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Why might such a scheme be necessary? As they grow older, men on above median earnings will usually have some savings beyond their pensions. As mortgage pressures, for example, ease, they may have an ISA or two. Those people on below median earnings, especially women who may be well below, seldom have savings. There is abundant research to show why. Scottish Widows has always flown the flag for women’s pension issues, as did the former EOC, which did good work on this, the DWP and the former DSS. Some of these points are fairly obvious but perhaps bear repeating.
Women will not have rainy-day savings because, clearly, there is not enough disposable money. Their earnings may be part-time, low and intermittent; in some sense, they may be regarded as temporary. What money there is may generate difficulties of management and, more likely, problems of debt, rather than problems of savings. On top of that, for younger women especially, there is still the utopian view that a Prince Charming at best, or husband if not, will see to it that there is almost a financial division of labour within the family. He will do the long-term pension stuff, while she does the short-term household budget stuff. His pension, therefore, is for them both. The idea that the pension was for both of them was one of the reasons why your Lordships time and again were behind pension sharing after divorce.
Despite what we know about family breakdown, the belief that it is for the man to provide for both of them persists. The woman may therefore feel that to save in a pension, rather like having a pre-nuptual agreement, somehow indicates a lack of trust. If money is tight and if the man saves into a pension, the woman, in turn, is more likely to view household spending as her priority. The trainers for the children and school trips are her contribution to family financial circumstances and she will tend to put other people’s financial needs, especially those of the children, ahead of her own.
The woman sees saving in a pension as being selfish—research has shown that women use that word—and women are hard-wired to think that that is the worst of all social sins. Even if she does not think that she is being selfish, she could be put off by complexity, obscurity, worries about mis-selling and concerns about the impact of means-tested benefits whereby, allegedly, Tracey’s mum who saved is no better off than her aunt down the road who did not. Above all, pension savings are locked away for 40 years. Therefore, if there is a crisis around the corner, they are untouchable, even though the need now may be far greater than the need in 20 years’ time because of, for example, divorce, disability, repossession or the husband’s unemployment.
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I believe that the policy makers are making a mistake. At retirement, men and women are, for the most part, in similar financial situations with a steady but low income and steady but predictable expenditure. Because men are none the less worse off in retirement than when they are in work, that is projected somehow on to women’s working lives. Because they share a common retirement life, it is almost like a retrospective fallacy. It is presumed that they share a common financial situation in their working lives and that, therefore, the job of pension savings is for men and women alike, primarily to smooth the way from work to non-work worlds.
However, just because the experience in retirement may be broadly similar, that does not mean that there will be a similar experience in work patterns and that, therefore, income should be relocated from working life to pensions in the same way. It does not mean that it makes equally good sense for women as it usually does for men to smooth incomes from working life to non-working life. Whereas men probably will work throughout and build a pension throughout, women face much more of a rollercoaster of risk, to which men are never exposed, which will result in intermittent connection with the labour market.
We need to help women to smooth their incomes during their working lives—something that we do not normally need to do for men—just as we need to smooth for both genders their income from their working lives into retirement. More than most men, a woman will need a rainy-day savings account—£5,000, £10,000 or £15,000 probably—because of the risks that she will face, which will be higher than those of most men, and because, as a low earner, she is much less likely to have any protection against those risks. Her need for a rainy-day account is greater, but her likelihood of having one is less. You would expect her instead to save in a pensions account. I suggest that those poorer women simply cannot afford to have both a rainy-day account and a pension, even if they were minded to. Faced with an impossible choice, women may choose to do neither and will remain at the edge of financial risk.
How do we help such poorer women? We are very good at helping better-off men who need our help least. For example, the movement of ISAs to pensions is permitted, even if the man probably has both and can afford both. The woman needs the reverse—that is, pensions to ISAs. But ISAs alone will not do, as they do not have the tax attraction or the employer’s contribution. As far as I am aware, there is no one simple and affordable product on the market that allows women to combine short-term rainy-day savings and long-term pension savings. Would a LiSA do that?
