 House of Commons |
Session 2006 - 07 Publications on the internet General Committee Debates Pensions |
Pensions Bill |
The Committee consisted of the following Members:Alan
Sandall, Committee
Clerk
†
attended the Committee
Public Bill CommitteeThursday 8 February 2007
(Morning)
[David Taylor in the Chair]Pensions Bill9.10
am
Further written evidence to be reported to the House for publicationPEN 2
Association of British
Insurers
New Clause 8Retirement
Income Funds
‘(1) The Finance
Act 2004 (c. 12) is amended as
follows.
(2) After section 152
(meaning of “arrangement”),
insert—
“152A
Meaning of ‘Retirement Income
Fund’
(1) In this Part,
a Retirement Income Fund means a scheme for the reinvestment of savings
in retirement which—
(a)
is operated by or on behalf of a person authorised to operate a
registered pension scheme,
(b)
is a scheme in which investments are approved by the Inland Revenue,
and
(c) meets the conditions
set out in subsections (2) to
(9).
(2) The first condition is
that, subject to the other conditions in this section, funds held in
the Retirement Income Fund may be invested and withdrawn by the member
as and when he elects.
(3) The
second condition is that an authorised Retirement Income Fund provider
must set an annual maximum withdrawal allowance for each member, based
on an assessment of each member’s life expectancy, and a
member’s withdrawals from the fund in any one year must not
exceed that allowance.
(4) The
third condition is that, in setting annual maximum withdrawal
allowances, an authorised provider must ensure that no member’s
total future annual income falls below the Minimum Retirement Income
level (as set under section [Minimum Retirement Income] of the Pensions
Act 2007) except in the circumstances provided for in the sixth
condition.
(5) The fourth
condition is that an authorised provider must set an annual minimum
withdrawal allowance so that each member’s total income is at
least equivalent to the Minimum Retirement Income level, except in the
circumstances provided for in the sixth
condition.
(6) The fifth
condition is that if a member chooses not to declare his total annual
income to the authorised provider he must withdraw funds equivalent to
the level of the Minimum Retirement Income level or his annual maximum
withdrawal allowance, whichever is the
lower.
(7) The sixth condition
is that, where 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 Minimum Retirement Income level,
the allowance should be set at the highest level consistent with the
assessment of the member’s life
expectancy.
(8) The seventh
condition is that the maximum and minimum withdrawal allowances must be
set at the same level if a member’s total annual income,
including his maximum withdrawal allowance, is lower than the Minimum
Retirement Income level.
(9)
The eighth condition is that a Retirement Income Fund, and any income
derived from it, must not be capable of assignment or surrender by the
member.”.’.—[Mr.
Waterson.]
Brought
up, and read the First time.
New clause
9—Amendment of the pension
rules—
‘(1) Section 165
of the Finance Act 2004 (c. 12) (pension rules) is amended as
follows.
(2) In subsection (1)
(which sets out the pension
rules)—
(a) in Pension
Rule 4, after paragraph (a),
insert—
“(aa) a
withdrawal from a Retirement Income
Fund,”;
(b) in Pension
Rule 4, after the second appearance of the words “scheme
pension”, insert the words “a withdrawal from a
Retirement Income
Fund”;
(c) in Pension
Rule 6, after paragraph (a),
insert—
“(aa) a
withdrawal from a Retirement Income
Fund,”;
(d) in Pension
Rule 6, after the second appearance of the words “scheme
pension”, insert the words “a withdrawal from a
Retirement Income
Fund”.’.
New
clause 10—Minimum Retirement
Income—
‘(1) The amount
of the Minimum Retirement Income in respect of each tax year shall be
set by the Chancellor of the Exchequer by order at the level of the
standard minimum guarantee prescribed under section 2 of the State
Pension Credit Act 2002 (c.
16).
(2) Before making an order
under subsection (1), the Chancellor of the Exchequer shall consult
such persons as he considers
appropriate.
(3) An order under
this section (other than the order that applies to the first tax year
during which this section is in force) must be made on or before 31st
January of the tax year before the tax year to which the order
applies.’.
New
clause 11—Removal of age limit for annuity protection lump
sum death benefit—
‘(1)
Schedule 29 to the Finance Act 2004 (c. 12) is amended as
follows.
(2) In paragraph 16(1)
(definition of annuity protection lump sum death benefit), paragraph
(a) shall cease to have
effect.’.
Mr.
Waterson:
Good morning, Mr. Taylor. I am
delighted that you and other members of the Committee have been able to
make it here through the snow. This is the last day of this Committee,
so I wonder what we are going to do with ourselves on Tuesdays and
Thursdays from now
on.
