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Lord Higgins: The reason for my not pursuing this point is that it seemed to me to be very late at night to engage in a discussion on an amendment of such importance. However, the views on this side of the Committee are well known; indeed, new developments in this field need to be taken into account. For example, the £55 billion windfall that has come into the Government's hands as a result of the mobile phone situation may alter the position in financial markets quite considerably. It remains to be seen whether, on the one hand, the Government use that money for debt repayment. That would obviously affect annuity rates, which would not be to the advantage of pensioners. On the other hand, given the increasing trend in pension funds to include in their portfolio corporate as well as government bonds, it
remains to be seen whether that £55 billion will anyway be offset by the phone companies themselves having to raise the finance in the form of corporate bonds. These are complex issues.I imagine that the noble Baroness is not proposing to press the amendment to a vote at this stage, even if she might win! It seems to me that the amendments tabled by the noble Baroness are, in many respects, rather more sophisticated than that which I, being a simple soul, had tabled. It is important to maintain people's ability to keep their incomes as pensioners above income support level. However, I hope that, subject to what the Minister says, we might return to this important matter at a later stage.
Lord Goodhart: I hesitate to become involved in a discussion about the philosophy behind tax relief on pensions at this stage of the night. However, I am somewhat concerned about the matter. It has always seemed to me that the purpose of tax relief on pensions is to provide a fund which is basically for the benefit of the pensioner and the pensioner's widow or widower. Once the pensioner--whatever age he or she reaches--is not required to use the whole of the fund for his or her own consumption, there is considerable scope for tax avoidance, particularly in the case of wealthier pensioners. One obtains the benefit of the funds and one can hand them onto other members of one's family with the benefit of the tax relief which one has not used oneself.
The amount of tax relief that is available on pensions contributions in this country is extremely large, compared with tax relief in other countries, or indeed compared with tax reliefs available in this country on ISAs. As I say, I am somewhat concerned about this matter. I can see that other measures could be taken, such as allowing funds to be invested in something other than strictly an annuity. I shall not go into the matter any further tonight but I am somewhat concerned about the amendments.
Baroness Hollis of Heigham: I am tempted to ask whether I can support the noble Lord, Lord Goodhart, and sit down again. I thought that he expressed admirably the concerns about this matter.
Clause 50 gives members of defined contribution occupational pension schemes the option of using the non-protected rights element of their accumulated pension fund accrued from April 1997 to buy an investment-linked annuity instead of an index-linked annuity. The clause also provides for a power to prescribe the conditions which investment-linked annuity products must satisfy.
I feel that I cannot deal with this matter quickly as it is such a substantive item. If we do it at all, I have to spell out the reasons for the Government's position. I had hoped that we might defer the matter to Report stage, but the Committee has decided otherwise.
We issued a public consultation document seeking views on whether greater flexibility should be allowed so that members of money purchase schemes could choose to buy either an investment-linked annuity or
a traditional index-linked annuity to satisfy the indexation requirements. Forty responses were received, of which, 34 supported the proposal for change and welcomed the Government's willingness to recognise innovative annuity products.The amendments have a number of intentions aimed at changing the current rules on annuity purchase for tax-approved pension schemes. Amendment No. 163 is intended to remove the existing requirement for pension funds to be used to purchase an annuity by the time of the member's 75th birthday at the latest.
Amendment No. 162A seeks to specify on the face of the Pensions Act 1995 as to the type of investment linked annuity products which may be purchased and is directly linked to Amendment No. 162B. Amendment No. 162B seeks to require that money purchase pension funds should be used to provide only an annuity of £70 per week and that figure would be subject to annual increases in an attempt to ensure that the annuitant would not qualify for income support. The balance of the pension fund would be invested so that it was not subject to income tax, and any withdrawal of capital or income from the fund would be subject to income tax at the highest marginal rate of the fund holder.
Defined contribution pension schemes, such as personal pensions and the new stakeholder pensions--money purchase-- are based on the idea of building up a fund from contributions made while the member is working. The fund can then be used to provide a pension income in retirement. Annuities convert capital into an income guaranteed to continue in payment for life. They are the only product that can do this. However, there is a wide range of annuity products available on the market to suit individual needs-- including investment-linked annuities, which allow annuitants to benefit from possible investment growth in the future. I stress that lifelong payment is a feature of all types of pension annuity. That is an important point.
