Lords Amendment

– in the House of Lords at 6:15 pm on 17 November 2004.

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359 Before Clause 229, insert the following new Clause—"Removal of compulsion to take annuities

Notwithstanding any statutory provision or rule of law to the contrary, the requirement for pensioners to take their pension in the form of an annuity, together with the requirement to do so by the age of 75, shall cease to have effect, provided that the pensioner can demonstrate that he has resources to ensure that he will not become dependent on means-tested benefits."

359A The Commons disagree to this Amendment for the following Reason—

Because it would alter the area of taxation, and the Commons do not offer any further Reason, trusting that this Reason may be deemed sufficient.

Photo of Baroness Hollis of Heigham Baroness Hollis of Heigham Parliamentary Under-Secretary, Department for Work and Pensions, Parliamentary Under-Secretary (Department for Work and Pensions)

My Lords, I beg to move that the House do not insist on its Amendment No. 359 to which the Commons have disagreed for their reason numbered 359A. This is, so to speak, the "biggie" for today.

The amendment relating to the removal of the requirement to annuitise by the age of 75 has been reversed in another place as it relates to financial matters, in which we in this place do not have a role to play in either initiating or amending. The amendment was rejected on several financial grounds, including that: it reduces the extent to which the member benefits from the income from the pension fund and therefore increases the amount of lost revenue; it allows a member who defers vesting to continue to make tax-privileged contributions to his pension fund until he draws an income; and, if the member dies and has not taken out an income from their pension pot, the pot reverts on a tax-free basis to their heirs. Removal of the restriction at the age of 75 extends that tax-free fund to everyone who has a personal pension pot.

That is the thinking behind the statement that the other place disagrees to the amendment because it would alter the area of taxation. It deems that reason sufficient. We now have an amendment which proposes to increase to 85 the maximum age before which an annuity must be purchased.

The intention of the amendment appears to be twofold. First, as championed on Report by the noble Lord, Lord Higgins, the effect would be to prevent people being forced to buy an annuity at a lower rate than they believe they might secure at a later date. Secondly, it would enable the privileged few who can afford to delay taking an annuity until 85 the possibility that their nominated representatives can inherit a tax-free lump sum which has in part accumulated as a result of generous tax relief.

Annuity rates would certainly rise the later one took one's annuity. That is obviously true, because there is less lifespan to cover, but it is important to qualify it. If someone decides to start taking benefits from his pension savings, and instead delays buying an annuity and draws income from his fund, part of his fund remains invested. After a period, he could use the residual fund with any investment growth to buy an annuity at the rate then prevailing. In other words, he could time-shift when he had turned it into an annuity.

However, the residual fund will need a strong growth rate if it is to allow pensioners to buy the same level of income as they could have achieved if they had bought an annuity when they first started drawing benefit from the fund. There are two reasons for that. First, the residual fund does not benefit from mortality cross subsidy until it is used to buy an annuity. The eventual annuity income of people who use drawdown gets less benefit from the early deaths of people born at the same time because less of their capital is ever pooled.

Secondly, life expectancy increases with age. For example, a man of 65 might on average expect to reach 82, but if he survives to age 75, he can expect to reach 85. People between 65 and 75 who have early mortality have already died and as a result the life expectancy of those left floats upwards. As regards the implications for annuities, an Inland Revenue consultation document published some years ago suggested that those deferring annuity purchase at age 60 would need to receive returns on their unannuitised funds of 1 per cent above return on fixed interest securities to keep pace with the better returns they could receive from annuities.

By age 85, this has gone up to around 10 per cent for men and around 7 per cent for women, so those not dying would have lost out from deferring. In passing, I should mention that these figures are based on the GAD projections for 2000, just in case I am suddenly challenged on them either in this House or in the press. However, it perhaps matters little because those deferring to the age of 85 are going to be the wealthiest to whom mortality drag matters less because their real focus is on tax planning.

I now turn to a related statistical matter. Much to my disappointment, it has been suggested in this House, in another place, and in today's press—including the Times in a column I normally respect—that I have provided inappropriate statistical information on life expectancies to this House. I am surprised and disappointed that a more inquiring approach was not adopted, in particular by the noble Lord, Lord Oakeshott, before he published the issue so widely, including in the press, because we are all aware—are we not?—that different statistical methodologies exist and that they are designed to serve different purposes.

