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Lord Lea of Crondall: My Lords, I simply wanted to ask the noble Lord why he dismissed so readily the idea that taxation has nothing to do with this. Half the tax relief at the moment goes to the top 15 per cent of contributors. We have had this discussion before.
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Would it not be those sorts of people that would take the greatest advantage of the removal of this requirement? For me, until that point is answered, that tilts the balance of the argument very much in favour of the status quo.
Lord Higgins: My Lords, as I say, the argument about people being forced to take an annuity at the wrong moment applies to everyone, not just to the people at the upper end of the income scale. Of course it is the case that those with larger pensions would have a greater interest; that is a purely quantitative aspect. None the less, I think it is important to stress that they also have lost, compared with what they expected to get, because of the huge drop in annuity rates which has taken place under the Government.
People were incentivised to save by the Chancellor, and the economy has gained by their saving in the mean time. I do not believe that forcing people to do what they do not want to do is justified by the argument that they had tax relief. They had tax relief because the Chancellor of the day believed that it was a good incentive to encourage savings and so on. As has been pointed out, a lot of people did not save all that much. None the less, I think that the arguments I have put forward stand up.
Lord Lea of Crondall: My Lords, the inference that many of us would draw from this interchange is that in principle there may well be a case to be made here, but that, if that case is to be made, it must be accompanied by a total reconstruction of the tax regime for pension contributions. That is the inference that I would draw.
Lord Higgins: My Lords, I am not sure whether that was an intervention or not. Perhaps I may just add that of course the whole thing is massively affected by inheritance tax and the fact that house prices have gone up so much. That brings more people into that structure. Incidentally, I think that the noble Baroness was wrong about capital gains tax and housing; she was certainly wrong about ISAs, which are an alternative to this sort of pension scheme, because they have fallen dramatically. These are broader issues. We can go further into them.
Lord Oakeshott of Seagrove Bay: My Lords, I wonder if this is a private party or whether anyone else is allowed to join in. We support these amendments in principle. Whether we are able to support them in practice will, I am sure, depend on the Minister's answer and the helpful guidance to opposition amendments that certainly the noble Lord, Lord Higgins, seems to be expecting. Obviously we shall listen to her with interest.
The point had also struck me whether it would be simpler, if indeed all these amendments prove to be defective, to raise substantially the limit for the compulsory buying of an annuity. No doubt the noble Baroness can tell us, either now or in correspondence, in what year the limit of 75 years was fixed and what the average age of death was at that time, and update it pro rata. I suspect that we would find that the average is higher. If one fixes a suitable number of
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years beyond the average age of deathsay, it were 85 or 90 nowone would not need to keep revisiting the issue as life expectancy increases. We certainly would be prepared to consider that alternative. But, as I say, in principle, we support these amendments.
Baroness Hollis of Heigham: My Lords, I agree that it is late, and I do not want to revisit everything that we said in Grand Committee. There are three levels of critique which I could apply to the amendments. The first is what I call the "blue sky" level, which was the level at which we discussed the issue in Grand Committee. I made it clear then that none of the proposals had a claim to be considered unless they included at the very least both an annuity to float people off income-related benefits and a full claw-back of the tax-protected regime and advantages, which is what Members of another place sought; otherwise, there would be an unreasonable fiscal burden on the rest of us.
So before I even begin to engage in serious discussion of these issues, those two points must be a given; that is, there must be both an IRB-related annuity and a look at a full claw-back of the tax-protected regime. People are putting moneys into those pots over and beyond what they need for their retirement precisely and only because of the attractiveness of the tax regime. If one is using that money for a purpose other than a pension, one would need to look at that before any further discussions.
That is the "blue sky" level of critique. We could argue who gains and who pays under the whole financial package, as my noble friend has done. However, there is a bottom level of discussion which would involve a very close reading of each of the amendments. I could spend a considerable amount of time showing how technically flawed they are in every particular and so on, but I do not think that that is required.
I shall opt instead for an approach that was known in my graduate classes in Berkeley as "middle-level generalisations", which is the point between those two levels of critique, and show why each of the amendments as constructed has major flaws. They are not just technical details, but major policy flaws which may not have occurred to Members opposite. That is why we cannot proceed with the policy in the way the noble Lord seeks, even if we were persuaded of the "blue sky" arguments, which we are not. I am dealing now not with the little words and the cross-references, but with the substantive problems with the amendments as they stand.
