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7 Mar 2003 : Column 1081—continued
Mr. Bryant: I hate to correct my hon. Friend but I do not think that he means that people were dying at the age of 10 in 1901; he means that they lived 10 years beyond the age of 65.
Mr. Dismore: My hon. Friend is correct. None of us would have been here, based on what I said. In 1901, men lived to the age of 65 plus 10.6 years, which is 75.6. In 2021, men are projected to live to 65 plus 18.1 years, which would be—[Hon. Members: "83.1."] That is O-level maths for you.
Mr. Bryant: My hon. Friend could be an actuary.
Mr. Dismore: I am not sure that I could.
Between 1901 and 2021, the differential is 7.5 years. In other words, in 2021, men will live 7.5 years longer than they were living 100 years ago.
For women, the differential is even greater. In 1901, women lived 11.6 years beyond 65, to 76.6. In 2021, they are expected to live 20.8 years beyond 65, to 85.8. The differential between 1901 and 2021 for women is 9.2 years. As life expectancies continue to improve for each sex, they affect the annuity pot necessary to provide for long-term retirement.
Mr. Bryant: The actuarial expectations in the 1930s and 1940s, notwithstanding the second world war, of how long people who were born in 1926 would live, have been far outreached. People who were born in 1926 have lived far longer than was expected. It is therefore especially difficult to make clear and unambiguous forecasts.
Mr. Dismore: My hon. Friend makes a good point that goes back to the vagaries of the actuarial market when it comes to how annuities should be calculated. The Bill does nothing to address his point or increase the pot.
To increase the pot, and so allow a greater distribution for most people, one has to do one of several different things. One could increase one's contributions during one's working life. We all know how difficult it is to convince young people of the need to invest for their future. I made my pension arrangements when I became a partner in my law firm. I did not do that voluntarily, but because it was a requirement of the partnership. When I was in my late 20s, my partnership share was not sufficient for me to consider it easy to make those contributions, but in those days interest and annuity rates were high, as shown in all the research material made available to us by the Library, although not by the hon. and learned Member for Harborough.
Other sources of additional money are tax breaks—I will refer to taxation later—and better investment of the overall pot. The latter suggestion is far better than the
proposals in the Bill for annuity reform. We will have to consider other forms of annuity. An annuity does not have to be purchased from the firm with which an individual has saved for their pension. We now have the open market option, which allows individuals to compare different annuity providers to maximise their retirement income. It is estimated that 90 per cent. of people would receive a higher annuity income if they exercised their open market option, but only around 30 per cent. of people who purchase annuities do so.
Mr. Pound: Like all hon. Members present, I have been educated by my hon. Friend's speech as he approaches his record. He has clearly done an enormous amount of homework—perhaps unlike some people—but has he considered the impact of the state pension credit? Everything that we are discussing will have to be recast because of the introduction of the state pension credit in October 2003. That will be immensely significant, will it not?
Mr. Dismore: My hon. Friend makes an important point that drives a coach and horses through parts of the Bill. Much later in my speech, I have a lot to say about pension credit.
Mr. Dismore: I am afraid that my hon. Friend will have to wait a little while yet.
I have considered alternatives to the Bill's proposals for annuity reform. I think that the alternatives would achieve far greater benefits for a far greater number of people. They require little, if any, legislative reform.
The Government have taken the view that many of the perceived problems with annuities could be addressed by product innovation within the existing legal framework. The Treasury economic and fiscal strategy report 2001 states:
- "The Government . . . welcomes recent moves by annuity providers to develop more flexible annuity products that will enable those pensioners for whom it is desirable to remain invested in equities. As the annuity market grows, it should aim to meet the demand for greater investment choice and higher returns. The Inland Revenue will continue to work with the industry to ensure that the tax rules do not unnecessarily restrict the development of these products and this market."
More recent innovation has focused on schemes that enable annuitants to purchase an annuity consisting of a series of temporary and deferred annuities. The deferred annuity guarantees income throughout retirement—a key Inland Revenue requirement for annuities purchased from approved pension schemes—while the series of temporary annuities enables annuitants to choose from a range of investment strategies appropriate to their personal circumstances and stage of retirement.
