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Baroness Dean of Thornton-le-Fylde: My Lords, I thank my noble friend for giving way. Clearly he misunderstood my point. I did not say that the whole fund would revert to the life company as a windfall profit. I was referring to the amount above the maximum return on a contractual annuity whereby, if the earnings were above 3 per cent, it was that element that was a "windfall profit" to the company; that then went into the company's funds if the annuitant died.

Lord McIntosh of Haringey: My Lords, I shall come on to this point. That is why there are a variety of possible annuities available. It is a competitive market and if what is being offered is not competitive, then it is up to the person who has the fund from the personal pension to shop around to find the best. The average life expectancy affects the rates that life companies are able to offer for annuities and, as my noble friend Lord Brooke confirmed, people are living longer. That is feeding through into lower annuities with the same pool of funds having to be stretched out to last longer.

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Inflation is another factor that affects annuities. As a result of this Government's prudent handling of the economy, we now have inflation under firm control. During the time of the previous government, inflation averaged 6.6 per cent; under this Government it has been steadily reducing and now stands at 2.2 per cent. Interest rates mirror inflation. That means that they too have dropped and that has contributed to annuity rates coming down.

But there are two sides to the coin. It is not accidental that with low interest rates the capital value of equities has increased. Pension funds invest heavily in equities so people have larger funds with which to buy their annuity. With low inflation the real purchasing power of the annuity will last well into the future.

As I indicated to my noble friend Lady Dean, we should not forget that people have a choice, not only in the timing of their annuity purchase, but also in being able to shop around for the best annuity deal on offer. The noble Lord, Lord Astor, asked for more flexibility. Holders of personal pensions have the facility to exercise an open-market option when they buy an annuity. They may not only choose the best rate, but may also decide which type of annuity best suits their needs. Many people choose a flat-rate annuity where the level stays fixed for the rest of their life, but there are also index-linked annuities which guarantee to keep pace with inflation, and the newer breed of "with profits" annuities where pensioners can share in the returns from the investments of the annuity provider. The last category has been well developed by the insurance industry and answers the claim that innovation is not taking place.

Of course, the insurance industry and the Government are keen to find further ways of developing flexibility, from the Government's point of view, within the principles that govern pension funds. We will look at any country to see whether there are better ideas. The noble Lord, Lord Astor, referred to the Irish Republic. But that is a restrictive scheme. It has a substantial minimum pot before it comes into force and is severely restricted in the number of people who are allowed to make use of it.

Some people would say that annuities are poor value because of the lack of a competitive market, but we do not have any evidence in that respect. One of the virtues of annuities is that they are relatively simple compared to other financial products. This allows providers to reduce their overheads so that the costs and commissions paid on annuities are much lower than those for income drawdown, for example, which requires intensive fund management.

High costs is one of the reasons why income drawdown is unlikely to be suitable for most people. Costs, combined with high investment risks, mean that providers will generally recommend drawdown only for people with large pension funds. A number of noble Lords, including both my noble friends and the noble Lord, Lord Astor, said that they were arguing not only on behalf of the rich. I accept that that is their intention, but the fact is that some providers specify a

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minimum level of around £100,000, while others say that it needs to be as high as a quarter of a million pounds. Few people have funds of that size. The contention that drawdown provides only for a minority is backed by a recent industry report indicating that there were only around 30,000 people in income drawdown arrangements. Therefore, that means that 30,000 people will be as upset at the age of 75, as noble Lords opposite seem to think will be the case.

The reason is very simple: the typical value annuity is bought with a pension fund of less than £30,000. A fund of that size could not sustain the risks associated with drawdown. The investment return on the fund must cover not only the income taken out, but also the high administration costs, inflation, and the fact that life expectancy does not remain constant but actually increases with age. To achieve the return needed, a substantial proportion of the fund must be placed in volatile investments. So there is a significant possibility that the value of the fund may fall rather than rise. This risk can be managed by a large fund using a comprehensive spread of investments, but a smaller fund would be much more vulnerable. That is not the way to secure a life-long income for retirement.

