax provisions to ensure that people would not take action that would be against their own interests or, to use a fashionable phrase, counter-intuitive. It would be silly for a person to over-provide for his pension if, in so doing, he was walking straight into a level of taxation that would remove the advantage.

As my hon. Friend the Member for Arundel and South Downs said, the Minister applauded ISAs because they have a different tax benefit and for many people they would represent a more efficient and sensible means of dealing with the problem than a private pension.

The Bill is organised in a way that is intended to avoid the compulsion that is present in the system, to retain the notion that people must provide for their old age and to erect a fiscal structure that ensures that the Government take account of the time lag between their investment in a pension and the recovery, so that they get back their part of the contract. The Minister has acknowledged that that time lag exists.

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The investment that people are able to make and the income that they earn from it would provide the Government with a dynamic stream of revenue. The income would be taxable and, as the Minister said, some of it would be paid by people in the 40 per cent. tax bracket.

I am unrepentant about what I am proposing. I acknowledge the Minister's concerns. She expressed them in vague terms, because she is unable to quantify them, and I acknowledge that it is not possible for her to do that. With regard to her concerns, I suspect that there is great deal of present fears are worse than horrible imaginings, to paraphrase Shakespeare. It is the Inland Revenue's job to have horrible imaginings but it is possible that, as other countries have discovered, they will not turn out to be quite as real as is feared.

Therefore, I am unrepentant about this mechanism in the Bill and I advise the Committee to reject the Government's amendment.

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Prepared 14 February 2002