State Pension Credit Bill [Lords]

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Kali Mountford (Colne Valley): Will the hon. Gentleman give way on that point?

Mr. Clappison: Certainly, but I hope that the hon. Lady will not—

David Cairns: Ask a hard question.

Mr. Clappison: The hon. Lady may certainly ask a hard question; I shall do my best to answer it. I hope that she is not going to suggest that the minimum income guarantee is not a disincentive to save, because that is the Government's case.

Kali Mountford: I should merely like to refer the hon. Gentleman to paragraph 23 on page 14 of the Select Committee report, which welcomes the recognition and extra reward that the pension credit will provide. The paragraph also mentions the minimum income guarantee. Surely we must consider pensioners' provisions as a whole, and not point by point, as he has tried to do.

Mr. Clappison: My question for the hon. Lady is this: will the extra reward that the pension credit establishes encourage saving? We know that there is no incentive for saving for those who see their every pound—100 per cent. of the savings they accrue—taken off their benefits. The Government know that. We must now ask whether the reward and withdrawal system that the Government are putting in place will create an incentive to save. As the hon. Lady has studied the Select Committee's report, she would do well to consider also the evidence given to the Select Committee by expert groups. One of the points made by the expert groups was that the Government's

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proposals do not entirely remove the 100 per cent. disincentive to save. Many groups are still subject to that disincentive.

As the hon. Lady and other hon. Members are evidently interested in the subject, I shall ask them some questions. Perhaps they would like to tell me whether they agree with the view that has been expressed about those—there are many of them—who are entitled to less than the full basic state pension. The first part of such a pensioner's personal savings will be used to bring them up to the level of the basic state pension and will not attract the additional savings credit. They will face a rate of withdrawal of 100 per cent. Quite a large number of those people are women who for historical reasons have not have the opportunity to accumulate a full savings record.

The hon. Lady will be interested to know that that is not the only case in which women are the losers. There is also the case of women who are aged between 60 and 65. They become entitled to the guaranteed part of the credit at 60, but they are not entitled to the savings credits until they reach 65. Presumably, between 60 and 65, if they fall within the appropriate threshold and have savings, they will have a rate of withdrawal of 100 per cent. and will gain no benefit from their savings in that period of their lives. If I am wrong about that Labour Members will put me right, but that seems to be explicit in the Bill. Those two substantial groups, one consisting exclusively of women and one of many women, will have a 100 per cent. withdrawal of their savings under the proposals.

Mr. Boswell: If my hon. Friend looks in detail at the Select Committee Report, as I am sure he has, he will see that paragraph 31 on pages 16 and 17 suggests that the Department had some difficulty estimating the number of those with incomplete rights. The Select Committee's conclusion was that

    ''there will be around 50,000 pensioner 'benefit units' who have private income for which they will see no benefit . . . Another 2–300,000 will be 'rewarded' for only some of their private savings.''

That is quite a significant number of pensioners.

Mr. Clappison: My hon. Friend's point is so important that I am sure that we will come back to it when considering other clauses and amendments. For the purposes of this amendment, it is extremely relevant to whether it creates a disincentive to save.

4.45 pm

I wish to move on from those who suffer 100 per cent. withdrawal from their savings. There will now, under these provisions, be for many others a much lower rate of withdrawal of 40 per cent. after they reach 65, and then it is the Government's case that those people will see a benefit from having saved. It is beyond peradventure that they will be better off by saving at that stage of their lives than those with no savings at all, because they will have the benefit of 60p in the pound for every £1 of their savings. However, that by itself does not fully address the question of whether they will find it worth their while to make savings earlier in life—whether there will be an incentive for them to save—because, to put it bluntly, what they save earlier in life will be subject to a 40 per cent. rate of effective tax later on.

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As the hon. Member for Colne Valley (Kali Mountford), who is interested in the Select Committee, will know, that point is made much more elegantly, and with far greater authority, by the Association of British Insurers, in its analysis of the implied rate of saving for those in the relevant circumstances. Its analysis looks at the implied rate of return for an individual saving £50 a month and, as the hon. Lady and others may know, it defines a negative implied rate of return as suggesting that saving, in fact, has a net cost to the individual; less value is received in increased retirement income than is paid through contributions.

