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Baroness Dean of Thornton-le-Fylde: My Lords, I thank the noble Lord for that intervention, giving me the opportunity to correct what I said. I referred to Ireland, where a £50,000 minimum is required.
I can understand the Treasury's concern about the loss of income from tax. One could say that, if one delays the annuity until 80 years of age, as I seek--only that is not enough; one needs to consider the whole reform--and starts to draw down at 75, if one passes on before 80 the Treasury could have a call on the balance of the existing fund at that time. Equally, I would argue that inheritance tax should take care of that aspect.
One could look at fixed term annuities, to be reassessed actuarially at the end of that fixed term. One could remove the requirement--new regulations would be necessary--that the annuity should be non-commutable and provide that one should be able to go back and do that against certain criteria. There may well be pitfalls. I do not put those suggestions forward as a panacea. But a review is necessary.
There are only about four kinds of product available at present. If we are to have a community which is saving for retirement--small though the amounts that individuals can afford may be--they need to have proper advice and proper choice as a consumer.
The Government have demonstrated recently that they are on the side of the consumer as regards the fixed interest mortgage issue. One had agreements reached between the consumer and the company. The Government have said that that is not fair in the interests of the consumer. We now need the Government to adopt that kind of consumer concern. I think that I am right--the Minister will correct if I am not--that the Government are considering the drawdown issue. I hope that they are looking at the maximum age limit of 75. I am aware that there was a parliamentary Question in another place. I am equally aware that the Minister replied that the Government would come back to the issue in due course. Perhaps the Minister can indicate how long "due course" means.
Some of us have been negotiating for many years for people's future provision. Pensions are savings. They are part of a person's income. They are part of a person's earnings. It is a wide issue. It not about avoiding tax. It is not about providing pitfalls for people who want to avoid the commitments into which they have entered. It is about giving people a choice, and ensuring that when they enter into agreements they get a fair return.
Lord Willoughby de Broke: My Lords, I am grateful to the noble Baroness, Lady Dean, for raising the question of pensions, especially as she is so clearly a long way off from being a pensioner herself. However, I was somewhat disappointed to hear her say that she does not seek to eliminate the need to take up an annuity. That is exactly what I think we should be discussing tonight.
I declare an interest. I am exhibit A! I am a pensioner; and I am a cross old pensioner too. I receive a very small taxed income from the annuity which I have taken out. Now that I have taken out the annuity, three-quarters of the money that I have saved over 35 years belongs to the pension company. It does not belong to me, my heirs or my estate. It belongs to the pension company. I think that that is unfair and inequitable. It is true that I could have delayed taking the annuity until I was 75--even, under the noble Baroness's suggestion, until I was 80. By that time I shall probably be too gaga to care what I do with it. However, if, having taken my annuity, on my 75th birthday I take my celebratory cruise and have a heart attack during a particularly vigorous game of deck quoits, again three-quarters of my enhanced fund goes immediately to the pension company. It is extraordinary.
The situation is rather like those men who try to sell you tarmac. If someone came to your door and said, "Now, squire, I've got a very good offer here. You'll absolutely love it. You give me nearly all your life savings and I'll give you a small income until you die", you might be a little upset and set the dog on him. It is exactly the same situation; there is no difference.
Something more imaginative is required from the Government. I am surprised that the noble Baroness did not go some way towards meeting that need. For example, the PEP scheme was excellent. It has been replaced by the slightly less excellent and more complex ISA. But when one puts money into a PEP scheme it is out of taxed income. The Treasury wants its slice and gets it because all contributions to PEPs or ISAs are from taxed income. The Treasury has had its tax. But one then builds up a tax-free fund. It is free of capital gains tax and of income tax. A retirement fund into which one can pay all one's life--it is up to the Government to state a minimum time before qualifying--would at least allow people to save and to keep that.
The noble Baroness is right to say that the issue is vital because it is about people's incomes; but it is also their capital. Under the present arrangement, three-quarters of it is given away to the pension company. It is that to which I object and I am sorry that the noble Baroness did not go further in her comments.
It would make more sense if people, having saved all their lives, were allowed to keep their pension pot and dispose of it as they wish; whether on buying high interest coupons, low interest stocks, a property to let or whatever. They would be spending their own money; money which they had saved all their working lives.
