Clause 47 — Pensions guidance

Nature – in the House of Commons am 1:15 pm ar 24 Chwefror 2015.

Danfonwch hysbysiad imi am ddadleuon fel hyn

Photo of Steve Webb Steve Webb The Minister of State, Department for Work and Pensions

This group of amendments relates primarily to the new pensions freedoms announced by the Chancellor in the Budget last year, which will generally come into effect on 6 April this year. I shall begin with the pension guidance and guarantee, now known as Pension Wise, covered by amendment 10 and amendments 66 to72. The Government intend that all those who stand to benefit directly from the new pensions flexibilities provided by the Taxation of Pensions Act 2014 should have access to guidance. The amendments to clause 47 and schedule 3 are technical amendments to ensure that that is the case.

The amendments adjust the definition of pensions guidance in new sections 333A and 137FB of the Financial Services and Markets Act 2000 to extend pensions guidance to survivors of members who have flexible benefits, rather than just the members of pension schemes. This is needed because in some circumstances pension schemes may provide benefits to survivors of members of the scheme other than insurance-based products or cash lump sums—that is, flexible benefits—without their becoming members of the scheme.

Amendments 11 to 18 and amendment 50 provide advice safeguards. Clauses 48 and 51 were amended in the Lords via Government amendment. These contain the provisions creating the advice safeguard, which requires schemes to check that financial advice has been received before an individual exchanges their safeguarded rights for those that can be taken flexibly. Clause 48 makes provision for Great Britain, while clause 51 makes corresponding provision for Northern Ireland. Amendments 11 and 15 improved the drafting of clauses 48 and 51, while amendments 12 and 16 ensure that the requirement to take advice also applies when a member takes an uncrystallised funds pension lump sum from benefits that are safeguarded.

On Report in the other place, a second group of amendments to those clauses were made in response to the recommendations of the Delegated Powers and Regulatory Reform Committee. Amendments 13 and 17 specifically provide for the only exception to the advice requirement that is intended to be in effect by 6 April—namely, an exemption from checking that advice has been received in the case of those with safeguarded wealth of £30,000 and below. Amendment 50 provides that regulations creating this exception are subject to the negative procedure, while regulations creating any other type of exception are subject to the affirmative procedure.

Amendment 14 provides more detail on the nature of the “appropriate independent advice” that is to be required under the safeguard. It provides that “appropriate independent advice” must be given by an “authorised independent adviser”, who has permission under the Financial Services and Markets Act 2000 to carry out a regulated activity specified in regulations. The Financial Conduct Authority sets out the standards for regulated activities in its rules, and that will allow it to set the standards for advice provided under the advice safeguard. Amendment 18 makes corresponding provision for Northern Ireland.

Let me now deal with amendments 19 to 21, 23 to 25, and 38 to 43, which are amendments to clauses 55 and 56, consequential on the Taxation of Pensions Act 2014. They allow a person to leave any remaining money purchase funds to a nominee or a successor. Schemes will be able to offer both nominees and successors a drawdown fund, so they need to be included in the clauses which deal with such arrangements. Amendments to clauses 60 and 61 do the same thing for legislation covering Northern Ireland, while amendments to clauses 72 to 74 make small changes to the definitions of terms used in part 4 of the Bill.

Let me now deal with amendments 22, 26 and 73 to 116, which are technical amendments to reflect the extension of the statutory right to transfer benefits and to ensure that the transfer process continues to operate smoothly after the requirement to take “appropriate independent advice” comes into force in April. Without these amendments there is a risk that the new transfer rights would not operate as intended after the new flexibilities come into force. Schedule 4 of the Bill amends the existing transfer rights provisions contained in part 4 of the Pension Schemes Act 1993 to give scheme members a statutory right to transfer a particular category of benefits, and gives scheme members with flexible benefits a statutory right to transfer these rights up to and beyond their scheme’s normal retirement age. Amendments 73, 92, 94, 96 and 115 would make consequential amendments to reflect numbering changes made elsewhere in schedule 4.

