Sir Malcolm Rifkind: Yes, I understand that it would. I do not see that that would be a problem. Depending on the size of one's fund, of course, the wisdom of investing in property would have to be taken into account, and for many people it would not be a serious option even if it were a theoretical one. There are collective vehicles, however, for those who wish to go down that route.
Mr. Timms: Is the right hon. and learned Gentleman aware of the concerns that, under the Canadian arrangements, there is a danger of people running out of money, particularly if they live until their late 80s or 90s? Does he have a sense of how large a pension pot people would need for them safely to go down the route that he advocates?
Sir Malcolm Rifkind: Some concerns may have been expressed, but I am not aware of them. Certainly, the Canadian Government have no intention of withdrawing the schemeit has been hugely successful, and almost half the pensioners of Canada use the arrangement that I propose. In addition, the Minister can be entirely assured because the amount that people will be permitted to withdraw from that fund for any purpose other than their retirement income will ultimately be controlled by the Government. They will determine what level of benefits are available to the public and the rate of entitlement to them, with actuarial considerations based on longevity as to what is a safe sum to be withdrawn in order not to run that risk. In 20 years, the problem has not emerged in Canadait might be discussed at a theoretical level, but in practice it has not proved to be a problem.
Retirement income funds, again unlike annuities, allow individuals the flexibility to decide to use a larger proportion of their money in the earlier years of their retirement, on their leisure or on financially helping their children, without the risk that they would become dependent on state benefits by excessive erosion of their capital. The removal of compulsory annuitisation as the
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only retirement income option at 75 therefore allows individuals to have greater control over their investments and provides for the possibility of stronger investment growth in their retirement income funds and a variable level of income during retirement. The competition of such funds against the monopoly of insurance companies currently offering annuities might even encourage a more vibrant market and better value product.
One of the guiding principles behind my introduction to the House of this fund is, as I have said, choice. The other is that individuals should not become a burden on other taxpayers on retirement. Tax relief on pension savings recognises the benefit to society of encouraging savings to ensure that people do not fall into that category. The Government have previously objected to ending the compulsory annuity rule by emphasising that tax relief had been given for pension purposes and not for the accumulation of capital savings. But they have already undermined their own argument by allowing the withdrawal, tax free and without the need to repay the tax relief obtained, of a lump sum currently valued at 25 per cent. of the fund.
The conditions within the Bill, covered in clause 9, are designed to show our commitment to ensuring that those who choose to withdraw from the fund a lump sum or higher income than obtainable through an annuity do not then become eligible to receive pension credit. I refer specifically to the minimum retirement income, as defined in clause 11 of the Bill. That minimum retirement income will be set each year at a level equal to the Government's minimum income guarantee or the level at which an individual will find himself eligible to receive pension credit as a top-up of his total income. That total income includes state pension and other pension schemes or sources of regular income as calculated under the State Pension Credit Act 2002.
That would mean that where an individual's total income is higher than the minimum retirement income and assessed to be so over his lifetime, he can choose to withdraw more fully from his fund, leaving only what is needed to maintain him at or above the minimum retirement income, or to draw a low amount. That could lead to a nil balance left or a nil income taken. Conversely, where his total income is below that of the minimum retirement income, he will be obliged to leave within the fund sufficient funds to meet any shortfall over his lifetime and only withdraw to that limit. It is not my intention to provide for someone to withdraw all their retirement funds and later throw themselves on the mercy or charity of the state or other taxpayers.
Sir Malcolm Rifkind:
First, that would depend on whether they had other sources of income. Most peoplenot all, by any meanshave the state pension, and they might have an occupational pension, second state pension and so on. To meet the minimum retirement income, therefore, the retirement income fund will have to be maintained at the level needed to fill the gap between the income that they have from other confirmed sources of income and that which will avoid
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their falling into benefit. It will vary from individual to individual, but the ultimate parameters will be determined by the Treasury and the Government. For that reason, the Government's interest will be entirely secure.
Clause 10 covers the previously mentioned principle of allowing a retirement income fund to be taken either before or at age 75, in addition or as an alternative to an annuity or alternatively secured pension.
To promote fairness and a better deal for consumers, I have also addressed the need to make provision for people who purchase value-protected annuities, enabling them to have capital returned to their spouses or other beneficiaries when they die after age 75. At the moment, under the Government's rules, the return of capital, quite illogically and unfairly, is allowed if people die before age 75. If they die a day before they reach 75, their relatives get a proportion of the unused capital, whereas if they die a day after 75, they do not get a penny. That is a completely arbitrary rule, totally unfair and unjustified, and ought to be removed.
