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Lord Williams of Elvel: My Lords, I wonder whether the noble Lord, Lord Higgins, has understood the present state of the market. First, as regards age, to advance the age would imply a significant difference in the present way that pension providers in the private sector manage their portfolios. I can say that from personal experience. Secondly, if there is a guaranteed annuity, the problem is when the guarantee starts. However, a number of products are coming onto the market, which I researched this morning, which provide for with-profits annuities and other kinds of annuities which do not necessarily fix the annuity in a particular frame so that they are not, for example, disadvantageous to women, or whatever. They are being developed by the major pension providers. I hope that the noble Lord, Lord Higgins, will do his research and understand that these possibilities are available and that the market is coping with them.

Lord McIntosh of Haringey: My Lords, we debated this issue at Committee stage and considered the whole issue of the merits of annuities, as we have heard from the quotation of my noble friend Lady Hollis by the noble Lord, Lord Higgins. Amendment No. 7 seeks to remove the requirement to purchase an annuity with the stakeholder pension fund, while Amendment No. 50 prohibits a pension scheme from requiring a member to take an annuity by a specified age. Since we have debated it before, I must go over the same ground again.

The fundamental point is that a deal has been done. In return for tax privileges related to contributions to pensions, the Government have taken the view that it is right for the proceeds of those funds to provide a stream of income on retirement. This reflects the fact that the Government want people to save for their old age. The key feature of an annuity is that it provides a guaranteed income for the remainder of the pensioner's life. That applies whether a traditional type of annuity is chosen or the pensioner opts for one which is in some way investment-linked, such as a with-profits annuity of the kind to which my noble friend Lord Williams referred.

As was made clear from the quotation of my noble friend Lady Hollis at Committee stage, in return for providing this tax privilege the state seeks to ensure that those who take advantage of it do not run the risk of looking to the state for their income in retirement. But the annuity rule includes flexibilities, and we propose that they should be extended to members of

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stakeholder pensions. Income drawdown--I believe that the noble Lord, Lord Higgins, attributed it to this Government but it was introduced by the previous government in 1995--has been available between the ages of 50 and 75 and allows a person to draw an income from the fund while deferring the purchase of an annuity.

The upside of the income drawdown is that in allowing him or her to choose the timing of an annuity purchase the person in the meantime is able to benefit from any investment growth. As the small print at the bottom and the gabbled words read out at the end of television advertisements always say, investments, annuities and even inflation can go up and down. Despite the observation of the noble Lord, Lord Higgins, Gordon Brown does not walk on water nearly all the time. However, there is a risk that investment performance may be inadequate to maintain the value of the fund and the person ultimately suffers a substantial reduction in income compared with what would have been achieved by the purchase of a secure annuity on retirement.

The noble Lord, Lord Higgins, referred to security. One cannot have all kinds of security all the time, but most people prefer to opt for peace of mind when they retire by taking their annuity at that time, because even though it may not be entirely what they expected in the full flush of high inflation or a different investment market, what they take at the time of retirement is what they will get until they die. There are exceptions. Those with large funds and a willingness to accept the attendant risks may be justified in taking the drawdown option, but there is a danger of fund depletion in such a plan which increases with age. A balance needs to be struck between allowing flexibility to the individual in the timing of annuity purchase and ensuring the achievement of the underlying objective: the provision of a secure income for the remainder of the pensioner's life. In our view, to require annuitisation by the age of 75--in other words, taking advantage of the changes introduced in 1995--strikes the right balance.

We continue to monitor the position. The Inland Revenue is now conducting a special exercise to assess how the current arrangements on income drawdown and annuity purchase are working in practice. We shall take account of the information obtained in this research in assessing whether any changes to the current rules are needed. Annuity rates are set by the market and reflect a number of factors, such as life expectancy and long-term interest rates. The noble Lord, Lord Higgins, said that they discriminated against women. Annuities bought with protected rights--that is, the part of pension savings derived from contracting out of the state scheme--are by definition unisex; in other words, they are at the same rate for men and women. If women get a smaller amount per year it is because of the expectation that they will receive that smaller amount for more years. I believe that there is a certain logic in that.

We accept that annuity rates have fallen in recent years, but that should not be considered in isolation. Inflation which ran at 6.6 per cent. during the previous

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government's stewardship is now under tight control; in other words, Gordon Brown does walk on water. That will benefit everyone, especially pensioners because their pensions will maintain their purchasing power into old age better in a low inflation economy which we are determined to maintain.

I stress that the current economic environment does not mean that to buy an annuity is a bad deal. The stable economy which the Government are delivering provides scope for sustained growth in pension funds which means bigger annuities. Lower inflation means that an annuity will buy more. That is a far better prescription than a boom and bust economy which would have a far more serious effect on someone's real income in retirement.

The noble Lord, Lord Higgins, went so far as to cast doubt on whether an annuity was the best alternative. He was answered to a considerable extent by my noble friend Lord Williams. I ask the noble Lord to bear in mind the point made so effectively by the Minister in Committee that this is a deal which has been made in return for tax privileges. We cannot afford to provide those tax privileges and at the same time allow people to fall into dependence on the state in retirement. That is the reason for these provisions, and I hope that the noble Lord will withdraw his amendment.

Lord Higgins: My Lords, I deal first with the point just made by the noble Lord. It may well be that in considering the position with regard to stakeholder pensions, if the amendment is accepted some further sophistication should be introduced to provide that a certain amount must be drawn in the form of an annuity, but there is no reason why the whole amount should be included in that.

I turn to the points made by the noble Lord, Lord Williams. I am aware that in this respect the market is developing considerably, for example in the field of profits-related annuities. None the less, the terms vary considerably and it may be that some other type of investment is preferable to an annuity in either form. The situation depends to a great extent on inflation. At Committee stage the noble Baroness stressed that an individual could obtain an index-linked annuity, but she went on to say that she believed that that could be done on very favourable terms at the moment. I have received a large number of letters from individuals who do not believe that to be the case.

As to a guaranteed income in retirement, whatever be the good intentions of any government rates of inflation fluctuate considerably. Unless one has taken what is, on the whole, a rather tough deal on an index-linked annuity--even then not on very favourable terms--one will have to consider the effect of inflation on that annuity. As people live longer, so inflation is likely to erode the annuity considerably. Certainly, in terms of real income some of my former constituents in Worthing did not find themselves on a very secure basis as inflation affected their fixed income rather than some other financial instrument which might have given them a greater degree of protection.

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It is true that last year there was an unfortunate conjuncture of the stock market and annuity rates. None the less, some of those people who retired may find that they are a burden on the state. In that respect also I have already suggested it is possible to provide a floor but for the overall change to be made. That would meet the point of the noble Lord, Lord McIntosh, about there being some kind of deal in this respect.

The noble Lord, Lord Williams, did not cover the point about the 75-year situation. That is one of our major concerns which we think is covered by the amendment.

Women have a lower annuity rate because they tend to live longer and therefore draw the income for a longer period of time. But in those circumstances it may be better for them not to be as restricted as at present on timing or the annuity itself. We believe that the present system is too inflexible. Accordingly, I should like to test the opinion of the House on this matter.

6.31 p.m.

On Question, Whether the said amendment (No. 7) shall be agreed to?

Their Lordships divided: Contents, 145; Not-Contents, 137.

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