The argument on
annuities is familiar. It is familiar in part because no fewer than
four of my Conservative colleagues have used the opportunity of the
private Member’s Bill ballot to put forward the proposition. It
is an important issue that affects a number of people—including
many who are not affected at the moment, because it touches on their
future behaviour. I have been toying with the idea of declaring an
interest, as I have some private pension provision and I am not yet
75—although, listening to the hon. Member for Yeovil, one does
see one’s life flashing before one’s eyes.
I mentioned previous
private Members’ Bills. I should particularly like to pay
tribute to the Rights of Savers Bill, which was introduced by my right
hon. and learned Friend the Member for Kensington and Chelsea (Sir
Malcolm Rifkind). It build elegantly on earlier attempts at dealing
with the problem, it was extremely well drafted, and it widened out the
debate to cover how we encourage saving for the future, so it dovetails
well with the argument about the shape of
personal accounts. I have drawn heavily on that excellent Bill for the
new clauses.
No other
country, as far as I have been able to discover, has a compulsory
annuitisation rule. I shall be happy to give way to the Minister now if
he can tell me of one that
does.
Mr.
Waterson:
I am not going to pursue that. I assume from the
fact that the Minister is still sitting that he does not have an
answer. Certainly, no country in the western world has such a
rule—the United States does not, Canada does not, and nor do
many other countries.
It is clear from the
difficulties that the Chancellor has got himself into over alternative
secured pensions that there is an appetite for change on annuities.
That, too, feeds into the debate about saving for retirement. There is
a particular issue about what we call the target group for personal
accounts, many of them younger workers who are not saving at the moment
and are turned off by the idea of pension saving. We have to inspire
them with confidence in the pensions system, which we touched on
earlier this week, and to make it more attractive. I see that as part
of the wider agenda of bringing flexibility and accessibility to
pension saving. It is bad enough asking young people to lock up their
savings for 40 years; telling them that at some arbitrary date in the
future they will have to buy an annuity whether they like it or not
adds insult to injury.
Let me anticipate the
Treasury brief that the Minister will no doubt treat us to shortly. The
state has a legitimate interest in annuities, but only a narrow one. Of
course, those with the potential to buy—people who have built up
pension pots—have had tax relief. We will hear more about the
Liberal Democrats’ current position on tax relief later but,
that apart, the only legitimate concern of the state is whether there
is a risk that people will blow their pension pots and then fall back
on the public purse.
Looking at new clauses 8, 9, 10
and 11, which have been lifted almost bodily from the Rights of Savers
Bill, I make no great defence of, or apology for, the drafting, but I
make the point that I have made in previous debates: if there is a
technical problem with it, I shall be the first to put my hands up. If
the Minister is happy to accept the principle of the new clauses he can
have them brushed up and improved by his draftsmen and
officials.
New clause
8 returns us to the Finance Act 2004 and is on the meaning of
“retirement income fund”, a point on which I shall go
into more detail in a moment. Crucially, from the point of view of
reassuring the Minister, the new clause mentions
schemes
“in which
investments are approved by the Inland
Revenue”
and sets out
various conditions for a retirement income fund. One is that
funds
“may be invested
and withdrawn by the member as and when he
elects.”
It is, after
all, the member’s hard-earned money that has prudently been paid
into a fund. I shall return in more detail to the other conditions set
out in the new
clause but the third condition, in proposed new subsection (4), is
important. It would set an annual maximum withdrawal allowance to
ensure that
“no
member’s total future annual income falls below the Minimum
Retirement Income
level.”
New
clause 9 would make consequential amendments to another part of the
Finance Act 2004. New clause 10 would give the Chancellor the power to
set a figure for minimum retirement income, and new clause 11 would
crucially remove the obligation to annuitise at a particular
age.
I
shall try as briefly as possible to take the Committee through what the
proposals would mean in reality. I have already made the point that we
are the only country that does this, so there must be a pretty good
reason why the United Kingdom is out of step with the rest of the
developed world. Buying annuities has become less and less attractive
in recent years. A great philosophical debate rages about whether that
is due to greater longevity, which is very nice. When somebody
purchases an annuity it means that they will get the money until they
die, which is also very nice. Whether because of that or because of
interest rates or any other factor, annuities have become a less
attractive deal.
We
are not proposing any new obligation on people, which seemed to be the
concern of the relevant Minister during the passage of the Rights of
Savers Bill. The proposals would place no new burdens on the large
majority of people who currently choose to purchase an annuity when
they retire. I pause to note that there are interesting statistics that
were repeated in “The Annuities Market”, the Treasury
document of December 2006. They show that the proportion of people who
annuitise between the ages of 70 and 74 is small—from memory I
believe it is something like 5 per cent. I am trying to anticipate what
the Minister will say but we must consider not people’s
behaviour now, when they know that there is a rule that they cannot
avoid, but their likely behaviour were that rule changed. In
particular, to return to my most important point, we must consider how
a change would affect the savings behaviour of people starting their
careers now rather than those who have already retired or are nearing
the end of their
careers.
