Clause 49 - Drawndown Pensions and Dependants’ Drawndon Pensions

Finance Bill – in a Public Bill Committee am 3:30 pm ar 6 Mehefin 2013.

Danfonwch hysbysiad imi am ddadleuon fel hyn

Question proposed, That the clause stand part of the Bill.

Photo of Chris Leslie Chris Leslie Shadow Minister (Treasury)

We now come to the question of draw-down pensions, one of the lesser spotted U-turns that the Government have made since their omnishambles Budget. It is a welcome U-turn, but a U-turn nevertheless. It comes on top of a number of changes of mind that the Government have had. We welcome the change, but it has caused significant stress, anxiety and problems for those who have had to grapple with or consider the mess that the Government have made of pensions planning, in particular for individuals thinking about how to make ends meet in their remaining years of retirement. Although this issue is relatively complicated, the Treasury ought to have got it right in the first place when it decided in April 2011 to decrease the draw-down limit to 100%. It has now reversed that decision.

Savers with defined-contribution pensions have two main options when they want to use their pension pot to generate an income and a lump sum: they can either buy an annuity that provides an income for the rest of their lives, or they can opt for income draw-down, where they withdraw from their pension pot but leave the bulk of the money invested. The Government estimate that 200,000 people have draw-down arrangements and 7.9 million people have defined-contribution pension funds.

The amount of money that can be withdrawn by an individual who is not eligible for draw-down is set by the pension scheme administrator, based on figures produced by the Government Actuary’s Department and based on the yields for 15-year UK gilts as reported by the FTSE UK gilts indices. The fall in gilts, combined with the reduction from 120% to 100% of comparable annuity incomes, has resulted in some maximum draw-down amounts falling by 40%. Many campaigners have therefore been calling on the Government to increase the withdrawal limit back to 120% of comparable annuity levels—that is what we are talking about in percentage terms—and remove the link between gilt yields and maximum income draw-down calculations. The Government eventually relented, which is why clause 49 exists.

As many hon. Members will be aware, concern has existed for a long time about annuity levels. The requirement for compulsory annuitisation by the age of 75 was removed, and temporary measures in the Finance Act 2010 allowed those who turned 75 after 22 June 2010 to  defer a decision on their annuity until new rules were finalised. In July 2010 the Government launched a consultation about annuitisation, in which they stated that they wanted to increase flexibility while ensuring that people did not exhaust savings prematurely in retirement and fall back on the state, or use pension savings as a tax-privileged means of passing on wealth. We do not disagree with that goal, because it is important to ensure that individuals cannot deplete their pension savings and fall back on the state.

However, the Government’s proposals, unwittingly, would have severely reduced the amount of income that pensioners who were affected would have been able to claim. In response to the consultation, the Government proposed to reduce the maximum withdrawal through the draw-down from 120% to 100% of comparable annuity levels, and to review the situation occasionally. A great deal of concern was voiced by those who would have been affected by the proposal, which resulted in the Chancellor’s U-turn in the 2012 autumn statement. Clause 49 returns the capped draw-down limit level to 120%. Clearly, the proposal has caused many people a lot of frustration, and the change would have had a considerable impact on the annual income levels of some pensioners. The Government’s change of heart is therefore welcome.

I want to ask the Minister some questions about the clause. Why has HMRC historically focused the comparable annuity amount at 120%? What is the logic for picking that figure? I understand that the Government needed to change their mind because the 100% figure caused great anxiety, but can he explain why 120% was chosen? Is the settlement long term? Where are we on the review cycle? We know that the Government plan to review the situation every so often. It would be quite useful if he could reiterate where we are. Are we back to this situation now for at least three years? Is HMRC intending to look at the matter again in three years’ time? Does the Minister now admit that the Government made an error with that decrease to the 100% level? Can he at least explain to the public what went wrong and why the Government made that particular choice? Will he at least take the opportunity to apologise to those who have been affected by this particular change and recognise that it was the wrong thing to do?

A smaller but none the less significant set of questions relate to draw-down and pensions. May I ask the Minister—this might be something he will want to write to me about, as I have not given him notice of the question—about individuals who suffer from serious illnesses and who are in need of particular pension provision because they might have a life expectancy of 12 months or less? A number of representations have been made to me and to other members of the Committee on the matter. If life expectancy is less than a year, and a recognised medical practitioner confirms the medical details, pension benefits can be paid out as a serious illness lump sum payment, so it is a draw-down of sorts. Those lump sums are often needed to provide for people in their last years of life, or to ensure that they do not leave their families with debt.

