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Lastly, the Government claim that, while they welcome,
as the Minister said last year, there is no appetite among the insurance industry for a retirement income fund. I find that very surprising. If any industry is open to new ideas, it is the insurance industry—if, that is, the Government allow it to be. Indeed, I noticed the other day a new scheme which, while just within the existing law, seemed extremely similar to my noble friend’s retirement income fund. So just what gives the Government such confidence that there is no appetite for this among the industry? Who have they consulted? I welcome the debate to follow.
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Baroness Hollis of Heigham: I do not know whether the noble Lord will press the amendment to a vote, but I would not support him in the Lobbies. I do, however, support his argument. What is the state’s public interest in this? It is twofold, as has already been suggested by noble Lords: first, to ensure that pension savings are privileged in order to provide an adequate retirement income; secondly, that there be no recourse to public funds. Both those objectives are met in the subsection of Amendment No. 128 referred to by the noble Lord, Lord Skelmersdale, by an annuitisation that I calculate to be between £120,000 and £150,000 a year. After that, if an individual chooses not to annuitise but to accept the implications of adjustment of the fiscal privileges that went to build up that fund, why does the state have any public policy interest in what happens to the residual money? It is not good enough to say that that money was protected for pension savings and must therefore be used for pension provision. A mantra is a statement of faith, not an argument based on evidence.
As the noble Lord, Lord Skelmersdale, said, 10 or 20 years ago this may have been a relatively rich person’s issue. It is no longer so, as we see the movement from DB to DC schemes. The noble Lord’s figures are exactly right; I did the calculations as he spoke. A woman on average earnings—£21,000—over 40 years, even in a personal account without a threshold, would have a pot of £250,000. That is with contributions only going in at 8 per cent of the total. If, more realistically, one has a DC scheme with higher rates,
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If that woman on average earnings with a pot of £450,000 had, after an annuity, some residual sum of £300,000—or £200,000 or thereabouts after tax privilege—it would perhaps go into a building society on which interest was paid. More likely, it would fall into her estate, on which inheritance tax after the basic rate would be 40 per cent. The state would recover for taxpayers what currently goes towards the profitability of private insurance companies. There is an additional argument that the taxpayer would not only not lose money, but returns would fall back to the country as a whole—and, therefore, to the improvement of benefits where appropriate.
I hope that my noble friend will not repeat the mantra that all Ministers, including me, have had to use on this subject at the Dispatch Box: “Pension savings are fiscally protected to provide income for retirement”. Provided that that need is met, and the fiscal protection has been adjusted, the state has no further legitimate public interest in what happens to the rest of the money. People should be free to make the dispositions they choose.
Lord Oakeshott of Seagrove Bay: It may be that we are all eating our own words tonight. The noble Baroness gave an interesting speech, but, given that she seemed to support everything that the noble Lords, Lord Hunt and Lord Skelmersdale, said, I did not understand why she would not support them if they pressed the amendment. So be it. The noble Lord, Lord Hunt, kindly reminded me of my words four years ago. One of the problems of getting older is that one’s memory is not quite as good as it was. I will go and look at the context of what I said.
An imposed limit at age 75 is clearly out of date. It might have been right to impose such a limit in 1976, but it is clearly not right now. We want change. This is a slightly odd grouping because we will come to our amendments—for example, Amendment No. 132—on the same topic later. We prefer the much simpler option of increasing the limit, which was the fourth option mentioned by the noble Lord, Lord Hunt. I well remember standing shoulder to shoulder with the noble Lord, Lord Higgins, fighting for specific increases, but we thought that this time—we have all been round this track a few times—we would say to the Government, “You say how much life expectancy has increased since the limit was fixed, and that is the amount by which it should now increase”. Given how fast life expectancy is rising, the limit should be reviewed every few years to avoid this problem in the future.
Of course, things have changed a great deal since the 1970s. Being 75 in those days was probably characterised by the actors in “One Foot in the Grave”; for many people now “Strictly Come Dancing” would probably be a more accurate representation. However, I cannot agree with the noble Lord, Lord Hunt, that
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Lord Fowler: As I understand it, the noble Lord is not in favour of the measure because he does not like the idea of money being inherited by family members. We part company with him there. Although he proposes that the age should be increased, that is not exactly the most fundamental reform of the system, if he does not mind my saying so. As for his argument that my noble friend’s amendments cover two pages of the Marshalled List, he has been involved in this area long enough to know that almost any reform involves at least two pages of text. Indeed, I am amazed at my noble friend’s modesty.
We differ from the Liberal Democrats on this rather important point. We believe that the family is the basis of society. We are probably not talking of spending vast sums to encourage people to save money for their children to inherit. Indeed, it is in the public interest that they are encouraged to do so. If that persuaded people to save money, it would be of vast public benefit. Therefore, I am not remotely persuaded by the argument of the noble Lord, Lord Oakeshott.
