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If, we are to recover in the long term, to coin a phrase from Keynes who seems to be very fashionable on the Benches opposite these days, we will do so because people and Governments put money aside for a rainy day. People should be encouraged to save. The tragedy for those who have done that, particularly with this Government—we saw it in the changes to the tax rules for dividend income and in the Government’s toing and froing on what people could and could not invest in their SIPPs—is that they are beginning to think, “I am not sure I will be safe by putting my money into a pension scheme because the Government can act in an arbitrary way and change or alter the rules at any time”. Surely we should be liberalising the rules as far as we can, consistent with not putting a burden on the welfare state. Again, I support my noble friend’s amendment, and if the Government are serious in their rhetoric that they will help people through this crisis, and if that has any value at all, surely the oldest and most vulnerable in our society who have done the right thing should benefit first from that rhetoric.
Baroness Hollis of Heigham: My Lords, I shall not vote on this amendment if the noble Lord, Lord Fowler, proposes to put it to a Division, but it is a sensible proposal, and I should like to say why. I have supported it on previous occasions.
Perhaps I may start where I suspect my noble friend will be coming from—this has been alluded to by other speakers. The argument is that it will affect only a tiny percentage of people; the 3 to 5 per cent of the well-to-do who, if they can postpone taking an annuity until they are 75, must have other resources on which they can live and therefore this is relatively marginal to their financial well-being. In any case, it is argued, their savings pot has been protected and wrapped around with generous financial subsidy because it is meant to be exclusively a retirement income and not available for other purposes. While I hope that I am wrong, the argument I suspect my noble friend will adduce is that, first, it is a matter only for the well-to-do who are cushioned by other resources; and, secondly, that it goes against public policy for which the tax privileges of pensions were designed. Let us take a moment to unpick those two arguments because I do not think they are valid, and have not been so for some time.
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The first government argument is that it affects only a tiny percentage of people. It may well be true that the people now coming up to their 75th birthday who have resources sufficient that they have been able to avoid annuitising so far are the well-to-do. However, that is because that generation has moved out of a DB world in which very often the pot has been accumulated through a change of life savings or in some other way. Now the predominant form of pensions in the private
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Why would someone seek to increase their contribution to a DC scheme if in addition to the investment risk in, the disinvestment risk out and the longevity risk they are taking also have the additional risk imposed on them by government of the timetable, the guillotine? As the noble Lord, Lord Fowler, said, any wise Government wishing to encourage savings would seek to abate, as far as they can, some of the risk associated with a DC scheme, one of which is the arbitrariness of the 75 rule. It is a form of risk unlike conditional indexation and some of the other matters we have discussed. In a DC scheme, you do not have the protection of the PPF—although you do have the protection of the TPR—and there are many areas in which people are exposed, but this is an additional area of risk that is man-made, government made, and could be done away with.
The Government’s second argument is that this is heavily protected by fiscal privileges; it is designed for retirement and therefore it should not be available as a lifetime income but should be turned into an annuity. That is all very well, but let us suppose that at the point you suspend it you extend that suspension and insist that at 75 you take an annuity from that pot of, if you are in a DC scheme, £300,000 or £400,000 which is sufficient to cover your need to draw down on benefits, and that that would take perhaps £120,000 at 75 or £150,000 earlier. Let us also suppose that you make a fiscal adjustment to remove the tax privileges, which might be 30, 35, 40 per cent, leaving you out of your pot of £300,000 to £400,000 with perhaps £100,000 clear. If that were the case, what on earth would it have to do with the Government what you did with the rest of the pot, provided you had paid back your dues? If you do not fall back on benefits and you have an annuity to protect you against that, and if you have had the fiscal addition removed from you, then the rest of your money is, frankly, nothing to do with government.
On the contrary, the Treasury would make a profit. Not only would the fiscal protection be returned back to the Treasury but those moneys as income would generate income tax and possibly eventually IHT returns. There would be an impact on cash flow but the Treasury would not be out of pocket. What would happen is that the additional revenues would be going back not to other members in the pot but to taxpayers as a whole.