It may therefore be helpful to the House if I clarify the position for those who need clarification. I will support what I say both in written correspondence and by a technical statement which I will arrange to have placed in the Libraries of both Houses. However, and in a nutshell, the difference between the Pensions Commission figures that are being quoted by the noble Lord, Lord Oakeshott, which say that male expectancy is 19 years at 65, and the figure of 16 years quoted by me are entirely due to the common usage in this field of two different methodologies. I and I am sure your Lordships have used—and I cannot believe that the noble Lord, Lord Oakeshott, is not aware of this—what is called the "period" measure of life expectancy, whereas the Pensions Commission has used the "cohort" measure.

Period life expectancies are worked out using the age-specific mortality rates for a given period—either a single year or a run of years—with no allowance made for any later or projected changes in mortality.

Cohort life expectancies are worked out using age-specific mortality rates which allow for known or projected changes in mortality in later years. It is a more dynamic approach, if I may use that phrase which was put to me.

The approach I have used and the figures I gave in this House were based on the approach which the Government Actuary's Department describes on its website as being the one most regularly used, for example, in ONS publications such as Social Trends. The website states:

"In most official statistics, period life expectancies are given".

The Pensions Commission report states:

"To some extent, the choice is expedient and reflects the nature of the data available".

Furthermore, the data I gave was based on the approach adopted in the Pensions Green Paper published in December 2002. So the approach I used has been consistent, common, conventional and widely understood. More to the point, it is a measure that provides a life expectancy for the period immediately ahead, which I believe to be the most appropriate for the purpose of this debate.

By contrast, the Pensions Commission chose the cohort measure because it is in the business of looking further ahead, which is what the Government asked it to do. By definition, the cohort figures I have explained will give a higher figure of life expectancy than the "period" measure.

I hope that that explanation clarifies the matter of period and cohort life expectancy statistics. I never thought that I would need to explain it to your Lordships' House as I took it for granted that Members were sophisticated enough to be well aware of this distinction. It was a pity that I was not given the opportunity to do so before the debate about a serious technical issue was allowed to lapse into accusations of a "tendency to mislead" and of "conning the public", to which I personally take some exception as your Lordships will understand.

I will make one further point. I have previously quoted period measures based on the 2001 GAD projections. There is no material difference between the period measure for 2001 and the 2003 projections. The 2003 GAD projections gives a period life expectancy for a 65 year-old as 16.3 years as opposed to my 16 years.

As I stated, I will support what I have said tonight by correspondence with the noble Lord, Lord Oakeshott, and by a written technical statement, but I hope that what I have said will now allow us to move on.

I want therefore to go to the second effect of the amendment; that is, it will enable the privileged few who can delay taking an annuity until 85 the opportunity to leave the tax-free lump sum to their heirs. That lump sum has had the benefit of generous tax relief during the time it has accumulated. It has been said in this House and in another place that a 35 per cent tax would be levied on unspent funds when they are passed on to the member's estate. Let me clarify that this tax charge is applicable only where the member has used some of the funds by way of income drawdown. If a member has been in a financial position not to use his fund, he leaves the whole amount intact to his heirs, free of tax.

Perhaps I may remind your Lordships that independent research carried out on behalf of the ABI clearly indicates that the vast majority of people purchase their annuity when they retire or well before they reach the age of 75. They need the money from the pension provided by the annuity to ensure that they have a regular income in retirement.

It is also apparent that the only people who would benefit from deferring the purchase of annuity to age 85 are those who can afford to accommodate the loss of a regular income. They do that knowing that if anything happens to them before that date, their heirs would inherit a tax-free lump sum. Given that they can afford to be without that regular source of income, I would suggest that these are people with other forms of income, savings and resources on which they can rely.

It was also suggested in another place by the honourable Member for Havant that my right honourable friend the Member for Croydon North suggested during the debate there that it now requires the purchase of a £250,000 annuity to keep clear of income-related benefits. That is not what he said. When Members were recycling the raiding of the Third Reading speech, having failed—perfectly reasonably—to consult the Report or Committee stages, they would have known that that was never argued in this House.

