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I will pick up on a number of points about the current range of pension pots. I take the point that, over time, more people will build up a significant retirement pot. However, the current figures show that, for 2007, a total of 445,871 annuities were sold, only 3.2 per cent of which—14,000—were for pension pots of more than £100,000. We also have figures for the first quarter of 2008, which show that 3.7 per cent of those sold were for pots of more than £100,000. I accept that that may change over time, as more people save in pensions and as personal accounts get under way. The Government have said that they will keep under review the age at which someone should annuitise in future.
Lord Skelmersdale: What matters is not 3 per cent of the total but what the percentage is of those who have to annuitise compulsorily at the age of 75.
While I am on my feet, the Minister was good enough to say that he wanted to investigate the tax arrangements more fully than he has been able to do so far. I am sure that my noble friend Lord Hunt will welcome that. The Minister referred to tax savings of £17.5 billion; that is spread among a large number of pension savers. When he does his investigation, could he ask the Treasury for figures on the number of people who hold ISAs? We would then get a better sort of comparison, especially if he also looked at the tax advantages, which do exist—he admitted that they do—for saving through ISAs. Could he also look at the alternatively secured pensions? They have tax arrangements that are somewhat different from what is currently envisaged elsewhere in the system.
Finally, all this talk of taxes reminds me that we are not debating a Finance Bill; we are tying to look at pensions as pensions. When the Minister has conducted his investigations on tax, will he be good enough to write to my noble friend Lord Hunt and me and put a copy in the Library for the general education of noble Lords?
5.45 pm
Lord McKenzie of Luton: It is not my job to investigate the tax effects of these propositions. The noble Lord said that we are debating pensions and that it is not for us to debate tax. You cannot decouple tax and pensions—they are inextricably linked.
Lord Hunt of Wirral: So why did the Government invoke the issue of privilege last year when we won the vote in this House?
Lord McKenzie of Luton: Precisely for that reason—taxation, as noble Lords know, is an issue not for this House but for the other place. The proposition was not acceptable to the other place; that is why it claimed financial privilege. We cannot debate sensibly a pensions issue of this nature without understanding the full
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The noble Lord asked about ISAs. You do not get a tax deduction on the way into an ISA; you may get tax-free income.
Lord Skelmersdale: And growth.
Lord McKenzie of Luton: And growth. I hang on to the point that the range of tax benefits going into pension savings—deduction for the employer, deduction for the employee, tax-free build-up and the opportunity to get 25 per cent tax free—means that this is a much more tax-supported regime than that involving ISAs; that is why there is a requirement to take an income flow from it.
Baroness Noakes: With all this talk of tax, I cannot resist getting up to the Dispatch Box.
Does the Minister accept the proposition of the noble Baroness, Lady Hollis, which seemed to me to be perfectly reasonable? She said that if a scheme could be designed that neutralised the tax advantages that accrued to not taking the retirement fund in the originally envisaged form—that is, retirement income—the amendments in the name of my noble friend Lord Hunt would be acceptable. If so, there is a model involving alternatively secured pensions, which my noble friend Lord Skelmersdale has just raised, although many do not find the model particularly attractive. Would the Government accept the amendments if those tax arrangements were embedded into my noble friend’s amendments?
Lord McKenzie of Luton: There is a big “if” about whether you could effectively describe the sort of regime that would cover the RIF. The proposition would facilitate the opportunity for someone to take a significant lump sum in one go as income or capital from the RIF. The noble Lord, Lord Fowler, looks askance at that but the RIF, as so defined, would provide it. If someone has enough income from the RIF, the minimum level that they must take, or which has to be set on an ongoing basis, would be zero, and the maximum amount that could be drawn could be very significant indeed. That would provide the opportunity for people to plan to take that in a tax-effective way. You could structure all sorts of anti-avoidance provisions that would greatly add to the tax legislation, for which the Government would doubtless be challenged. You would need that if you are going to make this fair. That is why we do not think that it is the right use of the pensions regime.
Lord Fowler: I was looking askance because I was wondering, while I listened to the Minister’s defence, whether there are any amendments or safeguards—however guaranteed—that would ever persuade the Minister. He is simply fundamentally opposed to any change in this area whatever, regardless of what is put forward.
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Lord McKenzie of Luton: Because of its tax impact, I do not see the merits of building on this proposal. With the exception of my noble friend, everyone who has spoken has been silent in advancing reasons for accepting it and, unless we know those reasons, it cannot be properly evaluated.
