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Lord Willoughby de Broke: My Lords, the money that one has saved goes into the pension fund not just when one dies, but when one takes the annuity.
Lord Taverne: My Lords, of course, the money goes to the pension fund--in order to pay the annuity. That is the nature of the bargain.
It seems that it was right to extend the age beyond 65 because life expectancy is so much longer. People now have 10 more years to make a choice. During a period of 10 years it is likely that interest rates will go up and down. People may miss their chance when interest rates are high or they may be unlucky or badly advised. It is a lottery. I do not see how that can be avoided if a pension becomes fixed. The nature of defined contribution pensions is that the employee or the individual takes the risk. The great advantage of defined benefit pensions is that that risk is then taken by the employer.
Should the age limit be extended to 80? I have no dogmatic views on that. It seems to me that if one gets close to the age of life expectancy--as the noble Lord, Lord Brooke, pointed out, for those who have reached
the age of 65 that is still well above 80--the advantage of the annuity tax-relief system begins to edge too close to what is perhaps an exceptional advantage.On the other hand, I believe that the question should be looked at again. Many of the suggestions made by the noble Baroness should be examined. As we live longer, I believe that from time to time the age limit will have to be raised. The other day a Dutch population expert predicted that babies born in the year 2010 will live to be 115. I hope that people will work longer. People are likely to be fit for much longer.
In my old age I have taken up running. The other day I read in a magazine about a highly competitive veteran athletic club where the over-60s held world championships and the 100 metres was won in a time faster than that of the Olympics of 1892. It is incredible how the physical abilities of people have changed.
On balance, looking at the tax advantage of the pension system, one should compare it with other forms of savings and the tax benefits that they give. On the whole, I am inclined to conclude that at the moment 75 is a reasonable age, but I am open-minded on the matter. I do not think that anyone should be dogmatic about it. As time goes on, I believe that the age limit will have to be raised.
8.32 p.m.
Lord Astor of Hever: My Lords, the House is grateful to the noble Baroness, Lady Dean, for introducing this important debate. As one would expect from someone who was on the Occupational Pensions Board and who lists pensions as among her special interests, the noble Baroness speaks with great authority and clarity on the subject. I look forward to hearing the response from the Minister. I know that he has a great deal of personal experience in this area. The debate has been characterised by contributions from noble Lords who are also experts. As a pensioner, my noble friend Lord Willoughby de Broke spoke with great authority.
As the noble Baroness used the word "when" in her question and not "if", I hope that there is cause for optimism, although I understand that she seeks only to raise the age from 75 to 80. At Report stage of the Welfare Reform and Pensions Bill, the Minister told the House that the Government were monitoring the annuity position and that the Inland Revenue was conducting a special exercise to assess how the current arrangements on income drawdown and annuity purchase were working in practice. I also remember that the Minister assured the House at that time that Gordon Brown was able to walk on water. If the Chancellor can do that, surely he can resolve the problems associated with forcing personal pension fund holders to purchase an annuity at age 75!
On 30th June in a debate on pensions in the other place, the Minister of State, Stephen Timms, said that the Inland Revenue's review would be published in the autumn. Today being 1st December, by my reckoning autumn has been and gone and we are well into winter. Therefore, can the Minister tell the House when we may have the results of that important review? I hope that the answer will not be "in due course".
Recently annuities have been the subject of much focus. As I am sure the Minister will be aware, Members of Parliament on all sides are finding that many constituents approaching the age of 75 are unhappy about the requirement to purchase an annuity. Indeed, I am advised that surveys show that about 98 per cent of people approaching the age of 75 are unhappy about it. I agree with the noble Baroness, Lady Dean, that it is not just the rich who are affected but also people on low incomes. This is not just special pleading for minorities, as the noble Lord, Lord Brooke, said.
The steady fall in long-term interest rates is seriously reducing the value of pensioners' incomes in retirement derived from an annuity. According to the Financial Times, in the autumn of 1997 annuity rates were at their lowest level for 40 years. In the past 10 years annuity rates have fallen from around 16 per cent to 8 per cent, halving income that a newly retired person with the same lump sum would receive.
I assure the noble Lord, Lord Brooke, that I do not want to be confrontational, but on these Benches it is our clear view that the requirement to buy an annuity at the age of 75 should be abolished. Indeed, this campaign has been driven for some time by the Conservatives, particularly by my honourable friend the Member for Arundel and South Downs, Howard Flight.
We want individuals to exercise a greater degree of choice for themselves. We want greater flexibility to allow those who have saved into a fund more control over their hard-earned savings to enable them to take advantage of a broader range of investment solutions. From a public policy standpoint, the issue of annuities is important, not least because of the Government's desire to promote stakeholder pensions. That has already been touched on.