We propose an
alternative way of using a pension fund on retirement and a method of
controlling the investments and income derived from it. It is not just
a matter for the fat cats, although Ministers tend to dismiss it as
something only for the better-off—for Tory voters or people with
long gravel drives, Volvos and ponies, who vote Lib Dem, whom we
mentioned early in our debates. Well-off people have rights too. It is
very old Labour to take the line that because people are better
off—in other words, they have worked hard and been prudent
enough to put money aside—they should somehow be treated badly.
That is a very old Labour concept, and I shall be interested to hear
how the Minister develops
it.
We are proposing
something called a retirement income fund—it was called a RIF by
my right hon. and learned Friend the Member for Kensington and Chelsea,
which seemed a happy coincidence. It is based on the Canadian system,
which is an alternative to annuity purchase. [Interruption.] The
Minister grunts from a sedentary position, and there is a world of
meaning in his grunts. I take that one to be a grunt of
disapproval. [Laughter.] As I understand it, the Canadians have
had the system for well over 20 years. It works perfectly well and
something like half of all pensioners in Canada have these alternative
retirement income funds. In fact they are the most widely held
retirement income vehicle for pension saving in Canada. In the last tax
year for which I have the figures—I am sure the Minister is more
up to date as part of his initiating negotiations to sort out the
frozen pensions issue in Canada—some 3 million Canadian citizens
were above retirement age. Nearly half of them—1.4
million—received income from a retirement fund of the sort we
propose.
The idea is a
little bit like self-invested personal pensions. The funds will be
self-administered. The individual could select, along with the
trustees, which investments could be made or managed by the insurance
or trust company. It has been hugely successful in Canada, which is not
a wholly different economy from our own. We are not suggesting
something that has not been road-tested in another country. An
important element of this is choice. People should have a right to make
these choices about their income in retirement.
Equally there is the principle,
which we accept as a responsible Opposition, that individuals should
not become a burden on other taxpayers on retirement. Tax relief
provided during the process of pension saving shows the benefit of
encouraging people to save so they do not fall into that category. Of
course in a sense the Government are part-way there already. In fact
they are a quarter of the way there because people can already take a
tax-free lump sum valued at up to a quarter of their fund. In a sense
the principle has already gone. It is just a question of how we
calibrate the proportion of the fund to which people can get access
rather than annuitise it.
The mechanics are fairly
clearly set out in the new clauses. The idea is that those who choose
to withdraw from the fund a lump sum or higher income than they would
get under the annuity do not then become eligible to receive pension
credit. That is why we have something called the minimum retirement
credit, and the mechanics of how that is established year to year are
set out. An individual can choose to leave assets in the fund and
annuitise later on if they want to, and leave in it only what is needed
to maintain them at or above the minimum retirement income or draw a
lower amount. In any event they would be required to leave within the
fund, sufficient funds to meet any shortfall over their lifetime and
only withdraw to that limit.
It is important to touch
briefly on the whole issue of alternatively secured pensions. Their
introduction was hailed at the time as the Government changing their
position on compulsory annuitisation. It was spun as a way of getting
round that. The Government have obviously taken fright because of the
numbers of people wanting to take up the option of alternatively
secured pensions. According to the Library
brief:
“When
Alternatively Secured Pensions were introduced, they were seen by many
as an opportunity to preserve capital built up with the help of pension
tax relief and pass it on to heirs on death.”
That is hardly a criminal aspiration; it
seems a perfectly sensible aspiration for someone who is prudent and
wants to pass things on to their family on
death.
The
problem with that has been the religious restriction. Strange as it may
seem, this policy was designed originally to assist people with a
religious objection to pooling mortality risk—to dicing with the
Almighty in parlance. That is the risk involved in annuities. It was
either the Christian or the Plymouth Brethren who had this concern. It
is perfectly legitimate that these concerns should be addressed.
According to the last census the total membership of that sect was 781.
I suspect that their membership has swelled to a much larger number
since then. I am interested to hear the Minister’s up-to-date
estimate of how many well-off middle-class people nearing 75 have been
queuing up to join. On a serious note, however, there is a hunger for
such flexibility.
I
have just been handed some briefing which is presumably relevant to my
speech; finally the dam has burst on the written evidence. It has been
in a large container parked around the corner.