I was arguing then, and was subsequently quoted as saying, that in terms of the range of annuity pot that would be required to float someone off income-related benefit, that could run anywhere between £120,000 and £250,000 according to the assumptions about the flat level, joint or single, and the level of increases in state benefits. I took £180,000, a figure common to most people as a guide, but I also went on to say that, given tax relief at 55 per cent on the rest, one would have to have a sum of well over £250,000 before one saw a clear advantage from all of this and had as a result a sum of £30,000 to leave to one's heirs. I argued, and continue to do so, that the number of people who would wish to lose the possibility of an annuity for such a sum would be very small; probably less than the 1 per cent who hold pots of that size.

Photo of Lord Higgins Lord Higgins Shadow Minister, Economic Affairs

My Lords, I thank the noble Baroness for giving way. Has she noticed that in the final paragraphs in col. 1235 of yesterday's Commons Hansard, immediately before a vote was taken on the issue that we are discussing, the Parliamentary Under-Secretary of State and Mr Webb refer to the figure of 250,000, which we agree is the amount in pounds which would be sufficient to take someone off means-tested benefit? Malcolm Wicks then says:

"Yes. The point is that we are talking about a quarter of a million people who are way above means-tested levels".—[Hansard, Commons, 16/11/04; col. 1235.]

It is an indication of the total failure to comprehend what we are talking about that he should switch from a figure of £250,000 to a figure of 250,000 people.

Photo of Baroness Hollis of Heigham Baroness Hollis of Heigham Parliamentary Under-Secretary, Department for Work and Pensions, Parliamentary Under-Secretary (Department for Work and Pensions) 6:30, 17 November 2004

My Lords, that may well have been a typo, and I do not wish to comment on that. Typos can easily happen. I was just anxious—

Photo of Lord Higgins Lord Higgins Shadow Minister, Economic Affairs

My Lords, is the noble Baroness accusing Hansard of getting it wrong?

Photo of Baroness Hollis of Heigham Baroness Hollis of Heigham Parliamentary Under-Secretary, Department for Work and Pensions, Parliamentary Under-Secretary (Department for Work and Pensions)

My Lords, I do not know whether Hansard got it right or wrong, but I am confident that my honourable friend's brief at the other end would have been very clear about this. I am sure that someone either spoke in error or was misheard, and I do not wish to be drawn into the debate, however teasingly, by the noble Lord opposite.

In good faith, I was trying to ensure that no one thought that I was saying at any stage—I do not think that your Lordships suggested this—that a person had to have £250,000 to be free of IRBs. The figure that we explored in much greater depth as the average within the range was nearer to £180,000.

I am near to concluding but I wanted to address some important issues that were raised at the other end as well as in this House. I want to draw your Lordships' attention to the potential costs to the Exchequer of moving the age limit from 75 to 85. It could amount to tens of millions of pounds. There is around £14 billion in unused tax relief each year, and 50 per cent of tax relief goes to the wealthiest 15 per cent of pension savers. Even a swing of 5 per cent into pension saving driven by this raise in age could cost upwards of £250 million per annum—all for the benefit of the wealthy individuals who would be using the relief afforded to pension saving as a means of passing on an inheritance to their heirs.

The UK has a long history of mandatory annuitisation of pension funds. The Finance Act 1994 increased to the current level of 75 the age by which an annuity must be purchased for occupational pension schemes. Personal pensions were introduced in July 1988 with an annuity ceiling of 75 years. In 1994, the average life expectancy for a male at age 65 was approximately 79 years. In other words, the expectancy was that people would potentially have four years to enjoy a stream of retirement income.

In comparison, on the period tables as opposed to the cohort tables, the current life expectancy of a male at age 65 is 82 years. Accordingly, raising the age by which an annuity must be purchased to 85 would mean that the majority of people who deferred taking an annuity would not benefit from any form of income stream. They would die before making that decision. By keeping the limit at 75, we are potentially offering the 95 per cent of people who annuitise before the age of 70 a further six years in which to enjoy an extra stream of retirement income.

Finally, at Third Reading, the noble Lord quoted the research into attitudes to annuities in the Watson Wyatt Worldwide study, which showed that people would prefer not to have to annuitise or to annuitise later. I think that that was repeated in the other place by the honourable Member for Havant, Mr Willetts. Again, I wonder whether the full findings might have been misquoted. The choice concerned whether to retain a lump sum of £100,000 and live off the interest or to use the £100,000 to buy an income of approximately £7,000 per year. However, what Mr Willetts did not share with us was that, of those who chose to annuitise, on balance there was a preference for annuitising earlier rather than later, the ratio being approximately 3:2 in favour. As that piece of research was quite heavily worked, I thought that it was worth seeking to contextualise it.

