Clause 1 - Amendment of the income and corporation taxes Act 1988

Pension Annuities (Amendment) Bill – in a Public Bill Committee am 8:55 am ar 28 Chwefror 2002.

Danfonwch hysbysiad imi am ddadleuon fel hyn

Amendment proposed [14 February]: No. 7, in page 1, leave out lines 11 to 14.)—[Ruth Kelly.]

Question again proposed, That the amendment be made.

Photo of Mr George Stevenson Mr George Stevenson Llafur, Stoke-on-Trent South

I remind the Committee that with this we are taking amendment No. 14, in page 2, leave out lines 18 to 20.

Photo of Ruth Kelly Ruth Kelly Economic Secretary, HM Treasury

Thank you, Mr. Stevenson. It is a pleasure to return to the Committee under your chairmanship. In light of the fact that we discussed the amendment at some length at our previous sitting, I urge members of the Committee to support it.

Question put, That the amendment be made:—

The Committee divided: Ayes 4, Noes 2.

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Question accordingly agreed to.

Amendment proposed: No. 3, in page 1, line 17, at end insert—

'(g) the payment to a member of income from a Retirement Failsafe Fund satisfying the conditions of section 637C.'.—[Mr. Flight.]

Question put, That the amendment be made:—

The Committee divided: Ayes 2, Noes 4.

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Question accordingly negatived.

Photo of David Drew David Drew Labour/Co-operative, Stroud

On a point of order, Mr. Stevenson. I was not present at our previous sitting, so I am a little confused about the amendments. I should be grateful if you could clarify the position.

Photo of Ruth Kelly Ruth Kelly Economic Secretary, HM Treasury

I beg to move amendment No. 10, in page 2, leave out lines 1 to 11.

Photo of Mr George Stevenson Mr George Stevenson Llafur, Stoke-on-Trent South

With this it will be convenient to take amendment No. 30, in page 2, line 10, leave out from 'member' to end of line 11 and insert—

'(i) attains the state retirement age; and

(ii) ceases to be in full or part time work for a period of more than three months.'.

Photo of Ruth Kelly Ruth Kelly Economic Secretary, HM Treasury

The purpose of amendment No. 10 is to remove the lowering of the age limit to 65 for the purchase of a minimum retirement income annuity. The Government encourage people to make private provision for their retirement by providing generous tax incentives. Contributions paid by both individuals and employers into occupational and personal pension schemes, including stakeholder pension schemes, receive full tax relief, as do pension fund investment returns and capital gains. Contributions made by an employer are exempted from the normal rules that would treat them as a taxable benefit in kind on an employee.

We debated the subject extensively in the Committee's first sitting. After the tax from current pensions in payment is taken into account, the net Exchequer cost of pension scheme tax relief is estimated to be more than £12 billion a year. In entering into a pension scheme, a person buys into a long-term savings arrangement that is intended to be used only to buy a retirement income.

The Bill's sponsors repeatedly argue that those who have sufficiently large pension pots with residual funds after the minimum retirement income annuity has been secured should have free choice over the use of that residual pension fund. However, that is not the contract into which they entered. In addition to the valuable benefit of the 25 per cent. tax-free lump sum of the accumulated fund, which can be taken when a personal pension scheme member first draws from the scheme, one of the benefits of the contract is that the Government defer the taxation of money going into the pension scheme until the person draws a pension. Tax relief on pension contributions and build-up are provided so that people can save for an income in retirement, not for other purposes.

We have debated the requirement to buy a minimum income annuity by age 65. That would impose a restriction on the vast majority of people, who would be forced to use their entire fund for that purpose, but would sweep away the existing requirement to annuitise fully by age 75 and would instead allow the wealthy—it would be only the wealthy—to use the balance of their funds for any purpose they wish. That is completely at odds with the purposes for which the substantial and valuable tax reliefs were given in the first place. I therefore ask hon. Members to support the amendment.

