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There are two key factors to consider. The first is the growth of life expectancy. Owing to better nutrition, better medical facilities, a reduction in the number of smokers and better long-term caredespite the state of the national health servicepeople are living longer. As a result, they have to make decisions at 65 or 75 whenmy hon. Friend the Member for Arundel and South Downs (Mr. Flight) put this most eloquentlythey have no idea what will happen 15, 20, 25 or even 30 years hence. That uncertainty is a problem.
The second factor, which relates to the point made by my hon. Friend the Member for NorthEast Hertfordshire (Mr. Heald), is the fact that returns are now poorer because of interest rates. We have no idea what future interest rates will be, but my hunch is that they will stay at about the level they are now. They might go a little higher, but I do not believe that we will have the double-figure interest rates that we saw in the 1960s and 1970s.
People feel that they are worse off. In 1990, an annuity with a 3 per cent. escalator and 50 per cent. provision for a spouse would produce £10,00010 per cent. on a £100,000 annuity. Today, the same annuity would produce £5,500. That is the killer. My hon. Friend the Member for Ryedale (Mr. Greenway) said that he has a pot of £250,000, which today would produce an income of only £12,500. I suspect that when he started out he did not expect such a return.
We have an obligation to buy an annuity before the age of 75. As many people said, it is an arbitrary figure. The onus is on the Government to say why the figure should not change. It is affecting the way in which people conduct their personal finances. The Government have to justify their decision. As many people have said, the remarks of the Minister for Pensions have not been helpful. I suspect that there is a touch of the old Labour politics of envy in his remarks when he says that it is only the better-off who will benefit from such proposals. The people who benefit are the thrifty: those who place no burden on the state and on society. Any reform will have losers and gainers, but these proposals have been carefully
These proposals are sensible, and they meet the Government's concerns. When my right hon. Friend the Member for Skipton and Ripon introduced the Bill, he was right to address their concerns and to try to make the proposal fiscally neutral. I believe that the minimum retirement income is absolutely essential. There is no question of this reform imposing extra burdens on the state. It is important that people have the right to put the rest of the money in a residual income fund.
I want to make a constructive suggestion to my right hon. Friend. Perhaps he has allowed too much flexibility. The hon. Member for Northavon (Mr. Webb) raised a point about inheritance and whether it can be tax-free when it comes out of the fund, but that was not fully addressed. I would be concerned if it were possible to blow it. Perhaps my right hon. Friend might like to look at the Trustee Investments Act 1961 regarding recommended investments for trustees of other people's income.
I have no difficulty in supporting the proposal in the Bill that there should be greater flexibility and the power to pass money on through generations if necessary, provided that it places no burden on society and no extra burden on the Treasury.
Dr. Vincent Cable (Twickenham): I want to reinforce the view of my hon. Friend the Member for Northavon (Mr. Webb) that the Bill has cross-party support. As a Liberal Democrat, I strongly support what the Bill is trying to achieve. It protects the interest of annuitants in a way that has not happened before, and it takes the political risk of trying to address the Government's two fundamental concerns about the blowing away of lump sums and the problem of tax yield, which the right hon. Member for Skipton and Ripon (Mr. Curry) addresses through his exit charge. As my hon. Friend explained, these are complex issues, and the Bill may need some refinement, but it is an excellent measure and probably the most sophisticated attempt we have ever had to address these central problems. As such, it deserves support and success.
The problem of annuitants is growing rather than declining. The problem of annuities first surfaced politically in 199899. It is probably a temporary problem because bond yields have fallen quite heavily in the market, from 10 per cent. to 4.5 per cent. Clearly, that is a big hit for the people whose annuities depend on them. It is a temporary problem because inflation expectations, which had fallen, will eventually translate into lower inflation, so there is a bit of a money illusion. Those people who have lower annuities will eventually benefit, and the real value of their annuities will be preserved over time, so it does not matter too much.
It has also been said that circumstances were slightly artificial two or three years ago. Annuities were particularly depressed, while the stock market was doing extremely well and people were making a lot of money in shares and were frustrated because they could not translate their savings into equities. Now that the stock exchange has taken a hit as well, that argument has disappeared.
One could argue that some of the problems with annuities were temporary and caused temporary grief. I would argue that, for reasons that have already been explained, it is a more systemic and serious problem, which is why the Bill is particularly important. The hon. Member for Arundel and South Downs (Mr. Flight) said that the move to money-purchase policies is growing rather than diminishing. There are good reasons why it is growing. It is partly because employers are not willing to take the cost element in defined contribution systems, and because people are becoming more mobile and want the flexibility of those policies.
All the evidence suggests that, despite the innovations in the market, people with defined contribution policies are not able to access flexible schemes. Only 16 per cent. of people with defined contribution schemes have got into the income drawdown. People with such schemes are faced with the most severe problem: when they retire and start drawing their pension they are obliged to take the annuity.
