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Clause stand part.
Schedule 3 stand part.
I do not intend to delay the Committee. By and large, I am very supportive of clause 6. The two-year extension for people reaching the age of 75 in order to allow them to buy an annuity when it is most effective for them is a good thing to do. The clause seems to be pretty well drafted and the description of it is extremely good. I am pleased about the protection in paragraph 8(2) of schedule 3, which provides that if a member dies before a year has passed since their 75th birthday, and at the date of death there are still funds held for the purposes of the arrangement that have not been designated as available to pay an unsecured pension, not paid as a lump sum, and not applied towards the provision of a scheme pension or a dependent's scheme pension, those funds are treated as though they had been designated as available for the payment of an unsecured pension and will then be taxed on death at a rate of only 35%. That makes sense.
However, I am aware, through a constituent of my hon. Friend Mr Weir, that there are a small number of individuals who have already reached 75, or will hit 75 before
As the rates for annuities were very low, this gentleman did not take up one on reaching 75 in 2007. Instead, he chose a scheme pension that allowed him, subject to pension regulation supervision-a specialist firm did that for him-to continue to manage his pension fund for a period of 10 years and take the actuarially calculated levels of income from it. That was very sensible and prudent. However, the downside is that on his death, if any of that fund is left, it will be subject to inheritance tax at a rate of 80% before it passes to a family member of his choice.
Indeed it was a constituent of mine who brought the matter to our attention. Does my hon. Friend think that a way round might have been for the clause to allow anyone to take the extra two years if they were to reach age 75 or were already in that position? I cannot imagine that the numbers affected would be huge, but it would have got round this particular problem.
It may have got round the problem. That is one of the questions that I shall put to the Minister.
If the 80% IHT rate is correct, as I believe it is, the situation seems dreadfully unfair, although I recognise that it occurs because of the tax benefits of the pension saving over a person's lifetime. Of course, people cannot benefit from the same tax twice; I appreciate that. However, I suspect that of the people over 75 who had the means to purchase an annuity but did not, very few would want to do so now. We may be talking about some very wealthy people who would always manage their own pension anyway. I welcome the protection for those who hit the age of 75 on
This is a matter of natural justice and fairness. I imagine that the numbers of people who are in this position and would want to buy an annuity are very small, so I am looking to see what protection there might be in the Bill. We may reach a situation whereby there is simply a cut-off, so that even if someone reached the age of 75 on
I hope that the Minister can give us some comfort as regards the small number of people, all of whom are beyond the age of 75, who will pay 80% IHT on any remaining funds at the time of their death, compared with those who, within the provisions of the clause, will pay only 35% if they die at that time. I would like an assurance that the Bill and the clause will help that small number of people too.
I am grateful to Stewart Hosie for his questions, and it is probably wise if I take this opportunity to set out to the Committee the background of clause 6 and address the issues that he raised. I am sure that he will be interested in the consultation document that has been launched today on a number of them.
The Chancellor announced in the Budget that the Government would end the effective requirement to purchase an annuity by age 75 with effect from April 2011. The reason why we want to do that is that it will provide greater flexibility and choice for the individuals affected. In considering the hon. Gentleman's amendments, it is important for the Committee to understand why we are making that change and how we are going about it.
A consultation on the detail of the changes was launched earlier today by my hon. Friend the Financial Secretary, and our intention is to introduce any changes from April 2011. As set out in the consultation document, the Government will be guided by the following principles in implementing the changes: first, that the purpose of tax-relieved pension savings is to provide an income in retirement; secondly, that any changes to the pension tax rules should not incur Exchequer cost or create any opportunities for tax avoidance; thirdly, that individuals should have the flexibility to decide when and how best to turn their pension savings into a retirement income, provided that they have sufficient income to avoid exhausting their savings prematurely and falling back on the state; fourthly, that pension benefits taken during an individual's lifetime should be taxed at income tax rates, with the tax-free pension commencement lump sum continuing to be available; and fifthly, that on death, as the hon. Gentleman mentioned, the pension savings that have been accumulated with tax relief should be taxed at an appropriate rate to recover past relief provided, unless they are used to provide a pension for a dependant. Those principles will ensure that the new rules offer maximum flexibility to pension savers, while avoiding undue complexity or incurring a cost to the Exchequer.
The proposals set out in the consultation document will create additional flexibility for anyone saving into a defined contribution pension. That new flexibility means that individuals will be able to decide for themselves whether and when to purchase an annuity. It will also allow them to leave their pension fund invested in an income draw-down arrangement beyond the age of 75, and to take benefits from their pension fund later than that age if they wish. In addition, individuals who can demonstrate that they have secured a minimum income will be free to draw down unlimited lump sums. The changes will also allow the pensions and annuities industry to consider more innovative products, giving consumers greater choice.
