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Lord McKenzie of Luton: I was going to raise this in relation to what my noble friend Lady Hollis said, but todays average annuity is purchased for around £23,500, with only 10 per cent of annuity purchases being over £50,000 and 3 per cent in excess of £100,000.
Lord McKenzie of Luton: The people who could benefit from these arrangements are those who have significant pension pots. Research has shown that you need a pot of about £100,000 to be able to go down the alternative route of income withdrawal schemes, with all the asset management and associated costs that that entails, so it is not an arrangement that would be available to people in general.
Lord Fowler: Surely the Governments whole purpose is to try to create this kind of pot. The noble Lord is looking backwards but surely the whole point of his policy is to create a situation whereby people will have more than £100,000.
Lord McKenzie of Luton: Of course we want that to happen, but I am not looking backwards; I am looking at where we are and at what pension pots are available today. My noble friend Lady Hollis is right about the sort of pots that people could accumulate under the new savings arrangements if one projects forward over 40 years, and we should welcome that. This situation does not necessarily continue for ever, but that is quite different from saying that today people on median earnings could take advantage of these sorts of arrangements. In my view, that is simply not the case.
Lord McKenzie of Luton: The people who could use these arrangements are those in the 3 per cent group with pension pots in excess of £100,000. If the noble Lord is asking me the number of people involved, I do not have the precise figure but I shall be happy to return to the matter. The group is only 3 per cent of those with pension pots. He shakes his head; I am not sure whether he is disagreeing with the figure of 3 per cent or whether the figure is insufficiently focused to deal with the question that he raised.
Lord McKenzie of Luton: The figures that I gave related to annuity pots and the percentage of people who benefited from those annuity pots. Of course, annuity rates change. As I think we all recognise, they are impacted by inflation and longevity assumptions and by what is happening with interest rates, so they are bound to change. I am not sure what point the noble Lord was pressing.
As I have already set out, I fear that the RIF would quickly become heavily marketed and used as a vehicle for saving funds for inheritance. That is clearly not part of the deal for giving tax relief. If I misunderstand the purpose
Lord Blackwell: If the Ministers major concern is the tax loophole, can he envisage our discussing tax arrangements which would close that loophole and ensure that money going in with a tax advantage was not improperly used? I do not think that anyone is arguing that the fund should be used as an improper tax loophole but, if that is the basis of his concern, can we not discuss how to find a solution to it?
Baroness Hollis of Heigham: I cannot support these amendments because of the way in which they are framed, but, in principle, if one could devise a structure that ensured that there was no recourse to public funds, but because you needed to take an annuity to float you off benefit levels at a sum to be determined by the Secretary of State and, on the withdrawals of money, there was a fiscal adjustment so that it was financially neutral, would my noble friend then withdraw his objections?
Lord McKenzie of Luton: My answer to that is no, because the Governments starting point is, as I said, that the deal on pensions, and the tax structure that surrounds it, is tax relief on the way in, tax-free accumulation up to a point in time and then the need to convert that into secure income. My objections to this are severalI shall come to some of the practicalities, certainly the potential tax effectsand indeed it violates what we see as the clear principle in all this.
I would explain the attraction of the RIF for those individuals who could afford not to use their pension scheme to provide an income, but I shall skip that point, as I have already touched on it. However, if the noble Lord wants me to, I shall continue. Those who do not need to use their pension funds to provide an income could instead let it build up tax-free in their pension scheme and pass it on, in due course, to their heirs. Current tax rules do not permit lump sums to be paid out where a member dies after age 75, so any such payments will attract unauthorised payment charges of up to 70 per cent. In the context of the deal that I have just described, noble Lords will see that this charge recoups all reliefs given when the money went into the fund and on the income and capital growth while it was there.
As I have said, the amendment before us is silent on what payments can be made out of the fund on death and how those might be taxed. I do not know what the mover of the amendment had in mindI would invite him to help us on that, but I am sure that he will do so when he winds up. It is clearly envisaged that a person can build up capital in their RIF without drawing an income. That leads me to conclude that the intention is that funds may be paid out of the RIF when the member dies after age 75 without unauthorised payment charges. As I have said, there is no rationale for the general body of taxpayers to subsidise bequests through tax relief on pensions. Those who want to save for bequests have a range of savings and investment vehicles available to them. The features of the RIF also give us a clue as to whom this amendment is aimed at.