In conclusion, we believe that the Government's position remains, which is why we ask the House, in due course, to reject the opposition amendment. First, the Government's position is fair to all. Secondly, we believe that the cost involved in the amendment would be unacceptable, and, thirdly, we should bear in mind the burden of responsibility that it would create.

However, we recognise—this was said by my honourable friend in the other place—the underlying issues of greater longevity and demographic shifts in this country and, indeed, across the developed world, both of which have profound implications for the way that our pensions policies are put into effect. We are taking action through the Bill and in other ways to meet those and other challenges.

We set up the Pensions Commission under Adair Turner to review the regime for UK private pensions and long-term savings. His first report, published last month, provides a mine of detailed and valuable information on the demographic challenges that we face. It is a singular fact that we are debating whether to preserve one of the few elements of compulsion in our pensions structure, but the Pensions Commission was set up specifically to consider the effectiveness of a voluntary approach to pensions and whether there is a case to move to greater compulsion.

The commission is considering whether the level of compulsion within the UK pension system is appropriate. For people investing in a pension, the requirement to purchase an annuity at the age of 75, with a tax privileged saving, is a compulsory element of the existing system. Once the commission has reported on the wider issues relating to compulsory saving, the Government will wish to consider key issues, including annuitisation at the age of 75, with particular care and urgency and decide whether they remain fit for purpose.

As a result of those remarks, I hope that your Lordships will feel able to reject the amendment which is to be moved in lieu and accept the original amendment as brought back from the Commons today.

Moved, That the House do not insist on its Amendment No. 359, to which the Commons have disagreed for their reason numbered 359A.—(Baroness Hollis of Heigham.)

Photo of Lord Higgins Lord Higgins Shadow Minister, Economic Affairs

rose to move, as an amendment to the Motion that the House do not insist on its Amendment No. 359, to which the Commons have disagreed for their reason numbered 359A, at end insert "but do propose Amendment No. 359B in lieu thereof":

359B Before Clause 229, insert the following new clause—

"AMENDMENT OF RULES TO TAKE PENSION ANNUITIES BY THE AGE OF 75 Any statutory provision or rule of law requiring a pension to be taken in the form of an annuity by the age of 75 shall be amended so that the age limit is 85."

The noble Lord said: My Lords, the noble Baroness spent some time this evening discussing the proposal on drawdown implemented by the Chancellor of the Exchequer a while ago. She did not, in fact, go into any detail on this during any of our previous discussions in Committee, on Report or at Third Reading. But what she said this evening confirms what we have always felt—that is, that this proposal is so complicated that it is unlikely to be taken up by many people, in the same way that the Chancellor's tax credits are not taken up. It cannot in any way be compared with the amendment which we originally tabled and which the Commons have now returned to us; nor, indeed, can it be compared with the simplicity of the amendment before us this evening. I start by taking up some points made by Mr Malcolm Wicks in another place in replying to the debate on these issues. It is interesting that the arguments that he put forward are not the same as those that the noble Baroness made this evening on the same points about privilege, and so on. In response to my earlier intervention, she said that he was reading out his brief. It may simply be that he has difficulty in reading out his brief. In any event, it cannot have been a misprint because his private office will have checked what he said and will have altered it only if there was justification for doing so. I want to take up the issue of privilege because the amendment has been returned to your Lordships' House in a slightly strange way. The arguments put forward by Mr Wicks in another place were as follows. He said that the Lords amendment, "allows annuities not to be paid where they might otherwise be paid". That has nothing whatever to do with privilege. He continued, saying that, "it extends tax relief by allowing more people in some circumstances to pass their tax privileged pension pot on to their survivors". In moving my amendment, which has now been returned from the Commons, I made it absolutely clear that we do not for one moment suggest that the proceeds of the pension pot should not be taxed in an appropriate way. So that point is totally invalid and Mr Wicks simply does not understand what was said. He went on to say that, "it allows in some circumstances for contributions to be made to pension schemes beyond the age of 75". It is possible to do so anyway, and so I have no idea why he said that. He then added that, "it reduces the instances when part of the tax relief given to contributions is recouped when an annuity is paid, and so on.—[Official Report, Commons, 16/11/04; cols. 1220-21.] That, again, is not the same as the argument which the noble Baroness put to us this evening. None the less, despite the curiosity of the arguments put forward by Mr Wicks, the Commons have returned the matter to us with a claim of privilege. We know what happens at the other end. If a particular issue is discussed and debated and if the Commons disagree with your Lordships' House, a committee is set up which retires to a little room behind the Speaker's Chair—I see the look of familiarity on the face of the noble Lord who is sitting behind the Minister—and they cook up some reasons. Strangely enough, the reasons often bear little resemblance to the debate that has taken place. The committee is chaired by the Minister in charge of the Bill. As I understand it, the normal form of words is that the amendment is rejected because it would involve a charge on public funds. The Commons do not offer any further reasons, trusting that that reason may be deemed sufficient. That is to say, they claim privilege. However, the form of words for this amendment is not conventional. It says: "Because it would alter the area of taxation, and the Commons do not offer any further Reason". Privilege is dependent on two things: ways and means, which is taxation, on the one hand, or the issue of supply, which is public expenditure, on the other. We are not allowed to interfere in those matters. It is put too broadly in the rather curious and unprecedented words—at least I cannot find a precedent form that is used in the amendment returning from the Commons—that it would alter the area of taxation. The House passes many Bills that alter the area of taxation and on which no claim of privilege is made.