For those reasons, the case that the Government have run in the past—that it affects only the well-to-do who are not at risk and that these were privileged savings which should be taken only in the form of an annuity—should no longer apply. Like the noble Lord, Lord Fowler, I would like to see this rule removed subject to those two conditions: an annuity so that you
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What are we saying to pensioners? Here we are, seeking to increase the basic state pension from 2012 by linking it to earnings and, with the help of your Lordships, seeking to help women improve their basic state pension. We are, however, saying as a Government, “Fine, but if you have a pension that you’re going to annuitise, we are willing to see it fall by between 30 per cent and 40 per cent from what it would have got six months or a year ago”. Why? We do not need to do that. We can put in the protections to make sure that this is not an unreasonable and advantageous thing for the well-to-do. Why add to the risk and penalise people at a difficult time in their life when the Treasury has nothing to lose by protecting them and everything to gain? It would be a win-win for all of us.
Lord Crickhowell: My Lords, I agree with every word that the noble Baroness has just said. I declare a rather unpleasant interest, in the sense that I fit two of the categories that have been described here. I am shortly to be 75 and I had an excessive investment in the Royal Bank of Scotland and other banks, because my stockbroker thought that they were a good dividend yield that would produce the sort of income that was needed in a pension scheme. All pension schemes are now going to be wrecked by the Government’s decision that dividends from banks should not be paid for a long time to come.
I rise, though, for another reason. I suspect it is possible that the Minister may introduce a topic that has already been referred to today, and which, if a quotation in one of last week’s papers is correct, led the Chancellor of the Exchequer to say, “Oh, there’s no need to do this because there is already an escape route. An alternative is already in place”. It is the escape route that my noble friend referred to as having been designed for the Plymouth Brethren. He said it applied to only a tiny handful of people. In fact, that rule is never restricted to the Plymouth Brethren; a large number of people took it up because they saw a way of avoiding estate duty. The Government intervened, perfectly reasonably, to stop that escape route, but the proposition that you can take out an alternative secured pension remains. Indeed, I have one.
For some time, I have had what is known as a drawdown arrangement in my personal pension scheme—managed by my broker, not tucked away in an insurance company or in any other way—and therefore do not have to buy an annuity. I do not begin to understand why, if the Government are prepared to allow that escape route, they are going to be so rigid about giving a rather wider escape route to all those who have not followed that route and for whom it might be quite difficult to enter into an alternative secured pension and a drawdown arrangement in the final months before the annuity rule applies to them.
If it is right and proper that a considerable number of pensioners can manage their affairs in this way, and quite a lot of them do, I see no possible reason why the Government should object to my noble friend’s other
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If the Chancellor is saying, “It’s all right, I don’t have to do anything; there’s an existing escape route”, he should warmly embrace my noble friend’s proposition and offer an escape route for all those facing the kind of desperate situation that I would have been in if I had not already taken the drawdown and alternative secured pension route. I am not a member of the Plymouth Brethren, and there was no actual restriction applying it to them. There were statements that that was why it had been introduced, but a large number of people who do not belong to the Brethren have alternative secured pensions. It is a legitimate thing to do, and the Chancellor and the Government are now apparently saying so. Let us have no more nonsense; let us accept my noble friend’s amendment and give hope to a lot of people who are otherwise in a pretty desperate state at present.
Lord Howarth of Newport: My Lords, I, too, hope that my noble friend the Minister and the Government will find themselves able to look sympathetically and constructively at the amendment tabled by the noble Lord, Lord Fowler. I should like to reiterate a couple of points that have been made.
We have seen in recent years a substantial move towards people saving for their pensions by way of defined contribution schemes. The Government have smiled upon this; they have certainly not discouraged it, and all the signs are that that trend will continue. Although many people in defined contribution schemes must certainly be deeply worried about the future of their pension savings, there is, I think, no likelihood—and the present nightmare events in the stock market only reinforce this—that we shall see a return to defined benefit schemes as the norm, so people will have no choice. But as things are, and given that no one has been able to devise a way to smooth the exit into an annuity for people saving in money purchase defined contribution schemes, they face a kind of Russian roulette, and it is the responsibility of the Government to do what they can to help those people secure themselves in circumstances which could be absolutely catastrophic.
