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Baroness Greengross: My Lords, I thank the Minister for that explanation. The principle of simplifying the situation so that credits are co-ordinated as much as possible across departments is important. Perhaps more thinking on that could be done before we reach the Bill's final stages. I understand the Minister's explanation and, for the time being at any rate, beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Baroness Noakes moved Amendment No. 26:
- Page 9, line 31, at end insert—
The noble Baroness said: My Lords, the amendment is designed to give the claimant the option to have his income from capital calculated by reference to his actual income rather than using deemed income under Clause 15(2).
I spoke in Committee about the fiction involved in the savings credit using the deemed income approach, especially with the 10 per cent rate, which we are told the Government intend to use. I am aware that many pensioner groups expressed themselves content with that approach because it means that they will not have to bother with producing income vouchers and so on. The amendment accepts that approach for those pensioners who are content to be deemed to have income but it would give an option to other pensioners who may be adversely affected by the rules.
I have done some calculations on the basis of likely actual income streams earned by pensioners at 5 per cent, which is what they could get if they invested in gilts, or at 2.5 per cent, which is what they would get if they invested in index-linked securities or roughly what they would get if they invested in equities. I have shared the detailed workings of those calculations with the Minister in advance of today.
I shall share with noble Lords the bottom line of both calculations. A pensioner who invests his money to earn 5 per cent per annum will find that for every £1,000 of capital he has over the £6,000 threshold, the pension credit system will leave him with only 19p per week. His £1,000 of capital—the extra £1,000—will actually produce him an extra income of £50 a year but the way in which pension credit calculations work will leave him with only £10 in his pocket. That applies evenly throughout the range of capital above £6,000 up to £35,000, which is roughly where the pension credit peters out. Put another way, there is an 81 per cent withdrawal rate for income from all capital over £6,000.
However, the real horror story involves pensioners who invested their money in index-lined securities or equities that earn 2.5 per cent. If a pensioner wants to protect the real value of his capital, he has to invest in a lower annual rate of return. Working with the same example, for every £1,000 over the £6,000 threshold, he will end up with 29p less income per week than at the lower level. That again rises evenly over all capital levels from £6,000 until the savings credit runs out. By the time that the capital rises to £16,000, the pensioner will have less than £100 in his pocket because of the interaction of the two systems—deemed income versus actual income.
The big message that comes out of that analysis is that there is a major disincentive to save. Why should any rational employee want to save for retirement if the result of every extra £1,000 capital that he saves is an extra 19p a week in his pocket or—worse—if he is
I said to the Minister when I passed her my calculations that I cannot believe that her department and the drafters of the Bill meant to have that effect. I look forward to hearing her response. I beg to move.
Lord Hodgson of Astley Abbotts: My Lords, I want briefly to support my noble friend. One of the difficulties with the Bill and its increased complexity is the fact that we are so rarely in touch with reality. There is "deemed" here and "deemed" there; we have 0 per cent return up to £6,000 and 10 per cent return thereafter. We agreed in Committee that none of that involves the real events that people will face out there in the real world. My noble friend's amendment therefore gives a chance to those who wish to do so to go back to the real world and assess what they are actually receiving from their savings, as opposed to the "deemed" system, elegant though it may be in terms of administrative savings; nevertheless, it means that we are some way distanced from reality. I very much support the comments of my noble friend.
Baroness Hollis of Heigham: My Lords, Clause 15 radically reforms the treatment of capital in the pension credit income assessment. I remind noble Lords that no longer will pensioners with capital of £12,000 or more be automatically cut off from any help, as is currently the case. Savings below £6,000 will be disregarded altogether, ensuring that 85 per cent of pensioners who are entitled to pension credit will not have to tell us about their savings at all. We will also have a more realistic rate of return of 10 per cent for capital above £6,000; that is half the current assumed rate of return—that is, 20 per cent—under MIG. Putting the two arrangements together, our treatment of capital is five times more generous than under the present MIG system and the old income support system which, so to speak, we inherited.
Taken together, the £6,000 disregard and the assumed rate of return mean that the effective assumed rate of return for most pensioners will be well below 10 per cent. Pensioners will, for example, have to have capital above £12,000 to see an effective assumed income rate of more than 5 per cent. To turn the point around, 95 per cent—I believe that the figure may in fact be 94 per cent—of pensioners will have an effective assumed rate of 5 per cent or less.