While the new rules are being finalised, it is important that individuals who are about to turn 75, and who have not yet made a decision about what to do with their pension savings, are not disadvantaged in the meantime. The changes set out in schedule 3 are the minimum necessary to enable those reaching 75 on or after Budget day to defer the decision on what to do with their pension savings.
The Bill achieves that by providing for the pension tax rules that previously applied to draw-down arrangements only up to age 75 to continue to apply up to an individual's 77th birthday. That means that the higher inheritance tax charges that apply specifically to pension scheme members aged 75 or over will not apply to individuals who are about to turn 75, and who have not yet made a decision on what to do with their pension. They will not now have to make a decision until they reach 77, and in the meantime we will have worked through the consultation process. Clause 6 and schedule 3 will therefore ensure that they need make no decision until after new rules are finalised next year. To do otherwise would be unfair and confusing, and changing the rules retrospectively would add unnecessary complexity.
I understand the Economic Secretary's point and I am closely following her argument. Does she accept that many people did not get annuities in the past two or three years because the economic position meant that it was simply not a good time to buy them? Those people are effectively being penalised. Would it not be fair, as I suggested in an earlier intervention, to say that everyone had two years from now, while the consultation goes ahead and changes are being made, to consider their position? Perhaps some people will wish to continue as they are, but at least they would have the option, which is rightly being given to people who are approaching 75.
I thank the hon. Gentleman for that intervention. I will set out our overall approach to the issue that he raised. In every individual case, there are specifics. I was not aware of the case of the individual whom he mentioned, and I would be happy to give him a more specific answer if he gives me details. However, in principle, he raises a difficult issue. It is doubtless hard for people who reached their 75th birthday before we got to Budget day when we announced the proposed changes. We had pressed the previous Government to take action earlier, but it was left to us, on coming into government, to start to take the steps that we all agree are important. We do not agree with making retrospective legislation, except in the most egregious cases. As he said, the provision affects only a few hundred people.
The inheritance tax charge of 80% would apply to estates over the inheritance tax threshold of £360,000 a year. On the face of it, I cannot give much comfort to the constituent of Mr Weir. We are trying to improve the position of those who reached 75 on or after Budget day, but I have set out the basic principles, and the details of the constituent's case may or may not fit them. If the hon. Gentleman provides the exact details, I will give him a more exact answer. I hope that I have provided some background and that we can find a way forward to clarify and resolve the specific issue.
I thank the Economic Secretary for her response. Clearly, the way forward for people reaching 75 is sensible. The two-year deferral until the consultation is complete is right. It recognises the problem and ensures that no one else falls through the cracks between now and the end of the consultation. I am slightly disappointed that no hope was offered that the consultation could allow a slightly retrospective element to those very few people who have become 75 in the past few years, did not take an annuity and are managing their own funds. I will not press the amendment, but I will have another think about it before we reach Report next week, when I may revert to it. I beg to ask leave to withdraw the amendment.
Amendment, by leave, withdrawn.
I beg to move amendment 61, page 3, line 12, at end add-
'(2) Schedule 3 shall not have effect unless the Chancellor of the Exchequer has laid before the House of Commons a report on the implications of the abolition of compulsory annuitisation of pensions, including-
(a) the revenue implications of abolition; and
(b) a distributional analysis showing who would benefit from abolition.'.
The amendment would mean that the age at which compulsory annuitisation is required could not rise, as the Government announced in the Budget, from the current 75 to 77 until the Chancellor lays before the House a report setting out the implications of abolishing the compulsory annuitisation of pensions savings. That would include the revenue implications and a distributional analysis of who would benefit from the abolition, in the interests of transparency. It is important to explore in more detail the Government's precise thinking and intentions.
Before I do that, I shall comment on the sudden appearance this morning of a written ministerial statement, to which the Economic Secretary referred, on the matter. It appeared without the courtesy of any warning before our debate on the subject.
I spent some time on the Treasury website trying to avoid the increasingly odious comments on the "spending challenge website", which continues to publish offensive and outrageous suggestions for savings, such as sterilising the poor, reopening the workhouses and the forced repatriation of immigrants. It appears to be completely unmoderated by the Treasury, and I hope that the Economic Secretary will convey my strong view that something should be done about that thing on the Treasury website.
What I could not find on the Treasury website, right up to the point when I came into the Chamber for today's debate, was a copy of the consultation document that the written ministerial statement said would be there. I have a copy of the complete list of Treasury consultation documents that was on the website at around 12.30 pm. It featured the bank levy consultation, but not the consultation alluded to in the written statement. I therefore had to go the Library and have it printed so that I had the chance to look at it before I dashed into the Chamber, but the Minister has been waving it about. Will it be the usual behaviour of those on the Treasury Bench to give Members of the House so little time to look at a 53-page document? There was no advance warning, and the document was unavailable on the Treasury website, even though the written ministerial statement said it would be there. The Minister should get her Department to do a lot better than it has done today. That the document was unavailable anywhere other than via a photocopying machine in the Library at the last minute is a discourtesy to the House.