With their amazing blend of
cool incompetence and arrogance, the Government did not include in
the 2004 Act anything to say that people had to have a
religious objection to pooling mortality risk in order to take out an
ASP. I love the innocence of some of these Library briefs; I shall
quote from this one
again:
“It
appears that many people who have no religious objection to annuities
have been taking out ASPs as an attractive way of avoiding the
requirement to buy an annuity at age
75.”
Wow! What a wicked
world. That towering figure, the Economic Secretary to the Treasury,
has ticked everybody off. On 4 July last year, he said that that was
not what was intended at all, but
that
“it was always our
intention that the rules would apply in the specific and narrow case of
individuals with such principled religious objections such as the
Christian Brethren.”—[Official Report, 4 July
2006; Vol. 448, c.
728.]
We have had
stern warnings from the Economic Secretary, and Treasury Ministers have
expressed determination to pass more restrictive secondary legislation
if such practices continue. No doubt the Minister will update us on
that. If I may say so, the Government are spectacularly missing the
point. If people are not harming their fellow taxpayers, why should
they not do what they are doing?
There was a good article the
other day in Pensions World, which put it rather
well:
“Religion should not be a tax avoidance
issue. It is staggering that an obscure sect (Census estimate=738
members!) gets special tax treatment. The Bible is the leading
Christian authority. Jesus made an important distinction between
religion and the state: ‘Render unto Caesar the things which are
Caesar's and render unto God that which is
God's’.”
Andrew
Selous:
I declare a slight interest, as I have quite a
large number of Plymouth Brethren in my constituency. They are
law-abiding, family-minded people and I am not sure that they would
like to be described as a sect. They see themselves as being in the
mainstream Christian
tradition.
Mr.
Waterson:
I do not want to start a schism. I am a Roman
Catholic and we have had enough of that over the centuries. I accept
what my hon. Friend says and I am sure that he is absolutely right. I
think that, as a
matter of principle, the Plymouth Brethren do not vote, so I can
continue with impunity to refer to them as a sect.
[Interruption.]
Mr.
Waterson:
None the less, I withdraw the word
“sect”; I will use “denomination” instead,
which is a neutral word.
A further Government report
said that they would introduce changes from April 2007, from which
point individuals will be required to take a minimum annual income from
their ASPs. There will be a large tax charge, which I will come on to
in a moment, on transfer lump sum death benefits. As Her
Majesty’s Revenue and Customs sharply put
it:
“These
proposals will bring practice and policy intention into
line”.
Well, there you
go. The problem with that is that we shall end up with essentially
confiscatory taxation. The over-75s will be crushed by a series of
heavy-handed tax burdens. According to the Government’s new
proposals, an inheritance tax charge of 40 per cent. would be charged
on any remaining sum. On top of the existing tax, that would amount to
a crippling 82 per cent. tax raid, which would wipe out any inheritance
benefit. That is grossly unfair and shows that, in his attitude to
ASPs, the Chancellor’s mind is as closed as ever on an issue
that requires flexibility and openness of
mind.
9.30
am
Finally, the
Minister’s letter to the Committee of 22 January, which
mentioned a seminar and promised us draft regulations—they have
not actually materialised—also talked about the Treasury report,
“The Annuities Market”. That report raised a couple of
interesting points that I shall touch on, partly in order to anticipate
his comments. It is an interesting report on a subject about which not
a lot is known by many people. On page 15, it quotes the Pensions
Commission as
saying:
“Since
the whole objective of either compelling or encouraging people to save,
and of providing tax relief as an incentive is to ensure people make
adequate provision, it is reasonable to require that pensions savings
is turned into regular pension income at some
time.”
Importantly, it
also quotes the commission as
saying:
“Government
should investigate whether there are changes to regulation or tax
treatment which can encourage the development of a wider market for
drawdown products.”
A
great deal of work can and should be done—the Conservative party
is certainly doing it—on giving flexibility to savings. I am
looking at how personal accounts could mirror some aspects of the
401(k) system in the USA in order to provide flexibility. These are
complex issues and we are only just embarking on that process, but it
is important, particularly if we are to make personal accounts
attractive—especially to younger
workers.
Page 17
contains a useful chart on the age at which people currently annuitise.
Some 40 per cent. do so between 60 and 64 and 41 per cent. between 65
and 69. As I have said already, only 5 per cent. do so between 70 and
74. I urge the Minister to regard that as current
behaviour based on current rules. If the rules change I suspect that
behaviour would also change.
The report refers to another
recommendation by the Pensions Commission: that the ages of first and
last possible annuitisation should rise over time in line with life
expectancy. I shall be particularly interested to hear what the
Minister can tell us about that. Interestingly, the report
states:
“The
Government does not believe there is currently a case for increasing
age limits.”
In
parenthesis, I vaguely recollect that the minimum age is in the process
of rising, or indeed has already risen, from 50 to 55. The Minister is
nodding so I take that as a
yes.