I am told that words such as "deemed" and so on are not part of the real world. However, the real world to me is what 95 per cent—or 94 per cent—of pensioners will experience. Moreover, 85 per cent of pensioners will not have to return detailed information on that; that will take them further away from the intrusive questioning that they disliked in the past. The next 10 per cent or so will have an effective rate of return on their total sum of something under 5 per cent. That seems to be the real, and realistic, world in which we
That is what we are doing and that is the real world. It is not the world of high finance in which we would go into the difference between equities, gilts, corporate bonds and so on. That is not part of the real world in which the pensioners about whom we are talking—those with incomes from savings, second pensions or whatever of a maximum of approximately £23 a week—live.
The Financial Services Authority supports our reforms. During the consultation period, it asked us to take into account the returns which pensioners can obtain from their savings. It also asked us to consider the need to avoid penalising those who have chosen to save in a pension. That is why we chose the 10 per cent rate of return. The FSA agrees that that rate would enable it to give clear advice to savers about the benefits of saving in pensions. That was the FSA's advice to us. In its professional view, a lower rate of return, including the actual rate, as the noble Baroness suggested, would tilt investment away from pensions into other savings vehicles. That cannot be right.
There are practical problems and, again, the devil is in the detail. I shall toss this point into the arena because I appreciate the amount of work that the noble Baroness has carried out on it and I found her statistics interesting. I am grateful to her for giving me prior sight of them. For actual income from capital to be taken into account, claimants would have to work out how much income their savings earned rather than simply tell the Pension Service how much they had as a capital sum. But we know from consultation that pensioners do not want to go to that trouble.
However, the situation is worse than that. The proposal would make the operation of the £6,000 disregard extremely difficult. At best, a claimant would know the total amount of income that his or her capital yielded—that is, if he had kept his books in order, worked out all the figures and calculated what was monthly, quarterly or yearly, and so on. But it is unlikely that he would know how much income a proportion of his capital generated. If he had £12,000 in capital, £6,000 would be disregarded and £6,000 would be real return.
With that in mind, I should be interested to know how the noble Baroness proposes to calculate how much of a claimant's income is attributable to savings above the £6,000 disregard. She is suggesting that pensioners and decisions-makers have to make a complex choice. I have been trying to puzzle out how one might do it without reintroducing into the five-year assessment the 40-page forms that on previous occasions your Lordships rightly scorned.
We would certainly need far more information from pensioners than we currently obtain. We could ask them to fill in the current self-assessment tax forms, as the noble Baroness and I will do when we work out our taxes, in order to determine how much of the income from capital is below £6,000, how much is above that figure and which bits are attributed to which. I suspect that it would work only if we dropped the £6,000 de minimis. But is that what the noble Baroness wants and would that, in turn, recommend itself to Age Concern?
In addition to the administrative difficulties involved, the amendment would also risk distorting the savings market. I spoke earlier about taking one form or another, but the amendment might, for example, discourage pensioners from saving in pension products and instead lead them to put their savings into low-interest investments. Obviously, there would be an incentive to go for growth over income in order to maximise one's entitlement to pension credit and to leave as much as possible to one's heirs. That might mean, for example, that pensioners would be attracted to low-income but risky high-growth products—one has only to mention emerging markets—as opposed to taking financial advice that would suggest corporate bonds, for example. Therefore, problems are involved. It is not our ambition to undermine equilibrium in the savings market or to skew incentives against pensions.
I understand that the proposed amendment may seem to provide a fairer way of proceeding. Yet, given a choice between the Government's proposed policy and Amendment No. 26, most pensioners with low and modest savings would gain more from the former. The Government's policy means that more than 90 per cent of pensioners entitled to pension credit face an effective rate of return of less than 4 per cent, and 95 per cent an effective rate of return of less than 5 per cent or thereabouts.
On the other hand, the proposed amendment would cost a substantial amount—on this occasion, £400 million; the noble Baroness is joining the ranks of the big spenders here—and would generally benefit better-off pensioners with large amounts of capital who would seek to shelter it in low-income products.
The noble Baroness said that current rates of return are lower than the notional 10 per cent. Of course, they are. But the cross-over point at which notional income exceeds real income is around the £10,000 to £12,000 figure. Above that amount, which, as the noble Baroness will recognise, is the cross-over point, it is surely not unreasonable to expect pensioners to treat their capital as well as the income from it as a resource for them to draw on. There may well be less to leave as an inheritance, but it is not the job of pension credit to ask taxpayers who may not have much capital to fund the incomes of pensioners so that they can leave fairly substantial capital assets—£50,000 plus for a couple, for example, on the noble Baroness's figures—to their children. That is not our job.
Our aim has been to find a fair assumed rate of return on capital which does not undermine the balance between different savings vehicles on the
"( ) A claimant may elect that income from capital may be calculated by reference to the actual income received or receivable, in which event subsections (2) to (5) above shall not apply to that income."
6.30 p.m.
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