These are important amendments that would abolish the obligation to take an annuity at the age of 75 and instead would require that people purchase a minimum retirement income annuity to ensure that they have sufficient income to avoid relying on income-related benefits. We understand that the intention might also be to require purchase of this annuity from age 65. I understand, as I said, the "blue sky" arguments.
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I turn to the particulars. Amendment No. 288 would force people, apart from those few currently in income draw-down, to buy an index-linked annuity for each personal pension arrangement they hold. That would take away the current right of people to take the annuity that best suits their needs at the time that best suits them up until they reach age 75. For example, it would deny people who are sick the opportunity to achieve higher incomes through the purchase of an enhanced annuity and it would potentially force people to take a low rate rather than delay purchase as they currently can.
In other words, to float them off IRBs, Amendment No. 288 would require members to take their annuity at 65 whether they wish to or not. So in order to help the best offthe 1 per cent or soone would be reducing the current freedom of the other 99 per cent of people to choose the time between age 65 and age 75 when they might wish to annuitise. That cannot be right.
Amendment No. 288 would have other consequences. I am looking at the firm policy points that are tucked away in the drafting of the amendment. The amendment would ignore the situation of the surviving spouse. The amendment provides no capacity for an annuity to continue on the death of a member. There is no statement on what happens to the retirement fund at death. There is no tax provision for that fund if it is paid out. The amendment would force 99 per cent of people to buy their MIR annuity at 65 instead of having the current freedom to continue until 75 if they wish. It applies only to personal pensions, but to each and every one of them, so that someone with half a dozen pots would be required to meet those needs in respect of each of them.
Leaving aside the situation of spouses and the problems of RPI, Amendment No. 288, by requiring everybody to take an annuity at 65 and requiring the provision to apply not to DC schemes but to every personal pension, would not begin to carry the policy intent that the noble Lord wants. I could outline what would happen to the gilts markets and so on, but I shall not.
Amendment No. 289 requires any withdrawals from the retirement income fund to be taxed at the member's marginal income tax rate. That goes back to my noble friend's point. Initial estimates suggest that we would have to levy tax at 55 per cent to make the change tax-neutral, broadly to recoup the tax fully from the individual's pension contributions, national insurance and tax relief on any employer's contribution, and the pension fund investment relief previously enjoyed. As drafted, the amendments would continue to provide a highly tax-favoured regime that a small number of people would be able to take advantage of. In short, the average, hard-working taxpayer could end up funding the legacies of the better off.
Equally, the amendment does not require withdrawals to be made from the retirement income fund, nor does it provide what happens to any funds remaining on the member's death. But the amendment's rules on non-assignment and non-surrender seem to prevent the retirement income fund paying death benefits to
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survivors. There will be problems in that respect. The amendments would also make it difficult for trustees or managers of pension arrangements to comply with an attachment order requiring them to pay a percentage of a member's benefits to a former spouse. It would not be possible to make a pension-sharing order, due to the rule embodied in the amendments against non-assignment. So among the many losers from the amendments of the noble Lords opposite would be divorced spouses, mostly women, of individuals who had set up a retirement income fund.
I could talk about leaving the powers with the Chancellor of the Exchequer and so on, but I am sure that the Chancellor could address the issues raised by the noble Lord.
Amendment No. 290A is a very narrow provision. It suspends the age of 75 for personal pensions, leaving other people in a hiatus. It produces a problem for those who will be affected by the rules of 2006, when there will be new rules on amalgamation to create a simple tax regime. The amendment would only have effect until 2006, as it amends the Income and Corporation Taxes Act 1988, which will be repealed by the Finance Act 2004. So it benefits only individuals who have pension savings in a personal pension fund and who reach age 75 on or after 6 April 2005 and die on or before 5 April 2006, when the new, simplified pension tax regime comes into force. This very short-term amendment, which would apply for only one year, cannot be what the noble Lord intends. I could go on.
Amendment No. 290B is the heavyweight among these amendments. It would allow people to acquire an annuity to attain income-related benefitnot just through an annuity; it brings into account any other income they might have. If there were sufficient other income, they would not need to annuitise at all. Then the whole issue of what the fund stood for in the first place would come into question.
Until now, all three amendments have addressed only the issue of personal pensions, but the "biggie" here is DC schemes. That is why in this amendment the noble Lord is seeking to apply Amendment No. 290B to the DC schemes that he cannot get at because of the three amendments which apply only to personal pensions.