The report goes
on to
say:
“However,
facilitating later retirement is an integral part of pensions reform,
and the Government will monitor both limits for consistency with this
policy.”
That
raises an interesting issue. We need to ensure that everything that we
are doing on the pensions front from annuities to personal accounts and
state pension reform dovetails together. There must not be
inconsistencies and internal contradictions and it seems sensible to
look at those ages while putting up the state pension
age.
On page 19 of the
report, the Turner commission is quoted as
saying:
“Government
should consider whether there is a case for a cash limit to the amount
which individuals are required to annuitise at any
age”.
That seems to
suggest that the Turner commission would also like to see the kind of
flexibility that we are talking about. The report
continues:
“Under
this recommendation, individuals would annuitise to a minimum income
level and be able to withdraw the rest of their fund as a lump sum
— subject to an appropriate tax charge. Although no level was
recommended, it has often been suggested it should be a level
sufficient to keep an individual off state
benefits.”
Well, that is
exactly what we are saying. A few paragraphs further down, the door is
firmly slammed in the face of that proposal with this bald
sentence:
“The
Government therefore continues to rule out introducing this
option.”
I really do
wonder why, when we seem to be out of step not only with the rest of
the world but with developments in the pensions world.
There is an interesting chapter
starting on page 27 on the issue of ASPs and the concerns expressed
about people using a religious loophole to get around the tax system. I
will finish on that note; of course, people should not abuse religious
objections as a way to get around a tax liability, but that is the
Treasury way of looking at it. We should be looking at it entirely the
other way around; first, why are people keen to do that—yes,
there is an appetite for more flexibility in the system—and
secondly, if that is the case why should we not give it to them? So, I
commend all the new clauses in the group to the
Committee.
Mr.
David Laws (Yeovil) (LD): Good morning, Mr.
Taylor, and welcome back to the Chair for this last day in Committee of
the Pensions Bill. New clauses 8, 9, 10 and 11 raise some important
issues that the hon. Gentleman touched upon and which have been debated
in the House many times before. I will therefore just comment briefly on
those, given that I shall have plenty of time to speak on some other
Liberal Democrat new clauses later
today—[Interruption.]—unless, of course, there is
a desire for a long speech.
I start by declaring an
interest. Like the hon. Member for South-West Bedfordshire, I have a
number of Plymouth Brethren in my constituency, including some of the
leading lobbyists of the Treasury and of the Department for Work and
Pensions; like the hon. Gentleman, I do not regard them as an obscure
sect even though they do not vote. In fact, they are becoming a lot
less obscure in Yeovil as they are about to build a large church on the
edge of the largest town in my constituency, which could therefore
become a centre for Plymouth Brethren throughout the country. I
congratulate them on the work that they, as a small group, have done in
lobbying the Government on this issue.
In fairness, I congratulate the
Government—including the Treasury—on taking the time to
listen to the concerns of such a small group of non-voters. As we saw
yesterday, there are many other examples of rather large groups who do
vote that the Government are good at ignoring, so we should not be too
ungenerous to Ministers about them taking the time to listen to a
particular group.
However, where such potential
anomalies and exceptions are created, people exploit them very
effectively. The hon. Member for Eastbourne set out what has happened
in attempts to use this potential loophole to get around the existing
rules on annuities. We have seen that type of experience many times
before, particularly in relation to tax policy. We all remember the
Chancellor’s film industry tax relief, which was supposed to be
targeted at major British films and ended up with programmes like
“Coronation Street” relabelling themselves as films to
get the benefit of the relief.
The problem here, as
highlighted by the comments of the hon. Member for Eastbourne, is that
we have a rather antiquated and illiberal system of obliging people to
take annuities. That, presumably, is largely built on the fact that we
have a low basic state pension and a great deal of means-testing;
therefore, the Government have stuck with these rules over time to try
and protect the taxpayer interest. We understand the
Government’s concerns about compulsory annuitisation, but it is
really all a product of Government decisions about the basic state
pension, and part of the price that we pay for having a low foundation
there.
For those
reasons I shall not rehearse all the arguments that we have debated
many times before in Committee, but I do want to raise with the
Minister a couple of practical issues that spring from the
Government’s attempts to give a bit more wiggle room to those
people with low pots of money who would normally have to annuitise. The
Government have introduced the trivial computation rules to allow
people with low amounts of money to get around annuitisation and to
take their moneys up front.
I recently met a constituent
who had taken that particular route, but who was very concerned about
the
apparent delays in processing her requirements. Also, although she had a
low amount of money and was a low-income earner, she discovered that
the Treasury was deducting tax at the 40 per cent. rate, rather than
the basic rate, and then requiring people to claim that back. Given
that many of the people who are taking their moneys under the rule will
be lower-rate or basic-rate taxpayers, I hope that the Minister will
look at that issue and respond, if not today, then maybe in a note to
the Committee.
