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It is fairly clear that there are two arguments, but two arguments only, for compulsory annuitisation. One is that people should not fall back on the means-tested benefits of the state; the other, which is also a legitimate Treasury argument, is that tax relief is given to pension contributions as they go into the scheme, and it is therefore reasonable that as money comes out of the scheme, those are taxed moneys out. The total tax treatment is not more favourable than is intended, allowing for the fact that the most favourable element of the tax treatment is the tax-free lump sum that already exists. However, if we took those two principles, we might well end up with a rule establishing a minimum level of annuity that people had to buy, plus an appropriate set of rules as to the tax treatment if people, at any stage, either through inheritance or taking a lump sum, took the lump sum out. I have found it difficult over the years to understand what the arguments against that approach are.

I have some concerns that the amendment in the names of the noble Lords, Lord Skelmersdale and Lord Hunt, is a little complicated. I am not sure why one should not end up with something that says that at the date of compulsory annuitisation one has to buy an annuity equal to some specified amount where that specified amount is enough, assuredly, to keep one out of dependence on the state—end of story, with appropriate tax treatment on top.

This is a debate with strange terms. I have never quite understood why that is not what we are trying to work out. However, I have sympathy with the belief of the noble Lord, Lord Oakeshott, that whatever else we do, we should accept the principle that as the state pension age goes up, the point of compulsory annuitisation should go up at least pari passu, and arguably more than that, to reflect the fact that it has not gone up for many years.

Whatever is resolved as a result of these amendments, there should at least be an increase in the age. The Treasury, the Government and all parties should think about a provision which goes back to the basic principles of an appropriate Treasury concern about tax treatment and appropriate concern that people are not dependent on means-tested benefits in retirement.

Baroness Hollis of Heigham: I, too, have a lot of sympathy with these amendments. I am not sure that I support them in the form in which they are currently drafted. I worry about their complexity, and in the remarks of the noble Lord, Lord Hunt, I did not notice any mention of the fiscal adjustment that the noble Lord, Lord Turner, identified, which would need to be made.

This is not about rights—it is about incentivising savings. What is increasingly happening is that annuity pots are no longer the prerogative of the rich—the upper 5 per cent or 10 per cent—and therefore nothing to do with the rest of us. As more of us go on to DC schemes, more of us will find that our pension is in the form of a pension pot rather than a lifetime annuity through a final salary scheme.

I have figures here that my noble friend was kind enough to give me in January, and they are quite remarkable. A man on median-average earnings over 40 years contributing 4 per cent plus 4 per cent—in other words, the level of the personal account, which is the lowest conceivable level that will exist—in a contracted-in scheme underpinned by a basic state pension and a state second pension would generate £240,000. A rate of 5 per cent plus 5 per cent, which is widespread in the voluntary sector, would generate a pot for that person of nearly £300,000 and, for a woman on median earnings, about £233,000. Those would be conventionally sized pots for people on median earnings in relatively low-contribution DC schemes—in other words, in 10 or 20 years down the line, most people.

The question then is how we encourage people to save. My criticism of the amendment is not only that it does not address the tax relief issue but that it is not bold enough. I very much liked the amendments tabled, perhaps to the 2004 Bill, that proposed a lifetime savings account. The two reasons why people are unwilling to pay into pension schemes are, first, because they would be gambling on their life expectancy and, secondly, particularly for women, if a catastrophe happens to them such as divorce or disability, they cannot get access to the money. It is tied up for 40 years. In the original Conservative proposals for a lifetime savings account, you could top-slice a fraction of it, as in Singapore and Chile, for possibly defined purposes, and rebuild that sum up again, so you would have an emergency savings fund embedded in your pensions scheme. That was an even more attractive proposition than the one proposed here today. The amendment leaves out part of what it should address and fails to be as bold on the savings issue as it might be.

I agree with the basic thrust of the argument made by the noble Lord, Lord Turner. The state’s public policy, while encouraging savings, is to ensure that no one should have recourse to public funds. Those funds take two forms: recourse to benefits and recourse to unreasonable tax privileges. Let us go back to our person on median-average earnings, with his £240,000 at 4 per cent plus 4 per cent—as I say, a personal account. He will have a BSP and a state second pension, which would together generate £7,000 or £8,000 in today’s terms. With £100,000 of that annuitised, it would produce a further £7,000 and an income of around £15,000, which by my calculations would float him off any conceivable recourse to benefits. Now add in a deduction for taxed extra gains—30 per cent or whatever—and that person would still be left with a very useful pot of some £100,000 or more.

