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Baroness Barker: Before the Minister sits down, will she clarify her statement about the 70,000 pensioners coming within the new tax credit framework? I should find that enormously helpful.
Baroness Hollis of Heigham: This relates to questions about earnings: those aged between 60 and
64 who may or may not be in the labour market. I understand that 70,000 people could get pension credit and the new tax credit. I do not have figures on how many on pension credit will pay tax. The figure could be 10 or 15 per cent. None the less, compared with the fact that 1.7 million pensioners of those we are targeting are currently on minimum income guarantee, it is a substantial number.
Baroness Noakes: If the figure of 70,000 relates to the 1.9 million on MIG, how many does the Minister estimate will receive the pension credit? It is a considerably higher number.
Baroness Hollis of Heigham: We estimate the number receiving pension credit to be between 5.5 and 6 million in the total scheme.
Baroness Noakes: Of those, how many does the noble Baroness estimate will pay tax?
Baroness Hollis of Heigham: I cannot give the precise figure. I cannot give a breakdown between the two. It depends on the size of the family, whether one refers to singles or couples. We think that the figure may be 10 or 15 per cent.
Baroness Noakes: I cannot say that I am surprised by what the Minister said. Pensioners normally come from a working environment. They learn the concepts about how their income is taxed. The Minister seeks to create a system where pensioners feel that they can claim the pension credit without stigma. Would not it be easier if the in-work treatment of income were moved to pensions?
The pension credit feels more like a core social security benefit, with means-testing and all that goes with it, and the problems of it not being taken up rather than an extension of a pension entitlement. The noble Baroness was keen to stress that factor earlier when we referred to means-tested benefit. I believe the department is missing an opportunity.
Baroness Hollis of Heigham: Before the noble Baroness sits down, perhaps I may point out that, given that about three-quarters of the number of pensioners do not pay tax and that the tax threshold for those aged over 75 kicks in at about £6,200 after personal allowances, she can see the point at which the provision begins. Is the noble Baroness really saying that she would wish to bring all the other pensioners into a regime which meant that they would have to have annual assessments of their income based on the tax system?
Baroness Noakes: Perhaps I may clarify the situation. In moving this amendment I did not say that I was moving toward an annual assessment. It is a separate issue as to whether one can combine the tax and benefit system at some stage where one would move to assessment on an annual basis. I am simply moving an amendment which states that how one calculates income is not by any deemed rules or putting
things in or out, but one would simply use whatever the income tax system used as income. It is not the same as moving to an annual basis for assessment, but using the concept of income which has no additional need for regulation put forward by the department. There is both statute and case law about what is and what is not income.My only point was that they are a set of concepts broadly familiar to those who have been in work and who have dealt with the income tax rules in their lives, notwithstanding the fact that when they retire many of them fall out of the tax net. I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Lord Higgins moved Amendment No. 73:
- Page 9, line 6, after "In" insert "calculating re-entitlement to a state pension credit, any income or capital gains on a PEP or an ISA shall be completely disregarded, and subject to this, in"
The noble Lord said: In moving this amendment I believe that it will be convenient to speak to Amendments Nos. 82 and 83. As the Committee will realise, Amendment No. 73 contains one possible formulation of the point we wish to raise and Amendments Nos. 82 and 83 are alternatives in rather more technical language.
Quite simply, the amendments we are now considering are concerned with the definition of an income. In these amendments we are suggesting that income from PEPs and ISAs should not be included. On the whole, the intiatives taken by Chancellors on PEPs and ISAs have been very successful in doing something to increase the level of savings. A crucial point about them, which I believe many people found to be greatly convenient, is that one does not have to include them in the income tax return: they are totally out with the existing system.
As the noble Baroness said a moment or two ago, it is true that a very large percentage of pensioners do not pay tax anyway. I could not help wondering to what extent they have been slightly terrified by those unbelievably moronic adverts on television which keep asking people whether they have sent in their tax return. They might have given considerable worry to many pensioners who, as the noble Baroness has pointed out, do not pay tax but may have wondered in the circumstances whether they were supposed to.