Photo of Mr Howard Flight Mr Howard Flight Ceidwadwyr, Arundel and South Downs

The Government's amendment is grouped with my amendment, No. 30. The Economic Secretary expresses a misunderstanding. The Bill is not intended to allow people to do anything with their pension savings. The issue is how pension savings are invested to provide income in old age. As has been pointed out extensively, the proposed taxation arrangements are in essence the same. There would

be a withdrawal tax of 35 per cent., and, if anything were left in the person's pension pot the money would form part of their estate, as happens at present when someone dies before the age of 75 and a draw-down is involved. The Bill is not intended to give people a new and different tax break on their pension savings.

Amendment No. 30 would deal with an aspect of the Bill that has been mentioned as a cause of anxiety. For many people who buy the minimum income annuity to ensure that their retirement income is above the level of benefits, there would be too much inflexibility under the Bill as drafted. They would be obliged to buy an inflation-indexed annuity at 65, whereas at present they have the flexibility to buy a non-inflation-indexed annuity and to defer the purchase of an annuity until the age of 75. The amendment would change the definition of 65 to the age at which they retire or—to make clear what ''retirement'' means—provide evidence that they have ceased work

''for a period of more than three months.''

It is increasingly the case that many people will work until 70 or beyond. They can, as long as they are working, continue to pay into their money purchase pension scheme. Only when they retire would it crystallise whether they were locked in or obliged to buy the annuity to keep them above the level of benefits.

Photo of David Curry David Curry Ceidwadwyr, Skipton and Ripon

I support amendment No. 30 because it would mean that those who work beyond the age of 65 would not need to annuitise until they had stopped working for three months. That is a practical and sensible measure. We had a long debate two weeks ago and on Second Reading and I do not intend to rehearse those arguments any more than the Minister does. This issue is at the heart of the Bill. Once people have made adequate provision for their old age—''adequacy'' has been defined by the Government—they should have free use of the funds that remain to them, subject to the fiscal provisions that we outlined in the previous sitting.

The Minister has spoken about contracts. Contracts can change. Governments can change them unilaterally; that is what legislation does. I would be interested to know more about the speculation that I have read in the papers in the past couple of days. The Daily Express is not a paper of which I am terribly fond—it was far too right wing to start with and is far too new Labour now—and I do not give it a great deal of credence, but it has mentioned some quite significant changes. What with the events of the past couple of weeks and concerns about the future of pensions and companies moving out of final salary schemes, the demand for private pensions will obviously increase. In future, an avalanche of funds might be funnelled into the straightjacket of annuities, which will not bear the strain. The little titivations in the consultation document will not do anything to sort that out.

As my hon. Friend the Member for Arundel and South Downs (Mr. Flight) said and makes explicit in new clause 1, which we shall discuss later, if people want to stick with the existing system, they can do so. They do not have to buy into the provisions. In response to the idea that only the wealthy can benefit from them, I refer to the London and Colonial scheme, approved by the Inland Revenue, which has an entry ticket of £250,000, is based in Gibraltar and has high fees. If that is not a Government-approved scheme specifically for the benefit of the wealthy, I do not know what is.

If more of those in company schemes are to take private pensions—some of them will have significant earnings—the definition of ''wealthy'' is likely to change sharply. That is why paragraphs (b) and (c) of subsection (4) offer the Government a better guarantee and I do not understand why they do not think that the provisions are a wonderful gift horse. They would require people to annuitise at 65. That would make possible much stronger tax flows from private pensions and the funds put into investment schemes, which are subject to capital gains tax and income tax. I wonder why the Government are determined to look that gift horse in the mouth. I stand by my draft and urge the packed ranks of the Committee to vote against the amendment. My provisions are at the heart of the Bill.

Photo of David Drew David Drew Labour/Co-operative, Stroud

I am pleased to play my part in the Committee now and I am sorry to have raised the earlier point of order, Mr. Stevenson.

I wonder whether the Minister would help me with the complex issue with which I have had to engage, not just today but when talking to constituents. I read the Government's consultation paper and am worried about how much we get hung up on the age barriers of 65 or 75. Will she rehearse the reasons why the Government are not willing to consult on the issue? People have opinions on the subject, although I do not say that they are necessarily right. We are talking about allowing a sum to grow. If people are not able to feel the benefit of that sum, they feel cheated. I seek clarification about the Government's position with regard to the consultation, as that is the crux of the Bill, and of the document that we are discussing.