That is the important point I wish to make. The Government will get their money early when people contribute to the scheme and those who have contributed to the scheme will have their own capital. The only losers will be the pension companies. My Lords, how very sad!
Lord Brooke of Alverthorpe: My Lords, I am grateful to my noble friend Lady Dean for tabling this Unstarred Question. I was present for the debates on the stakeholder pension funds on 24th June and 11th October and I voted against the amendment proposed by the Opposition on that latter date. Those debates were strictly within the confines of stakeholder pensions, but we are having a different debate today.
I regret that I must advise the noble Lord, Lord Willoughby de Broke, that I am not here to speak strongly for the total abolition of annuities. I intend to speak on similar lines to my noble friend. It is an important topic and it is useful to have a general debate rather than the confrontational exchange which took place on 24th June and 11th October. There will be a commonality of view in some areas and I hope that from the Minister we shall gain an understanding of how we might move forward. Having read his firm response on 11th October--he nods--I hope that he will not be so firm tonight.
We must take note of what is happening around us because pension provision affects many people. The 1995 figures indicate that under existing pension arrangements at least 5 million individuals will have to purchase annuities. Moreover, with the shift from defined benefit occupational pension schemes to money purchase schemes--that is happening to many employees--the number is likely to grow.
The Government should take note of the fact that the simmering discontent with the present means of providing retirement income through annuities will grow. I hope that the Government will be conscious of that. Indeed, it continues to be one of the topics which figures regularly in the money pages of the financial press--and, in my view, with increasing justification. I speak not on behalf of the rich, but on behalf of
Therefore, I hope that the Government will listen carefully to the case not for total abolition but for change. I also hope that they will avoid the bureaucratic knee-jerk reaction which can come from government departments, particularly the Inland Revenue with which I have had a long association. They do not always react in such a fashion, but I imagine that as regards this topic they may believe that there is special pleading for a minority, that few people are affected by it, and that those who are probably well heeled and seeking to enhance their opportunities for further tax breaks. Like my noble friend Lady Dean, I contend that that is not the case or the purpose behind our argument.
I understand and appreciate the Government's caution about introducing changes. That was expressed by my noble friend. Even with the present declining rates, annuities give certainties, which is important. They provide a level of security for pension income that is a reassurance not only for the recipient, but also for governments, especially after they have provided tax relief for the contributions made during the years.
Annuities also help to limit dependency on the state, for which all governments aim in the longer term. I strongly argue that those factors need to be taken into account and be part of any annuity changes. I want to subscribe to such principles and I believe that the Government will continue to do so. We need to write them into future changes.
The Government also need to take account of the changes which have taken place in society during the relatively short time since the 1986 Social Security Act and the introduction of personal pension plans in 1988; for example, longevity has significantly increased. People are receiving better healthcare and better food. They take more exercise and are staying fitter. Fewer than 10 years ago, a 65 year-old man could expect to live until he was 79 and a woman until she was 83. Today, a man of 65 will probably live until he is 85, if not 87, and a woman until she is 87. A big change has taken place, therefore.
Furthermore, people are working differently from what was the fashion in the 1960s and 1970s; for example, there are now 4 million self-employed people as against only 1.5 million in the early 1980s. The Inland Revenue forecasts at least 5 million in self-employment soon. As IT spreads, we shall see more people working in different ways; working from home, for themselves or on a contractual basis.
Importantly, many people need to work longer, not just into their 70s but into their 80s, too. The demography of the future labour force will require more people to work even longer. The Government will need that. People will not only be fit enough to work, but I suspect that many people will want to do so. Furthermore, a substantial number of people will have divorced perhaps twice and married a third time and will have seen their pension provisions scattered in
In the immediate future I can see no reason why the current legislative requirement for money purchase pension holders to purchase an annuity no later than age 75 should not be reviewed and be increased to, say, age 80. The age of 75 has been the upper limit for many years. I do not know from where it was plucked in the first instance, but it was certainly stipulated in the 1986 legislation and when pension plans were introduced in 1988. On an index link to the changes in longevity, looking at a period from the last decade to this one, there is at least a case that it should be reviewed and revised upwards. I am not certain how far it should go, but we should have a serious look at extending it up to the age of 80.