Amendments 22, 82 and 83 ensure that clause 55 and regulations under clauses 56 and 57 override any pension scheme rules which conflict with the statutory right to transfer overriding provisions for the purposes of the definition of “scheme rules”. These provisions amend the Pension Schemes Act 1993, the Pensions Act 1995 and the Pensions Act 2004, while amendments 26, 105 and 106 make corresponding provision for Northern Ireland. Amendment 75 replicates existing powers in the 1993 Act and will be used to preserve the effect of existing regulations under those powers, while amendment 98 makes identical provisions for Northern Ireland legislation.

Amendments 76 and 78 provide powers to extend the period within which a member who has received a statement of entitlement must take the cash equivalent of their accrued rights, and for the right to take the cash equivalent to lapse. Amendment 80 provides a power to extend the time in which the trustees of a scheme must do what the member requires. Amendments 88 and 89 make similar provision to extend time for pension credit members, and for trustees to act on members’ instructions. Amendments 99, 101, 103, 111 and 112 make similar amendments to the corresponding Northern Ireland legislation.

Amendments 79 and 102 make changes to section 98(1) of the 1993 Act and clarify that a member’s right to take a cash equivalent falls away where the trustees’ duty to carry out the member’s wishes is extinguished because they have been unable to confirm that the member has taken appropriate independent advice. Amendments 81, 86, 93 and 95 ensure that the definitions of scheme rules in the 1993 Act and the 2004 Act work for personal pension schemes. Amendments 82, 83 and 105 ensure that the definitions of “scheme rules” in the 1993 and 2004 Acts also apply for personal pensions, while taking account of any provisions that override these rules. Amendments 104, 109 and 116 do the same for Northern Ireland. Amendment 87 inserts a power to disapply the right of a pension credit member to transfer their pension credit rights in relation to prescribed descriptions of persons. Amendment 110 makes a similar amendment to Northern Ireland legislation. The remaining amendments in this group make a number of drafting, technical and consequential amendments to schedule 4 of the Bill.

Amendments 27 to 37 relate to public service scheme transfers. These are technical changes to improve drafting and ensure that the new safeguard applies where it should. The remaining amendments 45 to 48 and 51 to 55 are general amendments to part 6 of the Bill and are what are often known as the “back of the Bill” provisions. Amendments to clauses 80 and 81 would extend provisions to Northern Ireland, while the amendment to clause 84 would ensure that pension flexibilities provisions come into force at Royal Assent. I hope that what I have said has been helpful, and I commend the amendments to the House.

Photo of Gregg McClymont Gregg McClymont Shadow Minister (Work and Pensions)

The Minister raced through his text, much to the chagrin of the whole House I am sure, as we were enjoying it so much. Let me pick up on a couple of issues. We are dealing with the part of the Bill that has created some complexities because, to put it politely, it dovetails with the 2014 Act. If we were being less kind, we would say that some tensions are created because we cannot examine this Bill while, side by side, scrutinising that Act. I put that point on the record, although it has been discussed previously.

Lords amendments 13, 14, 17, 18 and 50 refer to the much-discussed guidance that those eligible to access their pension pots from April will be offered. The Minister mentioned Government amendments being tabled in the other place. Of course, the amendments are welcome, both as a necessary second line of defence and because they show that the Government are listening to the Opposition in this place and in the other place, and to the campaign led by interested pensions organisations outside the House. Why is it so important to have that second line of defence? As the Government accept, it is simply because it is one thing to offer guidance online from, in person from citizens advice bureaux and by telephone through the Pensions Advisory Service, but what happens when an individual discusses buying a product from a provider is another thing entirely.

Much of the debate on this Bill and other pensions Bills in this Parliament has revolved around that issue. According to the FCA studies and a variety of sources, decisions often end up being much more in the interest of those selling the product than those buying it. The Government have recognised that when someone comes to consider buying a product, the provider must check that they have received the appropriate guidance, either from the services I mentioned or from other sources. It is welcome that they have accepted the argument of the Opposition and others on putting in place a second line of defence, which the Minister calls the “advice safeguard”.