Photo of Ruth Kelly Ruth Kelly Economic Secretary, HM Treasury

We extensively debated the merits of this private Member's Bill on Second Reading and in the previous sitting of the Committee.

The crux of the matter is whether amendment No. 10 re-inserts the restriction that people are required to buy an annuity at the age of 75, and whether the Government believe that people should be forced to buy an annuity with all of their pension funds at a certain age.

I will briefly run through the argument. Currently, an annuity is the only financial product that guarantees an income for life. A pension fund has been built up with significant Government tax relief: on average, of every £100 in a pension fund, the Government have provided £30. We have provided that sum specifically to ensure that people can provide for themselves in their old age, regardless of how long

they live, and annuities are at present the only product available that enables them to do so.

If Committee members—or other people—come up with sensible, workable and affordable alternatives that ensure that that income for life is maintained, we will be prepared to consider them, but with one important caveat—they must not worsen the prospects of everyone who is forced to buy an annuity. The proposals would lead to a lowering of annuity rates for the majority of pensioners and I—as the responsible Minister—could not tolerate that.

The consultation document examines how the market could be made to work better for the majority of people with small pension funds. At present, someone who has a smallish pension fund of about £20,000 could be losing out by up to £8 a week, if they are not receiving the best advice and not taking out an annuity suited to their needs. Indeed, they could be losing out by much more than that if, for example, they have not taken out an impaired life annuity, which might be particularly suitable for them.

People are not getting good value with regard to annuity deals; there is a huge gap between what they are getting and what they should be getting, and they, rightly, feel aggrieved about that. That market must improve and we think that the consultation paper will enable us to make a significant beneficial impact on the lives of the majority of people who have to provide for themselves in retirement.

That is a summary of the argument that we have addressed in depth in the past few weeks. Amendment No. 10 restores the requirement that the whole of the pension fund must be used to provide an annuity income for life by no later than the age of 75.

Amendment No. 30, tabled by the hon. Member for Arundel and South Downs, substitutes the age of 65 as the point at which the minimum income annuity must be secured with the new criteria of the attainment of state pension age and the cessation of all work for more than three months. Its intention is to give greater flexibility with regard to the ending of work—perhaps, it therefore takes on board the argument that has been put forward by Labour Committee members about the need to take account of flexible retirement and related matters. The amendment does not deal with those concerns, however. It would relax the rules in the original Bill to such an extent that people who are in any sort of part-time work—even as little as one hour a week—could avoid ever having to buy a minimum retirement income annuity. I am sure that that is not the hon. Gentleman's intention. If it were accepted, the pension scheme could turn into something akin to a death benefit scheme for those who so chose, with no pension ever being paid, and the whole fund eventually reverting to the scheme member's estate.

Amendment No. 30 would enable even the partial use of funds for a pension purpose, which the original Bill intended to avoid. For all those reasons, I ask hon. Members to support amendment No. 10 and resist amendment No. 30.

Photo of David Curry David Curry Ceidwadwyr, Skipton and Ripon 9:15, 28 Chwefror 2002

The Minister has reiterated her point. Whenever the Government claim, absolutely and categorically, that something is a central principle, one knows that within a few weeks things are likely to change. It will be interesting to see whether there will be future developments, especially with regard to inheritability. I simply maintain that if one reviews the events of the past two or three weeks, when several companies have withdrawn from final salary schemes, the implication is that people will have to look much further. Provision will be through the private pension mechanism, so many more people—perhaps not immediately but in a predictable future—will be forced into the straitjacket of annuities, which will have an enormous impact on the way in which the annuity market works. It will work much less well because there will be more demand from a very limited supply, the consequences of which we have already seen.

It is inevitable that at some stage we will at least have to move towards a principle that is enshrined within my Bill. There must be choice and the Government will eventually see that logic. We have the opportunity to put my views and those of the Minister side by side. The consultation process makes my Bill work better, because I also depend on annuities. The better they work, the better for all of us. That is only a bit of the answer. I am trying to provide the other bit and I commend that bit to the Committee.