The
hon. Member for Eastbourne again raised this important issue. I fear
that we may be about to hear from the Minister the response that we
have heard many times in the past few years. However, we shall wait and
see whether the hon. Member for Eastbourne has been successful in
persuading the Minister of the strength of his case and of the Canadian
model.
The
Parliamentary Under-Secretary of State for Work and Pensions
(Mr. James Plaskitt):
In introducing the debate
on the clauses, the hon. Member for Eastbourne said that the issue was
familiar, and it certainly is. He also displayed great perspicacity in
anticipating the sort of responses that he would
get.
The amendments
allow us to discuss the decumulation aspect of pensions, namely turning
pension savings into retirement income. I will come to the specifics of
the amendments tabled in a moment, but a little bit of background will
be helpful. “The Annuities Market”, published with the
pre-Budget report of 2006 and already referred to, restated Government
policy on turning tax-privileged pension saving into retirement income
by purchasing an annuity. It also responded to the views of the
Pensions Commission and set out the reasons why we will again be
rejecting the clauses
today.
Pension saving
is about giving individuals an income in retirement, and for no other
purpose. The Government provide tax incentives to encourage people to
save for their retirement. In the last financial year those totalled
£14.3 billion. When individuals come to take their pension
benefits, they can take up to 25 per cent. of the pension fund as a
tax-free lump sum. In return for such generous incentives, Governments
of different persuasions have required, as part of the
“deal”, that the remainder of the pension fund is, by age
75, converted into a secure retirement income for life, or used to
provide for dependants’ benefits. The most efficient way of
doing this is by purchasing an annuity. The arrangements have been in
place since 1976 and operated throughout the previous Administrations,
as well as this one. Annuities provide the peace of mind of an income
for life, regardless of how long that life might be.
Despite some of the criticisms
of the scheme that we have heard, annuities provide simplicity,
security and a guaranteed income, and at very little risk. Individuals
have flexibility on when to annuitise, between the ages of
50—which will become 55 from 2010—and 75, to suit their
circumstances. The vast majority in fact annuitise on retirement. Only
around 5 per cent. do so after the age of 70. Furthermore, consumers
can now choose from an increasing range of annuities, including those
that facilitate a flexible retirement or those for people who are
prepared to face some investment risk.
The hon. Member for Eastbourne called for greater flexibility in the
annuities market, but there has been a remarkable growth in what are
called mid-market products in recent years. There is a whole variety of
ranges of annuities that can be purchased and which introduce a
considerable amount of flexibility into the
market.
9.45
am
Mr.
Waterson:
Before the Minister moves off the issue of age
limits, what is the current thinking about changing the limits to tie
in with the growth in life expectancy and the increase in the state
pension age? Perhaps he was going to come on to
that.
Mr.
Plaskitt:
Yes. We took on board what the Pensions
Commission said about that. There is no pressure to alter the current
age, especially in view of the choices that people make about when to
annuitise, as I have just explained. Given life expectancy trends, the
upper age will be kept under review.
Individuals have flexibility
about when to annuitise, and only a very small proportion do so at
anywhere near the present upper age limit. The Government welcome the
Pensions Commission’s endorsement of the policy; the hon. Member
for Eastbourne has already quoted what the commission said and I will
not repeat it. Support for the principle is enshrined in the rules of
annuitisation.
New
clauses 8, 9 and 10 would establish a retirement income fund as an
alternative to annuities to deliver an income stream in retirement. The
RIF would remain invested and withdrawals between a minimum and maximum
would be permitted. An annual maximum withdrawal allowance would be set
by the provider for each member, based on an assessment of their life
expectancy. A member’s withdrawals from the fund could not in a
year exceed that allowance. An annual minimum withdrawal allowance
would also be set by the provider, and we presume that a member must
withdraw at least that each year. In setting that allowance, the
provider would have to ensure that the member’s total income was
at least equivalent to a minimum retirement income as defined in
new clause 10.
Nothing appears to stop the
minimum allowance being set at zero. Provided that the member’s
income from other sources for future years is greater than an MRI,
there is effectively no maximum withdrawal from the RIF, in which case
the member could draw any income.
The RIF has appeared in various
guises in the past—the savers Bill has already been referred to
in that respect—and it has not improved on its latest outing.