The other point to reiterate is that the Government want people to save more. They want people to work for longer and to be more flexible about the moment of their retirement. You must have a pensions regime that supports them in that approach and in taking those decisions. The noble Lord, Lord Sanderson, said that the present circumstances in the market are very unusual, and indeed they are extreme. However,
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Baroness Dean of Thornton-le-Fylde: My Lords, I, too, support the amendment of the noble Lord, Lord Fowler. A number of us in this House think the current annuity provisions and requirements are wrong anyway and need changing. The amendment does not do that: it simply meets the current circumstances that are facing people. Yes, we have had and always will have ebbs and flows in the stock market, but the current situation is different. There will be no going back; once people have taken their annuity at a much lower return, that will decide their pension for the rest of their lives. There is fairness in the amendment, so I look forward to the Minister’s response. It seems fair and equitable to realise and accept that these are extenuating circumstances. There is a time factor related to the amendment, and I hope that the Minister will say that he will move on it.
Lord Oakeshott of Seagrove Bay: My Lords, it seems to be the fashion in this debate for most, if not all noble Lords, to declare their age and pensions arrangements, so I am happy to declare mine. I am 61, so I could be buying an annuity—I just have a defined contribution pension—but, luckily, I have a good salary and do not need to do so now.
If I were older, the last thing I would want is a temporary suspension, be it for six months or two years, not knowing where I stood. I am afraid that the speeches that we have heard, particularly the powerful speeches from the Conservative Benches, are effective in favour of not this amendment but Amendment No. 77 or Amendment No. 77A, in my name and that of the noble Lord, Lord Fowler, which would permanently raise the limit by a significant number of years. The point has been made very powerfully that people will need a few years to rebuild their pension pots, which have been cruelly savaged by recent market movements. I congratulate the noble Lord, Lord Fowler, on finding an ingenious way to bring his amendment up the batting order, but many of the arguments are essentially those with which we shall deal later.
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Anyone who has experience in long-term pension planning would not and could not support an unknown and temporary suspension. This proposal appears to have been drafted on the back of a fag packet by the noble Lord’s right honourable friend David Cameron a week or two ago. We have not seen it previously. I remember jointly moving in this House an amendment with the noble Lord, Lord Higgins, to raise the limits to 85 and then to 80. Even if noble Lords feel that
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Lord Forsyth of Drumlean: My Lords, I appreciate that there is in history perhaps less experience of government on the noble Lord’s Benches, but it sometimes helps to provide a Minister with a way out having rejected one thing. Given what is at stake here, which is many people’s livelihoods and pensions, would it not be sensible for the noble Lord to treat the amendment as giving the Government a way out, which can be reviewed subsequently, and deal with the matter immediately at hand, rather than being gratuitous in his comments about my right honourable friend’s fag packet? This is an attempt to provide the Government with a way out to help people who are in real need. Does he not see that?
Lord Oakeshott of Seagrove Bay: No, my Lords. I have probably rather more experience advising Governments either than the noble Lord or the right honourable David Cameron. I was a special adviser in the 1974 Government when conditions were even more turbulent, which is why I say what I say. I also have 32 years’ experience of pension fund investment management. I believe that serious people in government have been thinking about compromise, which would, by however many years the limit were raised, be sensible and sustainable in the long term, but no serious Government would be able to accept the way forward proposed by the amendment. That is why I do not think that this proposal will work and we will not be able to support it. However, I hope that noble Lords will support Amendment No. 77A of the noble Lord, Lord Fowler, which is very sensible.
Baroness Greengross: My Lords, I support the noble Lord, Lord Fowler. The amendment is a modest but effective way of dealing with the present, unfortunate situation, which will affect a lot of people. I shall also support the noble Lord, Lord Oakeshott, later. The amendment is a sensible way forward. It deals with the crisis at the moment and behoves us to support it.
Baroness Howe of Idlicote: My Lords, I was quite amazed by the various contributions to the debate and became more convinced as it wore on. Being 75-plus, I am glad, I suppose, that I have been able to take my annuity, although I wriggled like mad at the time, because, it will not surprise any noble Lords to know, annuities are not my favourite subject and they discriminate against women.
