New Clause 8
Pensions Bill
9:45 am
James Plaskitt (Parliamentary Under-Secretary, Department for Work and Pensions; Warwick and Leamington, Labour)
I am coming to that in a moment, but there remain fundamental differences between what the hon. Gentleman proposes and the current rules on annuitisation. The existence of the 25 per cent. tax-free lump sum drawdown does not breach the principle, because that must be considered alongside all the other rules that apply to the current annuity scheme, many of which are totally breached by the proposed RIF scheme. I shall elaborate on that in a moment.
There is also no mention of what happens to the RIF on death. That suggests that the new clause might be designed to allow individuals to pass on their pension funds to heirs, rather than to secure a retirement income. There is no rationale for taxpayers subsidising bequests.
Another flaw of the RIF, a serious one in my view, is the risk of running out of money during retirement. I note the hon. Gentleman’s faith in insurers’ ability accurately to predict an individual’s life expectancy, which is necessary to make the RIF scheme work. However, nobody can accurately predict an individual’s life expectancy. What insurers can do is to predict average life expectancy of particular cohorts. That enables them to provide a guaranteed income for life, regardless of how long that life is. That is a unique feature of annuities, and another reason why they are an ideal retirement income product.
The hon. Member for Eastbourne noticed that when he referred to the Canadian experience he elicited a bit of a grunt from me. The reason for the grunt was that if we look into the detail of the Canadian experience, we find that the problem of potentially running out of money during retirement is a feature of the Canadian system. That should give us pause for thought before we recommend it. I draw his attention to the view of the Canadian Bankers Association, which is that
“if you take out too much money, you may outlive your RIF and may be short of funds.”
It is a bit difficult to say to people in their eighties or nineties, “Watch out; you are running out of money.” An implication of the scheme is that it is recommended if one will not live long. What happens under our annuitisation laws is that insurers effectively spread or pool the so-called longevity risk across a range of individuals. Annuities are effectively insurance contracts, insuring individuals against the risk of outliving their pension funds, which makes them fundamentally different from RIFs.
Anyone taking out a RIF would need to simultaneously absorb investment and longevity risk and would be likely to need alternative assets to do so. The ongoing charges of managing a RIF are likely to be significantly more than those for conventional annuities. That is why we think that the RIF would typically be aimed at wealthier individuals.
So the RIF would be a complex product, probably attractive only to the wealthy, for the reasons that I have just given, but funded by the general taxpayer. By contrast, we are committed to promoting better outcomes for all pensioners in retirement. The Government are clear that innovation in pension provision must take place within the principle of tax-privileged pension savings being used to provide a retirement income, and the RIF violates that principle.
Finally, I turn to new clause 11. Value-protected annuities are 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. The new clause would abolish the current age limit of 75 where value protection can be offered.
A concern commonly expressed by consumers with annuities is the risk of dying soon after purchasing the annuity, so that the annuitant might not receive a financial benefit. Such concerns tend to reveal a misunderstanding about the basic insurance properties of annuities and the role of pooling. The benefit of buying insurance is the peace of mind provided even if an event does not occur and no claim is made. If the insured event does not occur, in this case if a person lives longer than expected, there is no return of the premium—the pension fund—so an annuitant’s early death does not result in profit for the insurer; it rather contributes to paying the pensions of those who live longer than expected.
The Government have nevertheless responded to early-death concerns by enabling providers to offer value- protected annuities in the early stages of retirement. The option expires at age 75 and abolishing that limit would tend to benefit those interested in using their pension fund more for inheritance planning than to provide a retirement income.
The hon. Member for Eastbourne prayed in aid the alternatively secured pension scheme as representing, as he put it, an appetite for change. He suggested that it supports those who try to get around annuitisation. That is not entirely accurate, and I remind the hon. Gentleman of what the then Financial Secretary, my right hon. Friend the Member for Bolton, West (Ruth Kelly), said at the time of the scheme’s introduction:
“We have made this concession because people hold significant, principled, religious objections to the pooling of mortality risk. We will keep the matter under review and check to see whether abuse is occurring. We stand ready to make any changes needed to preserve the integrity of the tax system.”—[Official Report, Standing Committee A, 8 June 2004; c. 485.]
So, far from being a chink in the defence of the scheme, it was accepted from the outset that that did not represent a rethinking of the principles underpinning annuitisation. It was a specific concession made in response to a specific pressure, and it has been our intention all along to reinforce the tax principle that underlines the annuity system and has done since 1976.