In its evidence to the Select Committee, the Association of British Insurers compares the present situation with the minimum income guarantee, and then the situation that will appertain under the pension credit. It concludes:

    ''Under the Pension Credit as outlined in the State Pension Credit Bill saving is more worthwhile for those saving for short periods of time than it is now, but the implied rate of return is still negative for more than 10 years. This is because any saving results in a reduction in income from MIG and Pension Credit of 40p for every £1 of saving income.''

The Association of British Insurers is not alone in expressing concern about the impact of the pension credit on savings behaviour. Similar concerns are expressed by the Institute for Fiscal Studies, the Institute for Public Policy Research, and many other interest groups, as well as those who have financial expertise in the field, and many of the interest groups and organisations that represent elderly people. Age Concern succinctly states:

    ''Given full information people may decide that if say £10 of extra income is only going to make them £6 a week better off (or possibly far less if they are also entitled to other means tested benefits) it would be better to spend the money when they are younger.''

I am not a financial expert of any description, but against this background and having read the views of these financial experts and the concerns of others, it seems to me that there is great uncertainty about the effects of the pension credit, to say the least. The uncertainty is increased by the fact that, evidently, more and more people will be drawn into it, at least for the foreseeable future—as we know, they will be drawn into pension credit, as the threshold increases in line with earnings. That point is made by the Institute for Fiscal Studies.

It has been argued in some quarters that all of this is unlikely to fall within the contemplation of pensioners. It is not my experience that pensioners are entirely uninterested in the effective treatment of their savings under the tax and benefit system, especially when it comes to what they regard as instances of double taxation. I am referring not only to pensioners, but to those who advise them. These days, more individuals receive professional financial advice. Those advising people who are looking towards their retirement will need to be aware of the treatment of savings under the pension credit system and will face difficulty in discharging the unenviable task of studying the effect of the pension credit in individual cases.

I am not intimately connected with the Institute for Public Policy Research, but it has an interesting

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perspective on such matters. My hon. Friend the Member for Daventry will be pleased to know that it used the word ''opaque'' when it said:

    ''the Pension Credit is a highly opaque means of generating the right incentives; it is extremely difficult for individuals to know what to expect from it, especially over the long time periods relevant to retirement planning. The problem does not just affect the individual planning for their own retirement: professional advisers are in a similar position in respect of their clients.''

The Minister may put a different complexion on such matters and put forward compelling arguments about the effect of the pension credit on savings. If he does, he will make a case for the amendment. It seeks to bring to light what happens with savings behaviour under the pension credit system. The Government's case is that pension credit will promote saving; that it will not only give pensioners an extra reward, but that it will create an incentive for saving earlier in life. So surely the Minister will look with some favour on the amendment because the Government will want to be as brave as their words about the pension credit and will want to make full information about it available. I hope that he will regard the amendments in the constructive and moderate way in which they are couched. We are asking only for information to be brought to light so that the exact effects of the measure are known.

Mr. Steve Webb (Northavon): I welcome you to the Chair, Mr. Atkinson. I have much sympathy with the amendments . The hon. Member for Hertsmere (Mr. Clappison) put the case well. Amendment No. 20 is probably pointless, however. As an academic, I suppose that I should not vote against more research being undertaken but, even if the amendment were accepted, the report that would result from it would be almost unilluminating. As an analogy, I cite yesterday's debate about the effect of the new deal with one side saying that it had been tremendously successful and the other side saying that it had been relatively unsuccessful. Vast amounts of research have been carried out into that, yet each side of the House chose to use the figures that suited it from which to draw its own conclusions. The problem with such matters—as with amendment No. 20—is that we are trying to work out what would otherwise have happened, how much of the effect was due to the specific measure and how much of it would have happened anyway. In matters such as the new deal, we could probably go a long way down the road of working out what may have happened anyway, but to work out total savings is extraordinary. We do not even know how much savings there are. Governments are bad at knowing the history of savings. As the hon. Member for Havant (Mr. Willetts) regularly reminds us from the Opposition Front Bench, the Government do not know the current amount of pension savings to within tens of billions of pounds.

 
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