My noble friend Lord Hunt set out the case extraordinarily well. The matter has a long history and represents a longstanding injustice. There is absolutely no reason why people should be forced to take an annuity at 75. I agree with everyone who says that, if they wish to do so, they should have that opportunity. That is their choice, and some people will exercise it, as they do not want the trouble of looking after their money. That is fine. That is their choice and they should be allowed to exercise it. However, many people will not want to make that choice because they feel it is not in their interests to do so. On a number of occasions noble Lords have indicated that they would much prefer the citizen to exercise his own choice in this matter. Rather than getting weaker over the years that we have debated this issue, that case has become much stronger. As my noble friend Lord Skelmersdale said, pensions are changing rapidly. We are seeing the demise of the final salary scheme, apart from in the public sector, and the establishment of many more money purchase schemes. It is not an issue of marginal importance or interest any more; it is a case of fundamental importance. That is one argument for a change.
The case put by the noble Lord, Lord Oakeshott, about age was also true. Even if you believe in compulsory annuities, no one in their right mind would put the limit at age 75 because age expectation has increased. You are now talking about 80 or 85 if you are a believer in the system, which I am not.
Let us face it: only the Treasury stands against this proposal, as in all things good in this world. The only reason it has for doing so is that people could fall back on to social security. In my noble friend’s two-page amendment, he has gone to enormous trouble to prevent that taking place. After that, like the noble Baroness, Lady Hollis, I cannot think of any sensible arguments that can be put in its place.
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My noble friend and others have talked about the pension pot of money that you hope to have at 75 or whatever age. If you are coming up to 75 now, you may well find that your pension pot is under more pressure than for many years. Your investment values will have gone down, probably at a worse rate than for 10 or 20 years; the noble Lord, Lord Oakeshott, is a greater expert on the investments than I am. At that point, you are saying to individuals, “We don’t mind that, but we insist that you annuitise at that inflexible age”. That is totally unjust.
For all those reasons, the time has come to reform the rule, whatever the past has been. The situation as everyone has recognised it has changed. There is a question of fundamental justice here, and I hope that the Minister will at long last recognise that.
Baroness Turner of Camden: I have been listening to the debate with great interest, and of course support everything said about compulsory purchase of annuities at 75. I also understand from the description that the noble Lord, Lord Hunt of Wirral, gave of his amendments that there is a case for them in the light of the changing situation, with the disappearance of final salary schemes and the introduction of money purchase and so on, so that people are left with a lump sum that they have to deal with when they reach the right age.
What bothers me about all this is that I am a supporter of final salary schemes; I hate to see them disappearing. Where the workers are strong enough and have enough collective pressure, in certain circumstances they have been able to retain their final salary scheme. I would hate to see anything introduced that could further encourage their disappearance. That is one reason why I have some dubiety in my mind about the amendments. Would they make the alternative to final salary schemes more attractive than it otherwise might be? I am in favour of retention—doing everything possible to retain final salary schemes in the private sector as well as the public sector.
Lord McKenzie of Luton: I understand that the issue has a long history in your Lordships’ House, certainly longer than I have been here, but just from the debates on last year’s Pensions Act I get a sense of déjà vu, or as the sports commentator said, “It’s déjà vu all over again”.
It falls to me to set out the Government’s position—maybe the Government’s mantra—on this. The purpose of pension saving is to provide individuals with an income in retirement. In order to encourage and assist people in saving for their retirement, generous tax incentives are given to pension savers. In 2007-08 this tax relief was estimated to be worth £17.5 billion.
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In addition to the tax relief given when a person makes a pension contribution and the tax-efficient environment in which their funds grow, you can take up to 25 per cent of your pension fund as a tax-free lump sum. In return for these generous incentives, the remainder of the pension fund must be, by the age of 75, converted into a secure retirement income for life, thereby achieving the purpose for which it was intended. In defined contribution schemes this secure income is
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The Pensions Commission has endorsed this 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”.
An alternative is available for those who have a principled objection to the way that annuities work by pooling mortality risk. The alternatively secured pension offers a product with similar restrictions to an annuity and achieves broadly the same aim without the mortality pooling aspect. Both these options, as well as the scheme pension, more typically used for defined benefit pension schemes, offer a secure income guaranteed for life. They use the pension fund built up to provide an income in retirement.
As the noble Lord, Lord Hunt, explained, his amendments would establish an alternative to annuities, scheme pensions or alternatively secured pensions: the so-called RIF. The intention is that the RIF product would remain invested and would permit withdrawals between an individual’s minimum and maximum level. An annual maximum withdrawal allowance would be set by the provider for each individual member, based on an assessment of their life expectancy. A member’s withdrawals from the fund could not in any year exceed that allowance. An annual minimum withdrawal allowance would also be set by the provider. In setting this the provider would have to ensure the member’s total income was at least equivalent to a minimum retirement income set by the Chancellor of the Exchequer.
There appears to be nothing in the noble Lord’s proposal to prevent the minimum allowance being set at zero if the member’s income from other sources was greater than the MRI. In those circumstances it is unclear how the maximum withdrawal allowance would work. As it is impossible to accurately assess an individual’s life expectancy—one of the requirements of the proposal—and there is no express requirement that the RIF be spread over the whole of the individual’s expected lifetime, it would be possible for a provider to set a high maximum withdrawal allowance. The member could then withdraw large lump sums of tax-advantaged pension savings. Alternatively the member might choose not to draw any pension income at all from the RIF in order to pass the fund on to heirs.