Anyone taking out a RIF would need to absorb simultaneously investment and longevity risk and it is likely that they would need alternative assets to do so. The ongoing charges of managing a RIF are likely to be significantly more than for conventional annuities. In many ways, the RIF resembles income drawdowncurrently available up to age 75whereby the pension fund remains invested and parts of it, within limits, can be withdrawn. It is likely to have a similar charge profile to the RIFs. We know, as this is documented in the Annuities Marketpublication, that income drawdown in its current form tends to be economic for funds of over £100,000currently less than 5 per cent of pension funds. This is not a vehicle that will be of benefit or use to a whole range of pension savers.
I now turn to another aspect of the RIF. As I understand it, under the proposed RIF, no individual's total future income could fall below a minimum income requirement. We could have an entire debate on what constitutes a reasonable level, but I will limit myself to pointing out that such a process would be bureaucratic.
Another flaw of the RIF is the risk of running out of money in retirement. I note the noble Lord's faith in insurers' ability to predict accurately an individual's life expectancy. Surely no one can do that. Insurers can predict average life expectancy of particular cohorts. That enables them to provide a guaranteed income for life, regardless of how long that life is. The RIF seeks to take an individual view on an individuals life expectancy, which seems to me to be a very difficult thing to propose as being possible. One can envisage someone well into their 90s, whose pension pot has run out, pursuing their pension advisers, saying, You told me I would only live to 85. Some very strange circumstances could flow from that.
Insurers efficiently spread, or pool, this so-called longevity risk across individuals. As some people in a pool of annuitants die earlier than expected, the insurer can carry on paying those living longer than expected. So early death does not result in profit for the insurer, but pays the pensions of those living longer than expected. Annuities are effectively insurance contracts, insuring individuals against the risk of outliving their pension funds.
I can only conclude that the RIF would be a complex product aimed at the wealthy at the expense of the taxpayer. By contrast, the Government are committed to promoting better outcomes for all pensioners in retirement. For example, the Government have set out proposals on personal accounts as a simple low-cost pension savings vehicle, which we hope and believe will lead to significant accumulation over time, as my noble friend Lady Hollis identified. The Government welcome innovative ideas for retirement income products for all.
Lord McKenzie of Luton: Indeed we do, as noble Lords will see if they look at what has happened to the annuities market in recent years and the range of different products that have been developed. The Government are in continual discussion on these matters so that new products are in line with the principle of securing a retirement income.
The Government are clear, however, that innovation must take place in line with the principle of tax-privileged pension savings being used to provide a retirement income. We believe that RIF clearly violates that principle. The Governments opposition to this measure is driven by a matter of principle. I was asked to set that out. The proposal would also involve a cost to the Exchequer. In most cases I would expect the likely tax charge on RIF withdrawals to be less, often considerably, than the amount of tax relief enjoyed on these funds. It would be unfair to expect taxpayers to foot the bill for people who take tax relief for pension savings but who choose to spend the money on something else.
On the repeal of paragraph 16(1)(a) Schedule 29, value-protected annuities were permitted from 6 April 2006. They allow providers to offer an annuity that includes a repayment on death before 75 of an amount representing the initial capital value of an individual's pension or annuity, less any income paid before the date of death. This repeal would abolish the current age limit of 75 where value protection can be offered.
A common issue raised by consumers with annuities is the risk of dying soon after purchasing the annuity and the concern that the annuitant might not receive a financial benefit. Such concerns tend to misunderstand the basic insurance properties of annuities and the role of pooling. The benefit of buying insurance is the peace of mind provided that, even if an event did not occur and no claim was made, the income would be secure. But if the insured event does not occurfor example, in the case of someone living longer than expectedthere is no return of the premium. So an annuitants early death does not result in profit for the insurer, as I said.
Nevertheless, the Government have responded to concerns about early death by enabling providers to offer value-protected annuities in the early stages of retirement. This option expires at age 75. Abolishing the current age-75 limit would tend to benefit those more interested in using their pension fund for inheritance planning rather than for providing a retirement income.
I have taken some time to set out the policy on this matter because I was particularly pressed on it and because of the range of comments made. In essence, these amendments seek to benefit those who willingly take advantage of tax reliefs given for pension savings to build up a substantial pension pot, but who want to break their part of the deal and use tax-privileged moneys for other purposes. I therefore urge the noble Lord to withdraw the amendment.