However, if a person is projected to have more than 12 months but less than five years to live, the annuities are usually bought and therefore there are fewer options.  Lump sum payments may be just as crucial for people in those horrendous situations. As we know with employment and support allowance, there are medical circumstances in which, sadly, some people know about their low life expectancy, but they may have more than that 12-month period left. In those horrendous circumstances, lump sum payments can be just as crucial, so does the Treasury have any plans to look at that particular boundary level timing? Will the Government consider extending the provision of serious illness lump sum payments to people who have terminal illnesses but a life expectancy of, say, three years? It would be possible to limit the availability of those lump sums to those with modest pension funds. They will obviously be in desperate need. I do not have information of the costings involved, but obviously I do not wish to incur any cost to the Exchequer. Some insight from the Minister’s officials on such matters would be extremely useful, because they are, sadly, of concern to a large number of people. I will be more than happy for the Minister to write to me on that matter.

Photo of Sajid Javid Sajid Javid The Economic Secretary to the Treasury 3:45, 6 Mehefin 2013

Clause 49 raises the annual withdrawal limit on the income individuals can take from their draw-down pension fund. It increases the limit to 120% of the value of an equivalent annuity. In the Finance Act 2011, the Government reformed the rules surrounding draw-down policy to improve flexibility for individuals while ensuring that pension savings provide a sustainable income over their lifetime.

Before April 2011, those aged under 75 could withdraw 120% of the value of an equivalent annuity, and those aged over 75 could withdraw only 90%. Individuals also face an effective requirement to purchase an annuity by the age of 75. The Government removed the restrictions by making income draw-down available throughout the whole of an individual’s retirement with a single annual withdrawal limit. That single limit was set at 100% of an equivalent annuity to ensure that people did not prematurely exhaust their draw-down funds, and for simplicity.

However, in the short term other factors have affected draw-down and annuity rates, such as gilt yields and other investment returns. Those factors have combined with the change in the annual withdrawal limit to reduce significantly flexibility and individuals’ pensions in a way that was not intended under the Finance Act 2011.

Clause 49 raises the annual limit of capped draw-down pension arrangements to 120% of the value of an equivalent annuity. That will benefit around 500,000 individuals in draw-down arrangements. The higher annual limit applies to all new draw-down pension years starting on or after 26 March 2013 and applies to both existing and new draw-down pensioners. In general, the Government’s decision has been welcomed by pension providers and pensioners.

Before I conclude, I will turn to a couple of the specific issues the hon. Gentleman raised.

Photo of Chris Leslie Chris Leslie Shadow Minister (Treasury)

It is the words “before I conclude” that bring me to my feet. I cannot let the discussion of the decision on draw-down pass without asking the Minister a straightforward question: do the Government regret deciding to go to 100%? They are having to change their mind. Does he regret that?

Photo of Sajid Javid Sajid Javid The Economic Secretary to the Treasury

I was turning to the hon. Gentleman’s specific questions. He used the term “U-turn”, but the only recent U-turns I recognise are those performed by the Opposition. The clause and the changes we are talking about are not a U-turn, because the cap has increased to 120% for all ages, whereas the age-related restrictions imposed by the previous Labour Government set different caps for different ages. This policy is not the same as the one in existence before, so it is not a U-turn. To further answer his question, the policy reflects changes that have taken place in the gilt market and in other investment returns. It is appropriate for the Government to keep tax policy under review and make changes where it is considered appropriate.

Photo of Chris Leslie Chris Leslie Shadow Minister (Treasury)

Let me get this absolutely clear: is the Minister saying that this was always part of the plan?

Photo of Sajid Javid Sajid Javid The Economic Secretary to the Treasury

What the Minister is saying is that we always keep tax policy under review to ensure that it is appropriate for the circumstances. When the circumstances change, especially those in the markets—the hon. Gentleman will know that the Government do not set gilt yields and investment returns in general—we look at the policy and ensure that it is appropriate and consistent with its original intentions. This change reflects that.

Photo of Chris Leslie Chris Leslie Shadow Minister (Treasury)

What market factor was so significant between 2011 and 2013 that it justified this change of heart?

Photo of Sajid Javid Sajid Javid The Economic Secretary to the Treasury

Since 2011, a range of factors have affected draw-down rates, such as the gilt yields. I am sure that the hon. Gentleman can see for himself the changes in gilt yields and investment returns since we introduced the last change. Those factors have combined with the change in the annual withdrawal limit to reduce an individual’s total draw-down income. The changes in the clause will help mitigate that impact.

The hon. Gentleman also raised the issue of individuals suffering from serious illness. He talked not just about individuals who may be in the last 12 months of their life, but those in the last two to three years—still serious conditions for individuals that have them. So far, I have not received many representations on that, but it is a good point. Any Government should have an open mind and ensure that the rules are sensible and practical enough to help individuals in such situations. He kindly invited me to write to him, furnishing him with more information on some of the representations and on our current approach, and I will take him up on that.

In conclusion, the Government recognise that exceptional factors have reduced the amount of income available to pensioners in draw-down arrangements in recent years. Raising the draw-down limit to 120% will increase the amount of income available each year to individuals with draw-down arrangements and provide greater flexibility.

Question put and agreed to.

Clause 49accordingly ordered to stand part of the Bill.