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Mr. Butterfill: I am very interested in what the Economic Secretary has to say, but would not it be very simple to overcome most of her objections by tabling an amendment in Committee that would simply make the arrangement optional, rather than compulsoryas, indeed, was the case in the similar Bill that I introduced in the previous Parliament?
Ruth Kelly: I understand that taking annuities at 65 would not be optional under the Bill. That is certainly how the Government read the Bill. A fundamental aspect of the Bill is that people would take an income at 65 to guarantee that they would not fall back on state retirement benefits after that point.
Advancing the contributions stop by 10 years for personal pensions is a substantial issue that is not compatible with the need to encourage increased economic activity over the age of 50 in the light of improvements in life expectancy. I am sure that the right hon. Member for Skipton and Ripon would say that his Bill would expand people's choice if they were only compelled to use a proportion of their pension funds to buy annuities. However, as I have said, those who stand to gain under the Bill are the small minority of people who are able to build up large pension funds.
I shall consider the Bill is greater detail. I have not yet even mentioned costs, but I shall return to the minimum retirement annuity. The Bill's aim appears to be to allow people to take benefits from their pension schemethe residual retirement income fundin whatever form they choose, as and when they like. Under the Bill, funds could be withdrawn while sweeping away all the current income withdrawal rules that are designed to prevent the fund being under-drawn or over-depleted.
Although the Bill would appear to give wide freedom on the manner of drawing down from the retirement income fund, it would also force the scheme member to decide, by the age of 65, just how much of the fund above the minimum retirement income they want to annuitise. Under existing income withdrawal rules, which would be repealed under the Bill, the member could annuitise any portion of the fund and could do so in varying stages until the age of 75, when the remainder must be used to buy an annuity.
Under the Bill, when an annuity had been bought by the age of 65, members could only turn the balance of the fund, or any other part of it, into an annuity if they first paid income tax on the withdrawal, thus reducing the available fund by up to 40 per cent. So, effectively, the Bill would impose a penalty on people who did not make the right annuity decision at the age of 65. In that sense, too, the Bill would reduce choice and restrict flexibility.
Let us consider the proposed retirement income fund when the annuity has been purchased by the age of 65. Normal advice for people considering entering income withdrawal is that they need large pension funds for the withdrawal to be financially viable. Different firms set their own rules, but some providers will offer such withdrawals only to people with funds of £250,000 or more to ensure that their customers can cope with fluctuations in income and capital that reflect, for example, the fortunes of the equity market and the administration costs involved. Unless they have ample other income, conversion of the whole fund into an annuity is normally the best advice for people with smaller pension funds, as investment and mortality risks are pooled and costs are much lower.
As I have already said, the average fund on retirement is about £30,000. More than 50 per cent. of those who reach retirement after taking their tax-free lump sum have a remaining pension fund of less than £50,000. For women, that percentage increases to about 70 per cent., and three quarters of people have a fund less than £100,000. Only 5 per cent. of recently retired scheme members are estimated to have a pension pot worth more than £250,000, after taking their lump sum. Again, the vast majority of the relatively few people who would have
Richard Ottaway: The Economic Secretary is not just opposing the Bill; she is doing a hatchet job on it, and that means that the Government will oppose its proposals in perpetuity. She claims that only a narrow group of people would benefit from the Bill, but what is the matter with that unless it is the politics of envy?
Ruth Kelly: I thought that I had gone to some length to explain why additional flexibility for the 5 per cent. of people who have funds worth more than £250,000 would, in fact, reduce choice and flexibility for the vast majority of pensioners who have smaller capital pots from which to buy an annuity. That is the basis of my objection to the Bill.
There is another important issue connected to the Bill to which I must try to do justice. I refer to the substantial costs to the Exchequer that could arise if the Bill became law. It is an incredibly important consideration to take into account, as hon. Members on both sides of the House know or should know. In his press release, the right hon. Member for Skipton and Ripon said that he had
Mr. Boswell: The Economic Secretary has told the House that the proposals would benefit only a small minority of rich people and that they would be a disbenefit to others. How come they would cost the Exchequer a fortune as well?
Ruth Kelly: If the hon. Gentleman is patient, he will find that I am just about to run through all the arguments as to why the Bill would cost hundreds of millions a year. I am sure that hon. Members will realise that we must have an opportunity to debate the sizeable expense involved.
People currently use only a fraction of the possible pension scheme tax reliefs available to them. There is a potential for take-upI put this figure in the public domain without suggesting that this is how much the Bill would costof a further £34 billion worth of relief each year within the current tax limits. Members have asked whether that figure takes into account the current limits and the answer is that it does.
People of modest means often face other demands on their income, and hon. Members have suggested that such people might not have too much disposable income to hand. That is surely the case. However, even higher rate taxpayers do not save as much as they could in tax-privileged pensions. If one asks how much of the £34 billion applies to higher rate taxpayers, one finds that more than £8 billion applies to those higher rate taxpayers who do not take full advantage of their tax reliefs at the moment. [Interruption.] Hon. Members suggest that that is hardly surprising, but that tacitly admits that higher rate taxpayers would take up the tax reliefs if they were given more flexibility over what they could use the money for.
The people with the largest pension pots are those most likely to have substantial amounts of money in other forms of savings and investments. They would need to switch only a small proportion of their savings into pension schemes for the public cost of the pension scheme tax reliefs to rise by hundreds of millions of pounds each year. Little, if any, of this extra tax relief would benefit the majority of people with modest pension funds who hold limited amounts in other forms of saving.
The right hon. Member for Skipton and Ripon proposes that his Bill should go even further than that. His press release of 17 December states that it is his intention to amend the Bill in Committee so that any money left in the fund on the death of a scheme member could be transferred to a spouse, partner or dependant free of tax. Some of these issues were explored by the hon. Member for Northavon.
Hon. Members are no doubt aware that, under the current income withdrawal rules, any funds remaining on death before the age of 75 that are not used to secure a pension income for a survivor are charged at a 35 per cent. tax.
Let us examine the possibilities. A 65-year-old man with a pension fund of £600,000 which has been built up with the assistance of generous tax reliefsprecisely the sort of person we might expect to benefit from the Billcan take £150,000 tax free, provided the rest of the fund is used to provide an income for the life of the scheme member. Such income would, of course, be taxable in the normal way.
Under the Bill's proposals, however, the member would be able to remove a £150,000 tax-free lump sum out of the fund. He would need to use about £72,000 to buy a minimum retirement income annuity, which would leave a remaining fund of £378,000 that would continue to roll up tax free. The income and the gains of the fund, although no longer needed for pension purposes, would be exempt from tax. The scheme member would be free to withdraw from the fund at will. If he did so, it seems that the intention is for the withdrawals to be taxed as income.
The proposal is technically flawed because it is too imprecise. Although that could be resolved, the principle remains a concern. If the scheme member decided to make no withdrawals from the remaining fund for the rest of his life, it would build up with the benefit of tax-free investment income and capital gains until his death. A man at the age of 65 has an average life expectancy of 17 years. For a woman, it is 20 years. Over such periods, if the lowest long-term growth projections of about 5 per cent. a year, as recommended by the Financial Services Authority for such a scheme, were achieved, the fund size
It is not clear whether the Bill would require the sum to be taken into account for inheritance tax purposes. If so, it would revert to the deceased member's spouse. However, there would still be no inheritance tax to pay.