I turn to the amendment on increasing the upper age limit of annuitisation from 75 to 85, proposed by the noble Lord, Lord Oakeshott. While this deals with a particular aspect of annuities policy, I fear that it is motivated by similar reasoning to that behind the RIF amendment, which I have already spoken about. As I set out, given that the Government provide generous tax incentives to encourage people to save for retirement, it is clearly important that we ensure that those moneys are used for the purpose for which they were granted. Annuities not only achieve this but provide the peace of mind of an income for life regardless of how long that life may be.
Within those overarching principles, people have considerable latitude on when to purchase their annuity. As I said to the noble Lord, Lord Higgins, they currently have a 25-year window between the age of 50 and age 75 in which to annuitise. Even after 2010, when the lower limit rises to age 55, people will still have a 20-year period in which to choose to annuitise best to suit their circumstances. That is close to a quarter of the typical male life expectancy. That significant current flexibility is little used at the upper limit. Only 5 per cent of people annuitise after age 70. The reason for that is that the vast majority of people need to draw on their pension savings in retirementafter all, that is why they saved in the first place.
However, a fortunate few who have made pension savings and taken the tax reliefs that go with them are able to delay annuitisation for a lengthy period post-retirement. They have sufficient wealth from other income and assets and are able to absorb the investment and longevity risks inherent in delaying annuitisation. Prior to annuitising, should the pension fundholder die, their nominated representative can inherit a tax-free lump sum, of which more than half could consist of tax relief granted for pension savings.
By raising the age limit by which a person must annuitise from age 75 to age 85, the amendment would significantly weaken the principle that pension funds built up with generous tax relief should be converted into a secure retirement income for life. Those who would benefit would be the small group who could afford to take advantage of the considerable latitude to delay annuitisation beyond age 75. There is no rationale for taxpayers subsidising bequests. Individuals who want to pass on assets at death have a number of non-pension vehicles to choose from.
I also draw the Committee's attention to the potential costs to the Exchequer of moving the age limit in that way. It is not possible to quantify that exactly because of uncertainties about behavioural effects, among other things, but although only relatively few people would benefit from the change, because they would typically be the better-off, the sums involved could amount to tens of millions of pounds, all for the benefit of the few individuals who would be using the relief given for pension savings as a means to pass on tax-advantaged lump sums to their heirs.
The Government do not believe that there is currently a case for changing the upper limit. As working longer is an integral part of reforms to meet the pensions challenge, the Government will of course continue to keep both the lower and upper limits under review.
In summary, the amendment, like the RIF, would undermine current policy on pension savings and decumulation. It would benefit those who willingly take advantage of tax reliefs given for pension savings to build up substantial pension pots but who want to break their part of the deal and use tax-privileged moneys for other purposes. Accordingly, I urge the noble Lord not to press his amendment.
I shall try to ensure that I cover all the points raised. Several noble Lords asked about choice. There is choice to act within or without a pension regime. Even within the pension regime, there is the 25 per cent tax-free lump sum, which is an added opportunity for people to save outside the scheme at some point. I understand the point made by my noble friend Lady Hollis, but I do not believe that it is right to say, as of today, that the issue affects people on median earnings. She is absolutely right to say that the landscape in 20, 30 or 40 years could be different and may well call for a change in the regime, but that situation is not with us now. I hope that I have covered all the points raised but, if not, I shall certainly try again. I urge the noble Lord to withdraw the amendment.
Lord Hunt of Wirral: This has been a very important debate and I am very grateful to everyone who has contributed. I hope that the Committee will forgive me if I do not now make a detailed response to all the points that have been raised. The overwhelming majority of the speakers have been in favour of doing something. The sole exception has been the Minister, who has been, to use his own words, the lonely person in this debate. He has made my task much easier. I need not go into great detail, because he has made this test of opinion an issue of principle. He responded to the former Ministerthe noble Baroness, Lady Hollisand to my noble friend Lord Blackwell by saying that the Government are not to be persuaded, even if all the detail is supplied. Of course, once the Committee has expressed its opinion, it is perfectly possible to set out further details such as the tax, the fiscal adjustment and various other elements mentioned by the noble Lord, Lord Turner. That is fine, but let us now have a decision on the issue of principle.
As the noble Lord, Lord Oakeshott, recovers from the rather devastating criticism of him by my noble friend Lord Fowlerincidentally, was it not wonderful to hear the noble Lord, Lord Higgins, again on this subject?I will quote again Mr Laws, his friend in the other place, who described the present system as illiberal. If there is one word that can persuade him and his colleagues, surely it is that. I would now like to see whether the Committee agrees with Mr Laws, with me and with the majority of speakers that this present system is iniquitous and illiberal. I wish to test the opinion of the Committee.
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