Annuities pool risk. Those who die younger are, by definition, cross-subsidising those who live longer. As those who, for whatever reason, suspect that they may die younger and avoid annuities, the average age of those who remain lengthens and annuity rates have to fall to cover them. An annuity then becomes a less attractive buy for persons with average life expectancy, so the non-virtuous spiral continues.
The income draw-down facility allows members to defer annuity purchase if they wish, while drawing an income from the capital of the fund, which can remain invested in stocks and shares, but which must stop at the age of 75. It is high risk and high cost. We calculate that it works only if one has a fund of at least £200,000 per year. Some experts give a slightly lower figure.
The noble Lord, Lord Goodhart, was absolutely right. Tax-approved pension funds benefit from valuable tax privileges at substantial cost to the Exchequer. Those incentives are designed to help people to obtain an adequate pension in retirement, not to provide a highly tax-privileged way to make
investments of a general nature to produce a highly privileged way of producing an inheritance for others subsequently to enjoy. It is right for the Government to have an interest in the use of pension funds after retirement to ensure that they do provide a pension through retirement as intended.We have heard much about the apparently poor value that annuities represent. I accept that rates have fallen in recent years but that is partly due to the money illusion. The stable economy provides scope for sustained growth in pension funds, and lower inflation means that an annuity will buy more. Since 1990, annuity rates have fallen by just over one-third. Inflation has fallen by well over two-thirds, while the FT30 has doubled. We are experiencing a lower return on a double-sized fund to meet an even lower level of inflation. Explained that way, people would be hard-pushed to argue that an annuity currently at around 9 per cent for a single male age to 65 with a five-year guarantee is unacceptable.
Amendments Nos. 162A and 162B seek to remove the current requirement to use the whole of a tax-approved defined contribution fund to buy an annuity. The amendments would require that an income of only £70 per week should be purchased as an annuity, subject to annual increases. That appears to be to prevent the pensioner having to fall back on income support.
The amendments have a similar objective to the proposals in the Retirement Income Working Party report. We are considering those points, but we need to assess the full implications of requiring people to buy an indexed annuity from their personal pension fund. Many factors need to be taken into account. We are giving serious consideration to whether that is a useful approach. Those are not empty words. Treasury, Inland Revenue and DSS officials are reviewing the Government's position but we need to be sure that any change is an improvement on the present position.
Annuities provide a guaranteed income for life. They are by no means poor-value products, as some people like to suggest--especially in the low-inflation environment that we are committed to maintain. The annuity purchase rules, as they relate to tax approval, are contained in the Income and Corporation Taxes Act 1988. Amendments to that legislation would fall outside the scope of the current Bill. The Government are actively considering the rules in question, and in light of my explanation, I hope that my noble friend feels able to withdraw her amendment.
Baroness Turner of Camden: I thank the Minister for that lengthy explanation. It has fulfilled the requirements of myself and my noble friend Lady Dean. She has not been able to be in her place this evening and I promised that I would move the amendment. We were anxious to get on record the view of the Government on what we consider to be a serious matter. As the noble Lord, Lord Higgins, said, it is inappropriate to start discussing a matter of such complexity at this hour of the morning. We shall examine in detail what has been said and consider
whether or not it is worth raising the whole issue yet again on Report. In the meantime, having thanked the noble Baroness, I beg leave to withdraw the amendment.Amendment, by leave, withdrawn.
[Amendment No. 162B not moved.]
[Amendment No. 163 not moved.]
[Amendment No. 164 had been withdrawn from the Marshalled List.]
Clause 51 [Information for members of schemes etc]:
[Amendment No. 165 not moved.]
Clause 53 [Investigations by the Pensions Ombudsman]:
[Amendment No. 166 not moved.]
Schedule 5 [Pensions: miscellaneous amendments and alternative to anti-franking rules]:
[Amendment No. 166A not moved.]
[Amendment No. 167 had been withdrawn from the Marshalled List.]
[Amendment No. 168 not moved.]
Schedule 5 agreed to.
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