What does it matter to the state what that person does with that money? There is no recourse to benefits and you have neutralised for the fiscal privileges, so why does it matter? I have tried to suggest to the Minister before, although I am not sure that I persuaded him, that the state would make a profit. That sum of money would go into an account—a conservative building society account, perhaps, which would pay interest, the tax on which would go to the Treasury. If some of the money was left in the person’s estate, it would go to his children, on which they would pay IHT. So why is there a loser? It is win-win, surely. It is a win for the person who wants to save, a win for public policy for us taxpayers, and a win for the Treasury, which could under certain circumstances actually make a modest profit. Surely everyone is happy.

I am baffled about why there should be resistance. I could understand it if this was regarded as a perk for the “over-privileged rich” who are “already heavily subsidised” through higher rate tax relief on their pensions, but we are talking about people who are on median earnings or even on the basic personal accounts of the noble Lord, Lord Turner, and who will end up with pots of £239,000 or £240,000 and are contracted in, which means that they are unlikely to have recourse to public benefits. So why should we not do this with those provisos?

As I say, I cannot support the amendment in this form as it is much too complicated. I also wish that it was bolder by trying to introduce the element of a lifetime savings account. I do not know whether the right Bill to do that is this one or the Bill to be introduced next year, but we need finally to lay this shibboleth to bed.

Lord Higgins: When I retired from the opposition Front Bench as spokesman for work and pensions after eight years, I was clear that I was leaving that responsibility in the talented and admirable hands of my noble friend Lord Skelmersdale. I congratulate him on how he has continued to fulfil that role so diligently. It is a very onerous task.

At the same time, I resolved not to take part in debates on work and pensions. I should have known better than to sit in the Chamber this afternoon. Like my noble friend Lord Fowler, I was astonished by the speech of the noble Lord, Lord Oakeshott. I moved amendments very similar to those that we are debating now in the debate on the Pensions Bill on 15 November 2004, as reported in Hansard at col. 1224. On that occasion, the noble Lord, Lord Oakeshott, seemed very clear that he was in favour of raising the limit—indeed, of abolishing the limit entirely—and he voted accordingly at col. 1236. Your Lordships’ House has carried similar amendments with suitable safeguards—provided in 2004 and today—to ensure that people did not spend the lot and become dependent on the taxpayer. We have carried such provisions on three occasions, the third being the date that I mentioned.

If I was astonished by the speech of the noble Lord, Lord Oakeshott, I was even more astonished by that of the noble Baroness, Lady Hollis. She also spoke in the 2004 debate, when I had to point out that removing this limit or even raising the age limit—and I am in favour of getting rid of it altogether—would benefit not only the rich. People on lower incomes also would benefit from not drawing their annuity at a particular age and could well take the view that they could get a better annuity if they delayed than if they were forced into it on a particular date. I have taken the view for some time that interest rates will continue to rise and that annuity rates will be higher than they were when we debated the matter in 2004. However, that advantage, that choice, would benefit not only those with relatively large pension funds. I welcome the noble Baroness on this road to Damascus; it is good that she can now recognise that. Nevertheless, it is very difficult to reconcile her speech today with the one she made in 2004.

This has been going on far, far too long. Your Lordships’ House has agreed to amendments of this type three times, and I very much hope that the Committee will agree to them again today. This matter needs to be resolved. It is absurd that people should continue—subject to the point made by the noble Lord, Lord Turner, about the tax treatment arrangements—to be denied that choice and forced to take an annuity at a moment that is disadvantageous to them, with absolutely no benefit to the Treasury. I hope very much that your Lordships will support this amendment, moved so admirably by my noble friend Lord Hunt.

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Lord Howarth of Newport: The arguments have been laid out very powerfully. My noble friend Lady Hollis has come among us unmuzzled. Therefore, I shall briefly add an extra plea from these Benches to the Minister that the Government should look sympathetically and constructively at the case for ending the obligation to annuitise at 75 or, indeed, at any age. I am not attracted by the Liberal Democrat proposal to defer the evil day. The Government need to produce their arguments, if they have any, about what the difficulties would be. Why should people be required to annuitise at any age? Why should capital, over and beyond what is needed to keep people independent of social security, be passed to an insurance company? Why should a saver not be able to pass it on in his or her estate, provided that tax relief is repaid and inheritance tax is paid on that estate? The net sums may not be terribly large after all that, but I still think that the principle is right.