The Tory proposals originally were probably fiscally too complex, because of the tax relief that comes into a pension pot, which would not normally be available for spending purposes, and because the American example—401(k)—was probably too loose. But we have a ready-made vehicle: the 25 per cent tax-free lump sum is available at the age of 50 now, rising to 55 in April 2010. It is often used to pay off the mortgage, the university costs of children or even to help children on the housing ladder. That lump sum can be drawn
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I propose that, subject to a floor and ceiling, individuals—obviously this would be most helpful to women—could access that lump sum over their working life. The floor might be £20,000, so that there has to be something like 10 years of savings already in the pension pot. The ceiling might be £80,000 or £100,000, so that it is not distorted by clever accountants as a wheeze to pay school fees, for example. It would mean that the woman could access £5,000, £20,000 or £25,000 during her working life if she needed to, but it would have to be rebuilt before she could draw any more. For example, if she took £10,000 from a £40,000 pot, she would not be allowed any more until she had rebuilt beyond that £40,000 to, say, £60,000. She could then take 25 per cent of the difference between the £40,000 and £60,000—that is, a further £5,000.
No tax adjustments would be necessary because that sum comes tax free. It is simple. Obviously, depending on when it is drawn down, it would have investment return implications and would need to be tracked in order to consider whether, for example, there should be a limit on the number of times it could be accessed. I believe that such a proposition or something similar would, if the Government and the industry were so minded, overcome what to me is the deepest risk of mis-selling, which is not that you are not better off in retirement than if you had not saved, which is how it is usually presented, but that you are worse off in your working life because you have saved and you cannot rescind that decision or touch those savings when your need in your working life may, especially for some women, be more desperate.
We are hooked on the false assumption that you are always better off under the age of 65 and worse off over the age of 65. That is what pensions are all about. For some women that is simply not true. Yet that assumption is seldom questioned because we still think in gender terms. I certainly advise younger people with non-conventional careers or no employers’ contributions not to think of a pension but instead to go into an ISA. Poorer women do not have that luxury. However, with personal accounts and compulsory employer contributions, it is wise for a woman to go into a pension, but only if she has some rainy-day protection.
To summarise and to conclude, I cannot do, and I do not think that any of us can, the counter-factual as to how many women might save who otherwise would not or, equally important, how many—I feel that there will be a growing number—would continue saving who otherwise would be tempted to give up when it gets difficult. We know that half of all women give up when they have children. When the going gets tough, the women get out. I believe that some women face far harder financial pressure during their working lives than at retirement, but this is seldom mentioned because it is not true for the men and we still continue to model pensions on assumptions about men’s working lives.
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I suggest to your Lordships that poorer women cannot afford both rainy-day savings and a pension. We may be giving them bad advice to go for a pension if through financial pressure they need access to that money earlier. That 25 per cent tax-free lump sum could allow us to bridge the risk that they face. As constructed, pensions are not an appropriate vehicle for some women. However, if there was support within government and the industry to provide a simple combined product—a LiSA—I think that that could be a win-win situation for us all. I beg to move.
Baroness Dean of Thornton-le-Fylde: I shall not detain the Committee for too long in lending my support to what is a probing amendment. As my noble friend was speaking, my mind went back some years to a time when people could draw the whole amount out of their pension funds and pay for it at the end of their lives. They could draw the whole amount out of the occupational funds. It was mainly women who did this simply because of crises during their lives—they drew it out for their children or for whatever purpose. If we want to have a saving culture that covers both men and women, this idea is certainly worth looking at. It is a probing amendment but it is something we need to pause and think about. It may or may not work but I certainly think it is worth examination. That is why I lend my support to the amendment.
Lord Fowler: I congratulate the noble Baroness, Lady Hollis. This is an interesting idea and potentially a rather valuable one. From memory, in the United States there was a similar scheme a few years back. It had both advantages and disadvantages. It illustrated the scope of what people might require and how they might be helped in this way.