Like previous attempts, the new clause is also silent on how RIF
withdrawals will be taxed and what will happen on a member’s
death. If the member’s other income outside the pension scheme
is above the minimum retirement income, they can withdraw large lump
sums of tax advantaged pensions savings. In such a situation, an
individual might also choose not to draw any pension income from the
RIF in order to pass the fund on to heirs. As I said, tax incentives
for pension savings are offered to encourage people to secure an income
in retirement. The commission
endorsed our view that if people take the tax relief on pension saving,
it is only fair that it is turned into a retirement income.
Given the apparent ability to
extract RIF savings below the annual maximum allowance at will, there
is a danger that it would become a vehicle into which other savings
were recycled for tax advantage rather than encouraging new retirement
savings. There is no mention in the proposal of what happens to the RIF
on death.
John
Penrose (Weston-super-Mare) (Con): Is the Minister saying
that he would support the principle behind the measures if the
technical problems that he describes could be dealt with? I have no
doubt that clever people in the Treasury could easily find ways of
preventing the sorts of tax avoidance that he
mentioned.
Mr.
Plaskitt:
No; that is certainly not what I am saying. I
would not accept what the hon. Member for Eastbourne said
either—that it is simply a matter of calibration; the RIF
breaches the fundamental point of principle that if tax concessions are
given to encourage saving for retirement and that is the purpose for
which they are given, that is the purpose to which the fund should be
converted. It should not be used for any other purpose. It is not a
matter of calibration or tweaking the rules; it is much more
fundamental than that.
Mr.
Waterson:
I referred to calibration in the context of the
existing liberty to take up to 25 per cent. as a tax-free lump sum.
What is the difference in principle between what is possible now and
what we are suggesting
here?
Mr.
Plaskitt:
I am coming to that in a moment, but there
remain fundamental differences between what the hon. Gentleman proposes
and the current rules on annuitisation. The existence of the 25 per
cent. tax-free lump sum drawdown does not breach the principle, because
that must be considered alongside all the other rules that apply to the
current annuity scheme, many of which are totally breached by the
proposed RIF scheme. I shall elaborate on that in a moment.
There is also no mention of
what happens to the RIF on death. That suggests that the new clause
might be designed to allow individuals to pass on their pension funds
to heirs, rather than to secure a retirement income. There is no
rationale for taxpayers subsidising bequests.
Another flaw of the RIF, a
serious one in my view, is the risk of running out of money during
retirement. I note the hon. Gentleman’s faith in
insurers’ ability accurately to predict an individual’s
life expectancy, which is necessary to make the RIF scheme work.
However, nobody can accurately predict an individual’s life
expectancy. What insurers can do is to predict average life expectancy
of particular cohorts. That enables them to provide a guaranteed income
for life, regardless of how long that life is. That is a unique feature
of annuities, and another reason why they are an ideal retirement
income product.
The
hon. Member for Eastbourne noticed that when he referred to the
Canadian experience he elicited a bit
of a grunt from me. The reason for the grunt was that if we look into
the detail of the Canadian experience, we find that the problem of
potentially running out of money during retirement is a feature of the
Canadian system. That should give us pause for thought before we
recommend it. I draw his attention to the view of the Canadian Bankers
Association, which is
that
“if you take out too
much money, you may outlive your RIF and may be short of
funds.”
It
is a bit difficult to say to people in their eighties or nineties,
“Watch out; you are running out of money.” An implication
of the scheme is that it is recommended if one will not live long. What
happens under our annuitisation laws is that insurers effectively
spread or pool the so-called longevity risk across a range of
individuals. Annuities are effectively insurance contracts, insuring
individuals against the risk of outliving their pension funds, which
makes them fundamentally different from RIFs.
Anyone taking out a RIF would
need to simultaneously absorb investment and longevity risk and would
be likely to need alternative assets to do so. The ongoing charges of
managing a RIF are likely to be significantly more than those for
conventional annuities. That is why we think that the RIF would
typically be aimed at wealthier individuals.
So the RIF
would be a complex product, probably attractive only to the wealthy,
for the reasons that I have just given, but funded by the general
taxpayer. By contrast, we are committed to promoting better outcomes
for all pensioners in retirement. The Government are clear that
innovation in pension provision must take place within the principle of
tax-privileged pension savings being used to provide a retirement
income, and the RIF violates that principle.
Finally, I turn to new clause
11. Value-protected annuities are permitted from 6 April 2006. They
allow providers to offer an annuity that includes a repayment on death
before 75 of an amount representing the initial capital value of an
individual’s pension or annuity less any income paid before the
date of death. The new clause would abolish the current age limit of 75
where value protection can be
offered.
A
concern commonly expressed by consumers with annuities is the risk of
dying soon after purchasing the annuity, so that the annuitant might
not receive a financial benefit. Such concerns tend to reveal a
misunderstanding about the basic insurance properties of annuities and
the role of pooling. The benefit of buying insurance is the peace of
mind provided even if an event does not occur and no claim is made. If
the insured event does not occur, in this case if a person lives longer
than expected, there is no return of the premium—the pension
fund—so an annuitant’s early death does not result in
profit for the insurer; it rather contributes to paying the pensions of
those who live longer than
expected.