There is an additional dynamic to this problem. As more and more people get into defined contribution schemes and are required to take annuities, the pension funds that back them up are having to buy more gilts in the market, which drives up the bond price and drives down the yield. That vicious circle makes the problem worse, and it will continue to do so. That is why we need to address it as a systemic problem, not as the temporary problem which it was viewed as a couple of years ago.
There are two problems with annuities. As I have explained, the returns are poor and are poor value for money, and there are problems associated with that. More fundamental than that, however, is the issue of principle concerning people's right to a basic entitlement to use their savings as they judge prudent. Families are of different sizes and have different expectations, and the population is increasingly mature and educated, so why on earth should we have a paternalistic philosophy dating from 1921? It was not Lenin who was responsible: it was a combination of Gladstonian Liberals and Conservatives. None the less, it is a rather paternalistic idea. Subject to the Inland Revenue being protected, which is crucial, why should a paternalistic view of the world prevail, and why should not people have greater choice?
The irony of this exercise is that, if the Government succeed in blocking the Bill, they may be humiliated in the courts. A human rights case is now being broughtI think by Cherie Booth QCchallenging the Government on the basic principle that the right to dispose of one's retirement income is fundamental. That, in essence, is what the Bill is about, and it is one of the fundamental reasons why I support it.
Mrs. Angela Browning (Tiverton and Honiton): I shall be brief, because I agree with much of what has been said. I shall not labour the point that I have made. Hon. Members on both sides of the House have been generous in giving way to me on the issue of equality of annuities for men and women. I have put on the record my concerns about departing from the analysis of risk merely on the ground of equality. In many other areas of life I would not make that argument, but I have concerns about the read-across to other areas where it could be to the detriment of women to use such a formula.
I congratulate and wholeheartedly support my right hon. Friend the Member for Skipton and Ripon (Mr. Curry) on the Bill. Conservative Members campaigned in the general election on the issue of abolishing the compulsory annuity. It is right that the matter has not just been left, and that my right hon. Friend has brought it forward now. All of us have received constituency correspondence from people who are very concerned.
Many hon. Members have drawn attention to the poor annuity rates that prevail. At the grand age of 55[Hon. Members: "Never!"] Hon. Members are too kind. During my lifetime, I have seen times when annuity rates have been very attractive. Although I accept all the reasons given by hon. Members for annuity rates being low, my view is that legislation should not be changed simply because of the state of the market at a given point. That is not my motive for supporting the Bill, because, over a lifetime, one sees that the market is cyclical, and it will always be so.
Pensions are lifelong investments, particularly for those who are wise enough to start investing when they start work. They do the right thing and put a bit away every year until they reach 60 or 65, but most of us never imagine that we shall reach such an old age. We do not save in our 20s and 30s when we are funding mortgages and children, then we shovel in every penny we can in our 40s and 50s. That is not the way to do it, but that is the reality and it concentrates people's minds.
A lot of attention has been drawn to money-purchase schemes in personal pensions, which are addressed by my right hon. Friend's Bill, but those schemes apply also to additional voluntary contribution schemes, which offer no opportunity to draw down a lump sum at the policy's end. Of course, younger people who have opted out of the state earnings-related pension scheme have their money in money-purchase schemes and they, too, have no opportunity to draw down a lump sum.
Although there are many types of pension vehicle for people with many years of working life ahead of them, they are confronted with the fact that they will be forced to purchase an annuity. Those who defer taking that annuity up to the age of 75, when it becomes compulsory, often do so in the hope of getting a better rate, but, as Members on both sides of the House have said, that, too, is a cause for concern.
I say to my right hon. Friend that I hope the Government see the sense in supporting the Bill and give it their backing. He wants to introduce one or two points in Committee about which the Government may have concerns, but he has introduced the Bill most constructively both to benefit the pensioner policyholder and to take on board the Treasury's concerns. On people who have deferred taking an annuitythose over the state retirement agethe Minister should bear in mind the point made by my hon. Friend the Member for Chesham and Amersham (Mrs. Gillan). I hope that many people will be able to make use of any new regulations that may be introduced in the near future, but they are hanging on, waiting to see whether the Bill receives support.
There has been some discussion of when such policies were introduced. Retirement annuity contracts were introduced in 1956 for the self-employed and those whose employers did not provide an occupational pension
I agree with the hon. Gentleman who spoke from the Liberal Democrat Benches. [Interruption.] No, not the hon. Member for Northavon (Mr. Webb), I am sorry to say. It is interesting to see two book ends sitting on the Liberal Democrat Benches today: the hon. Gentleman, who sits on the Front Bench, espouses the classical socialist philosophy while the hon. Member for Twickenham (Dr. Cable)the free marketeer who sits behind him and with whom I agreesays that people should be allowed the flexibility and responsibility to make more choices about how the money that they have earned and saved is ultimately used.
I do not want to labour the point, because Conservative Members agree wholeheartedly with the thrust of my right hon. Friend's Bill, although I should perhaps declare a modest interest, which has become even more modest since I entered the ChamberI have heard the rates. I have money-purchase policies, which I want to transfer to something more useful in due course. There is a lot of support for the Bill, not only in the House, but out in the country, and I hope that my right hon. Friend will be successful.