Clause 12, in part 2, covers the removal of the age limit for annuity protection lump sum death benefit. When people buy an annuity, they are buying an insurance policy against living longer than their funds allow. Annuities are sold by insurers who cope with the risk of paying out for longer than is profitable by retaining any remaining capital after an annuitant's death. Therefore, if an annuitant dies soon after purchase, the annuity provider stands to keep a large amount of capital. Many consumers feel that that amount of risk represents a bad deal.
From April 2006, as I have said, people can pay extra for value protection on their annuities, so if they die within a protected period, the remaining capital can be passed on in their wills, minus a tax charge. Under the Government's current proposals, that return is available only to those who die before the age of 75. I believe that the Government, like me, are committed to fairness regardless of age, and believe in helping consumers to get a better deal. This is the sharp end of equal opportunity and anti-age discrimination policies, and it is crucial if we are to persuade people to save more for retirement. When people know that the retirement income market is fair and that products represent good value, they will be more likely to save in the first place.
Part 3 covers the promotion of personal pension schemes, and it will not take more than a moment to explain. There is broad concern about the problems that are caused when people collect a large number of small pension pots. That has already been mentioned today. It is often known as high proliferation. When people stop paying into their main pension arrangements after a short period, it is known as low persistency. The problems largely stem from people's moving between employers, or in and out of employment. As a result, large numbers of people retire with private pension savings that are over-complicated, numerous and inadequate at the same time.
A recent survey by the Association of British Insurers found that more than 40 per cent. of people over the age of 30 have more than one personal pension, with some having more than five. ABI figures show that there were
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nearly 23 million personal pensions in existence in 2002, although Her Majesty's Revenue and Customs suggests that only about around 10 million were active and receiving tax relief.
A key problem is the fact that past practices and current stakeholder pension designation requirements ask employers to deduct pension contributions at source, but to pay the contributions into a single designated scheme. According to recent research, only 15 per cent. of people in receipt of an employer's pension contribution are able to choose where it is paid. That encourages low persistency, as when people move jobs they are likely to have to end the contributions to their former employer's pension schemes and start paying into a new alternative scheme. Allowing people to go on paying into the same pension after moving employers, and allowing easy consolidation of different pension arrangements, would not only benefit people who move jobs, but help those who return to paid work after a break and who already have an individual pension arrangement.
My Bill proposes reforms designed to make it easier for consumers to start paying and continue to pay into the same pension scheme, regardless of whether they move jobs. That will be achieved by allowing many more employees to have their employers' pension contributions paid directly into a pension scheme of the employees' choice. My reforms will increase radically the number of employers who offer the facility of paying pension contributions directly into a pension scheme of each employee's choice. The change would be implemented by asking those employers who have to designate a stakeholder pension to offer a payroll deduction for contributions to any stakeholder or other personal pension scheme, including SaRAs.
The Bill would also reduce the cost of running pension schemes, because providers would have fewer small funds to administer. For example, if people tended to take their pensions with them from job to job, there would be less need to pay initial commission to cover the sale of a new product, with a resulting impact on charges for consumers. The end result will be fewer, bigger pension funds which are easier for consumers to understand, which cost less to administer, and which provide higher incomes in retirement.
I apologise for detaining the House for so long, but I was of course pleased to respond to so many interventions. Let me finally say this. The Government have said on numerous occasions over the past few months that they hope it will be possible to achieve a degree of national consensus on savings and pensions so that future generations of savers and pensioners can be given certainty and security. We have told the Government that we understand that aspiration, but consensus requires the Government not only to speak but occasionally to listen, and to be prepared to accept sensible, constructive proposals that may come from other sources. It would not be acceptable for the Government, either explicitly or implicitly, to reject proposals simply because they were not invented here.
I hope that the Government will consider my proposals on their merits. I have no doubt that some changes will be needed in Committee to much of the detail. That is true of even the Government's legislation from time to time, so that in itself could not be an objection. I do not think that anything in the Bill
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conflicts with any of the objectives of Government policy. We all recognise that a savings crisis exists. The schemes in the Bill are not theoretical: they are not "unthought" ideas. They have worked in practice, particularly in Canada, for the last 20 years.
The Bill has bipartisan support. I have already mentioned the right hon. Member for Birkenhead, who carries a good deal of weight in the House when it comes to these matters. I hope that the Minister will be able to give a positive response, and that the House as a whole will consider the Bill worthy of its support.