The complexity here is huge. We would still need to broaden it further even to begin to make it work. At that point I believe that real problems are presented for the restructuring and relative attractiveness of DB to DC schemes. If somebody in a DB scheme found that if only he had saved in a DC scheme he could have got access to his money in a DB scheme there would then be a stampede from one to the other in order to gain access to the equivalent of the money pot.
All the amendments as they stand have serious policy flaws. I do not mean just technical drafting problems, but serious policy flaws. I have yards of speaking notes on this matter. I have not tried to go into the small level, detailed technical drafting. I have
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not tried to open up again the big blue sky issues. I am saying that these amendments create far more problems than they solve while none of them does what the noble Lord seeks to do, which is to remove the requirement to annuitise at 75 whether the losers be the 99 per cent who all require to do so at 65 instead of having a choice between 65 and 75 and whether it is simply abandoning the position of divorced spouses who have rights to attachment orders. All these are insuperable problems as regards these amendments.
I do accept that there are real concerns about the issue of annuitisation and the gamble one takes about the level of annuities as well as the gamble of longevity risks at the age of 75. I do understand why people would want to have access to money they have saved in pension funds. I can see why, if it could be made fiscally neutral, people might think that it was something that was worth looking at further.
I repeat three points. First, these amendments cannot carry the policy of noble Lords opposite. If passed they will not deliver and they will introduce new injustices and anomalies into the system. They are so deeply flawed that unless the Government were willing to take them over, which is a matter for another place as well as this, the amendments cannot do what the noble Lord wishes. It would be a monumental task of drafting given the read-across to all the existing tax legislation. As they stand, they would force everyone to annuitise at 65. The amendments do nothing for divorced spouses and there is no protection for the surviving spouse. Those are three compelling arguments against the amendments. There is no time, even if the Government were so minded, which they are not, to take them over on behalf of noble Lords opposite.
There are real consequences for the Treasury about the differential impact of tax relief taken and enlarged suddenly by the pension pot becoming a savings vehicle. People would certainly be much more willing to invest in a pension pot up to the pension cap ceiling, which they do not do at present, because they know they could access it if they found that it was surplus to what they thought were their requirements. That would have quite complicated cash flow problems for the Treasury. I am not saying that it is an insuperable problem because it could be restructured over time. The pattern of payments and receipts would have to be very heavily reconfigured and that has not been mentioned here today.
Finally, and perhaps most worrying of all, there is a deeper effect on pensions structure. If people have the choice of a DB scheme which they can never access and a DC scheme which they can, particularly if the levels of contribution are not so disparate, why would they ever go for a DB scheme when they could use the DC scheme as both a savings pot and a potential legacy?
More to the point, there would be huge pressure on DB schemes to convert and to be translated into a money pot with the destabilisation of the market that would occur, with pressure moving away from DB schemes onto the annuity markets that would
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have to provide the base annuity to float people off. At the moment DB and DC schemes with similar levels of investment should produce broadly similar results over a long period of time except that the risk is carried by the employer under the DB scheme and by the employee under the DC scheme. In turn they also have the flexibility of that decade which will be lost with these amendments. I am confident that the relative attractiveness of DB compared to DC schemes would disappear with this amendment. It has repercussions across the whole of pension provision.
As I have said, I have not sought to engage seriously in the blue-sky stuff; I have not sought to do low-level techy stuff. As drafted, these amendments have really substantial policy flaws in them. I cannot say to the noble Lord, "If you go for this one, this will work and the others won't". Bluntly, all the amendments would need government consent in order to find the time and parliamentary counsel willingness to redraft across the board an elaborate array of tax legislation and so forth. That certainly cannot be done in the immediate future; that is, in the next 10 days or so.
Given that, I am sorry not to be able to help the noble Lord on which of the amendments might have some chance of staying power and robustness. The truth is that none of them will. Whether the noble Lord or noble Lords opposite can come up with an amendment that has more staying power at Third Reading, I do not know. That will be for them to determine. I emphasise that we could not even begin to consider any of that unless it is not only fiscally neutral but also addresses the issues, as I have said, of the reconfiguration of Treasury cash flow and the deeper consequences for the existing structure of our pensions systemDB and DC schemes. That cannot be pulled out in isolation, as noble Lords seem to think.
I have tried not to repeat what I said in Grand Committee. With those remarks, I invite the noble Lordas he has already indicatedto withdraw his amendment.
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