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James Purnell: The hon. Gentleman is doing a good job of trying to get his party off the hook as regards what will be a popular measure. What will he say when faced on the doorstep by a 67-year-old with a basic state pension who earns less than the minimum income guarantee, if he is going to oppose the pension credit? It seems to me that the hon. Gentleman is supporting the MIG and the increases, but if he does not support the savings credit, those concerned will lose all their private income from a pension or earnings. Would he continue to take that away, pound for pound?
Mr. Webb: We have never at any point opposed the MIG, or said that the additional support for low-income pensioners is not welcome. However, if we are to spend the £2 billion implied by the Bill and by related measures, is the best way to do so through a lotterywith a one-in-three chance that those who need it will get itand by penalising women with incomplete contribution records, or is it better to guarantee the money to the people who need it most and who may, indeed, have saved as well: the older pensioners? It is a question of priorities. Who would be the better person to get it?
When the legislation was proposed, we said that the basic state pension and the state second pension were not adequate because they did not keep people clear of the basic means-tested poverty line. At the time, the Government said that that was nonsense and that the proposal was quite enough. However, before the pension had even been introduced, it was reformed. That has to be some sort of record; pension schemes normally last about 10 years before they are reformed. The Government said that a top-up was neededin other words, "The second pension is not good enough; we need a third one." People will get a basic pension, a SERPS or a state second pension or perhaps a graduated pension. However, all of that is not enough and the Government will give them a pension credit on top.
The sense that the Government's pensions policy is being made up on the back of a fag packet is irresistible. They make it up as they go along, spotting the blunders one year and trying to amend them for the next. The savings credit is a lottery for those who will not get it; it penalises women; and it gives people money who have not saved in just the same way as it does those who have. In what sense is that an incentive to save?
Mr. Tynan: Does the hon. Gentleman not realise that some people cannot afford to save money and that their full income is used to survive? The pension credit will mean that if they have a small occupational pension scheme, they will be given extra money so that they can improve their living standards.
Mr. Webb: I do not disagree with anything that the hon. Gentleman has just said. The savings credit is not a significant reward for those who have saved; more fundamentally, it is not an effective incentive to those currently of working age.
The House should consider the sort of person at whom the Bill is aimed. Let us suppose that someone has just turned 40. Life, perhaps, has just begun, but that person has also begun to panic about pensions. What effect will the scheme have on someone who is 40? He has 25 yearsa relatively long timeto think about saving for a pension. He is on relatively small earnings but could, if he sacrificed something, put perhaps £50 a month into a pensionalthough as the hon. Member for Hamilton, South (Mr. Tynan) says, a lot of people could not afford that.
According to the Secretary of State, the 40-year-old is supposed to ask what he will get for £50 a month. First, he must assume the return on the fund. His adviser says that he will get 3 per cent. above inflation, through a mix of equities and gilts. In 25 years' time, he will have about £22,000. What sort of annuity or pension can he get with that? The second thing he must do is guess what the annuity rate will be in 25 years' time. It might well be lower than today, if one thinks that today's 65-year-olds will not live as long as those in 25 years' time. However, let us assume that the rate is the same; so he will receive 6 or 7 per cent on a £22,000 pot.
What sort of pension will that give? The answer is £1,400 a year, or £27 a week. The 40-year-old has done all these calculations, but then remembers that there is a pension credit or savings credit. He must guess what his pension will be, without knowing what the minimum income guarantee will be in the future or whether it will be price-indexed or earnings-indexed. We know the situation until the end of the Parliament, but the Government's own forecasts do not assume necessarily that the MIG will be earnings-linked or indexed beyond then. He must guess about indexation and work out the difference between the two things.
For the sake of argument, let us assume that the provision is the same as at present; between £77 and £100. That is a gap of £23. Our 40-year-old has a £27 pension, the first £23 of which gets him 60p in the pound, or £13.80. However, the last £4 takes money off, at 40p in the pound. That is £1.60 off, so he will get a £12 pension credit.
At the age of 40, this person is supposed to consider whether to save £50 a month in the hope of getting £12 a week above income support. How many people will do that calculation, make all those guesses and assumptions and sacrifice £50 a month? To give a concrete example, £50 a month could pay for a subscription to a nice sports club. For the next 25 years, that person could go swimming, or to the gym. He has a choice between doing that, and putting that £50 a month aside for 25 years in the hope of receiving £12. Does anybody seriously think for a minute that people will do those sums and, because of the Bill, save more? It is complete and unutterable nonsense to suggest that this Bill is an incentive to save.
Mr. Cousins: Could I press the hon. Gentleman in the way that I pressed the hon. Member for Havant (Mr. Willetts)? If the blue-yellow front amendment is carried tonight, what can that same 40-year-old assume about the relationship of the basic state pension to average earnings when he retires?
All of this assumes, as the hon. Gentleman was hinting, that the scheme is still there in 25 years' time. Typically, second-tier pensions last about 10 years or so. The graduated pension lasted 10 or 15 years, while SERPS lasted about 10 years before the Conservatives cut it. The state second pension was reformed by the Government before it had even come in.
What chance is there that the state pension credit will even be there in 25 years' time? What chance is there that any sane person in middle age will plan for their retirement on the basis of a scheme that is so complicated that they cannot work out what they will be entitled to? It is simply nonsense. [Interruption.] The heckling from Members sitting behind the Secretary of State shows that they have lost the substantive argument.
The Secretary of State is fond of saying that the Bill proposes "a 60p in the pound reward for saving". It is a 60p in the pound reward for small saving, or for £23 a week of saving, to be precise; the gap between the pension and the means test. If people save more than £23, they will not get a 60p in the pound reward. Someone who saves £40£2,000 a year of pension on top of the £3,500 basic pension, which is not much to live onwill not get 60p in the pound of pension credit; they will get 15p in the pound. That is the effect of this system.
Unless one is clever enough to calculate one's pension to match exactly the gap between the pension and the means test and get the maximum credit, one does not get 60p in the pound at all. It suits Ministers to imply to people that when they save, they will get a 60p in the pound top-up. But they will not; if they save £40, they will get a 15p in the pound top-up. As ever, the measure has been grotesquely oversold.
Lynne Jones: Does the hon. Gentleman agree that the only way to get complete security is to have the basic state pension set at the same level as the minimum income guarantee? In that way, people will know that they will keep everything that they have saved.
Mr. Webb: I have a lot of sympathy with that point. Let me come back to the point made by the hon. Member for Newcastle upon Tyne, Central about our proposals. At the last election, when we proposed the 50p income tax rate on those earning more than £100,000 a year, the Treasury estimated a yield of well in excess of £3 billion. From that, and with money to spare, we proposed raising the pension in tiers according to the age of the pensioner. For those over 75, we proposed putting £10 a week on the pension. The Government are spending £2 billion on the Bill and related measures, and have told me that they could have put £15 a week on the pension for every person over 75. If we add our proposed £10 to the Government's £15, that £25 would bring the pension for everybody over 75 up to the level of the minimum income guarantee. As the hon. Member for Birmingham, Selly Oak (Lynne Jones) rightly says, that is the incentive to save. Every penny saved on top of the basic pension that brings people up to the minimum income guarantee is pure gain. It is not taxed at 40 per cent.it is not taxed at all That is the incentive to save.