Baroness Hollis of Heigham: Perhaps I may help my noble friend. When I was in the department, I argued for changes in this area but I could not persuade HMRC. The figures may well have altered now and I would not wish to go to the stake on them, but the work that I had done suggested that the tax gain on pensions represented between 45 and 55 per cent of the total value of the final pot. That was the range that we dealt with and it included the tax gain from the 25 per cent lump sum.
Lord McKenzie of Luton: It depends on which taxpayer is involved and whether he is getting tax relief on contributions at the higher rate or the basic rate.
Baroness Hollis of Heigham: At that time, they were almost entirely higher-rate taxpayers because they were the only ones who possessed such sums. Obviously the tax privilege would be considerably less. My estimate is that it would now be between 35 and 50 per cent on average if we included basic-rate taxpayers—for example, the woman on average earnings who will over the course of a few years find herself with a pot which is much larger than necessary to float her off income-related benefits.
Lord Oakeshott of Seagrove Bay: Perhaps I may say a brief word as one of those who the noble Lord said had been silent on this issue, although that is partly because we will move our own amendment later. I think that there is a genuine problem here and I sympathise with the Minister on that. I say to the noble Baroness that, even if overall her figures are right, the key difference between pension pots and ISAs is that, although perhaps only a small number is involved, pension pots can be worth several million pounds. I do not know of anyone with an ISA of anything like that sum. That is why I am nervous about these amendments. Potentially there is quite a big tax linkage on some of the very big pots, so I do not think it is right to say that ISAs and pension pots are totally the same.
Baroness Hollis of Heigham: If someone had a pot of a couple of million pounds and was seeking not to annuitise it, the tax element in it, which might be at least a third and perhaps a half, would go back to the taxpayer. It seems to me that the consequences of the noble Lord’s argument are the reverse of the implications.
Lord Oakeshott of Seagrove Bay: We need to look at the whole picture.
Lord McKenzie of Luton: Indeed; I am with the noble Lord, Lord Oakeshott, on this. Perhaps I may recap the situation. First, I think that the question is: if I pay the tax back, why cannot I access my retirement
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Secondly, it would be very hard to work out the exact value of tax relief in any particular case, as it would depend on the profile of a person’s earnings and his tax and pension contributions over the years, plus tax regrowth on his pension investments. Therefore, this option would involve either very complex and expensive processes to work out individual figures—even if it were possible to do so—or a very high flat-rate level of tax recovery to avoid tax abuse. It would lead to the bizarre scenario where an individual saved in a pension vehicle to enjoy the tax relief but then faced the trouble of paying back the tax relief when he could have avoided all the inconvenience in the first place by saving in a savings vehicle such as an ISA, subject to the limits properly referred to by the noble Lord. Those who advocate this approach invariably want to access their pension fund taxed at their marginal income-tax rate, but that would greatly undervalue the tax relief previously enjoyed and would amount to a generous taxpayer subsidy.
I move on to Amendment No. 140. Although the amendment does not directly relate to the RIF, it nevertheless results in the same outcome—that of enabling those with the greatest means to use pension saving for a purpose other than providing an income in retirement. The amendment would remove the upper-age restriction on the payment of an annuity protection lump sum benefit.
An annuity protection lump sum death benefit was a concept introduced by the Government in the Finance Act 2004. It allows a return of pension savings used to secure an annuity, less any payments already made, to be made on a person’s death before age 75. The intention behind an annuity protection lump sum death benefit is to ensure that, should the member die early in his retirement, his family gets something back from the retirement provision that he has made.
Removing the upper-age restriction would go beyond that intention. The provision of this type of death benefit would make it attractive as an inheritance tax planning vehicle, due to the tax relief. An annuity with this form of protection typically costs more than one without it, reducing the income received in exchange for the protection offered. The extra cost of extending that protection beyond age 75 would be significantly more than under the current rules. That would make this option primarily suitable for those who could afford to take the reduced income and wished to use their pension savings for another purpose, such as inheritance planning.
The restriction on the payment of annuity protection lump sum death benefit beyond age 75 is consistent with other lump sum payments on death from pension arrangements and provides consistency between defined contribution and defined benefit pension schemes.
The noble Lord, Lord Hunt, asked me about alternatively secured pensions and referred to the Christian Brethren. For those with specific objections to pooled
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I have been speaking for some while on this issue and I know that I have disappointed those in favour of the proposition, although I suspect that I have not surprised them. I hope that the Government’s position is very clear on this. It is important to be clear that the amendments all share a common theme: they allow those who are able to afford it to utilise the tax relief available on pension savings for purposes other than providing an income in retirement. Although innovation in the pension market is to be welcomed, and indeed encouraged, the Government are clear that it should not allow the well-off to take advantage of the system at the cost of the taxpayer. I therefore ask the noble Lord to withdraw the amendment.