When I had a look at the consultation as I sat on the Front Bench while other debates were going on, the first thing I noticed was that the consultation will be a mere eight weeks long. It starts today and will end on
"Consultations should normally last for at least 12 weeks with consideration given to longer timescales where feasible and sensible".
The consultation is an eight-week, rushed consultation that includes the entirety of the August holiday, when many of the people who have expertise on this matter will be sunning themselves in very much nicer climes than most of us could probably afford to visit, before they come back to pronounce. That is a very peculiar way to consult on such an important matter.
I too wanted to ask the Minister this: what on earth is the rush about? One thing about annuitising and pension rules is that she has a little run-in time to consider-at some length-the implications of her proposals. I do not understand why there was such short notice and why the consultation is so rushed. I am forming an impression that the Government have already decided what they are going to do and that the consultation is a sham. If it is, they ought to have the decency to tell us what they have decided and not to consult at all. I would not have thought that the many experts who will be sunning themselves over the August holidays will thank the Government very much for giving them such a short time to respond.
The foreword of the consultation document states:
"The Government wants to foster a new culture of saving in the UK."
We would all agree with that, and that a rebalancing towards saving is necessary. Therefore, it is important to prioritise large numbers of people saving appropriately. I had a look to see what the Government have done so far to encourage saving, particularly in pensions, which is what annuities are all about. Will the Minister explain quite how reducing public and private pensions by changing their definitions from RPI to CPI helps to increase pension saving? Yesterday, the Daily Mail and various other experts said that that is a raid on people's pension expectations of more than £100 billion in the private sector, an amount that will accumulate year after year. Can the Minister explain how that encourages pension saving? Will she confirm that the impact assessment in this consultation lets the cat out of the bag when it comes to changing annuitisation rules? We have no particular problem, and certainly no philosophical problem with shifting the age of annuitisation from 75 to 77. Longevity has increased and the last rules-and the age of 75-were set in 1956. Indeed, annuitisation was first made compulsory in the Finance Bill of 1921, which was slightly before my time and I know that it was also before the Minister's time.
I am reassured by what the Minister says about what might be called red lines in the Treasury's view of the consultation. The first is that annuities should continue in order to provide an income in retirement rather than as a tax-privileged method of saving large amounts of money that can then be taken as a lump sum over and above the 25% that can already be taken tax-free. Others are that there should be no Exchequer costs and no tax-avoidance activities. The latter might be difficult to sustain if the Minister intends to make changes that introduce a minimum income requirement. Interesting attempts have been made to define a minimum income requirement to allow someone to take complete usage-with appropriate tax paid, I hope-of the rest of the money in their pension pot. I know that the Government are consulting on that point, but it is not going to be an easy thing to decide.
I notice also from the impact assessment that although the annuities market last year saw 445,000 people annuitise up to £11 billion of funds so that they could take an income until they required it no longer, the estimate of how many individuals will actually be affected by this change is a mere 8,000.
At a time when we need to encourage more people to make pension provision, does my hon. Friend think that these proposals will help? My concern is that having a minimum might reduce the numbers of people providing for their retirement rather than increase them.
My hon. Friend raises a reasonable point. Changes in this area have to be made very carefully to avoid the law of unintended consequences, especially when large amounts of tax-privileged income are at stake. The Minister knows that, which is why she said that there would be no increase in tax-avoidance opportunities.
We would have to have a long debate about a range of issues to answer that, but I am happy to defend our record. The closure of defined-benefit schemes took place for a range of reasons and the closures began in earnest when I was still at school, so I do not take personal responsibility for that.
When we look at the impact assessment, we see that the changes will affect a tiny minority at the very top-a mere 8,000 people on the Government's estimates, out of 445,000 people who annuitise every year. They will affect only those who can afford to live without touching their pension pot until fully 10 years after retiring. We know that two thirds of people take their annuity upon retirement and that only a much smaller number of people last beyond 70, so the flexibilities that the Government are looking for will be required by only a tiny number of very rich people. The Minister therefore needs to justify why this is a priority and why we need a rushed consultation of only eight weeks over the summer to bring it about.
I will be brief, Mr Evans, because I believe that some Members have other things to do later on. I also remind the House that in the Register of Members' Financial Interests I have explained that I offer business advice to a couple of companies.