That brings us to one question that relates to part of the 2014 Act, as well as this Bill: how do we ensure that individuals are equipped to make what at times are complex financial decisions about what to do with their retirement income? Much of the legislation pertaining to this important aspect lies in the 2014 Act and, on one level, is outwith the bounds of what we are discussing today. But it is important to put on the record that significant questions remain about how the guidance guarantee will work from April. That view has been heard repeatedly from those in the pensions world and I am sure that the Minister, if he is not having sleepless nights about it, is paying close attention to it.

The impact of the new flexibilities, which will be introduced from April, on eligibility for means-tested benefits was the subject of much discussion in the other place. This pertains to the guidance amendments and, more widely, to the 2014 Act, which of course goes hand in hand with the Bill. Baroness Hollis asked a series of important questions of the Minister in the other place and the Government about how this new system of pension flexibilities will work in harness with existing eligibility for benefits and, more widely, with Department for Work and Pensions benefit rules.

I have to say that it is not that reassuring to hear from the Minister in the other place that all will be revealed before April. As things stand, there is still no clarity over how the new flexibilities will interact with DWP benefit rules, which will concern the whole House.

Let me give three examples, the first of which is on income. Let us say that, at 56, a person has a modest wage of £20,000. They rent privately and get housing benefit as they have minimal savings. They have a small pension pot of £25,000 and, after April, they take £15,000 of that pension pot to pay off debts or buy a new car. Up to 25% of that pot—some £6,000—is obviously tax free under pension rules, but will count as income against their means-tested benefits under DWP rules. Above that £6,000, they will pay income tax as well as lose benefit on the rest of the £15,000. Surely it is essential that anyone on means-tested benefits at the age of 56 knows what the impact will be of accessing their pension pot in line with the new flexibilities after April. I suspect that most people are simply not aware of that interaction. Something will need to be done rapidly to ensure that that kind of interaction and detriment are understood.

That is a simple example, but what about capital? What happens if, instead of accessing their pension pot to count as income, a person lets it sit there as capital, fully accessible when they need it, but not yet taken—a bit like an untouched ISA, as Baroness Hollis said. Up until now, inaccessible pension pots, which cannot be accessed under current rules, have, quite sensibly, been ignored. They do not count against the DWP’s capital savings rules, whereas other accessible incomes and savings such as ISAs do. That is another issue. In the debate in the other place, the Government said that they would clarify that matter shortly. But it is already nearly the end of February, and the rules come into place in April. It is not unfair to suggest that the Government are really running up against time here. Individuals need to understand the potential impact on their eligibility for benefits if they access their pension pots.

Let us say, for example, that someone is earning £25,000 a year, and have £25,000 in ISAs and £25,000 in their pension pot. They have injured their back and need to stop work and want means-tested benefits, but their £25,000 of ISAs savings debar them. What do they do? It is a no-brainer, as Baroness Hollis observed. They cycle their ISAs into a pension pot and shelter them. When they retire next year, at 56, they will get full means-tested benefits and, potentially, the same access to their savings that they had when half of them were ISAs. It is great for that individual, but for the rest of us, as taxpayers, it means bigger benefit bills. In the other place, the Government did not provide a compelling answer to that problem.

Finally, social care is means tested. At normal retirement age, a person’s pension pot—even if they have not touched it—is treated as if it is giving a notional annuity income. That notional income is included when assessing how much a person should pay in social care. Pension pots are not sheltered. Let us take another example. A person of 55, who may have built up a modest pension pot at work, has broken their back and needs social care. Although their pension pot is fully accessible, as if they were 65, their pension is not taken into account for social care means testing. If someone gets injured at 55, they pay little or nothing for their social care. If they live a little longer, as we hope, their pension is taken into account and their social care bill soars. How is that fair? Baroness Hollis suggested that it was age discrimination. How can we expect people to understand such contrary rules?

The Government might have compelling responses to those hypothetical case studies, but so far they have not provided any enlightenment on how the pension flexibilities contained in the Budget will interact with eligibility for DWP benefits.

In the other place, the Government said that they intend to come forward “soon” with explanations of how the Budget reforms will interact with DWP rules. But time is marching on. We are very close to those flexibilities “going live”, and it is incumbent on the Government to let us all know how the reforms interact with DWP benefit rules.