I am amazed by the views of the noble Lord, Lord Oakeshott, on this amendment, because I see it as being a temporary arrangement that cannot last for more than two years. My goodness, if the situation that we are now in lasts only two years we will be very lucky indeed. The amendment has a degree of flexibility
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Lord McKenzie of Luton: My Lords, this has been an interesting debate. I will start by comforting noble Lords with the fact that the Government do not feel that they need a way out of this issue. I very much agree with the noble Lord, Lord Oakeshott, that the debate has been around 75 or some other date. It has not focused on issues of temporary suspension. That is a significant issue. Stakeholders out there in the pensions community are not enamoured of this suggestion either.
As the noble Lord, Lord Fowler, said, we face a global financial crisis that is imposing lots of challenges. The noble Lord, Lord Forsyth, said that we should be doing everything that we can to encourage people to save and I very much agree with that. That is why the Government have taken action to produce stability in the banking system through the measures that the Prime Minister and the Chancellor have announced. That is why the measure that is before us today in this House—and has been for several weeks—is about automatic enrolment into pension schemes to encourage further saving. That is why the Government introduced the PPF to protect people who might have lost their savings and, after some challenging debates, have dealt with VAs to protect people who lost their pension savings. That is why we strengthened the role of the Pensions Regulator, which we will come on to later. We have been encouraging people to save in this environment.
The amendment would allow suspension of requirements to buy an annuity by the age of 75. I will take this opportunity to clarify that there are no such requirements on the statute book. The noble Lord, Lord Crickhowell, hit the nail on the head with understanding what the regime says. The requirement is to have started to draw an income—either through an annuity, a pension scheme or, since 2006, an alternatively secured pension. There is nothing that says you have to annuitise by the age of 75. That is an important distinction and I want to reiterate that: nobody is forced to buy an annuity with their pension savings.
Indeed, my noble friend Lady Hollis advanced the proposition, as she has before, that people should be able to take a modest income out of their pension pot and withdraw tax savings, and then the rest has nothing to do with government policy. In essence, that is exactly what alternatively secured pensions achieve. Under an ASP, you are required to take between 55 per cent and 90 per cent of the annuity value of the pension pot. If there is anything left at the end of the day not taken as an income it has a tax exit charge. That is exactly the proposition advanced by my noble friend.
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Lord Crickhowell: My Lords, is it not remarkable that, having tried desperately to minimise the number of people who took this route and suggesting that it was only introduced for a small number of religious objectors, the Government now turn around and say, “There has never been any pressure to buy an annuity. It is entirely a myth that has been thought up by the Opposition”? This is an extraordinary statement from the Minister, and an extraordinary development in government policy.
Lord McKenzie of Luton: My Lords, it is not. I was stating a matter of fact and the law. There were changes in 2006 to the alternatively secured pension regime, but I am doing no more than reiterating what the law says.
Baroness Hollis of Heigham: My Lords, will my noble friend clarify to the House what happens to the residual money in the pot of ASP on death? Where does it return to?
Lord McKenzie of Luton: My Lords, it depends upon the precise arrangements. In some instances it goes to charity but, if it goes to people with heirs, then there is an exit charge on it which does exactly what my noble friend was proposing: drawing and clawing back the benefits of the accumulative tax relief that has been achieved.
That is how it works, so people must face three alternatives by the time they reach the age of 75. The additional flexibility introduced by the Government in 2006 allows people to leave their pension funds invested indefinitely beyond the age of 75 and an alternatively secured pension. The only requirement is to draw down an income from the fund of at least 55 per cent of that which would have been provided by an annuity. Consequently, suspension would only really benefit those who do not need to take any income from their pension savings and who may therefore wish to use them as a means of making bequests partly funded by the taxpayer.
I see the noble Lord, Lord Forsyth, bristling at this point; let me see if I can help him. Should you sadly die before reaching the age of 75, and before an income has been crystallised, then, routinely, the fund goes tax-free—free of inheritance tax to survivors. Of course, once you are into an income-crystallisation event—whether annuitisation or an alternatively secured pension—that is not the case, as I have just discussed.
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