Rights of Savers Bill

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The Chairman: With this it will be convenient to discuss amendment No. 27, in page 9, line 38, at end insert—

    ‘(9C)   Section 109(1)(b) of the Employment Rights Act 1996 (c. 18) shall not apply to the holder of a SaRA.’.

John Penrose: The amendments are motivated mainly by the recently published Turner report. They seek to allow people to specify the time at which they wish to begin their retirement. At any point after 60, someone should be able to say that they wish to convert their SaRA into a retirement income fund. Importantly, however, that date should not be specified. They may wish to convert at 61, 71 or, indeed, 81, depending on their personal circumstances.

There seems to be unanimity throughout the House about allowing people to choose their own date of retirement and to choose a later date if they want to. If someone chooses to retire at 71, it is in everybody’s interests to allow them to continue working until 71. Under age discrimination laws, companies can fire somebody without any come back when they reach 65. The amendments seek to remove that exemption, so if someone has not opted to retire or had not converted their SaRA to a retirement income fund, they could not be fired by their employer simply on grounds of age.

Sir Malcolm Rifkind: Yet again, my hon. Friend has put forward some changes to the Bill which, at first inspection, seem to benefit the way in which the retirement income fund would operate. Between now and Report, we shall have time to consider the wider implications and, if necessary, table any further amendments.

Amendment agreed to.

Amendment made: No. 27, in page 9, line 38, at end insert—

    ‘(9C)   Section 109(1)(b) of the Employment Rights Act 1996 (c. 18) shall not apply to the holder of a SaRA.’.—[John Penrose.]

Question proposed, That the clause, as amended, stand part of the Bill.

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Sir Malcolm Rifkind: The clause is the first of part 2 and relates to the proposed retirement income funds. The provision is a response to remarks made about previous private Members’ Bills and previous attempts to remove the compulsory annuitisation provisions.

In the past, the Government have made their objections clear, and we have sought to endorse at least one aspect of their concerns. The concern expressed has been that in trying to meet the wishes and to provide flexibility for those who do not wish to take out annuities up to the age of 75, we might be introducing new obligations for the higher number of people who have happily taken annuities and are likely to be willing to wish to continue to do so over the years to come. It is no part of the Bill’s purpose to impose obligations on anyone. We seek maximum flexibility, and the retirement income fund is a way of meeting that need.

The provision once again draws on north American experience. That is important, because when introducing a new provision in a complex area, it is reassuring to know that the proposal has worked satisfactorily for a good number of years in another western, highly developed country with a developed pension structure. The Committee can be confident that the proposals would meet the need.

Clause 9 would amend the Finance Act 2004 to allow the creation of retirement income funds. They could be operated only by or on behalf of the person authorised to operate a registered pension scheme, and only investments approved by the Inland Revenue could be made by such a fund. It would have to meet certain conditions. The funds held should be invested and withdrawn when the scheme member so requests, and an authorised provider must set an annual maximum and minimum withdrawal allowance for each member, based on an assessment of each member’s life expectancy. A member’s withdrawals from the fund in any one year should not exceed that maximum allowance.

Other additional conditions have been included to prevent someone who has a fund from falling back on means-tested benefits at any point in the future, which has been one of the Government’s prime concerns in recent times. The annual maximum withdrawal allowance must be set so that no member’s total future income falls below the minimum retirement income level and so that each person’s total income is at least equivalent to the MRI. If a member chooses not declare his total annual income, he must withdraw funds equivalent to the MRI level or his annual minimum withdrawal allowance, whichever is lower.

Finally, additional conditions provide for situations in which individuals have small retirement income funds, which means that they will need to claim means-tested benefits in the future if they live as long as expected. It should be noted that some people with small annuities can also find themselves in need of means-tested benefits, either when there are insufficient funds to enable the annual minimum withdrawal allowance to be set so that a member’s total income is at least equivalent to the MRI level, in which case the allowance should be set at the highest
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level consistent with the member’s assessed life expectancy, or if a member’s total annual income, including his maximum withdrawal allowance, is lower than the MRI level, in which case the maximum and minimum level allowances must be identical.

The provisions meet the Government’s concern about avoiding any unnecessary dependence on state benefits. In response to a point made by the Minister on Second Reading, I emphasise that he cannot argue that the existing compulsory annuitisation always prevents dependency on benefits. There are circumstances in which, even with an annuity, some benefits are required and persons entitled to them. In the same way, that would be the consequence of these proposals. However, they would provide the flexibility that is an important objective.