Lord Hunt of Wirral: I am very grateful to the Minister for taking so long to explain the Government’s position. He said that a theme was running through these debates, and indeed there is. In this House, there is general dissatisfaction with the maximum age of 75, and we have voted on several occasions, often by substantial majorities, to remove that age limit.
The Minister also said that it was not his business to try to improve the amendment, but surely he has to accept that he has already lost the argument on several occasions. These amendments were passed last year and in 2004 substantial majorities were secured to remove the age limit of 75. I accept that last year it was not possible to debate the matter further because the other place invoked privilege, but if the Minister is listening to this place, should he not at least agree to sit down with us to see whether there is a way forward? I thought that the noble Baroness, Lady Hollis of Heigham, had a number of very interesting ideas. No one wants to create a serious situation for the Treasury; we just want to encourage more saving. We want to encourage people—particularly those who in the past have been deprived as regards pension arrangements—to save for their pension and to save for their later life, and perhaps we can devise a series of amendments that will achieve that.
The Minister is right that a number of people exercise the option to purchase an annuity at a comparatively early age because they know that by the time they get to 75 they will be forced to annuitise. As my noble friend pointed out, that may well be at just the wrong moment. So, of course, they annuitise in advance and they want to receive the money earlier because they know that they will be compelled to purchase an annuity. Surely there is a way, as my noble friends have pointed out from the Front Bench, by
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6 pm
Lord McKenzie of Luton: I am more than happy to set up a meeting with officials from the Treasury or HMRC. I do so, in all honesty, without any great hope that they will see a way through this that is satisfactory because there are real concerns, but they may be able to articulate those more effectively than I have been able to. Yes, of course, the Government listen to this House but they also listen to the other place, which has declared itself on this point on several occasions. On the crucial issue of the tax component, the other place has particular primacy.
Lord Skelmersdale: I cannot let the noble Lord get away with that. The great clunking fist came down when the Commons discussed this amendment and so great was that clunking fist that not a single word was uttered against it in another place. The clunking fist was to invoke privilege.
Lord Hunt of Wirral: I have no wish to make a comment on the voiceless clunking fist, except to say: what more could I ask? The Minister has probably gone much further than his brief, for which we all congratulate him. I thank all noble Lords who have participated in the debate. I say to the noble Lord, Lord Oakeshott, that it is important to put his remarks in context. I apologise to him if I did not mention that in the previous sentence to the one I quoted, he said that,
- “there should, at the very least, be a substantial increase in the limit”.—[Official Report, 15/11/04; col. 1229.]
He went on to say that he supported the amendment and that at the very least there was a strong argument for an increase in the limit to 75, if the principle of abolishing the limit altogether was not accepted. He then voted to abolish the limit and the amendment won the day. I say to the noble Lord, please do not desert us now.
Baroness Hollis of Heigham: In your hour of need.
Lord Hunt of Wirral: In our hour of need, as the noble Baroness says. I sense that the noble Baroness, Lady Hollis of Heigham, is moving because in that Division she voted against these amendments as she then held ministerial office. Last year, she did not appear in the voting Lobbies and I sense that there are ways in which we can find some form of accommodation so that the voice of this House can be heard.
I thank my noble friend Lord Fowler for a powerful speech. The noble Baroness, Lady Turner of Camden, shares my concern about final salary schemes. We must find a way through that in our debates. I would especially like to single out my noble friend Lord Skelmersdale on my Front Bench for emphasising that basic human right. It represents personal savings and deferred wages which belong to the individual. My noble friend Lady Noakes pointed out that there are tax implications and that we should be able to find a
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Amendment, by leave, withdrawn.
[Amendments Nos. 128 and 129 not moved.]
Baroness Noakes moved Amendment No. 129A:
(1) The Secretary of State may by regulations provide that the rules of an occupational pension scheme shall be modified so that they reflect—
(2) Regulations may not be made under this section unless a draft of the statutory instrument containing the regulations has been laid before, and approved by a resolution of each House of Parliament.”
The noble Baroness said: This amendment introduces a statutory override in respect of the indexation capping rules, both in the Pensions Act 2004 as well as in Clause 88 of the Bill. For today, this is a probing amendment, but I would not like the Minister to think that I do not raise this as a very serious issue. The statutory override was examined in the deregulatory review undertaken by Messrs Lewin and Sweeney, which reported last summer, and many are disappointed that the Government have not dealt with the issue.
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