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7 Mar 2003 : Column 1103—continued
12.34 pm
Mr. Howard Flight (Arundel and South Downs): I declare an interest as a beneficiary of a money purchase pension scheme.
I congratulate my hon. and learned Friend the Member for Harborough (Mr. Garnier) on securing the Bill. The hon. Member for Hendon (Mr. Dismore) entirely missed the point. The purpose of the Bill and the intended purpose of the debate is to allow a constructive discussion about abolishing the obligation to buy an annuity.
The Government proposed that that be abolished. Paragraph 5 of the Green Paper on revenues clearly sets out the proposal that draw-down should continue beyond the age of 75 until death. The capital protected annuity that the Government allegedly support is a slightly different way of meeting part of people's objections to the present compulsion. The hon. Member for Hendon, who is obviously a keen authoritarian,
ignores the fact that people object to compulsion. For the past 10 years, I have campaigned on that issue of principle. It is a great pity that as a result of the hon. Gentleman's extreme long-windedness, the House has lost the opportunity today to discuss how we could sensibly pull together the strands that are in place.It is extraordinary that the hon. Gentleman endorsed the Inland Revenue's approval of a Gibraltar-based offshore annuity contract that costs 3.5 per cent. and effectively achieves the underlying objectives intended by abolishing the obligation to buy annuities. That is contrary to the objection on the part of the Government and the Financial Services Authority to over-expensive insurance wrappers. Furthermore, it is pathetic to support a product that is both expensive and outside the control of the UK authorities, even though it meets the objective, rather than considering how to address the underlying problem.
My hon. and learned Friend the Member for Harborough said that I would say a little about the Plymouth Brethren. For better or worse, the religious principles of the Brethren mean that, as a matter of conscience, they are not permitted to buy insurance products, and the failsafe alternative to the retirement income annuity referred to in the Bill would be a simple cash pot that would need to be substantially greater than the retirement income annuity, with rules to ensure that there would always be sufficient in it so that people could not blow the money and become dependent on the state.
Times have changed as the debate has gone on. The big issue is the pensions crisis, which has many aspects but is, above all, about millions more people ending up with money purchase pensions, the fact that fewer than four in 10 final salary schemes are now open to new members, and the failure of stakeholder pensions, which have achieved only 2 per cent. of the market of 5 million people earning between £10,000 and £20,000.
All that has been caused by several factors, principally the weakness and decline of corporate profitability under excessive taxation and regulatory costs. The UK market has underperformed America's by 50 per cent., substantially as the result of the Chancellor's famous £5 billion tax on pension schemes. There has been a dramatic fall in annuity pension yields.
When the subject was last debated, the Minister referred to the Inland Revenue paper on modernising annuities and in particular to graph 2, and argued that, although that showed that annuity yields had fallen from some 14 per cent. to 8.5 per cent. since 1986, in real terms, the pensions delivered for 30 years of money purchase pension saving had risen.
Given that I spent 30 years of my career in this territory, I found those figures strange, so I asked various questions of the Treasury. Although it had not been disclosed at the time, it turned out that those data were based on the extremely unlikely assumption that, over the last decade of a money purchase savings scheme, 10 per cent. per annum would have been moved into gilts, ensuring that the fund would be 100 per cent. invested in gilts on retirement. The truth of the matter is that very few people proceed in that way. The much more typical balance will be 50 per cent. gilts and 50 per cent. bonds.
Even on the basis of the assumption that was used, which should have been disclosed at the time, the pension in 2001 was the lowest in real terms since 1994
and 1990. However, in answer to my question about the position on the assumption of a balance of 50 per cent. gilts and 50 per cent. equities over the five years prior to retirement, I was told that the pension delivered in real terms was 20 per cent. lower than in any year since the Government table started in 1986, and was indeed the lowest for 40 years. With the greatest respect, overlooking the fact that the annuity pensions available from money purchase pensions have fallen dramatically is a major issue at a time when the majority of the population—some are privileged because they are in the public sector—are being forced into money purchase savings. Candidly, that is ridiculous.What is this all about? Why is there a view out there—the ABI survey subtly reflects this position, and as it represents annuity providers, it obviously wraps it in a particular way—that it is wrong for people to be forced to buy annuities? First, there is an objection to compulsion, but there is also an objection to the risk of loss when people die shortly after retirement. Of course, people can buy annuity contracts that cover such eventualities, but the overwhelming majority do not and buy a straight annuity. There is a fear that all their pension savings can quickly be lost if they should die shortly after retirement.
Mr. Bryant: Will the hon. Gentleman give way?
Mr. Flight: Labour Members used a great deal of the time of the House and I wish to finish my speech fairly briefly, so I am afraid that the answer is no; the hon. Gentleman has had his turn.
The second great fear is that people are being forced to buy annuities at or near the bottom of a long-term inflation and interest rate cycle. Nobody knows what the future will hold, but it is self-evident that people who bought annuities when even straight annuity yields were 14 per cent. or more bought them at a favourable time after which there was an era in which inflation was not as high as expected, so they did very well. Indeed, people were mainly happy to buy annuities for that reason. At present, people fear that in five or 10 years' time, or perhaps sooner, inflation will rise, the purchasing power of their annuity will contract and they will have bought a product at the bottom of the market. Indeed, until and unless the Government address that problem, there is a risk that, in 10 years' time, a whole generation will feel that they have been profoundly mis-sold to as a result of Government compulsion.
