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Baroness Noakes moved Amendment No. 15:

After Clause 3, insert the following new clause—

"WITHDRAWAL RATE
No one drawing a state pension credit shall suffer a withdrawal rate of benefit greater than 40 per cent."

The noble Baroness said: My Lords, this amendment deals with the important area of the withdrawal rate of benefits. The Bill proposes that income beyond the £100 minimum guarantee level will be reduced by 40 pence in the pound. The story does

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not end with the withdrawal of the savings credit. The Government say in the Explanatory Notes that the rules that apply to housing benefit and council tax benefit will in the main reflect those of pension credit. But it appears that that generosity does not extend at the margin.

The Minister wrote a very interesting letter to my noble friend Lord Higgins, which was copied to the noble Baroness, Lady Barker, in which she illustrated the rates of withdrawal of the various benefits including the income tax effect. The standard withdrawal rate for savings credit, housing benefit and council tax benefit is 91 per cent. The Minister outlined that matter in Committee. But with the impact of tax, which is complicated by the individual circumstances of the pensioner, that can rise to a staggering 93 per cent.

That is a very difficult level of withdrawal to contemplate as being fair, just and reasonable. Perhaps just as importantly, the Bill should be promoting savings. It does absolutely nothing to promote savings if the pensioner can see the trap waiting for him once his savings get beyond the level of generation of income which pulls these withdrawal rates into effect.

In Committee, the Minister told us that large numbers of pensioners would be involved if the amendment, which we have before us again today, were agreed to and that it would be very costly. I think she also said that there would be no cash losers under the Bill. I hope that she will forgive some scepticism from these Benches, given the complexity of the matters and with so much presumably needing to be dealt with by regulations which are not yet before us.

The biggest problem is that these high marginal withdrawal rates—91 and 93 per cent—are a massive disincentive to savings for the future pensioner population.

I fully accept that Amendment No. 15 is inelegant. It seeks to cap those withdrawal rates at 40 per cent. I should very much like to find a more elegant formulation for it. For now we remain to be convinced that it is right to have a withdrawal rate of more than 40 per cent for all of the benefits taken together that are caught by these withdrawal rates. I beg to move.

Baroness Hollis of Heigham: My Lords, Amendment No. 15 would ensure that no pension credit recipient suffered a marginal deduction rate of more than 40 per cent. The noble Baroness, Lady Noakes, in her final remarks said 40 per cent "all taken together". As I explained in Committee, the costs associated with that are £17.5 billion, almost nine times as much as our pension credit proposals. I am sure that the noble Baroness does not mean to raise the cost for pension credit by such large amounts, even from those Benches. So I shall assume that she is referring only to ensuring that those pensioners receiving the savings credit do not suffer marginal deduction rates of more than 40 per cent.

That is not what she said. But that may be what she actually means. I should not wish to put a £17.5 billion tag around her neck, particularly as we go into the

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weeks running up to the Budget. To do this, we would have to extend the allowable amounts in housing and council tax benefits to the end of the savings credit so that single pensioners with weekly incomes up to £135 and pensioner couples with incomes up to £200 are passported on to full housing and council tax benefits. The cost of doing that, which is a much more modest amendment, is £600 million. It is poorly targeted because the pensioners who would gain from that amendment would all have incomes in excess of the guarantee credit.

So my first response is that the cost—whether it is the biggie or even the littlie—is extremely expensive and going to the wrong people. I do not think that the noble Baroness really wants that.

The second point made by the noble Baroness, which I believe is the thrust behind the amendment, is her worry about marginal deduction rates, or MDRs, which will be 91 per cent for the approximately 8 per cent of pensioners who may receive the taper out of the pension credit, housing benefit and council tax benefit—with a further 2 per cent, or so, on top if they also pay tax. I take her point: no one likes high marginal deduction rates. The noble Baroness's language of incentives would be right for people with an option of increasing their income who chose not to do so because of high MDRs. Who is in that situation? People in work who know that, if they work for another £10, they will keep only 9p, 90p or £1. Those are the people who will be deterred by MDRs.

Where there is a high MDR but a fixed income, no change in behaviour will follow. If one is a cash gainer—my understanding remains that there will be no cash losers under the Bill—the concern of the noble Baroness about MDRs is unrealistic. I make that distinction. MDRs are a problem for those in work who have the option of increasing their income but may be deterred because of what are effectively very high rates of tax. For people who have fixed incomes, such as pensioners for whom such choices do not come in to play, MDRs can in no sense be a deterrent because there is nothing to deter them. The net result—this is important—is that they will remain cash gainers by between £7 and £11 a week, on average, from pension credit.

Given those two points—first, that the amendment would be excessively expensive, whichever figure the noble Baroness chooses, and poorly targeted; and, secondly, that what matters here is not MDRs but whether pensioners are cash gainers, as they will be—I hope that the noble Baroness will withdraw her amendment.

5 p.m.

Baroness Noakes: My Lords, I thank the Minister for her reply and for the cost estimates, which are indeed significant. In speaking to the amendment, I stressed the impact on future populations of pensioners and, in particular, the incentive effect on saving. Marginal deduction rates will not work only on those in work, who may see only 7p or 9p left from £1 of earnings. They may well have an impact on those

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considering the effect on their position for marginal extra saving—the sacrifice that they would make while they work to save for their retirement; or, indeed, their decision once in retirement whether to keep their savings or to start to draw them down and spend them.

We have constantly been talking about the effect of the Bill on the incentive to save because it is important that there should be a great incentive for individuals to save so that they do not become a long-term burden on the state. We have constantly asked about that future pensioner population, and have often received answers about the effect on the current pensioner population. Those are two distinct issues. However, I heard what the Minister said, in particular on cost. I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 4 [Exclusions]:

Baroness Greengross moved Amendment No. 16:

Page 3, line 39, leave out subsection (1).

The noble Baroness said: My Lords, I tabled this amendment in Committee but it was the last amendment considered on the first day of the Committee stage, so it was late when we reached it and was considered only briefly.

As the Minister covered the substance of the issue in Committee, I shall, again, be brief. The issue here is whether couples should be assessed individually, as is the case with tax, or together as pensioner couples, as is the case for benefits. A move towards integration will help us to move from the language and practice of means-testing to the language and practice of entitlement, which I think we all want.

My question is simply whether the Government intend eventually to integrate state pension credit with the tax system. I know that that could be done only in the long term. When asked in Committee whether the Government were going to disaggregate, the Minister said:

"The answer to that is no".—[Official Report, 24/01/02; col. 1690.]

That seemed a pretty clear answer. Yet in the consultation document published in November 2000, I, for one, was encouraged to read that the intention was indeed to,

"look at the tax system to consider whether there could be alignment with tax rules . . . smoothing the path to greater tax/benefit integration in time".

Am I to assume that the Government are not now making any effort along those lines? I beg to move.

Baroness Hollis of Heigham: My Lords, I shall be brief. Pension credit is designed to meet household need—the guarantee element—and to reward savings that are at present being absorbed by the relative generosity of MIG. The whole of social security is based on the concept of a household. The Government have no intention to disaggregate. There is, therefore, no likelihood that the pension credit would be or could be disaggregated, as the noble Baroness suggests.

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Under the noble Baroness's proposal a woman who had a wealthy husband or cohabiting partner with little personal income but who was, none the less, in a wealthy household would be entitled to pension credit, even though her partner or husband had a very high income. That cannot be the basis of social security; it never has been. I must say that we shall not go down that road. I am sorry, but it is right to be absolutely clear. With that assertion—it is not really an explanation, it is an assertion—I hope that the noble Baroness will feel able to withdraw her amendment.

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