As has been argued, we should encourage people to save. It is essential that we get coherence into savings policy and ensure systematic encouragement for people to save, instead of policies which contradict each other at different phases of life—there is tax relief to encourage pension savings but then you are told that the capital sum built up in your pension pot will be taken away from you. That does not seem a rational policy. As my noble friend also pointed out, would not the Exchequer do rather well? What on Earth is the difficulty?

Lord Blackwell: I wish to speak briefly to the four amendments in this group in the names of my noble friends. For the reasons set out by the noble Baroness, Lady Hollis, we have to recognise that the annuity rules are a major disincentive to people accumulating savings in a pension plan. Like her, I think that the best solution would be to move away entirely from this stricture towards a much more flexible lifetime savings account, and sooner or later we shall get there. However, I recognise that we are dealing with a Pensions Bill this afternoon, and it seems to me that dealing with annuities in this way is a sensible first step.

Reading these amendments, I anticipated that the kind of objection made by the noble Lord, Lord Oakeshott, about the complexity of these arrangements, would be raised. Therefore, it would be useful, if the Government are bringing up the argument about complexity, to know whether that is the sole reason for their objection or whether they would be open to dialogue on whether different arrangements could be made. For example, the noble Lord, Lord Turner, suggested that people should be required to buy a fixed annuity and then be free to spend the rest of the capital; alternatively, if the Government do not want to introduce those conditions, they could specify a minimum level of capital that had to be kept within the scheme at certain ages. There are lots of ways that those measures could be simplified to achieve the same end of ensuring that people do not fall back on benefits while dealing with the tax issue on other funds that are taken out. It is important that we know whether the Government are against annuitisation relief in principle or whether it is simply a question of finding a practical way round it.

I cannot sit down without making the further point that another aspect of the disincentive of annuities is the inability to pass savings in pension pots on to the next generation. If money is saved in a pension pot, surely others who will need a pension pot later could also benefit from it. Do the Government accept that it is beneficial to take money left in a pension fund at the end of a life and pass it into a pension fund of the next generation without tax being taken from it? I recognise that I am extending the argument slightly.

Baroness Howe of Idlicote: At Second Reading I was rather dubious about the benefits of raising the age at which you could take annuities, but the more I have listened to what has been said this afternoon, the more convinced of them I have become. We have the noble Baroness, Lady Hollis, on side, as it were. I have been through the same procedure with her on one or two other occasions, when I was told that my amendment, which will come up later, had no basis of justification. But now that we have heard from her about all the benefits that would arise from this measure, I am even more convinced. There will still be a pot, albeit a discriminatory figure, of some £233,000 for a woman who retires, compared with some £240,000 that an equivalent man would receive. Nevertheless, it is a lot of money and, as we have heard, it is highly likely that the sum will grow with inflation. If we can delay payment until as late as age 85, it is possible that by then no one will be able to argue that the gap between men and women has not closed in every sense; almost certainly, the ages at which men and women die will be closer together. For those reasons, I now very much support the amendment, not least because it will contribute a little to the arguments that I shall advance later.

Lord Turner of Ecchinswell: Perhaps I may add two comments. First, I support and reiterate the words of the noble Lord, Lord Blackwell, who correctly asked the Government to be clear whether they objected in principle to the amendment or simply on the basis of detail and complexity. The noble Lord, Lord Hunt, said that the Government expressed concern in another place that few people would take up that option. It is somewhat strange to use that as an argument, given that the alternative assured scheme was introduced for the 750 wonderful members of the Plymouth Brethren, although they are small in number.

Secondly, we said in the Pensions Commission report that there is an issue regarding the total capacity of the insurance sector to write the scale of annuities for which there could be demand. As we shift from defined benefit pension schemes to defined contribution schemes, a previously implicit process of annuitisation within defined benefit schemes is becoming an overt purchase of annuities from insurance companies. There is an issue about the capital capacity of insurance companies to write the sheer scale of annuities that will be demanded. The bigger the imbalance is between demand for and supply of that capacity, the lower the annuity rates will be.

There is an interest for everyone who buys an annuity in ensuring that those who do not need to buy one do not push their demand into the market and therefore decrease yields. That is a serious point. It is a benefit not simply for those who have chosen not to buy annuities but for those who buy them, as the vast majority of people will.

Lord McKenzie of Luton: I welcome the debate, although I feel a little lonely. I missed out on the debate in 2004—I had just arrived in the House during the final stages of that Bill. I will respond in particular on the Government’s view on practicalities and on principle.