The issues and amendments pertaining to the second part of this Bill are necessarily related to the Pensions Schemes Bill. The Minister will not be able to provide us with all the answers. One problem is that the questions that one feels compelled to direct at the Minister of State for Pensions would be better directed at Treasury Ministers. That is something that has emerged during the course of these two parallel Bills.

I am sure that the Minister would agree that the interaction with DWP benefit rules is crucial. Unless the Government very rapidly explain the situation, significant numbers of people might undergo detriment.

Let me end on a note of consensus. The second line of defence, which came about as a result of the great work of the Opposition in the other place, has been accepted by the Government and will be welcomed by Members from all parts of the House. I rest my case.

Photo of Steve Webb Steve Webb The Minister of State, Department for Work and Pensions 1:30, 24 Chwefror 2015

I hope that I can respond helpfully to the two sets of issues that the hon. Gentleman raised. I thank him for using the attractive word “dovetailing” to describe what is happening between DWP and HM Treasury legislation.

The hon. Gentleman asked about the second line of defence. I think that there might have been some confusion in what he said. I apologise if the speed with which I went through my remarks put him off the scent. I had assumed that nothing I said would affect what he was going to say, which is why I went so quickly. To clarify: the second line of defence, which is the requirement on providers to ask searching questions of people choosing to do things with their pension pot, is not in the Bill at all. The amendments that refer to advice—as in independent financial advice and regulated advice—are the safeguards for people who are transferring from a defined benefit pension into a defined contribution pension with a view to accessing the flexibilities. The Bill requires them to have taken independent financial advice, and the amendments help to specify exactly what that is. I hope the hon. Gentleman is not confused. The amendments relate to the advice safeguard, which is about things such as DB to DC transfers. But he is right that the issue of a so-called second line of defence is an important one. The Government have listened. We anticipate that the Financial Conduct Authority will bring forward its detailed rules on how that should work in practice and we will be working with the trust-based pensions sector to do the same through the pensions regulator. I agree that those who raise such important issues both within and beyond the House deserve credit for doing so. I am grateful to him for the credit that he gave to the Government for listening to those concerns.

The second set of issues that the hon. Gentleman mentioned were those raised by Baroness Hollis in another place about the interaction with means-tested benefits. He will know, I hope, that my noble colleagues met Baroness Hollis before Third Reading in the Lords, and another meeting is planned to ensure that her concerns are properly addressed. I can tell him that it is largely business as usual. The intention is that the principles of the current rules relating to the treatment of pension funds will remain in place after April 2015. Obviously, we are in a new world, and we will have to consider carefully the impact of pension flexibilities and freedoms on income-related benefits and social care, but the Government want to ensure that someone’s decision to use a flexible pension product does not have a significant effect on how their means-tested benefits or social care charges are assessed.

The hon. Gentleman asked one specific question. I might have some cash in an ISA that the Government would account as capital, whereas if it were in a pension fund they might not, so why not just shove it into a pension fund? It is fine for someone to transfer money from an ISA into a pension pot for the sole purpose of improving their retirement provision, as we do not mind people putting money into a pension to retire on, but if they have done it with the intention of increasing their benefit entitlement we can still take account of the money. That mirrors existing provisions. In other words, if someone has some money in the bank, blows it on a foreign holiday or a sports car and comes along and claims benefit without the capital, one thing we will ask is where the money went. We have deprivation of capital rules so that if someone has artificially engineered their finances to get within the scope of means-tested benefits, we can deem them still to have the money. In the example the hon. Gentleman gave, if someone takes their ISA balance and flips it into a pension simply so they can get more pension credit we can simply say that we will treat them as though they still had the cash.

We think it is right to treat ISAs and pensions differently. ISAs are immediately accessible and are not long-term savings vehicles, so we think that that distinction is important. I can confirm that we will continue to have our conversations with the noble Baroness to ensure that we have addressed her concerns, but the spirit of what we are doing is that of business as usual, with the same broad approach as we had before the reforms were introduced. I hope that that responds to the hon. Gentleman’s concerns and I commend Lords amendment 10 to the House.

Lords amendment 10 agreed to.

Lords amendments 11 to 117 agreed to.