The principal advantage of such a change is that not only will people be able to make contributions for a longer period but they will also be able to purchase their annuity at the time which would be to their best advantage. Furthermore, if the existing income draw-down provisions were applicable between the ages of 75 and 80, that would be beneficial also--not to many people, but it would provide some benefit. I should like to hear whether my noble friend the Minister is prepared to give, in the light of the arguments which we have been advancing, some more favourable consideration to possible changes. That might possibly even include indexation of the age limit as a factor to be examined. Again I see him scowling, as if to say, "No, I am not prepared to do so", but those are issues that we should look at carefully and not dismiss lightly. If we do so, we are ignoring changes which are taking place around us.
It may be feared that those are tax-aided arrangements which could accrue lump sums or savings rather than pension schemes. I am conscious of that and I do not want to see that happen either. There are many anomalies and loopholes in the inheritance tax legislation which would not cover some problems that could arise on that front. I suggest that those can be plugged. Indeed, I urge the Government to start turning their attention to inheritance tax reform and reorganisation. However, those factors should not be a reason for not looking for more flexible applications of annuities to provide opportunities for better returns, yet with safeguards to meet the Government's aims that I mentioned earlier.
We need to stimulate a more imaginative and innovative response from the life insurance industry than we have had so far in its offerings to its customers. I suggest that if any life insurance people listen to this debate or read it in Hansard afterwards, they should start to pay attention--as are some of the banks--to people's other greatest asset next to pension plans;
Lord Taverne: My Lords, I begin by declaring not one interest, but two. First, I am chairman of an insurance company, Axa Equity and Law Life. Secondly, I have a personal interest, because at the age of 75 I shall be forced to have a fixed annuity which I should much rather avoid. From the point of view of personal interest, I greatly hope that the suggestion made by the noble Baroness is followed by the Government.
However, I shall consider the issue not from a personal point of view, nor indeed, from a corporate point of view. I begin with what appears to be the suggestion in the Unstarred Question--although I gather that the noble Baroness gave a different interpretation to it--that we should, in effect, abolish the present mandatory requirements.
On the face of it, the Motion seems very reasonable. Of course, what the noble Baroness said was very reasonable, as one should expect. A fixed date can undoubtedly be difficult. Interest rates may rise rapidly and unpredictably. I defy people to predict the future of interest rates. Economists are extremely good at telling one tomorrow why what they predicted yesterday did not come true today. Interest rates can rise and fall unpredictably. A great difference can be shown by a matter of timing, even within a period of six months. There is an element of a lottery, as the noble Baroness pointed out, which can certainly seem extremely unfair.
However, I have considerable difficulty with the Motion and I may even have some difficulty with the interpretation given to it by the noble Baroness. I turn first to the Motion. The fundamental question is why tax relief is given to pensions. The simple reason for that is because the state has a considerable interest in people providing pensions for themselves. Therefore, it encourages tax relief and savings. The tax relief for pensions is extremely valuable. It has the classic EET form: there is exemption for the contributions, exemption for the income as capital, and tax for what comes out.
The tax-free lump sum is an anomaly in that, and has been so for a long time. At some stage, I expect that the Chancellor will have a go at that tax-free lump sum. It is kept because many people have made their plans on the basis of receiving such a sum and it therefore seemed harsh to deprive them of that.
There are two advantages if there is a postponement of the age at which the annuity--which is the equivalent of a pension--has to be fixed. First, the capital continues to be available with tax-free income, from which a certain amount has to be drawn which is
Tax relief is a wonderful thing to have, but one man's tax relief is another man's tax burden, and another woman's tax burden. One cannot be generous and give tax relief all round because other people still have to pay corresponding taxes. Therefore one has to examine whether, in some ways, tax relief can be over generous. One must compare pensions with other forms of savings. Because of the large contributions which can attract the exemptions, tax relief of that kind--if there is no liability at the end and further advantages are obtainable--is far greater than that which can be obtained by other forms of saving such as ISAs.
Therefore I believe that the Motion, if interpreted purely, would be stretched too far. Is 75 even such an intolerable age? The noble Lord, Lord Willoughby, says that the whole system of annuities is unfair because one may die the day after one takes one's annuity. He said that he might die on his cruise playing deck quoits. I should have thought it far more likely that, following the example of many in this House, he will live to a ripe old age and that it is the insurance company that will lose. For one person who dies and therefore gives a great benefit to the insurance company, another person lives to a very ripe old age and the insurance company loses, which balances out. If people live longer, then rates will be lower. If people die earlier, then the annuities can be more generous and it will balance out.
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