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Malcolm Wicks: I have said that the scheme will be up and running in the spring.
Mr. Miller: I apologise to my hon. Friend—I was not clear enough. I was asking about the earliest date from which pension schemes can be eligible to claim from the scheme.
Malcolm Wicks: We are engaged in a secondary exercise to collect precise data from schemes. Although hon. Members have particular interests in certain schemes, I know that my hon. Friend will appreciate that we are dealing with perhaps 250 schemes and that the data-gathering exercise is complex. He will therefore understand that I am not yet in a position to answer his question.
Given the interest in this matter, we felt it important to make the announcements last week because it had come to our attention, from a number of people within the pensions industry, that some pension scheme trustees were unaware of how the Bill's provisions would operate. We felt it essential to confirm the position to enable trustees to make more informed decisions about the future of their pension schemes. It is very much that concern that enabled us to rethink the advantages and disadvantages. We thought that there were advantages in the announcements, which is why we were able to proceed in that direction.
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I appreciate that there is a good number of amendments before us and that we have relatively little time to deal with them. I am happy to have been sidetracked—I do not mean that pejoratively—into these important issues. With those remarks and with the interventions that have been made, I shall draw my remarks to a conclusion.
Mr. Webb: We are dealing with a large number of amendments and I want to refer only to those that we have been talking about that relate to the FAS and the scope of the PPF.
One of my concerns is that the Government are not getting best value for money out of the wind-up of the schemes. Schemes are winding up now and the assets are being used to buy deferred annuities. People will then be left with a substantial shortfall, some of which will be made up by the FSA scheme. I plead with the Minister, in the seconds that we have available, to look again at the issue of allowing schemes to close through poor value deferred annuities, thereby leaving the FSA scheme having to make up a big gap.
Would it not be better to take those assets as a going concern not into the PPF, but into some form in which they could be carried on? That would mean that there would be less of a burden on the FSA scheme, which is already overburdened. There is a danger that it will be even more overburdened by the announcement that the Minister has just made.
It being two hours after the commencement of proceedings, Mr. Deputy Speaker put the Question already proposed from the Chair, pursuant to Order [this day].
Mr. Deputy Speaker then proceeded to put the remaining Questions required to be put at that hour.
Lords amendment No. 283, as amended, agreed to.
Lords amendments Nos. 96 to 282, 284 to 297 and 299 to 358 agreed to.
Malcolm Wicks: I beg to move, That this House disagrees with the Lords in the said amendment.
I obviously know all the amendments off by heart, but I had briefly forgotten the significance of Lords amendment No. 359, although it is of considerable interest to the House. Mr. Speaker has brought it to the attention of the House that the amendment involves the question of Commons privilege. It relates to financial matters where it is the role of the Lords to agree not to initiate or to amend.
The effect of the amendment is to alter the taxation arrangements made by the Commons: it allows annuities not to be paid where they might otherwise be paid; it extends tax relief by allowing more people in some circumstances to pass their tax privileged pension pot on to their survivors tax-free; it allows in some circumstances for contributions to be made to pension schemes beyond the age of 75; it reduces the instances when part of the tax relief given to contributions is
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recouped when an annuity is paid, and so on. The House can waive its privilege but I think that it is inappropriate to do so.
I shall explain the proposed amendment and its background further. It is similar in intent to one that we in this House have previously rejected in Committee. It is also a topic that has been endlessly debated in this House as a result of a number of private Members' Bills and during the progress of this year's Finance Bill.
The present rules on annuities mean that members of personal pensions schemes and small defined contribution occupational schemes must purchase an annuity with their pension fund by the time that they reach the age of 75. Members of occupational pension schemes are required to receive a pension, rather than purchase an annuity at the age of 75.
4.15 pm
The intention behind these rules is to ensure that pension pots are used to provide a stream of income in retirement. Personal pension schemes will purchase an annuity and occupational pension schemes usually, but not always, provide a pension from the scheme rather than for the purchase of an annuity. Members of pension schemes benefit from more favourable tax treatment than other savers. Tax relief is provided at the pension scheme member's marginal income tax rate so that, in effect, he saves the gross amount and not the net amount of income into his pension pot.
Sir John Butterfill: Will the Minister give way?
Malcolm Wicks: Yes, but I want to make some progress. The House needs to hear the whole story.