Photo of Lord Lea of Crondall Lord Lea of Crondall Labour

My Lords, perhaps the noble Lord can explain a point. What economists call tax expenditures—for example, tax reliefs—are precisely the same as a form of taxation.

Photo of Lord Higgins Lord Higgins Shadow Minister, Economic Affairs

My Lords, as I am trying to explain, that is not what we are doing in the amendment that has been returned by the Commons. More particularly, it is certainly not applicable to the amendment that we are now discussing.

When we discussed the original amendment, which has now been returned, I distinguished between whether there should be a requirement to take an annuity and whether it should be compulsory to take it at the age of 75. I have put forward the arguments in the Watson Wyatt report and I do not in any way retract from what I said, despite the remarks made by the noble Baroness. From that report, it is very clear that 58.8 per cent would prefer not to take it as annuity at all and 12.1 per cent would prefer to take it later.

That side of the argument raises all kinds of issues which we have been discussing. I understand that the Commons are not prepared to accept it. For that reason, I have tabled an amendment on the second leg of the argument; namely, that instead of being compelled to take it at age 75, they should be able to take it up to the age of 85. It will be clear to your Lordships that that is a compromise. It is not what I want, as I would have preferred the original amendment. None the less, it deals with substantial problems that arise in relation to the present arrangement.

Many people object to the fact that they are required to take an annuity at a particular moment in time. Instead of being able to exercise their discretion about whether to take it at a certain point or later, when they may believe that annuity rates will go up, they are prevented from doing so. That particularly concerns those approaching the age of 75 at the moment. I regret to tell your Lordships that I am not in that category.

The important point is that life expectancy has undoubtedly risen. That is not in dispute. It is interesting to look at the history of the matter. As far as we can establish, the argument for taking one's pension pot in the form of an annuity dates back as far as 1921. In 1956, the age of 70 was established. Very interestingly, in 1976, only 20 years later, it was raised from 70 to 75. It is a long time since 1976, a longer time than elapsed before the previous increase. It seems not unreasonable to suggest that the time has come for the age to be raised to 80. That would mean that many people would have discretion to delay taking their annuity, if they wished to do so.

I shall make one point absolutely clear. The original amendment is established Conservative policy, and we shall bring it in as soon as we come into office—I believe in a comparatively short time. That is our clear position, and that is what we want to go for. None the less, there is a case for raising the limit now to help those approaching 75, and the amendment would do that.

On life expectancy, the noble Baroness referred to a letter, a copy of which the noble Lord, Lord Oakeshott, was courteous enough to send to me. As the noble Baroness has pointed out, he also sent a copy to the press and she did not have an opportunity to make it clear whether she had or had not misled the House, as the noble Lord suggested. That was unfortunate. It was not in line with the way in which we would normally behave in this House. It would have been better if the noble Lord had waited for a reply before going public on the issue. The argument that the noble Baroness has put forward this evening for why she quoted the figure, and why she does not believe it was misleading, is very technical. We wait to see what point the noble Lord, Lord Oakeshott, makes in response to what she has said. What is beyond doubt is that life expectancy has risen, which strongly supports the Motion that I am moving as a response to the Commons rejection of the amendment that we originally proposed in another place.