I hope that the Minister, who is part of a Government who have consistently opposed such measures, will take account of the Turner commission’s views on this important area. The commission has recommended first that the age for first possible and last possible annuitisation should rise over time in line with life expectancy. In other words, the Government should not be committed to the 75-year requirement. Turner also urges a review of the case for a cash limit on the amount that individuals are required to annuitise at any age, so that a wider market for drawdown products can develop.

Turner is, I think, recognising that the Government’s position is increasingly unsustainable. The clause is a constructive way of providing an alternative, and I commend it to the Committee.

Mr. Waterson: We entirely support the proposals, which are very much in line with—indeed, a refinement of—provisions in a series of private Members’ Bills presented by Conservative Back Benchers. They are a recognition that, in this day and age, there is a feeling that compulsory annuitisation, up to the age of 75, is outdated and unfair, and often brings very limited returns. We are almost the only developed country where it is still a legal requirement.

With all the conditions that my right hon. and learned Friend has explained in detail about ensuring that the Treasury will not be losers the clause seems to us to be the way forward. I believe that the Government see that, because they try constantly by spin to show that that their alternative secured pensions proposals achieve just the same. Of course, they do not. We need a clear, coherent proposal, like that in the clause, which sweeps away the obligation to annuitise at a certain age and gives people the flexibility that is so important. I hope that such a proposal will, in the longer run, play its part in encouraging people back into savings, which we badly need to do if we are to begin to deal with the pensions crisis.

Mr. Timms: I have just a couple of observations on the retirement income fund. It is another interesting idea and another reason for my welcoming our debate on the Bill, which is drawing, as the right hon. and
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learned Member for Kensington and Chelsea said, on Canadian experience. However, a concern that I raised on Second Reading was the danger that people would run out of money late in their lives. In the debate I drew attention to the advice issued by the Canadian Bankers Association:

    “If you take out too much, too soon, you may outlive your RIF and may be short of funds.”

The prospect of that happening to someone in their mid-90s with no dependants is very alarming, and we should create safeguards against it.

I think that the right hon. Gentleman suggested on Second Reading that the risk would be theoretical, but that is not so. In Canada, it is a significant risk. I have had the opportunity, since Second Reading, to read the interesting paper by Professor Milevsky of the Fields institute in Toronto, called “How to Completely Avoid Outliving Your Money”. He goes into the issue at some length and concludes that what we need are annuities. There are real difficulties about the idea, which require further thought, beyond the provisions in the Bill.

I should also point out that quite a few changes are being introduced, such as the change to the trivial commutation limit; the change in the rules on income withdrawal from A-day; the innovations of limited period annuities and value-protected annuities whose attractions Professor Milevsky particularly celebrates; and, alternatively, secured pensions, which the hon. Member for Eastbourne mentioned. The right hon. Gentleman’s idea is interesting, but involves some serious difficulties that require further thought.

Sir Malcolm Rifkind: The Minister has put me at a disadvantage. I must confess that I am not familiar with the views of Professor Milevsky, and the Minister did not think to give me advance notice that that learned professor’s views would be almost the only argument that the Government could advance against the clause. The Minister has argued that some people might at a very elderly age run out of necessary funds. He is correct, of course, but that applies under the existing arrangements in the sense that even with an annuity, people might find themselves dependent on benefits because the annuity is very small. As the Minister knows, the vast majority of people will increasingly have several sources of income in their retirement. They will have some element of the state pension and an occupational or other pension, so they will not be entirely dependent on the retirement income fund in order to meet the minimum income guarantee.

My final point is that the fund is only an option available to people. No one will be required to go into a retirement income fund. If they wish to have an annuity, they will have the same rights as they do currently to continue doing so. On that basis, I commend the clause to the Committee.

Question put and agreed to.

Clause 9, as amended, ordered to stand part of the Bill.

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Clause 10

Amendment of the pension rules

Question proposed, That the clause stand part of the Bill.

Sir Malcolm Rifkind: Clause 10 amends the Finance Act 2004 to allow retired people both prior to and after the age of 75 to take a retirement income fund as an alternative to an annuity. Unlike previous Conservative private Members’ Bills, it would mean that compulsory purchase at the age of 75 is not abolished. Instead, the Bill extends the choice of products available from solely annuities at this point. It also places no obligation on anyone to take up a retirement income fund or take the minimum retirement income from it. I commend the clause to the Committee.

