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Standing Committee Debates
Pension Annuities (Amendment) Bill

Pension Annuities (Amendment) Bill

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Standing Committee A

Thursday 28 February 2002

[Mr. George Stevenson in the Chair]

Pension Annuities (Amendment) Bill

Clause 1

Amendment of the income and corporation taxes Act 1988

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

8.55 am

Question again proposed, That the amendment be made.

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

The Economic Secretary to the Treasury (Ruth Kelly): 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.

Division No. 2]

Drew, Mr. David Kelly, Ruth
Quinn, Lawrie Ryan, Joan

Curry, Mr. David
Flight, Mr. Howard

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.

Division No. 3]

Curry, Mr. David
Flight, Mr. Howard

Drew, Mr. David Kelly, Ruth
Quinn, Lawrie Ryan, Joan

Question accordingly negatived.

Mr. David Drew (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.

The Chairman: That is a helpful point of order.

9 am

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

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The Chairman: 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.'.

Ruth Kelly: 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.

Mr. Howard Flight (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

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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.

Mr. David Curry (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.

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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.

Mr. Drew: 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.


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Prepared 28 February 2002