The straight annuity yield is down from 14 to 7.5 per cent. However, there is a better illustration of what faces someone who is retiring. Consider a man with a wife of 62, who retires at 65, and consider that he wants a pension that will provide 50 per cent. for his wife and a degree of escalation of 3 per cent. for five years. In 1990, £100,000 bought an annuity pension of £12,500, but now it would only buy one of £4,500. That illustrates the magnitude of the increased cost of annuities and of the long-term economic cycle risk.
We must take into account the rising tide of money purchase pension savings. The amount going into annuities is already around £12 billion each year and it is growing compound at 20 per cent. As I have already said, the final salary schemes have closed in a rush after the Chancellor's £5 billion pension tax. More and more
people will have money purchase pensions and it will be essential for us to work out the best way for money purchase pension savings to be converted into pensions.There was a concern that the yields on gilts that underlay annuity investments were artificially low; there was a rising tide of money but the supply of new gilts was relatively frozen. However, the Chancellor's wrong estimates, and the potentially excessive borrowing that will now be required, look as though they will solve that problem. There may end up being an over-supply in the volume of gilts. The return on an annuity reflects gilt yields as well as longevity. Real gilt yields are in essence about the supply and demand of gilts.
The other powerful argument for addressing this issue is that the Government and the country want much greater private sector pension saving. We remember the famous objective of moving from 40 per cent. private to 60 per cent. private, and not moving in the reverse direction—although that is what we are now doing.
Fifteen years ago, when Canada effectively abolished the obligation to buy an annuity on a pension product that is very close to the stakeholder pension, and when it put in a retirement income fund that is essentially similar to the one proposed in the Bill, a product that had had no support suddenly became extremely popular. A total of 40 per cent. of Canada's population now save through the equivalent of a stakeholder pension. In Canada, it was found that the main psychological problem—until the obligation to buy an annuity was abolished—was that people had a fear and dislike of the perceived risk of losing all that they had saved in their pension vehicle if they were to die early.
South Africa, as a result of the miners' union quite rightly having had no truck with the apartheid Government, has now had for 25 years a clean and straightforward money purchase saving regime with no obligation whatever to buy annuities. That has had substantial success in delivering capital for people who are retiring—in particular, from the mining industry—to allow them to start their own businesses.
The Government's arguments against a radical approach have been that such an approach would only benefit the better-off. The underlying case is that, if anything benefits only the better-off, it should not be considered. I want to illustrate why I consider that wrong thinking. Three constituents of mine had a self-administered pension scheme that went with the business for which they had worked. The scheme had invested in all sorts of local businesses. It was extremely successful as a venture capital investor and had accumulated far more than would ever be needed for those people's pensions. They wrote to me saying that it was wicked that they had to abandon supporting small businesses simply because they were 75. They have to sell the scheme, put the money into an annuity and cannot do as much as they did in the past. That example shows why forcing people is wrong.
The Government's second argument is that the Bill would encourage too much pensions saving, but their first problem is too little pensions saving. They could not even get the figures for it right. A universally applicable exit tax on capital that leaves a pension fund renders anxieties about avoidance and excessive pensions saving by the better-off false. People's natural behaviour shows that they tend to save what they can afford for pensions.
If so-called clever schemes that can use pensions saving to avoid tax are outlawed, the motivation for avoidance goes away.The key development in the Green Paper is the Government's acceptance of the principle of the argument. I have already referred to their proposal that people should be able to continue to engage in draw-down schemes after the age of 75. I believe that the Government also accept capital-protected annuities—an annuity product that allows people's estates to get back the capital if they die early.
For some extraordinary reason, the Government's position on both those matters is to require that any capital that remains after a person has reached 75 should go to the pension provider and not the beneficiary's estate. I do not understand why it can go to the estate before but not after the age of 75. Subject to a universally applicable pension exit tax, which is currently 35 per cent.—inheritance tax is paid on top of that—why is there anything wrong with allowing the residual capital to go to the estate?
As the industry pointed out, the proposals in the Green Paper are almost unintelligible. They say that the capital should revert to the provider. Can the trustee of a statement of investment, who is the provider, pay the tax and pay on the proceeds to the beneficiary's estate? That is not stated. The pension actuaries to whom I have spoken consulted the individual who wrote the Green Paper, and even he does not appear to know the precise intention.
Again, we are considering an issue of principle. There is nothing wrong with people saving for pensions and, subject to paying a fair amount of tax, for any residue to pass to their estates, which suffer inheritance tax. For some reason, the Government take a dogmatic view that, beyond the age of 75, it is morally wrong for any pension savings, even after adequate tax, to pass to someone's heirs.
The purpose of the Bill and the debate is to tell the Government to get a move on and sort out their proposals. They have introduced a bit here and a bit there, but they do not fit together or work. If the Government end the obligation to buy an annuity on draw-down and allow people to get capital back through annuity contracts, there is no logic for having one rule up to the age of 75 and another afterwards. There would also be no problem involved in tightening the tax regime to ensure full and fair taxation of any capital that exits from a pension scheme.
It is a great pity that the House has not had the opportunity today constructively to debate the issues that the Bill exposes. I hope, therefore, that it will go into Committee to enable that to be done.
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