I would like to briefly praise the Minister and her team for their proposal. For many years, the Conservatives while in opposition urged the then Labour Government to allow people a bit more flexibility and freedom with their money in retirement. Even now, after the election defeat, the party does not get it. This was not the main reason it lost the election, but it was one of many things where it misread the public mood. People want more freedom and flexibility over their own resources and more control over their own lives, but Labour was always trying to stop them. This is a small but important move, and I think we might find that it affects rather more people than the hon. Lady says-
The hon. Lady is protesting. I know it is in the Government document, but I am suggesting that the Government might be wrong and might have underestimated the number-it is extremely difficult to know how many people might take advantage of the provision. I also think it will not necessarily be only rich people who are affected. I know that Labour never wants any successful people to make money and be able to spend their money sensibly.
Indeed, it tried to stop them on many occasions. If we do too much of that, however, we have a poorer country, a smaller tax base and all the rest of it. It is a pity that the Labour party still has such a downer on success, prudence and savers, but it might be surprised-hopefully, pleasantly surprised-in due course to find that people on more modest means take advantage of this flexibility as well. We no longer live in a world in which everybody retires at 65 and does no more work. I see around my constituency many people taking on paid work into their late 60s and early 70s, either because they want to or, in some cases, because they have to in order to supplement their resources. Why should we debar them from this flexibility any more than richer people, if they have savings?
The right hon. Gentleman mentioned the record of the last Labour Government on pensions, but what about the record of the previous Conservative Government when it came to the mis-selling of pensions? I trust he would accept that that was a serious problem.
I would love to deal with that point, but I shall take your advice, Mr Evans. The real sin was the tax and regulatory raid on pensions under the last Government, which led to the wholesale closures of final salary schemes, and as a result of which most people starting out in work today have no access to a final salary work-based scheme in the way that their parents' generation did. That is a great tragedy. However, this provision is a small move in the right direction, so I hope that the House will warmly welcome it. Well done to the Minister.
I thank my right hon. Friend for his kind words. This provision is a step forward. As he said, it might be a small one, but it is an important one that will open up a flexibility that many whom we want to encourage to start saving for a pension will value, which is why it is important that we take the time to make an early start on this matter.
I want to respond to a couple of the shadow Minister's points, including the one about the consultation document not being published in good time. This clause allows us to engage in a consultation. It was not necessary to launch the consultation today, but as it was it was launched at 12.30 pm, and by the time we got to the clause it was 5 o'clock-several hours after the document became available-which has meant that we have had a more informed debate today.
We are getting into the same sort of argument that we had in the previous debate, where if we had put the consultation document up and had not had a sentence on an earlier webpage saying that it was there, we would have been accused of hiding it away. I am afraid that we have to do one before the other, and clearly in this case we decided to put out the statement that the consultation was going up on the website, and then we put it there, which is where it has been since 12.30 pm.
Whatever the bluster from the Opposition Benches, it cannot mask the fact that we are taking a positive step forward on pensions today. We have launched what I think will be a landmark consultation. Clause 6 and schedule 3 will give us the time to get that consultation right over the summer and then bring forward legislation in the forthcoming Finance Bill to ensure that people have more flexibility in dealing with their pensions, because ultimately it is their money, which they have put aside for their retirement. We want them to be able to deal with the pot that they have built up in a way that suits them, rather than in a way that suits the country.
Interestingly, we had a brief discussion about the fact that 75 has been the statutory age for some time. It was first agreed in 1976, which is ironic, given the obviously parallels between Britain then and now, with the Labour Government then having to be bailed out by the International Monetary Fund and going on to leave a desolated economy. We are ensuring that we have sustainable finances in our country over the coming years, so hopefully we will reach a different end point from that of that Labour Government.
I very much welcome the fact that the shadow Minister nevertheless supports the consultation going ahead, and I can assure her that we are going to get on with it. We believe that eight weeks is plenty of time to get a response, given that the issue is one that people have been pressing Governments past-and now present-to address. We are a new Government, so we are getting on with adopting a new and improved approach to annuities and pensions, as we can see from today's debate. I therefore very much hope that the hon. Lady will withdraw her amendment, so that the clause and the consultation can improve the legislation, creating more flexibility in pension law for the people who so badly need it.
I am not really that satisfied with the answers that the hon. Lady has given, as she will not be surprised to hear, after that brief reprise of the 1970s. My information is that the Finance Act 1921 introduced compulsory annuitisation and that the current age of 75 was introduced in 1956, which was a Conservative time, not a Labour time.
Regardless of the Minister's point scoring, however, it is important that we take an appropriate amount of time to see how any changes to the annuitisation regime might work in practice. The Opposition have no objection to the idea of having a higher age. However, there is some scepticism about the practicality of having a minimum retirement income and how it might be worked out, although that is part of the consultation, which no doubt we will now all be struggling with over August. It is a shame that the information was not available in a more timely fashion, so that we could have done more preparation for this debate. Because the amendment seeks more information and because the Government seem to be rushing ahead so precipitously, we would like to press the amendment to a vote.