Photo of Mr Howard Flight Mr Howard Flight Ceidwadwyr, Arundel and South Downs

In essence, the Minister is saying that my amendment requires a tighter definition of what is meant by the term ''in work'', to clarify the potential number of hours worked and avoid being caught by her interpretation. We could deal with that issue on Report. However, I repeat and strengthen the opposition to amendment No. 10. The fundamental problem with the obligation to buy an annuity is that it forces people in the main to lock into a straight guaranteed annuity. It forces them to part with the pension savings in their pension pot and they are then at the mercy of whatever happens with inflation.

The Government ought to be extraordinarily worried about the rising tide of money being forced into annuities. As my right hon. Friend the Member for Skipton and Ripon (Mr. Curry) said, it is about to rise even more. Inflation and interest rates are historically low at present, but any rational person would agree that there was a prospect within the next 10 or 15 years of our going through a period of considerably higher inflation. Indeed, if people talk down sterling so that we can apply to join the euro, as has been predicted, inflation could easily rise to 5 or 6 per cent. with interest rates rising to 8 or 9 per cent.

People who have bought a fixed rate annuity at the low rates of inflation and interest that have prevailed for several years could see their pensions erode to very little in value. Millions of people are frightened of that happening as a result of the Soviet-style enforcement that continues. If people could keep a wider spread of investments, they would be able to manage their affairs in accordance with the economic cycles of life.

As we have repeatedly made clear, the reason to top up to a level and buy an inflation-linked annuity is to prevent people from blowing their money irresponsibly and becoming dependent on the state. The annuity is inflation-indexed to protect against that. It is correct that if things had gone the other way, people might have enjoyed a slightly higher income as a result of buying a standard fixed annuity, but that is an irresponsible risk, particularly at present.

I emphasise the argument of my right hon. Friend the Member for Skipton and Ripon that the Government have made much of the Bill affecting a privileged minority. With the tragic demise of final salary schemes, the majority of people are moving to money-purchase pensions, whether group personal pensions, individual personal pensions or stakeholder pensions. If there are no reforms along the lines of the Bill, and my right hon. Friend the Member for Skipton and Ripon and I are the first to concede that it is not perfectly drafted but we are discussing the principle, that will mean that the majority of people retiring in 10 years, the great rump in the middle—the middle England vote that the Prime Minister is so keen to secure—will be hit by the problem of having to buy an annuity. The purpose of the Bill is to provide relief for that majority. Pension saving is declining because people do not want to pension save, despite the tax advantages, when they know that at the age of 75 they will have to put themselves at risk of the interplay between annuity yields and inflation. The principle of the reform is not for the minority but for the majority, in a fast-changing world in which money-purchase pensions are becoming the majority.

The arithmetic argument is that if an annuity is to deliver a guaranteed income, it must be invested in gilts or top quality safe bonds. There is a supply-and-demand problem because, if the Government are balancing their budget or even producing a fiscal surplus, the supply of gilts contracts. The rate of annuity money coming on to the market has been rising by 20 per cent. compound—some £8 billion last year—and is likely to rise even faster. The net effect is that the amount of money buying gilts is rising dramatically against a fixed or even declining pot of gilts in which annuities must be invested. Not surprisingly, that drives down yields. The halving of annuity yields and the doubling of the cost in the past decade or so has been the result not only of inflation but of long-term interest rates virtually halving. That has resulted from a major shift in supply and demand.

Unless the Minister is saying that the Government are about to move substantially into fiscal deficit and create a large supply of gilts, the rising tide of money-purchase pension money will make the position worse, long-term gilt yields will fall further and the real cost of annuities will rise further. The present position cannot continue because of what is happening to supply and demand for gilts under existing annuity arrangements. Widening the scope of annuities to equities may be fine for the better off, but while people are forced to buy annuities, the majority are likely to opt for standard fixed-rate annuities as at present.

They will be rightly nervous of buying equity annuities because they are complex animals, expensive and, despite the excellent clarity of the paper on annuities, not everyone will easily understand them.

I suggest, as did my right hon. Friend, that the Government must not sit on their seat and wait for another private sector pension disaster to hit them, as they did with the final-salary pension disaster. The matter must be tackled now with a scheme to cope with the rising tide of money-purchase pension savings so that on retirement people will have a reasonable income.

Photo of Mr George Stevenson Mr George Stevenson Llafur, Stoke-on-Trent South

Order. Before I call the Minister, I shall briefly explain that, although the hon. Gentleman's contribution was wide ranging, the amendments are at the heart of the Bill so I thought it entirely appropriate.