Question put and agreed to.

Clause 10 ordered to stand part of the Bill.

Clause 11

Minimum retirement income

Question proposed, That the clause stand part of the Bill.

Sir Malcolm Rifkind: Clause 11 sets out how the minimum retirement income will be calculated. The level will be determined annually by the Chancellor of the Exchequer by order, on or before 31 January. It will be set at the level of the minimum income guarantee as set out in the State Pension Credit Act 2002. That is the level at which basic pension credit becomes payable. I commend the clause to the Committee.

Question put and agreed to.

Clause 11 ordered to stand part of the Bill.

Clause 12

Removal of age limit for annuity protection lump sum death benefit

Question proposed, That the clause stand part of the Bill.

Sir Malcolm Rifkind: Clause 12 specifically addresses the iniquity of the age limit rule in capital protection of annuities. One of the principal criticisms people have made of conventional annuities is that in the event of the annuitant’s death, the remaining capital from the pension fund is lost. From April 2006, value-protected annuities will be available, which enable the return of annuitants’ original capital minus the annuity payments received and minus a tax charge when they die. However, the rules state that the annuitant has to die before reaching the age of 75 in order to receive a return of capital. That is clearly a totally arbitrary approach.

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The Association of British Insurers has found that 47 per cent. of annuitants would be interested in the option of a value-protected annuity and would be willing to give up a reasonable amount of income for one. In fact, a fifth of those whom the ABI surveyed were prepared to give up to 20 per cent. of their annuity income in order to be able to pass on something after their death. I have referred to the conclusion of the Turner report that the age of 75 has become rather an arbitrary one that should not be insisted upon by the Government, and I commend the clause to the Committee.

Question put and agreed to.

Clause 12 ordered to stand part of the Bill.

Clause 13

Duty of employers to facilitate access to personal pension schemes

Question proposed, That the clause stand part of the Bill.

Sir Malcolm Rifkind: The clause is in part 3, which is the final substantive part of the Bill. It is intended to address the worrying trend of pension proliferation, whereby many savers have large numbers of often very small private pensions. That situation is caused by changes of circumstances, such as new jobs or, in the case of women, career breaks. It is important to deal with that. Stakeholder pensions have made some progress in that sphere, but only by allowing transfers to other stakeholder pensions. The clause places an obligation on those employers who have to designate a stakeholder pension to offer payroll deduction for contributions into any stakeholder or other personal pension scheme, and it is intended that that should also apply to savings and retirement accounts. I commend the clause to the Committee.

Question put and agreed to.

Clause 13 ordered to stand part of the Bill.

Clause 14

Consequential amendments and repeals

Question proposed, That the clause stand part of the Bill.

Sir Malcolm Rifkind: Such is the Government’s enthusiasm for the Bill in the latter part of the Committee that I am having difficulty keeping up with the clauses that we are considering. I commend this one to the Committee.

Question put and agreed to.

Clause 14 ordered to stand part of the Bill.

Clauses 15 to 17 ordered to stand part of the Bill.

Schedules 1 and 2 agreed to.

Question proposed, That the Chairman do report the Bill, as amended, to the House.

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Sir Malcolm Rifkind: Partly due to your excellent chairmanship, Mr. Benton, partly due to the inherent merits of the Bill, and partly due to the late conversion of the Minister to those merits, we have not only been able to approval all the clauses, but have done so in exemplary time, which may indicate that we are moving rapidly towards the great national consensus that the Minister was seeking. Some are born with consensus, some achieve it and others have it thrust upon them. The Minister appears to be an example of the third category as far as today’s proceedings are concerned. I suspect that he did not entirely anticipate that every clause would be approved by the Committee and that half of them would be approved with his
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participation. It just goes to show the merit of mature debate in these matters. Even the Government, whom I have often felt the need to criticise, are not entirely unresponsive when the arguments are put in a clear and excellent fashion.

It is good that the Bill will go through to Report, although I can only speculate as to when that might happen and the Bill’s ultimate fate. However, I commend the Bill to the Committee.

Question put and agreed to.

Bill, as amended, to be reported.

Committee rose at Seven minutes to Four o’clock.

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Prepared 19 December 2005