I have a couple more points. First, the noble Baroness says that the amendment will help only the rich. We reject that view. We do not believe that the amendment, or the other one, helps only the rich. Many people, who perhaps have retired, have more than one pension arrangement and have not cashed in—and may not now wish to cash in—their pension pots. However, they are not necessarily well off at all, but they may have kept a little in reserve and want to cash it in when they think that the moment is right. They would be helped by our original amendment, and they would be helped by what I now propose. They are not in any way only the privileged few—a slightly pejorative expression that the noble Baroness has used. A discussion took place in the other place about how many pensions individuals might have, but I shall not go into that issue.

In her closing remarks the noble Baroness said that we had had a marvellous report from Turner. It set out the arguments very clearly, but I do not believe there was much that was new either to the noble Baroness, myself or to many noble Lords. It is inconceivable that Mr Turner could succeed in thinking up any argument on this issue that we have not heard already. I cannot believe that he is so original in his methods of thinking that he would be able to do that. We know all the arguments on the issue. I believe that they support the amendment that I have pleasure in moving. I very much hope that the House will accept it. I beg to move.

Moved, as an amendment to the Motion that the House do not insist on its Amendment No. 359, to which the Commons have disagreed for their reason numbered 359A, at end insert "but do propose Amendment No. 359B in lieu thereof".—(Lord Higgins.)

Photo of Lord Oakeshott of Seagrove Bay Lord Oakeshott of Seagrove Bay Shadow Minister, Treasury 6:45, 17 November 2004

My Lords, let me start by making it clear that noble Lords on these Benches support the amendment. If we had been able to do so, and it were not a Motion which could carry only one signature, we would have put our names to it.

I shall return in a moment to the short substantive reasons why we support the amendment. Clearly, in view of the noble Baroness's opening remarks I should say a few words on that topic. I am sorry that I upset her with the points I made and with my questioning on this final area of disagreement after we all agreed that after Third Reading the Bill generally left this House much improved by the efforts on all sides.

I want to make it clear that there is a wide discrepancy between the figures the noble Baroness gave and those in the Turner report. The Turner report says—and I will explain how this came about—that it took the Government Actuary's 2002 base projections as its base case assumptions. It then points out that by 2004 the Government Actuary's department—that is what Turner is talking about; it is not something it has dreamt up—said that life expectancy at 65 would be 14.8 years and that today it is believed to be 19 years. That is what I was basing my figures and my request on.

Obviously, in normal circumstances if we had been in Grand Committee or something like that and there was no time pressure, one would wait. However, as soon as I read the noble Baroness's remarks in Hansard I rang up her private office. I was told what her figures had been based on. In particular, let me point out—and I shall be interested when we get the technical notes; we do not want to go into too much detail today—that office said to me quite clearly that the figures she had given me were based on a 2001 projection of 16 years, even on the basis that she prefers. I said, "Please send me any more information if you can".

However, in the situation we were in, with the matter coming up in the House of Commons in the afternoon, it was exceptionally important that we got our position across and on the record and also that my honourable friend Steve Webb was able to raise the matter.

I listened carefully to the Minister. She said that life expectancy at 65 is now 82. Is it not the case that, even on her own basis, life expectancy is now 17 years and not 16 years? So, obviously to that extent we would welcome a correction.

We support the substance of the amendment. Clearly, the exact level at which one puts the cap depends to some extent on what view one takes of life expectancy. But the principle of a substantial increase on 75 is incontrovertible, whichever life expectancy rate increase one prefers.

I have some sympathy with the arguments expressed both in this and the other House by the Government on the question of who will benefit. It is not only rich people who will benefit. But I think that we should accept that on balance this will be of more benefit to better-off people. That does not mean that just because people are better off they should not be treated fairly and that the rules for them should not reflect major changes in life patterns and life expectancy.

So, even accepting that, we believe that this is a sensible amendment. The time is long overdue, if not for this restriction to be abolished, at least for it to be substantially increased. On that basis, we strongly support the amendment.