Photo of Ruth Kelly Ruth Kelly Economic Secretary, HM Treasury

In light of those comments, it would be wise for me to respond briefly to the points raised by the hon. Member for Arundel and South Downs, particularly to those about the move from defined benefit to defined contribution. I shall not analyse that situation for hon. Members, but say that the Government are seriously considering whether rules for defined benefit and defined contribution schemes can be simplified so that no artificial bias is in the system. I am sure that the hon. Gentleman is aware of the Pickering review that the Department for Work and Pensions is carrying out, the Sandler review that the Treasury is carrying out and the Inland Revenue simplification exercise.

Perhaps more important than the move from defined benefit to defined contribution is the underlying fact that employers are using the opportunity of the move to cut the value of their contributions. That should concern Committee members. On average, in five benefit schemes, employers contribute 16 per cent. of earnings, but when they move to defined contribution schemes, that tends to drop to an average of 10 per cent.

The hon. Gentleman points to the halving of annuity yields. I refer him, and other interested hon. Members, to the chart on page 19 of the consultation document on modernising annuities. It is a fascinating chart that shows that while the nominal annuity rate has fallen starkly since 1986, the pension delivered in terms of earnings deflated has risen since then, although there has been a slight fall-off in the past couple of years.

Much misunderstanding still exists. Annuities still provide by far the most efficient way of delivering retirement income, but we must make the market work better. The hon. Gentleman pointed to the imbalance in the gilt market, but the Bill will make that imbalance far worse by forcing those at the age of 65, or thereabouts, to buy an index-linked annuity. At the moment, about 80 per cent. of people buy flat-rate annuities, and 20 per cent. buy other forms, presumably mainly index-linked. If everyone at the age of 65 bought an index-linked annuity, such pressure would be put on the gilts market that it would probably collapse, although I do not like to make such dire predictions. [Interruption.] Well, the

market would not function, or deliver what supporters of the Bill would like. We must live in the real world and the hon. Gentleman is right that the gilts market already has a shortage of long-term gilts.

Photo of Lynne Jones Lynne Jones Llafur, Birmingham, Selly Oak

On that point, it might be appropriate for the Government to increase public investment, thus releasing more gilts.

Photo of Ruth Kelly Ruth Kelly Economic Secretary, HM Treasury

As my hon. Friend is aware, we are increasing public investment. However, even if we doubled the investment in the pipeline, it would not deal with the issue before us. Fundamentally, the gilts market is not able to deliver a reasonable balance between supply and demand and would not be able to deliver that if people were forced to buy an index-linked annuity at the age of 65. There have been suggestions that it should be earnings linked, but that would not be possible.

Through our consultation document, we have tried to tackle issues that people find frustrating about the annuities market, such as not being given proper advice and not having the option to switch providers when they find themselves with a poorly performing provider. There needs to be more flexibility and competition in the market. To give the Committee a flavour of what we are considering, the document proposes limited-period annuities for discussion. One could take out such an annuity for four or five years, reassess one's circumstances at the end of that period, and then choose a different product. People under 75 could use income draw-down. A limited period annuity, backed by short-term gilts, would take pressure off the gilts market. The result would be that everybody, no matter what their income, would benefit in their retirement. We need to consider those matters seriously, but I do not think that this private Member's Bill tackles them. It actually exacerbates them to the point of making the Bill unworkable.

Photo of Mr Howard Flight Mr Howard Flight Ceidwadwyr, Arundel and South Downs 9:30, 28 Chwefror 2002

The table to which the Minister refers is interesting and useful, but it also illustrates a real problem that people perceive. It shows that in 1986, an annuity yield was about 14 per cent. That meant that 14 per cent. was the fixed income regardless of capital. If inflation—I have forgotten what inflation was in 1986, but I think it was about 5 per cent.—were to fall, one was well placed, and one received a pretty good nominal yield. Given the long-term declining trend of inflation that started in the late 1970s, people rightly took the view that annuities were an attractive vehicle.

