|Pension Annuities (Amendment) Bill
Mrs. Browning: In other countries they have found a solution. If the will is there to find a solution, one can usually do so. I hear what the Minister says about dealing with the majority of people, but the whole point about minorities is that one must first have the will to resolve the problem. Clearly, other countries with comparable economies such as Australia and the United States have done so. I urge her to consider carefully the fact that other countries have had the will to resolve this problem. Despite any technicalities on the face of the Bill, if the will is there and others have done it, there is no reason why we cannot do it too.
Ruth Kelly: It is important to explore in detail some of the flaws in the amendments to show why the Government cannot support them. That is not to say that we do not have the will to explore issues in relation to the Brethren. I shall come to some of the methods that they may use to save for their retirement.
To return to the size of the fund, even if there were enough money in the pension scheme, there would be no guarantee that the failsafe fund would be able to generate the minimum retirement income year after year. Although some of these issues apply to the suggested failsafe fund, they apply equally to the principles behind the Bill and this is a useful opportunity to explore them. The Government's objections on that score also apply to other provisions.
Mr. Flight: On that point, the risks would be even greater if people bought standard annuities and we had a period of rapid inflation that devalued them to
Column Number: 14very little. The risk of people having to depend on the state is, in absolute terms, just as great as the risk of 150 per cent. not providing something that was parallel to or greater than what the required annuity would provide. There are unlikely risks both ways, but it is not right to cast one and not the other.
Ruth Kelly: I find the hon. Gentleman's point a little difficult to interpret, as the Bill deals with the requirement to buy an index-linked annuity. I think that he is referring to people who take out a flat-rate annuity and who might fall back on the state when inflation rises.
Mr. Flight: I thank the Minister for her comments; she is right. I was pointing out that, under the regime that the Government accept at present, they must realise that there is a massive risk to the state because an overwhelming number of people buy flat-rate annuities. Whether the income from them will be sufficient to keep people depends entirely on whether inflation remains low. I was not contrasting the failsafe fund with what is in the Bill; I was saying that the risk to which the Minister refers is smaller than the risk that she is already running.
Ruth Kelly: I thank the hon. Gentleman for those comments. It is important to draw out these points. About 80 per cent. of people who buy annuities buy flat-rate annuities, which are not index linked and are therefore vulnerable to the problems that he described, such as inflation eroding their value in retirement. That is why we are asking why people take out flat-rate annuities. What is their driving force? Is it that they are ill informed and do not have proper choices? Does the advice market work properly? Do we have appropriate facilities to enable people to shop around and take advantage of competitive rates?
I understand, for instance, that there is a gap of some 30 per cent. in income flow between the best and worst annuity providers. The inertia in the system is so great that people tend to take the annuity directly from their pension fund manager without even asking themselves which sort would suit them best. I fully accept that, because of the way in which the current system works, it is vulnerable to those effects.
The Government are committed to understanding the reasons for that inertia and to correcting it by making the advice market work better. Under the auspices of the Financial Services Authority, there are already initiatives to encourage people in the annuity market to shop around and take advantage of the best deals. That is a slow process, but I hope that it will have an effect in the long term.
One of the main aims underlying the consultation document that we recently issued was to find out why the market worked in that way and the measures that we could take to correct it. It is only right that people should ask before they buy an annuity whether it is appropriate for their age, gender, financial circumstances and other income streams, and whether their life is impaired, for example. Those are basic questions that people do not ask at present.
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Mrs. Browning: I return to a general point: the purpose of pension vehicles and the tax breaks that the Government of the day decide to apply to them is to encourage people to save from their earnings during their working lives for their retirement. The compulsory element of annuities acts as a disincentive to people to do so. For example, I have just cancelled my contribution to my parliamentary additional voluntary contributions because, if my right hon. Friend the Member for Skipton and Ripon is not successful with the BillI hope that he will be and I shall reinstate my contributionthose with AVCs and other pension savings who contracted out of the state earnings-related pension scheme, which carried a bonus, will have to take out an annuity. There are other things that I can do with that money
The Chairman: Order. The hon. Lady's intervention is stretching the point a little. I recognise entirely that amendment No. 5 mentions people who choose not to take out an annuity and it is legitimate for hon. Members to explore the reason for that. However, they should not forget the purpose of the amendments.
Ruth Kelly: Thank you, Mr. Stevenson. I shall try to stick precisely to the amendment, although I shall argue that there are alternative savings vehicles. How a fund may be used is legitimate in the context of the amendment.
The amendment would not ensure that the retirement failsafe fund would generate sufficient income in retirement to enable people who took that option to be sure that they would not have to fall back on the state in later years. It states that if the fund is less than the necessary sum, it will become a retirement failsafe fund. Although there is no guarantee that a fully funded retirement failsafe fund would sustain the necessary income, any fund underfunded at the outset would be guaranteed not to do so. Failsafe is something of a misnomer in these circumstances. That is a technical detail that applies to the entire Bill.
I understand the motives of the Christian Brethren, but an annuity is the only means of guaranteeing a secure income for the whole of a person's life, which a failsafe fund cannot do. The same thing can happen to those with very large funds. Their failsafe fund might be depleted until it could not sustain the minimum retirement income, but they would have freedom under the proposals to withdraw as much as they liked from the remaining personal pension fund before the age of 80. At 80, the remaining funds are supposed to be merged, and at that time and every year after that the fund must be divided by the number of years remaining to the age of 100, as the hon. Member for Tiverton and Honiton said, and that amount paid out as income.
There is nothing to stop the fund remaining after the failsafe fund has been set up being withdrawn before the age of 80; it would be the choice of many wealthy people to extract the maximum possible so that they could take full control of it. The lack of any compulsion to buy an annuity, and full access to the funds before the age of 80 would be a huge incentive to
Column Number: 16wealthy people to save much more of their income or to transfer savings from elsewhere into tax relief pension funds. The cost to the Exchequer of the extra tax relief that would be claimed as a result is estimated to run into hundreds of millions of pounds a yearan issue that we will discuss later in the Bill. I take Mr. Stevenson's advice to stick to discussing the principles of the amendment, which is about religious objections to the annuity system.
The amendments leave many questions unanswered. What happens to the remaining funds if a pension scheme member dies before the age of 80? What happens if the pensioner lives beyond 100? The proposals make no provision for how the funds are to be dealt with in those circumstances.
The hon. Lady talked about cash ISAs. It is worth exploring the methods of saving available to Christian Brethren and others with religious objections to insurance products. It is important to realise and accept that people can save for their retirement without a personal pension scheme. There is a tendency to think that if people do not take out insurance products there is no vehicle available to them to save for their retirement, but that is not true.
A personal pension scheme may currently be the most efficient and tax-advantageous use of money, but those who want to build up savings for their retirement can do so in other ways. Those ways include the individual savings accounts that the hon. Lady mentioned, which are tax privileged and can be used for any purpose. Money can be invested in residential properties for letting. That would yield a rent income and result in capital appreciation over time. Judicial investments and careful planning are needed to realise profits and deliver a secure income for retirement.
Mr. Flight: As the Minister may be aware, there is a specific issue for Brethren who are employers. They are by law obliged to offer their staff a stakeholder scheme, which in turn, as the law stands, obliges them to invest in annuity. I understand that there have been discussions with the Revenue about shaping an ISA saving scheme. There are two problems: first, the obligation to offer a stakeholder scheme and, secondly, the time limit on ISAs. Unless some change were made to that situation, it would be almost impossible to craft an ISA retirement scheme. Will the Minister comment on whether the Government are thinking of addressing that?
|©Parliamentary copyright 2002||Prepared 14 February 2002|