The proposal made by the noble Lord, Lord Higgins, in his amendment to the Welfare Reform and Pensions Bill, and which is reflected in the wording of the Question--although not in the speech--of my noble friend Lady Dean, is not about providing a better pension for the majority of people in this country. But that would not be a reason for opposing an easement for a minority if it could be shown to be beneficial and justified. So we must return to the purpose of pensions and the justification for spending the equivalent of £13 billion of public money a year in subsidising private pensions through tax relief.

The purpose of a pension is to provide a secure income throughout retirement. People will not then be likely to have to fall back on state benefits. If the pension were not secure--through no fault of the pensioner, necessarily, but perhaps, because of poor investment decisions--he or she might lose their pension income. The state would then end up paying twice over. Many of the people who have been lobbying Ministers to remove the 75-years age limit do not even need to draw their pension income; they already have security in their retirement.

Perhaps I may return to the issue of the need to charge tax, which would be necessary if we were to make substantial changes to the annuity requirement. There is a misconception that the annuity requirement is about the Inland Revenue taking back the tax reliefs given. It is not. It would be quite straightforward to recoup tax in other ways. As the noble Lord, Lord Taverne, pointed out, the essential point here is that pensions are not vehicles for passing wealth between generations. If they were to become so, as they might if the age 75 requirement were removed, we would have to reconsider the system of pension tax reliefs. We would also have to consider the consequences for other types of private pensions. In particular, we would have to consider the threat to

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defined benefit pension schemes--occupational pension schemes--which might lose out if people were to leave them. It might make some of them non-viable and we would have a particular problem with unfunded public pensions, which could involve a considerable risk of expenditure for the Treasury.

I turn now to the point my noble friend Lady Dean made about the artificiality of the age 75 requirement and her proposal that it should be increased to the age of 80. The problem here is that the longer an income withdrawal arrangement continues, the greater the risk of depletion of the pension fund, leaving the pensioner reliant on state support. I am not saying that there will never have to be changes; indeed, life expectancy changes make that an inevitable consequence at some time. But change of the kind proposed by my noble friend would run the risk that we would depart from the essential purpose of pension arrangements; namely, to provide a secure income throughout retirement. As I believe the noble Lord, Lord Taverne, acknowledged, the current age 75 requirement strikes a reasonable balance between minimising the risk of the fund depleting too quickly and allowing a good measure of flexibility to the individual who can choose when to buy an annuity over a period of up to 25 years.

Perhaps I may conclude on a positive note. The Government are committed to improving pension provision in this country for all sections of the community. We have already made good progress with the proposals put forward in our Green Paper, which was published last December. Those proposals were taken forward in the Welfare Reform and Pensions Act and we are working in partnership with

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the pensions industry further to develop and implement these ideas. We have received a great deal of support, for which we are grateful.

The pensions industry has also helped us to look at income drawdown. As has been said, the Inland Revenue has reviewed with industry representatives the current rules for personal pension income drawdown to see whether the rules are working well, or might be improved. That is important because, if we can streamline the process, it may assist the industry to provide a better product. However, as I said, that does not mean that changes in life expectancy may not cause changes in the age requirement in due course. Although the review is complete and the recommendations are currently being considered by Treasury Ministers, I have to say that the invitation which was issued by Stephen Timms (then the Minister for Social Security) on 11th March of this year--for anyone else outside to come forward with positive suggestions--has not achieved any positive results. No suggestions have been made for improvements other than those which have been drawn out in the course of the consultation process.

Therefore, I must return to what Ministers in the House of Commons have said. The Government recognise people's concerns. We are encouraging the financial sector to come forward with possible alternatives, but they must be practical and must address the central purpose of a pension. The Government believe that it is important for people to have a secure, reliable income for the whole of their retirement. It is not clear at present that anything other than an annuity can do this.

        House adjourned at two minutes before nine o'clock.

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