The Annuities Market, published with the Pre-Budget Report 2006, restated government policy on turning tax-privileged pension saving into retirement income by purchasing an annuity by the age of 75. It also responded to the views of the Pensions Commission. I reiterate our belief that pension saving is about giving individuals an income in retirement and nothing else. The Government provide tax incentives to encourage people to save for retirement. In 2006-07 those were in total some £16.3 billion. When an individual takes their pension benefits they can take up to 25 per cent of the pension fund as a tax-free lump sum, which is a not inconsiderable benefit.

In return for those generous incentives, the Government have required, as part of the deal, that the remainder of the pension fund is, by the age of 75, converted into a secure retirement income for life, or is used to provide for dependants’ benefits. The Government believe that the most efficient way of doing this is by purchasing an annuity.

As we know, annuities provide the peace of mind of an income for life regardless of how long that may be. While they provide “simplicity”, “security”, “a guaranteed income” and “little risk”, some feel that they are inflexible and represent poor value for money or prevent them passing on their pension to heirs on death. The Annuities Market responded to these issues.

In terms of bequests, more than half of a pension fund might consist of tax relief. There is no rationale for the taxpayer subsidising bequests. Individuals wishing to pass on assets at death have a number of non-pension vehicles to choose from. Individuals have flexibility to annuitise between the ages of 50—or 55 from 2010—and 75 to suit their circumstances. The noble Lord, Lord Higgins, referred to people being forced into an annuity at the wrong time, but there is a fair spread of years within which to make your choice. Consumers can now choose from an increasing range of annuities, including those that facilitate a flexible retirement or take on investment risk.

The noble Lord, Lord Turner, referred to pressures on the annuities market. In recent years, despite what I think is a threefold increase in the level of investment in annuities, the market has coped and innovated. The Government are keen to work with the market to see further innovation.

The most comprehensive UK pricing survey, published in 2006, showed that annuities are priced fairly. Today's annuity rates need to be seen in the context of the low inflationary environment and the fact that people are living longer. The Government welcomed what we perceived to be the Pensions Commission’s endorsement of this broad policy. It stated:

“Since the whole objective of either compelling or encouraging people to save, and of providing tax relief as an incentive is to ensure people make adequate provision, it is reasonable to require that pensions savings is turned into regular pension income at some time”.

Let me turn to the proposed new clause which would establish a “retirement income fund” as an alternative to annuities to deliver an income stream in retirement. The RIF has appeared in various guises in the past, but I would like to restate that it is incompatible with government policy. The RIF would remain invested and withdrawals between a minimum and maximum would be permitted. An “annual maximum withdrawal” allowance would be set by the provider for each member, based on an assessment of their life expectancy. A member's withdrawals from the fund could not, in a year, exceed that allowance. An “annual minimum withdrawal” allowance would also be set by the provider, and we presume that a member must withdraw at least this each year. In setting this, the provider would have to ensure that the member's total income was at least equivalent to a “minimum retirement income”, as that is defined in the proposed new clause.

Nothing in the proposed new clause appears to stop the minimum allowance being set at zero. Provided that the member's income from other sources for future years is greater than an MRI, it appears that there is effectively no maximum withdrawal from the RIF—in which case the member can draw any income. Additionally, in such a situation, an individual might choose not to draw any pension income at all from the RIF in order to pass the fund on to heirs.

Like previous amendments, this proposal is silent on how RIF withdrawals will be taxed and what will happen on a member’s death. I listened with great interest to the noble Lord, Lord Hunt, to see what he was going to say about that. My noble friend Lady Hollis picked up on that point. In a sense, I thought that the game was given away by the noble Lords, Lord Fowler and Lord Blackwell, who said that it is right that people should be able to pass something on to their children. Of course it is. However, to use pension tax privilege schemes of this nature to do so is not what the scheme is about. I presume that the intention is that RIF withdrawals would be taxed. RIF savings would be tax-advantaged compared with other forms of savings. Given the apparent ability to extract RIF savings below the annual maximum allowance, there is a danger that it would become a vehicle into which other savings are recycled for tax advantage rather than encourage new retirement savings.

Several noble Lords referred to the alternative secure pensions regime. Does not history prove that, where you create special arrangements and change the rules, people pile in and try to abuse the purpose for which the arrangements were created? One could see exactly that situation flowing from these arrangements, if we were to accept them. As such, I fear that the proposed new clause is designed to allow a small group of individuals to pass on their pension funds to their heirs on death and not, as intended, to secure a retirement income. Perhaps I may reiterate in a little more detail the deal on pension tax and why the RIF amendment clearly violates it. The Government provide—

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