Clause 1 - Amendment of the Income and Corporation Taxes Act 1988
Pension Annuities (Amendment) Bill
10:00 am
Ms Ruth Kelly (Economic Secretary, HM Treasury; Bolton West, Labour)
The right hon. Member for Skipton and Ripon cannot criticise these amendments on the ground that they are drafting amendments. They address a major aspect of the clause, and they are intended to correct an inherent flaw.
The Bill seeks to force all personal pension scheme members to use their funds to buy a minimum income annuity by the age of 65: any remaining moneys can be designated as a retirement income fund, from which income can be drawn at the will of the scheme member. The Bill removes an existing flexibility—the right not to buy an annuity until the age of 75.
It also sweeps away the current rules with regard to income withdrawals, which are designed to ensure that the fund is not under-drawn or over-depleted. The right hon. Gentleman has said that there are problems with those rules. We accept that they are not perfect, but they have a role to play. They ensure that pension funds are used for their intended purpose. They set minimum and maximum income limits to ensure that a reasonable income is drawn, and that the fund is not over-depleted. They also provide that income withdrawals must not be made after the age of 75 when, under the current system, a lifetime annuity must be purchased. The right hon. Gentleman has criticised the Government for talking about only people with large pensions funds who are able to benefit from some provisions. However, it is worth bearing in mind those who use the draw-down facility, considering how that facility is used, and examining the potential effect of its retention or abolition on the pension system.
The draw-down facility is popular with people who have very large pension funds. It attracts about a quarter of matured retirement savings by volume, although only about 5.5 per cent. of the transactions. It is clear that they are among the larger retirement funds, and their average value is more than £140,000. People have told the Treasury that the advantages of the current draw-down system include transparency
and control. Additionally, there is potential for legacies should a person die before buying an annuity. Depending on how pensioners arrange their draw-down facility, they may have complete control over the part of the fund that is invested, and they need not delegate choice about the deployment of their funds unless they wish. People who choose draw-down systems usually value that transparent arrangement. They say that they do not wish to cede control of their pension assets to an annuity provider in order to retain equity exposure.
However, as the right hon. Gentleman alluded, draw-down systems involve considerable disadvantages, which I shall mention before I tell the Committee why I want the system reinstated. Draw-down inevitably exposes pensioners to mortality drag. If the right hon. Gentleman has read the consultation document, he will realise that although the public may not be curious about mortality drag, the Treasury and the Inland Revenue are fascinated by it. Mortality drag is the reason why annuity purchase is such a good deal for pensioners.
Mortality drag works in different ways, but it ensures that the longer a person waits before buying an annuity, the less efficient the use of their income. If a pensioner decides to invest his pot of money in equities before purchasing an annuity, he may benefit from the growth of that fund, which may be invested in the stock market or other securities. The growth might outweigh the loss of efficiency that is incurred by buying an annuity at a later date. Economic analysis suggests that around the point when a person reaches the age of 75, it becomes clearly more worth while to buy an annuity rather than waiting for further growth of a pension fund because that money becomes much less efficient.