Photo of Lord MacGregor of Pulham Market Lord MacGregor of Pulham Market Conservative

My Lords, I was fascinated by the Minister's concluding paragraphs—if I heard them aright. After spending about nine-tenths of her time explaining why her mind was set absolutely against this proposal, she gave herself a let-out clause—an escape hatch, as it were. She finished by saying that she recognised that this was one of the few elements of compulsion in the pension scene. She recognised all the arguments about life expectancy and longevity and that if the Pensions Commission came back with different arguments in favour of it that she would be prepared to look at that.

Of course, all that was based simply on the increase in life expectancy. We know that already. We do not need to be told that by the Pensions Commission. So I think that the Minister was giving herself a little bit of an escape hatch, but actually we do not need it; we know already.

I want briefly to make three points in support of the amendment. First, the Minister spent some time saying—and certainly she is correct for many people—that over the piece one would have better returns from taking the annuity earlier rather than waiting until a much later age. That is not the point. In many cases that would be true and many people would be advised to do that. But it is not for the Government to say that; it is for individuals to make their own decisions on these matters. There is a question of choice here, to which my noble friend Lord Higgins referred in his speech when winding-up the other day. I entirely agree that it is a very important element in this argument.

Secondly, the Minister talked a great deal about avoiding inheritance tax as a result of raising the age to 85 or removing the requirement altogether. I have to say that in the vast majority of cases the inheritance tax would be 40 per cent on those sums if they were passed on and not consumed during the person's lifetime. So there is a tax taken at the end of the day in return for the tax benefits that are gained from making the contributions to the personal pension in the first place.

Finally, I want to make one point about the current age cut-off. In our last debate the Minister made the point, quite fairly, that interest and annuity rates are lower now. The annuity rates are lower partly in response to low inflation. So, if low inflation continues people are not particularly worse off from having lower interest rates.

That argument is based entirely on the supposition that inflation rates will remain where they are. I challenge anyone to suggest that that will necessarily be true. So what about the situation where somebody aged 73 has to take out an annuity at a very low annuity level because of low interest rates and four years later finds that inflation starts to move ahead substantially again? That would have been a wrong decision to make, forced by the compulsion of taking an annuity at the age of 75. I think that that is a very good reason for raising the age barrier from 75 to give people the individual choice. That is why I strongly support the amendment.

Photo of Lord Monson Lord Monson Crossbench

My Lords, I shall certainly support the noble Lord, Lord Higgins, in the Division Lobby tonight. Perhaps I may tentatively suggest to him that, assuming he wins and the other place rejects his amendment, it would be sensible to compromise tomorrow by splitting the difference and proposing an age of 80 for the compulsory taking out of annuities.

The noble Lord, Lord Oakeshott, believes that people are living a full six and a half years longer on average than was forecast when the annuity rules were first framed. The noble Baroness at one point seemed to suggest that it was three and a half years and at another point that it was six years, but one way or another it is certain that there is increased longevity compared to a couple of decades ago.

If you average out those forecasts they come to a little over five years. So I think that there really can be no excuse for not raising the age to at least 80.

Photo of Baroness Hollis of Heigham Baroness Hollis of Heigham Parliamentary Under-Secretary, Department for Work and Pensions, Parliamentary Under-Secretary (Department for Work and Pensions)

My Lords, I will be very brief. I know that there is other, even more urgent business awaiting your Lordships. The noble Lord, Lord Higgins, raised two points, of which the substantive one was echoed by the noble Lord, Lord MacGregor. The first point was the point of privilege. The noble Lord has experience of the other place that I do not. I can only tell him what I understand to be the situation. As I understand it, privilege includes the extension of tax relief, which is the effect of the noble Lord's amendment and which is therefore interfering with financial arrangements. I am therefore assured that, on the grounds that I cited—this is not to argue against the noble Lord's amendment, but on the grounds for rejecting the original amendment—privilege therefore applies. However, like others, I am now reading my brief on that point.