As regards these amendments, there would appear to be a strong case for excluding any income or capital consequences—perhaps the noble Baroness can tell us whether it is relevant as regards the capital arrangements—to preserve the incentive which successive Chancellors have given for individuals to save. I believe that the present arrangement is convenient.
Of course, it is the case that many people, particularly those who have been driven away from with-profits funds with insurance companies and all the problems they have been running into, have been recommended in the Sunday papers to choose ISAs or PEPs rather than some other form of pension
provision. From the wording of Clause 15 as it now stands, I am not absolutely clear whether or not other retirement pension income is to be included in the definition of earnings. If not, there seems to be a very strong case for excluding any income from ISAs and PEPs. I hope that the noble Baroness can clarify the situation as regards these two forms of saving. I beg to move.6.45 p.m.
Baroness Hollis of Heigham: The provisions in Clause 15 abolish the rules that exclude pensioners with £12,000 or more of savings from any help. As we have said, we will apply a notional rate of return of 10 per cent on any capital sum over £6,000 disregard but £10,000 for people in residential care or nursing homes. This means that 85 per cent of pensioners entitled to pension credit will see any income received from their savings ignored entirely. Ignoring the first £6,000 of savings also helps better-off pensioners; for example, only pensioners with capital above £12,000 will face effective assumed rates of return greater than 5 per cent.
The noble Lord's amendments then consider the treatment of ISAs and PEPs. I believe that in tabling these amendments the noble Lord intended that actual income and capital gains from PEPs and ISAs should be disregarded in the pension credit income and capital assessments. Achieving such an aim would make the administration of pension credit extremely difficult. For example, we would have to find a way to distinguish the proportion of a person's fund made up of interest and capital growth and how we broke it down between the two.
In addition, I believe that the suggested policy would result in complex incentive effects. PEPs and ISAs would become a more attractive investment vehicle, and in addition to distorting the financial products market, it would also make it extremely difficult for financial advisers to give clear information and advice.
The fundamental difficulty with the proposed amendments is that the Bill, as drafted, already takes no account of actual income or capital gains from PEPs and ISAs, as I have mentioned. We are only proposing to apply a notional tariff sum of 10 per cent to capital sums over £6,000. Thus the only practical way to implement Amendments Nos. 73 and 82 within the structure of a pension credit would be to disregard the whole amount of capital held in a PEP or ISA; in other words, to set the notional rate of return to zero for those savings products. As a result, capital held in ISAs and PEPs would thus be treated more favourably than savings in other vehicles.
Amendments Nos. 73 and 82, therefore, have the same practical effect as the noble Lord's final amendment on this topic. Amendment No. 83 proposes a complete disregard of capital held in a PEP or ISA in the pension credit income assessment. They would all have significant effects on both the cost of the pension credit package and on wider incentives to save in various vehicles.
Any of these amendments would result in a large initial cost in the region of £300 million, with many pensioners with capital held in PEPs and ISAs becoming entitled to pension credit for the first time. In addition, many pensioners with capital held in different vehicles would probably respond to this policy by moving their savings into a PEP or ISA.
Eventually, the noble Lord's amendments would thus amount to a near total disregard of all capital in the pension credit income assessment at a cost of about £1 billion per year. Moreover, the incentive to save in a pension for those who expected to be eligible for pension credit would be eroded.
We developed the provisions in Clause 15 after listening to both Age Concern, which told us that pensioners did not want the hassle of recording actual income from capital and would prefer a notional rate of return, and the Financial Services Authority, which advised that a 10 per cent rate of return enables it to give clear advice to savers about the benefits of second pensions.
Therefore, I hope that Members of the Committee opposite accept that by ring-fencing ISAs and PEPs as they suggest would not only produce very substantial costs but also deform the patterns of saving in the future. In the light of what I have said, I hope that the noble Lord will not seek to pursue the amendments.
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