If the annuity rules relating to 75 year-olds were to stay as they currently are, I believe that professional best advice would suggest that many of the target market would be better served by putting their money into an ISA rather than into a stakeholder pension. Whether or not it was in fact the best professional advice, human nature would probably produce that result.
When viewed by those with perhaps less to save, the choice would be between a stakeholder pension and an ISA. With an ISA they could put money in when they chose to but withdraw it when they chose to. If they have the discipline to continue saving until their retirement, they could use the fund as they saw fit. With a stakeholder pension the choice will be to put money into a stakeholder pension as flexibly as with an ISA, to have that contribution grossed up for tax, but to be forced to leave the money there until they retire and then be forced to purchase an annuity with everything they have saved. Put in those stark terms, as many pensions experts do, it is likely that many will choose the ISA route rather than the stakeholder route.
In the light of that, does the Minister agree that compulsory annuities for all the moneys saved in a stakeholder pension scheme could damage the attraction of the scheme? If so, what action do the Government intend to take to redress the situation?
I draw the Minister's attention also to the range of more flexible arrangements such as equity-linked, variable drawdown and term annuities that are currently found in the United States, Australia, South Africa and Ireland. Though the noble Baroness may disagree, the Irish pension system is particularly interesting. Pensioners there buy a basic annuity and are then free to do as they like with the rest of their pension pot. Will the Minister consider looking at such arrangements to see whether they would have any merit in this country?
The problem facing those coming up to 75 is now serious. Government policy must respond. The issue will not go away, and Ministers in the other place accept that. I hope that the Minister will bring the House, and the many people approaching retirement age, some good news tonight.
8.40 p.m.
Lord McIntosh of Haringey: My Lords, the noble Lord, Lord Taverne, said that there were considerable difficulties for economists in making the kind of forecasts necessary to understand these issues well. It is not just economists. I remind him that the solicitor of Jeanne Calment of Arles made a deal with her when she reached her 90th birthday. The deal was related to her flat in Arles--in French it is called viager--that while she lived, he would pay her an income and when she died he would inherit the flat. Madame Calment lived from the age of 90 to the age of 122. When she died the solicitor was already dead. I hope that noble Lords will not get themselves in that sort of position.
I am grateful to my noble friend Lady Dean for introducing this debate. As she said, we debated the issue of annuities for stakeholder pensions in this House on 24th June and 11th October, and my noble friend Lord Brooke is right in saying that I gave a firm reply to the debate at that time, though he is right also in saying that what I was replying to was a different proposition from the Opposition Front Bench to that which my noble friends have been putting forward tonight. I am still grateful for the opportunity of saying it again, though whether I give any more reassurance to the Opposition than I did at that time is extremely doubtful.
Let me explain the present situation. Currently, people in personal pension schemes--that is, defined contribution schemes as opposed to defined benefit, occupational or final salary schemes--must use their pension fund to purchase an annuity. They do not need to do that at the point of retirement; instead they can choose to draw an income from the pension fund by a process commonly known as the "income drawdown". That has been in place since 1995. But they must purchase an annuity by the age of 75 at the latest.
Income drawdown is a useful facility for providing people with a degree of flexibility over the timing of their annuity purchase, but it is not a panacea for all the perceived ills of annuities. I shall come on to the reasons why in a moment, but I should like to say a little more about annuities and why there is a requirement to purchase them.
The purpose of a pension is to provide a person with a secure, reliable, life-long income when he or she stops earning. As the noble Lord, Lord Taverne, rightly said, that is why we give tax relief on the contributions to a pension fund. Of course nobody knows how long retirement will be, so it is difficult to plan for the income to last and at the same time to maximise the level of that income. That is why we "annuitise" it; that is why we set up annuities which, in simple terms, insure the length of a person's life.
Annuity rates are decided by life expectancy, combined with yields from secure long-term investments such as gilts. I can say to my noble friend Lady Dean that they are not normally based on individual life expectancy; they are based on the life expectancy of all annuitants and do not relate to an individual's own life expectation. There are exceptions. There are different annuity rates for smokers. My noble friend Lady Farrington would obtain a better annuity than I would, though my dissolute life would probably overcome that if we were going to personalise it. Nevertheless, the essence of pooling arrangements underlies the basis on which annuities are given. Of course individuals who die young benefit the pool. Those who live longer draw from the pool as the noble Lord, Lord Taverne, said. It is not a matter of the money going into an insurance company. My noble friend Lady Dean talked of the whole fund reverting to the life company as a "windfall profit". That is simply not the case. The calculation and the market for annuities is competitive. It is based on the life expectancy for all people and there must be a balance between those who gain and those who lose.
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