On the substantive point, which the noble Lord, Lord MacGregor, also made, pension provision is voluntary. No one has to save in a pension pot through a money purchase scheme if he chooses not to do so. Indeed, many people today are going for buy-to-let and other arrangements. If they choose to save in a pensions pot, they understand that they will be required to annuitise but, in order to attract people to that pension pot knowing that they will be required to annuitise, they will enjoy the benefits of tax relief that effectively roll-up in value to something like 55p in the pound. Having chosen that pension pot—there was no compulsion—they then, having attracted the tax relief that has artificially inflated that pension pot courtesy of taxpayers, normally with far lower incomes than they and often without themselves having an occupational scheme, want to turn it into both a savings draw-down account and a potential legacy.

My argument is that basically, if people enter a pension pot arrangement, they know what the rules are and that, as a result, they attract extremely generous tax relief that other sections of society do not attract. If, instead, they want not to turn it not into an annuity, but into a savings pot or a legacy, they have other vehicles with which to save, ranging from property to fine art and fine wine: take your choice. We do not have to seek to deform—I use the word advisedly—an annuity arrangement in order to ask it to do other things.

There may be a philosophical difference between us on this, but that is the Government's position. People entered that arrangement voluntarily. Having done so and attracted hugely generous tax relief, they now seek to change the original contract, so to speak, with the taxpayer under which they entered an annuity arrangement. I understand the argument about longevity, and so on. We can argue about that. In response to the noble Lord, Lord Oakeshott, I understand that the difference between 2001 and 2003 is 0.3 years but, as I said, we will tease that out in some of the technical papers.

Photo of Lord Oakeshott of Seagrove Bay Lord Oakeshott of Seagrove Bay Shadow Minister, Treasury

My Lords, is life expectancy on that basis, as both she and Mr Wicks yesterday at the other end of the Corridor appeared to say, 17 years or 16?

Photo of Baroness Hollis of Heigham Baroness Hollis of Heigham Parliamentary Under-Secretary, Department for Work and Pensions, Parliamentary Under-Secretary (Department for Work and Pensions)

My Lords, as I said, it is 0.3 years extra. The figure for 2001, on which I drew originally, gave a life expectancy of 16 years for men at the age of 65. The figure for 2003, two years later, has become 16.3. I said just now that it was 0.3 years extra and have now spelt that out in detail. That is on the same basis of the period of life expectancy.

I return to the original point. We cannot accept the noble Lord's amendment, or even the so-called compromise being offered from other Benches. Our position rests that we believe that the arrangements for annuities now are very generous in tax privilege terms. Between the ages of 50 and 75, people must take their annuity pot. Of course people would like low inflation and high annuity rates. Would not we all? But we know that that is not the world in which we live. Of course annuities are pooled risk but, at the end of the day, a pension pot and the requirement to annuitise was a contract voluntarily entered in to and then greatly enhanced by taxpayers, some of whom will be much worse off than those benefiting from those arrangements. We have not yet heard any arguments that suggest that we should disturb that arrangement.

If the Adair Turner commission reports differently, the Government will obviously take that into account. As I made clear in my statement, we will consider any of its recommendations with care and urgency. Your Lordships would not expect me to go beyond that: I do not know what it will recommend and cannot predict what our response would be to any recommendations that it may make. To suggest that we are somehow denying choice to people when their original choice was made to enter a pension arrangement and therefore an annuity is unreasonable. I hope that, with that explanation of our philosophy—that we believe that what we are arguing is fair and reasonable and that we do not think it right to deform the original intention of that pension contract, which was designed to ensure a secure income in retirement—your Lordships will reject the amendment.

Photo of Lord Higgins Lord Higgins Shadow Minister, Economic Affairs

My Lords, I shall make only two points. First, I do not believe that the amendment alters—that is the crucial word—tax relief. Secondly, it is right that we should press for a change to the age of 85. Given that all the legislation—and this Bill is at the end of the queue—is right up against the buffers, I very much hope that when the Bill goes to another place, it will accept that an amendment of this sort is appropriate. We have deployed nearly all the arguments; I do not intend to repeat them now. I seek to test the opinion of the House.

On Question, Whether the said amendment (No. 359B) shall be agreed to?

Their Lordships divided: Contents, 207; Not-Contents, 136.

Division number 2 Private Parking: Ports and Trading Estates — Lords Amendment

Aye: 205 Members of the House of Lords

No: 134 Members of the House of Lords

Aye: A-Z by last name


No: A-Z by last name


Resolved in the affirmative, and amendment agreed to accordingly.

Motion, as amended, agreed to.