The aims of such products, from the annuitant's viewpoint, would be to increase potential lifetime income through greater freedom to choose optimally
performing assets; to vary that choice during retirement to reflect any change of attitude to risk and reward any change in financial circumstances; to provide insurance against longevity, but with flexibility as to the extent of the cover chosen; to generate stable income but allow flexibility about the level of income generation; and, to allow transparency, which is extremely important in a stakeholder culture.
Mr. Love: Will my hon. Friend comment on the risk and reward of the new flexible annuity products, which are based on equities and the stock exchange? There is anxiety that risk may overtake reward, and that the traditional annuity may be a better product.
Mr. Dismore: Most people who hold annuities have small ones. I shall deal with that point later. The products that we are considering are vehicles for the better-off. People should not get involved in them without good, independent financial advice. However, the Bill is supposed to help the better-off. My hon. Friend made a telling point about the alternatives that I was describing, but they are genuine alternatives to the proposal of the hon. and learned Member for Harborough. Unlike the Bill, they provide greater flexibility for the people whom he is trying to help without screwing things up for everybody else.
Let me give some examples. The flexible annuities that the Prudential and Canada Life offer provide increased freedom for individuals to alter their income in retirement. The Canada Life annuity growth account enables individuals to purchase five-year annuities while the rest of the fund is invested. If an individual survives the five-year period, a survival bonus is added to the account. That is the cross-subsidy from other individuals who die during those five years. At the end of the five years, another temporary annuity can be bought at a different level of income. At age 85, the fund must be used to purchase a life annuity.
The Prudential flexible annuity allows individuals to continue to invest in the stock market and vary their income within limits until the age of 90. Had the products been around at the time, they might have been of interest to the father of my hon. Friend the Member for Battersea (Martin Linton), although he appears to have done well out of his investment.
The insurer London and Colonial launched a different sort of annuity, which financial advisers have welcomed as an even more revolutionary form of annuity provision. The open annuity offers a range of investment options and manages an annuitant's fund in isolation rather than pooling funds, which the traditional annuity product does. The product has been structured in such a way that any capital that remains on death can form part of the investor's estate. The Inland Revenue's approval of the annuity suggests a new flexibility in dealing with the problems that the hon. and learned Member for Harborough identified but failed to tackle. I have therefore shown that there is much better way of achieving the honourable and learned Gentleman's objective and that his Bill is not necessary.
My third point, which is the longest and most important, deals with the honourable and learned Gentleman's definition of minimum retirement income. It is the key to the Bill because without it, the measure falls apart.
Mr. Pound: It has fallen apart.
Mr. Dismore: It has fallen apart in other ways, but I shall put another nail in its coffin.
The honourable and learned Gentleman announced the Bill in a press release, which stated:
- "In order to prevent or discourage pensioners from wasting their funds and becoming dependent on the state, the Bill provides for a minimum retirement income annuity that is designed to give pensioners a guaranteed income for life above the level of state income support. The income from this will come from a retirement income fund."
I have had to fall back on the Library briefing, which gives a best guess at a figure, should the Bill be enacted. I am happy to give way to the hon. and learned Gentleman if he would like to say what he has in mind. He does not want to intervene, so he obviously has no figure in mind. We therefore have to fall back on the Library briefing's best guess, based on the work of the retirement income working party, to which the honourable and learned Gentleman paid great tribute.
The RIWP considered three broad options for setting the minimum retirement income. The first was based on the minimum income guarantee for a single pensioner. It was £75 a week at the time, but as of this month, it will be £98.15. From April, it will be £102.10. That shows the Government's generosity to the least well-off pensioners. However, the RIWP rejected that option because it would not provide certainty that the annuitant would remain off means-tested benefit throughout retirement. After retirement, the components of an individual's retirement income will increase in line with inflation. For this Parliament at least, the Government are committed to increasing the minimum income guarantee in line with earnings. When we are re-elected, the policy will undoubtedly continue. A minimum retirement income set at the level of the minimum income guarantee at the date of an individual's retirement would quickly fall below it during retirement.
The second option that the RIWP considered was setting the minimum retirement income at a level that represented the average income from the basic state pension and membership of an occupational scheme. At the time, the figure would have been £220. It was rejected as being too high to secure the required flexibility. Is £220 too much?
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