Sir John Butterfill: I am sure that the Minister did not wish in any way to mislead the House. That is why I am grateful that he has taken my intervention. There are other savings schemes that are equally tax privileged. I am thinking about enterprise investment schemes and venture capital trusts. There are a number of other schemes that involve quite significant levels of tax relief in terms of savings schemes that do not have the lock-up that pensions do. I do not think that the Minister would be completely accurate in saying that these reliefs were not available to other savings schemes that are open to the public.
Malcolm Wicks: Let me make some progress. I think that I will be able to cover some of those issues.
The contributions grow in a tax-favoured environment when invested. There is also the tax-free lump sum on vesting a pension, which adds to the favourable treatment. That can be up to 25 per cent. of the value of the fund and is recognition by the Government that people need encouragement to lock away their money for a considerable period until they are ready to draw retirement benefits.
Those tax reliefs are then only recovered when the pension fund is converted into an income stream either by taking a pension or purchasing the annuity. That can happen as early as age 50 under present rules but must happen once the member reaches the age of 75. I recognise that there will be a debate about the
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cost-benefit tax analysis of that against other savings vehicles but our argument would be that this is a tax-privileged area for savings for retirement.
Mr. Frank Field (Birkenhead) (Lab): Will my hon. Friend give way now that he has interrupted himself?
Malcolm Wicks: I welcome my right hon. Friend to our proceedings and I am happy to give way.
Mr. Field: There is probably no one in the House who is arguing that people should be able to unlock their funds before they are retired, and having done so then make a claim on welfare. That is surely the issue that we are addressing in the Lords amendment.
Malcolm Wicks: Indeed. If I come to the end of my script and give a better balance, I think that my right hon. Friend will be able to stay until the end.
The amendment from another place would remove the requirement on members of personal pension schemes and some occupational schemes to purchase an annuity—and thereby secure an income stream—by the age of 75. However, there is a proviso. That is that only those who can "demonstrate" that their existing resources mean that they can avoid any reliance on means-tested benefits are allowed the privilege of not having to purchase an annuity. At any one time, and for any one individual, it is quite difficult to say what level of resources might be required to avoid entitlement to the income-related benefits. However, I can assure the House that the amounts involved are far in excess of the amounts that most people saving into personal pension schemes have in their pension funds. Furthermore, to ensure that the individual continues to avoid entitlement to the income-related benefits the annuity would have to be index-linked. There are therefore several ironies. First, for the vast majority of annuity purchasers, the Lords amendment would create a far more restrictive environment than currently exists and, secondly, it would undo the liberalisation that we are seeking to achieve on index-linking elsewhere in the Bill. It will benefit the top 3 or 4 per cent. of annuity savers and in particular the 1 per cent. with pension funds in excess of £250,000, should they attain the age of 75 without purchasing an annuity.
Independent research shows that most people buy their annuities when they retire and even those who do not do so still purchase their annuity well before the age of 75. The paper by the Association of British Insurers entitled, "Annuities—The Consumer Experience" shows that, of people who retired in the past two to three years and purchased an annuity, 95 per cent. did so before the age of 70. The ceiling of 75 for annuity purchase is clearly not a major problem for the vast majority of annuitants. It certainly is not for my constituents nor, I suspect, those of my right hon. Friend the Member for Birkenhead (Mr. Field). The Lords amendment would certainly not benefit the vast majority of pension savers, because 80 per cent of pension pots are worth less than £30,000—a sum significantly and substantially less than the funding needed to be above income-related benefit.
The Government recognise the underlying issues of greater longevity and demographic shifts in this country and, indeed, across the developed world, both of which
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have profound implications for the way in which our pensions policies are put into effect. The Government are taking action through the Bill and in other ways to meet those and other challenges. We set up the Pensions Commission under Adair Turner to review the regime for UK private pensions and long-term savings. Its first report, published last month, provides a mine of detailed and valuable information on the demographic challenges that we face. It is a singular fact that we are debating whether to preserve one of the few elements of compulsion in our pensions structure, but the Pensions Commission was set up specifically to look at the effectiveness of the voluntary approach to pensions and whether there is a case to move to greater compulsion. The commission is considering whether the level of compulsion within the UK pension system is appropriate. For people investing in a pension, the requirement to purchase an annuity at 75 with tax-privileged saving is a compulsory element in the existing system. Once the commission has reported on the wider issues relating to compulsory saving, the Government will wish to consider key issues, including annuitisation at the age of 75, with particular care and urgency, and decide whether they remain fit for the purpose.
It should be clear by now that the Lords amendment is not appropriate, although we acknowledge the evident interest shown by the other place. The amendment would specifically benefit people who do not need to buy an annuity while requiring the less well-off to subsidise them through income taxation.
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