It seems to me that it makes the whole concept more attractive. That is important because if we are going to have more people covered by pension saving we have to make it as obviously attractive as we can. It also means that the tax-free sum could help women in particular at particularly difficult and crucial times of their lives. The noble Baroness, Lady Hollis, said that this does not mean that your pension savings are simply locked away for life. That is a rather important point to hang on to. It recognises that many women are not able both to have a pension and to save in addition to that pension. That is the crucial point. I should have thought that anything that could be done to help in that regard should be done and is obviously of particular importance to women. This is an imaginative idea that deserves study and I hope that the Government will give an assurance that they will at least think about it and examine its potential.
Lord Kirkwood of Kirkhope: I share the view of the noble Lord, Lord Fowler, that the concept is a good one. The analysis is understood and shared and the objectives are laudable and fine. This may sound like a bureaucratic point of view from the Opposition Benches, but anybody who has listened to Mr Tim Jones of the Personal Accounts Delivery Authority will know that he is absolutely fixed with the notion that this has to be a quintessentially simple scheme without any kind of embellishments—I do not mean that in a derogatory way as I think this is a fundamentally important idea.
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The Personal Accounts Delivery Authority is trying to keep the administrative costs to a minimum—I understand that the tax regime would not be that different because the provision for the lump sum is already there—and I cannot help thinking that this idea would make personal accounts more expensive to deliver. If this provision were as seductive as the noble Baroness sets out, lots of people might take advantage of it. Notwithstanding that I agree with the concept, might we not find that it would be so seductive that a lot of people would go for this and we might end up with a level of expenditure and administration behind the personal accounts that would put the whole scheme in jeopardy?
I do not want to base my case on the notion that I am against this idea because I think it would cost too much but I certainly think that, if it is a probing amendment, we should be very careful in looking at the background to the costs if we pursue this idea, as I hope we will, in further proceedings on the Bill.
Baroness Howe of Idlicote: Having listened to the noble Baroness, I am very attracted by this concept. As a probing amendment, it has that flexibility, which anyhow is reflected throughout the Bill and, indeed, throughout the Turner report, that makes life so much easier, particularly for women, who have this rather different lifestyle. I hope that it will be looked at very sympathetically.
I have a query as to how often this could happen for one person because presumably it would be tax free. If you went out and, if you were lucky enough to be earning enough, came back into the scheme and opted out again for another crisis, how often would this be allowable? If those queries can be answered, and with the support one hopes it would get from industry and commerce, it would indeed be a very interesting concept to float and to try to get some answers for.
Lord Hunt of Wirral: In welcoming the opportunity that this amendment has given for a wider ranging debate than just the element of PADA, I once again declare my interest as a partner in the national commercial law firm of Beachcroft. I also have the honour this year to be president of the Chartered Insurance Institute.
I congratulate the noble Baronesses, Lady Hollis of Heigham and Lady Dean of Thornton-le-Fylde, on giving us an opportunity to debate this issue. Pensions have always been a poor fit for the risk and realities that women face. I very much welcome their support for what was an initiative by David Willetts in launching four years ago a consultation on the paper Towards a Lifetime of Saving written by the Conservative Research and Development Policy Unit. LiSA—the lifetime savings and pension account—is a new approach which is extremely simple, clear and flexible and supports both life cycle and retirement saving. It is very much a wrapper not a product in itself and, after the consultation last August, John Redwood’s Economic CompetitivenessPolicy Group report endorsed the idea of a flexible lifetime savings account.
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I agree with my noble friend Lord Fowler that this in an interesting and valuable notion. His reference and the reference by the noble Baroness to the Section 401 scheme in the United States gives us an example of how one can turn the cycle of what has now become a system in which it is very easy to borrow but very difficult to save. That is one of the problems the Government are now facing in bringing forward the Bill. I agree, however, with the noble Lord, Lord Kirkwood of Kirkhope, that although the concept is good, we are a little concerned that it might make the objective of PADA and Mr Tim Jones more complicated. Although it is a very good idea, attaching what one might describe as bells and whistles to the concept might make it a little more difficult to introduce and delay its implementation. However, it is important to know where the Government stand on the idea. There is no doubt that the noble Baroness is right—something needs to be done to meet the particular circumstances faced by women as well as a number of other groups in society. It is easy to regard investment in a home as the opportunity to build up resources for retirement. Indeed, we have seen a shift towards greater emphasis on property investment in the main home rather than in a more flexible savings account.