Lord Skelmersdale: The noble Lord is worried about drawdown of tax relief savings. Do not ISAs, for example, have incredibly generous tax relief?
Lord McKenzie of Luton: Indeed, ISAs have tax relief, but not the same as provided through pension saving. That is an absolutely fundamental point. The
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Lord Hunt of Wirral: The Minister is moving into rather technical issues that demonstrate what I said previously: he and his colleagues are particularly concerned about avoidance. Although I cannot see what is wrong with someone pursuing the path that he is outlining, surely the answer lies in the amendment. The Chancellor, in bringing forward the order under subsection (1), could well cover the sort of situation that the noble Lord is most concerned about. I am happy to discuss with his officials ways in which we can ensure that when the order comes forward, provided that the House agrees to these amendments, there is no level of avoidance that would cause the sort of problems that he is talking about. I am also waiting to hear what the noble Lord has to say about Christian Brethren.
Lord McKenzie of Luton: In answer to the first point, I do not believe that the amendment will do what the noble Lord describes. Perhaps I may expand on the issue of the tax risk to the scheme. I noted that no noble Lord who spoke in favour of the proposition—with the exception of my noble friend Lady Hollis, who talked about withdrawal of the scheme’s tax benefits—indicated in any way what tax regime he or she thought should apply to it. That was not part of the proposition advanced by the noble Lord, Lord Hunt, and adhered to by others who spoke in favour of the amendment. It can make a fundamental difference to the operation of the proposal.
I reiterate that, under this proposal, if someone has income from other sources, the minimum retirement income could be set at zero. If it is set at zero, so that the provider does not have to preserve amounts in the scheme for subsequent periods, there could effectively be no limit on the withdrawal. You could take a lump sum from the scheme in one go. It would be tax-advantaged savings with some real risks as to how the tax on it might be withdrawn. The noble Baroness, Lady Noakes, is shaking her head, but that is how this proposition would operate. A member would be able to withdraw large lump sums of tax-disadvantaged pension savings. Alternatively, as I said, a member might choose not to draw down any pension income at all from the RIF in order to pass the funds on to heirs.
I say to the noble Lord, Lord Fowler, that we have no objection to—we would support—people providing for subsequent generations, but enhancing that provision for heirs by means of the benefits of a very significant tax-advantage regime is not what that regime is for.
Baroness Hollis of Heigham: If the noble Lord, Lord Hunt, tabled a subsequent set of amendments to cover the point about tax privilege, and if that created
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Lord McKenzie of Luton: I do not think so. The nature of the regime that would have to be established, particularly given the opportunity for withdrawing significant one-off lump sums in circumstances where someone might plan to be non-resident for a period, would require a raft of anti-avoidance provisions that would fetter the fundamentals of our current pension saving schemes.
None of these options is compatible with the basic and fundamental purposes of pension savings—to provide the member with an income in retirement. As I said, I would also like to consider the tax consequences of the amendments. These amendments do not indicate how withdrawals would be taxed. The expectation would be that a form of taxation would apply, but in most cases it would seem likely that the tax charge on RIF withdrawals would be less than the amount of tax relief enjoyed on these funds. RIF savings would clearly be tax advantaged compared with other forms of savings. Given the apparent ability of those with sufficient other income to extract RIF savings at will, there is a danger that it would become a vehicle into which other savings are recycled for tax advantage, rather than encouraging new retirement savings. It would be unfair to expect taxpayers to foot the bill for people who take the tax relief for pension savings but do not use the accumulated funds to provide an income in retirement.
It is unclear what would happen to the RIF on a member’s death but, given what is proposed by Amendment No. 140, which I shall move on to shortly, it seems that these clauses would allow a small group of wealthy individuals to pass their pension funds on to their heirs on death. There is no rationale for taxpayers to support bequests in this generous way.
One of the primary considerations of current pension provision products is that they provide an income that is guaranteed for at least the rest of the person’s life. With the proposed RIF, there is a risk of the individual running out of money in retirement. This is because it is impossible to accurately assess an individual’s life expectancy. How on earth would that be done? Insurance companies can protect the average life expectancy of particular cohorts. The noble Lord, with his expertise, does not need me to tell him that. The RIF requires an individual assessment to be made that enables a guaranteed income for life to be provided, regardless of how long the life is, by pooling the risk.
Annuities achieve exactly the same outcome for defined contribution pension schemes as exist for defined benefit schemes or, for that matter, state pensions; namely, that pensions are paid as a regular stream of income until death and, barring dependants’ pensions, that they end on the member’s death. No refund of contributions is given to the estate but everyone has the peace of mind of knowing that the pension will continue to be paid regardless of how long they live.
In essence, these amendments would benefit those who are able to take advantage of the tax relief given for pension savings to build up substantial pension
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