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Baroness Hollis of Heigham: My Lords, I take the reproof. I do not like bringing amendments on Report either. I accept that charge. All I would say is that it is not peculiar to this Bill or this Government. I remember the passage of the Pensions Act 1995 when I spoke from the Opposition Benches without support, save of course the huge support of my noble friends on the Front Bench. I have checked on the number of amendments introduced by the government then. It was 260--rather more than we are introducing to this Bill. I accept that it is a perennial problem of government. Many of the amendments are technical. I understand that in regard to the Northern Ireland amendments parliamentary counsel waited until the last possible moment because they were trying to see the shape of developments, if any, progressed in the Northern Ireland Assembly. They used the period of the Summer Recess in the hope that the situation might be fully resolved. It has not been, and that is why we are having to approach the matter in this way.

Some of the other amendments coming through at this stage are in response to requests by the Delegated Powers and Deregulation Committee. I believe it is right to say that we have accepted every proposal that the committee has made to us. The rest are in response to issues raised in this House, including, for example, changes to the national insurance contribution, with which we shall deal in our debates on Wednesday. So there is good reason for each batch of amendments. However, I accept that it is not the most desirable way to proceed. In the light of that, I hope that the House will accept my proposals.

Earl Russell: My Lords, before the Minister sits down, if, as the noble Lord, Lord Higgins, put it, the draftsman woke up rather late in the day, should we not say, “Better late than never"?

Baroness Hollis of Heigham: My Lords, that is right. It is my understanding that parliamentary draftsmen take a long time to train. In anticipation of the Labour Government wanting a whole series of legislative measures pushed through quickly because they had a huge commitment in their manifesto, the previous administration might have been kind enough to start training and employing those parliamentary counsel five years ago in readiness for us!

On Question, amendment agreed to.

Lord Higgins moved Amendment No. 7:


Page 1, line 21, at end insert (“but there shall be no requirement to take out a stakeholder pension in the form of an annuity by a specified age").

The noble Lord said: My Lords, this is an important amendment, standing also in the names of my noble friends. It relates to the question of annuities. It suggests that, so far as the stakeholder pension is concerned, there should be no requirement to take an

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annuity at a specified date. Amendment No. 50 is related to this one and refers to annuities more generally.

The noble Baroness said that it is important for people to be able to look forward to a secure income in retirement. That will have a hollow ring for those who retired about 18 months ago on money purchase schemes. Their retirement coincided with a fall in the Stock Market which reduced the value of their fund. On top of that, they saw a huge fall in annuity rates compared with a couple of years or so previously. Indeed, some found themselves obliged to take their pension at a level that was only some 60 per cent of what they had originally expected or had expected 24 months or so in advance of their actual retirement date.

Against that background, I find it extraordinary that in regard to the stakeholder pension the Government have committed themselves to stating what pension people may expect on retirement. If the amount varies by that much over a period of two years, it is certainly likely to vary a great deal more over a longer period.

There are several different aspects to the amendment. The first relates to whether people need to take the pension at a particular time--for example, when they retire. The fact that they are presently obliged to do so can have severe consequences. When people come to draw the stakeholder pension, they may feel that they would like to defer it and not be forced to take the annuity at that particular time.

There is a second aspect to the question of timing; namely, whether people are obliged to take an annuity at the age of 75. There has been growing pressure against the change in demographic background since the time of Beveridge--that that limit is not appropriate. I believe I am correct in saying that at the time of Beveridge people were expected to survive only two years after retirement age. Now, the period is vastly longer. It is likely that a number of people at the age of 75--not looking at the actuarial tables but at their general state of health and given their other financial circumstances--may feel that they would prefer to delay drawing their pension because they do not desperately need it and may feel that they would like to do so if their life expectancy is quite a bit longer than the average. The fact that they have to take the pension as the clock ticks at 75 may mean that they do so at a disadvantageous moment.

Annuity rates have plummeted. That is to some extent a reflection of the fall in the rate of inflation. That being so, one may say that it does not matter that the annuity rate is lower because the rate of inflation is lower. But there is no guarantee that the inflation rate will be at the same level at the moment when one wishes to draw the annuity.

It should also be stressed that the reason annuity rates have plummeted has to a large extent been that the Government have issued very little long-term date debt of the duration required to meet the needs of pension funds and others who feel that they have to hold annuities in order to meet their liabilities. It is a

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point that the Chancellor may wish to consider. If the Government expect to move into long-term surplus, the dangers are even greater that the annuity rate will fall further. So the timing aspect relates to the moment at which people have to take their pension, whether when they retire or whether at 75. Somewhat different considerations apply in each case. Our amendment suggests that the stakeholder pension ought not to force people into these particular circumstances.