We are now looking through the other end of the telescope. Annuity yields are about 6 to 7 per cent. and the margin of risk would be enormously greater if inflation rose to 3 per cent. Therefore, no responsible financial adviser would advise people to lock in for up to 20 years all their capital to a fixed rate of interest the value of which would erode quickly with the fixed yield at only 7 per cent. That is precisely the issue: a change in circumstances has turned something that, on a sensible economic assessment, was a very attractive vehicle in the mid-1980s and early 1990s into a high-risk vehicle today.

Photo of Mr George Stevenson Mr George Stevenson Llafur, Stoke-on-Trent South

Order. Before I put the question on the amendment, I should advise Members that should

amendment No. 10 be agreed, amendment No. 30 would fall.

Question put, That the amendment be made:—

The Committee divided: Ayes 3, Noes 3.

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The Chairman: I am advised that my casting vote should be no, to leave the Bill in its present form.

Question accordingly negatived.

Photo of Mr Lawrie Quinn Mr Lawrie Quinn Llafur, Scarborough and Whitby

On a point of order, Mr. Winterton. Does that advice also mean that amendment No. 30 will fall?

Photo of Mr George Stevenson Mr George Stevenson Llafur, Stoke-on-Trent South

Given my comments before I took the vote, the hon. Gentleman's point is fair. Does the hon. Member for Arundel and South Downs wish amendment No. 30 to be moved formally?

Mr. Flight indicated assent.

Amendment proposed: No. 30, in page 2, line 10, leave out from ''member'' to end of line 11 and insert—

''(i) attains the state retirement age; and

(ii) ceases to be in full or part time work for a period of more than three months.''.—[Mr. Flight.]

Question put, That the amendment be made:—

The Committee divided: Ayes 2, Noes 4.

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Question accordingly negatived.

Photo of Mr George Stevenson Mr George Stevenson Llafur, Stoke-on-Trent South

We now come to amendments Nos. 15 and 16. As hon. Members will recall, these were grouped with amendment No. 6, which the Committee agreed to at its first sitting. Does the Minister wish to move amendments Nos. 15 and 16 formally?

Photo of Ruth Kelly Ruth Kelly Economic Secretary, HM Treasury

If I do not move the amendments, may I reserve my right to bring them back on Report?

Photo of Mr George Stevenson Mr George Stevenson Llafur, Stoke-on-Trent South

Indeed. This is a procedural issue. Will the Minister confirm that she does not wish to move any other amendments to clause 1?

Photo of Ruth Kelly Ruth Kelly Economic Secretary, HM Treasury

Yes, although I reserve my right to bring the amendments back on Report.

Amendment proposed: No. 5, in page 2, line 41, at end insert—

''637 Retirement Failsafe Fund

(1) Where a member elects not to purchase an annuity he may transfer funds into a Retirement Failsafe Fund as follows—

(2) The sum to be placed into the Retirement Failsafe Fund shall be the lesser of

(a) 150 per cent. of the fund size needed to ensure the member has an income the equivalent of the Minimum Retirement Income, or

(b) the whole person pension scheme fund

(3) Withdrawals from the Retirement Failsafe Fund must be taken such as will ensure the member has an annual income equal to the Minimum Retirement Income set under section 2 of the Pensions Annuities (Amendment) 2002.

(4) Any balance remaining in the personal pension scheme after the Retirement Failsafe Fund is established may be withdrawn as income as and when the member elects until he attains the age of 80.

(5) At the age of 80 the balance in the Retirement Failsafe Fund shall be transferred back into the personal pension scheme and withdrawals made from the whole scheme as follows—

In each successive year starting at the age of 80 a sum shall be withdrawn equal to the balance of the fund at the commencement of that respective year divided by the number of years then remaining to the age of 100.

(6) All withdrawals under subsections (3), (4) and (5) shall be regarded as ''income'' within section 1 of this Act.

The right to all withdrawals under subsections (3), (4) and (5) must not be capable of assignment or surrender.''.—[Mr. Flight.]

Question put, That the amendment be made:—

The Committee divided: Ayes 2, Noes 4.

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Question accordingly negatived.

Question put, That the clause, as amended, stand part of the Bill:—

The Committee divided: Ayes 4, Noes 3.

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Question accordingly agreed to.

Clause 1, as amended, ordered to stand part of the Bill.