The
Government have nevertheless responded to early-death concerns by
enabling providers to offer value-
protected annuities in the early stages of retirement. The option
expires at age 75 and abolishing that limit would tend to benefit those
interested in using their pension fund more for inheritance planning
than to provide a retirement
income.
The hon.
Member for Eastbourne prayed in aid the alternatively secured pension
scheme as representing, as he put it, an appetite for change. He
suggested that it supports those who try to get around annuitisation.
That is not entirely accurate, and I remind the hon. Gentleman of what
the then Financial Secretary, my right hon. Friend the Member for
Bolton, West (Ruth Kelly), said at the time of the scheme’s
introduction:
“We
have made this concession because people hold significant, principled,
religious objections to the pooling of mortality risk. We will keep the
matter under review and check to see whether abuse is occurring. We
stand ready to make any changes needed to preserve the integrity of the
tax system.”—[Official Report, Standing Committee
A, 8 June 2004; c. 485.]
So,
far from being a chink in the defence of the scheme, it was accepted
from the outset that that did not represent a rethinking of the
principles underpinning annuitisation. It was a specific concession
made in response to a specific pressure, and it has been our intention
all along to reinforce the tax principle that underlines the annuity
system and has done since
1976.
Mr.
Waterson:
I take the Minister’s point about
intention, but can he shed any light on why the Government took no
steps to put that fundamental condition for ASPs in the 2004
Act?
Mr.
Plaskitt:
I think that the answer to that is contained in
the discussion of the matter in the document to which the hon.
Gentleman referred earlier, “The Annuities Market”. The
Financial Secretary at the time gave an explicit undertaking that the
workings of the system would be kept under review, as indeed they have
been. Subsequent changes have been introduced, such as sanctions for
breaching the minimum withdrawal and the additional measures that the
hon. Gentleman mentioned to prevent misuse of the system as a
tax-avoiding inheritance vehicle. We have indicated that if further
changes are necessary to reinforce and protect the principle of the
system, they will be included in the next Finance
Bill.
I have taken
time to set out our policy on turning tax-privileged savings into a
retirement income to show why the proposed RIF is inconsistent with the
policy that has been in place since 1976. The new clauses are
essentially intended to benefit those who willingly take advantage of
the tax relief given to pensions savings to build up substantial
pension pots and then break their part of the deal by using that
tax-privileged fund for other purposes. For that reason I urge the hon.
Gentleman to withdraw the
motion.
10
am
Mr.
Waterson:
I am grateful to the Minister for taking us in
some detail through the well-trodden brief from the Treasury about why
it does not accept the principle of the new clauses. The fact is that
the Minister has been unable to point to a single other country in the
entire world that has this system. The
Treasury’s view is clear, as the Minister said—that the
system is designed to provide income in retirement and has no other
purpose. The new clauses deal with the legitimate concerns of
taxpayers; we are, after all, considering people’s money. It is
not the Chancellor’s money. Those people have of course had some
tax relief but it is their money, set aside during their working
lives.
The Minister
said that the system has been in place since 1976, which is
interesting. Compulsory annuitisation, therefore, is a relatively
modern concept. However, parties change their minds and my party has
changed its mind. That should be abundantly clear, not only from what I
have said, but from the series of private Members’ Bills from my
colleagues in the official
Opposition.
I was
interested in what the Minister said about the age limits and so on and
pleased that he is going to keep those under review. The trouble with
the debate is that everyone knows everybody else’s arguments in
advance, so there is an element of formality, a ritual ballet that we
go through, and the Minister said what I predicted: that the Turner
commission supported the principle. However, I went on to quote other
bits of the Pensions Commission report, which suggested that it was in
favour of greater flexibility as
well.
The Minister
talked about the dangers of people trying to avoid inheritance tax. If
the Chancellor would only reduce the tax or increase the threshold
significantly, perhaps the problem would not be as acute as he
believed. He asked what would happen to the RIF on death. I think our
intention is that people should be able to pass the fund on, which is
not an aspiration that we should look down on—I have made that
point. Fundamentally, when my hon. Friend the Member for
Weston-super-Mare asked the Minister whether, if the technical
difficulties could be overcome, he would accept the principle, he
firmly and clearly said no—that it was not a question of
technical details but of the
principle.
As I said,
no other country does this. The Minister has certainly not been able to
point to one. We will return to the issue, but for the moment I beg to
ask leave to withdraw the
motion.
Motion and
clause, by leave,
withdrawn.
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