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7 Mar 2003 : Column 1090—continued
Mr. Deputy Speaker: Order. The hon. Gentleman is in danger of being repetitive with his interventions and I can easily rule those out of order.
Mr. Dismore: Thank you, Mr. Deputy Speaker. I fully accept your constraints, but I had to read that rather lengthy extract to try to set out the figures accurately so that I could illustrate—
Mr. Deputy Speaker: Order. I have been extremely generous to the hon. Gentleman; more than 100 minutes
passed before I intervened to make that point. However, he will be testing the patience of the House if he continues to read extracts at length, and I have therefore reminded him of what "Erskine May" says on that subject.
Mr. Dismore: I fully understand that point, Mr. Deputy Speaker. I should like to develop the argument that comes from those extracts.
The Library briefing illustrates that the tax system is based on the taxation of individuals, unless the hon. and learned Member for Harborough proposes that we should return to a joint taxation system, which would have a series of other ramifications and would open up a huge can of worms. Each member of the couple would have to have £140 a week, if we assume that to be the illustrative figure. The problem is that that would create a combined income of £280, which would be an over-provision if the hon. and learned Gentleman's test is the minimum income guarantee limit. If my previous arguments are correct and one has to take account of housing benefit, council tax benefit, long-term care for the elderly and so forth, £280 a week may not be sufficient. However, the Bill is silent on that point, which is part of the problem.
The hon. and learned Gentleman challenged me on the question of compulsion. He said that I was in favour of compulsion, and in a press release announcing the Bill, he stated that it would get rid of compulsion. I want to develop some of those arguments. The press release stated that at present it is compulsory to buy an annuity at 75 years of age with a pension pot that has been saved up over the contributory years, subject to a 25 per cent. tax-free lump sum. I stress that point: the hon. and learned Gentleman states that it is compulsory to buy an annuity at 75. However, that is not correct. It is compulsory to buy an annuity by the age of 75, but not at the age of 75. At present, one can buy an annuity from the age of 50—from 2010 that will rise to age 55—until the age of 75. There is flexibility during two decades as to when one buys one's annuity. The Bill compels everyone, whether they like it or not, to buy their annuity at the age of 65.
There is a reason for the choice of age 75. It is something called "mortality drag". Some people believe that it is better for a pensioner to wait to buy an annuity because annuity rates are higher for older people. That is a false conclusion, as that feature is only part of the story. Annuity providers set their rates by judging the life expectancy of their customers. That judgment determines how much capital they can afford to return each year along with interest to people who buy the annuities. Because older people are more likely to die, the provider can give a bigger capital boost to its older annuity customers. That is why annuity rates rise with age.
If someone decides to start taking their benefits from their pension savings, delays buying an annuity and draws income from their fund while part of the fund remains invested, after a period they could use the residual fund, with any investment growth, to buy an annuity at the rate for their age then. The residual fund needs a strong growth rate if it is to allow that to happen, and the optimum maximum age, because of mortality
drag—bearing in mind your constraints, Mr. Deputy Speaker, I shall not quote at length from the large amount of source material that I have to justify this—is 75. The critics of the present system, who have said—at length—that age 75 is an arbitrary figure, plucked out of thin air, simply have not studied the actuarial evidence that justifies it.Compulsion at age 65 is at the heart of the Bill for all but a wealthy few. I believe in flexibility. We need to work towards the flexible decade of retirement. People increasingly live longer and want to work beyond 65. We have received plenty of letters from people who object vehemently to being forced to retire at 65. They think that that is the worst sort of ageism, and I agree. In some jobs it may be appropriate to retire at 65, but in others it may not. By specifying 65, the Bill does not provide the flexibility that the modern age requires.
Being an hon. and learned Gentleman, the promoter of the Bill will be aware of the requirements of European Union law. I am not sure where he stands on the Eurosceptic front, but the Government are developing proposals to outlaw age discrimination in employment and vocational training by December 2006. The hon. and learned Gentleman has failed to address that serious point. The present system provides 20 years' flexibility; his provides none at all.