The other aspect is not one of timing. It relates to whether an annuity is anyway the most appropriate form in which to take one's pension. Given the increase in life expectancy, people may well feel that, if they are to survive only two years, an annuity is not wholly inappropriate. But if people have a considerable life expectancy, they may do better to invest their pension in some other form of financial asset.

Recently, the Government have to some extent relaxed the rules on annuities, particularly with regard to so-called “draw-down policies". They are a highly sophisticated instrument and are not to be undertaken by the unwary. Reports by actuaries such as William Mercer do not suggest that, welcome though the changes may be in some ways, they are likely to meet the main problem I seek to address this afternoon.

If one is forced to take the pension as an annuity, it gives one no scope for making possibly preferable other investments. It locks one into a situation in regard to when one dies and the annuity comes to an end.

Another important point which may commend itself to the House is that the fact that at present the pension has to be taken as an annuity discriminates considerably against women. Women have a greater life expectancy than men and annuities for them are lower than for men. So, the fact that the present arrangements force people to take an annuity as their pension means that women are worse off than men. If they were able to use some other form of financial instrument, it would be to their advantage.

When the matter came up at Committee stage, the noble Baroness referred to a point which I had not seen spelt out in black and white before. At col. 1122 of Hansard for 24th June, she said:


    “Under Inland Revenue legislation the funds built up in money purchase schemes--"

which is what we are talking about--


    “must be used to purchase an annuity. Perhaps I could remind your Lordships why this annuity rule exists. It reflects the fact that the tax privileges accorded to pension contributions are given in order to ensure that the beneficiaries have an income throughout retirement".

Of course, it is quite possible for people to use an alternative form of financial instrument which would give them an income throughout retirement. It depends very much on the level of pension.

The noble Baroness continued (still at col. 1122):


    “This avoids the risk of an individual having to rely on a low pension income and perhaps income related benefits because they have spent the proceeds of their fund in the early years of retirement".

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There's the rub. There is no reason why one should not have a less restrictive rule if, in the light of the amendment, that was the Government's view. That rule would say that people must at least take as much in the form of a secure income--namely, an annuity, albeit unfavourable--on the basis of having enough money to keep them off means-tested benefits. The Government could do that, although it depends on the level. In relation to the stakeholder pensions, that may not be unimportant.

Another provision which I ought to mention and of which I was not previously aware is that, apparently, if a person dies before taking the pension, proceeds may be obtained from it but there is a tax charge of 35 per cent. I was not aware of that. Presumably, one could introduce some flexibility into the scheme by saying, “If you want to give away or give back the tax advantage and retire, you could get the money on that basis". However, that is taking us rather wide of the amendment.

It seems to me that these arguments have now “ripened" to the point where, in relation to both timing and the financial efforts involved, because the market has developed considerably, and against a background of a demographic change and people living much longer, we ought not to continue with the kind of restrictions which have previously been imposed. It ought to be possible to meet the objections from the Inland Revenue and others. Such changes would be helpful in avoiding discrimination against women. I beg to move.

6.15 p.m.

Lord Goodhart: My Lords, I regret that I am unable to support the noble Lord, Lord Higgins, on this amendment. We agree that problems may be faced by people who retire at certain times. As the noble Lord pointed out, 18 months ago a particular combination of circumstances made it difficult for those who retired at that time and who wished to take out a pension immediately. Since then, the considerable rise in the stock market has made things look rather different.

That is dealt with to a considerable extent by the fact that prospective pensioners are now allowed to defer taking their pension until they reach the age of 75. A few people go on working and are therefore in a position to defer taking a pension until they reach that age. Those who retire at some point between 60 and 70--the normal retirement ages--can defer taking their pension for a considerable time until the economic situation becomes more favourable.

However, it seems to me that the whole basis of pension schemes is that the pension builds up a fund which at some point has to be “annuitised". Pension funds are not simply a tax-favoured savings scheme which can be drawn on by someone at any time after they reach retirement age and in any manner that they wish. Other kinds of tax-favoured savings schemes, such as ISAs, give a facility to draw them down with much more flexibility.

The purpose of an annuity is to provide a regular income in retirement. On the one hand, it prevents pension-holders from spending the contents of their

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fund early and therefore having to rely on state benefits as they reach a greater age and have used up their fund. On the other hand, it prevents pension-holders from saving up their pension funds in order to pass them on to their children. Once again, that is clearly not the purpose for which the tax relief is given.

Therefore, we on these Benches are unconvinced that there is any need to depart from the principle, which has existed ever since the beginning of tax relief for occupational pension schemes, that sooner or later, unless someone dies before reaching the age of 75, the fund will have to be “annuitised".


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