We shall be dealing with the right to access tax-free lump sums when we come to the amendments on annuities. I do not really want to go down that road although John Redwood said in his Economic Competitiveness Policy Group report that it was essential to abolish the age requirement of 75.
The noble Baroness has given us an excellent opportunity to reflect on how we can ensure that the particular circumstances of certain groups, especially women, are met much more adequately and positively by new concepts and by moving forward in a way that will positively encourage the sort of saving that we would all like to see. I hope that the Minister will come forward with some constructive proposals in response to this most interesting debate.
Lord Oakeshott of Seagrove Bay: This has been an interesting debate; the noble Baroness has done us all a service by raising this issue. The more I listen, the more I think about it. When she introduced this probing amendment she, very fairly, asked where the Conservatives stood on this. They are not exactly progressing very fast. I remember the major initiative by David Willetts four years ago—that is quite a long consultation. I was not quite sure, listening to the noble Lord, Lord Hunt, where the Conservatives stand, even though they are keen to hear where the Government stand.
I am a bit sceptical, to be honest. The noble Baroness has rightly highlighted the problem of poorer women in particular, but whether this is the right way to solve it I do not know. It raises the question of whether a revolving pension pot, which is what she is talking about, should enjoy tax relief. In principle, it also raises the question of whether the tax-free lump sum is ultimately defensible and is the best way of dealing with pensioner poverty. It is very interesting that this debate has highlighted that possibility; the noble Baroness might say that as long as you have the tax-free lump sum, you should be able to withdraw it.
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The point made by the noble Baroness, Lady Howe, about amounts going in and out and complications arising is important. I agree with my noble friend Lord Kirkwood that anything that would complicate personal accounts or make them more difficult or costly to administer at this stage is not the right way to go. I am sorry to sound a bit ministerial, but I look forward to hearing whether the Minister will be more ministerial than me.
Lord Dearing: I congratulate the noble Baroness on raising this issue. There is a government interest in this in that the more they can extend the will to save and to provide for the future more widely than at present, the less in the long term will be the cost of supporting people later on.
I am all in favour of this savings initiative that will spread the breadth and practice of saving. The Minister should not be shy about the Government encouraging such things. Long ago, when the poor did not save, a government department, called the Post Office, introduced insurance for the poor and the Post Office Savings Bank. It had a good run and provided a useful service. Regrettably, on insurance, when the private sector showed far more enterprise than the Post Office, and did good work for the poor thereby, the secretary to the Post Office, when encouraged by colleagues to employ salesmen to promote his product, wrote:
“To recruit an army of ingratiating salesmen would not be compatible with the traditions and dignity of the Post Office”.
I say to the Minister, don’t have dignity—do the business.
Lord McKenzie of Luton: I thank my noble friend for a typically thought-provoking contribution; I also thank all other noble Lords who have spoken in this short debate. I understand the basis on which the amendment has been moved; it is a probing amendment to get reaction to the concept, and I will seek to set out as clearly as I can the Government’s position.
As my noble friend explained, the amendment proposes to allow individuals to access their pension savings, as a tax-free lump sum, at any point before they retire in order to encourage more individuals to participate in pension saving. I am sympathetic to my noble friend’s concern that some individuals, particularly the low paid and women, may be reluctant to commit to saving in a pension because their money would be “locked away” until their retirement. I was interested in what my noble friend said about less emphasis on smoothing income from women who are in work to retirement, and should like to reflect further on that component of her contribution. However, from a policy perspective and an operational viewpoint, this proposal goes against the underlying principles of reform at a time when it is paramount that we make pensions simpler and clearer.
Pension saving in the UK is privileged through the tax system. Tax relief is worth up to £17.5 billion per annum. The Government provide generous tax relief to support pension saving and are able to do so because pensions are less flexible than other saving products. Tax relief in pension saving is not provided to support pre-retirement income, asset accumulation or inheritance. The trade-off for individuals making
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Allowing individuals to withdraw some of their funds prematurely could not only undermine the purpose of providing tax relief for pension saving but reduce individuals’ income in retirement. It may also increase the risk of reliance on means-tested benefits in retirement.
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