The Bill would remove people's current choice and instead force them to buy an index-linked annuity for each personal pension arrangement that they hold. That may not be what they want. It certainly may not be in their best interests. The opportunity, if a very small pension arrangement is held, of taking different annuity types at different times to spread risk would be removed. Using their open-market option for annuity purchase, people have the freedom to decide which type of annuity best suits their needs. The proposals in the Bill would take away that choice.
The Bill would also require the annuity to be bought by age 65, so that most people would have no option but to draw all their pension benefits from that age, whether retired or not, again limiting choice. That would introduce inconsistency and unfairness, as the requirement to annuitise by 65 applies only to personal pensions and not to retirement annuity contracts or defined contribution money purchase occupational pension schemes, which are not affected.
The age 65 rule also introduces a much larger issue. People who were saving in a personal pension scheme would not be able to contribute it to it past 65, and would have to take an annuity from that age. Those who have not made provision earlier in life or are still active and working would be allowed to continue in employment but not to save any of their earnings in a pension scheme for their future retirement unless they have a retirement annuity contract or are in an occupational pension scheme.
As my hon. Friend the Member for Don Valley (Caroline Flint) said, this is a typical Tory Bill—for the few, not the many. In fact, most people would be considerably disadvantaged by a requirement to use their fund to purchase an index-linked annuity. It would remove choice, hitting particularly those with small funds who might need to maximise their income. At present they can choose whether to have a higher-income flat-rate annuity or a lower starting income but
index-linked annuity, or they can utilise a number of with-profits or investment-linked annuities that are available on the market. The Bill would force everyone to buy an index-linked annuity whether or not it suited their preferences or needs.A major criticism of the Bill is that it benefits only rich people. We have been accused of bringing the politics of envy into the debate, but I am not bothered whether the Bill would benefit only rich people; my main concern is whether it is fair between the different income groups, and between the annuitant/taxpayer and the Exchequer. If the measure is genuinely revenue neutral, I am quite laid back about it—there is not a problem. My concern is whether the proposal could penalise the less well-off, which takes us back to the relationship between pension credits and the minimum guaranteed income.
I am also concerned about whether there is equity between the different income bands. I pray in aid the comments of the ABI, which were reported as long ago as 17 December 2001 in the magazine This is Money, under the headline "Insurers welcome pensions Bill":
- "The Association of British Insurers said that this was a contribution to the debate on the compulsory purchase of annuities. However, association spokeswoman Emma Grainge said: 'Our general fear is that most people will have insufficient savings to take advantage of it.'
She said that to get an income of more than £140 a week people would have to spend around £50,000 on any annuity, and many people's retirement funds were less than this."
However, if the yardstick—we do not know what it is—were an income equivalent to the full minimum income guarantee amount, the fund needed to buy an annuity income equivalent to its April 2003 level of £102.10 a week, or £5,309.20 a year, for a male aged 65 would be around £70,000. Assuming that people would take their maximum tax-free lump sums, the necessary fund size would be some £94,000. If the annuity were to be index-linked, a fund before lump sum of about £120,000 would be needed. If the minimum income required to be secured under the Bill were only the difference between the state retirement pension and the minimum income guarantee—£24.45 a week or £1,281.80 a year—the fund needed before the lump sum is taken in order to provide an index-linked annuity would be about £129,000. None of those examples, which come from the hon. and learned Gentleman's previous briefing materials, would necessarily suffice to protect the state as the minimum income guarantee is earnings linked and would increase at a faster rate than the minimum pension income.
Who would benefit from all this? Most of those retiring now have pension funds of far less than those amounts. ABI figures show that in 2001 the average fund used to purchase an annuity was about £25,000, and that around 45 per cent. were less than £10,000. Incidentally, that shows why pension credit is so important. Precisely those sort of people will benefit from the pension credit. The ABI's evidence shows that most people do not have more than one pension pot. The changes proposed in the Bill would therefore benefit only the wealthier sections of the population who are able to build up larger funds. The vast majority would remain compelled to use the whole of their pension fund
to buy an annuity and would gain nothing from the changes except the compulsion that removes the freedom of choice that they already have.
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