Clause 155 - Pension rules

Finance Bill – in a Public Bill Committee at 3:00 pm on 8th June 2004.

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Photo of George Osborne George Osborne Conservative, Tatton 3:00 pm, 8th June 2004

I beg to move amendment No. 284, in

clause 155, page 139, leave out lines 22 to 26 and insert—

'No payment of pension other than—

(a) a scheme pension,

(b) a lifetime annuity, or

(c) unsecured pension, if the member has not reached age 80, or

(d) alternatively secured pension, if the member has reached age 80'.

Photo of Mr John McWilliam Mr John McWilliam Labour, Blaydon

With this it will be convenient to discuss the following amendments:

No. 285, in

clause 155, page 139, leave out lines 34 to 41.

No. 286, in

clause 155, page 139, line 42, leave out

and insert

'6'.

No. 221, in

clause 157, page 141, line 1, leave out from beginning to end of line 5 and insert—

'No payment of pension other than

(a) a scheme pension,

(b) a lifetime annuity, or

(c) unsecured pension, if the dependant has not reached age 80, or

(d) alternatively secured pension, if the dependant has reached age 80'.

No. 222, in

clause 157, page 141, leave out lines 13 to 20.

No. 223, in

clause 157, page 141, line 21, leave out

and insert

'5'.

No. 229, in

schedule 28, page 423, line 2, leave out '75' and insert '80'.

No. 230, in

schedule 28, page 423, line 9, leave out '75' and insert '80'.

No. 231, in

schedule 28, page 423, line 13, leave out '75' and insert '80'.

No. 232, in

schedule 28, page 423, line 24, leave out '75' and insert '80'.

No. 233, in

schedule 28, page 423, line 41, leave out '75' and insert '80'.

No. 234, in

schedule 28, page 423, line 43, leave out '75' and insert '80'.

No. 235, in

schedule 28, page 425, line 3, leave out '75' and insert '80'.

No. 236, in

schedule 28, page 425, line 6, leave out '75' and insert '80'.

No. 237, in

schedule 28, page 425, line 11, leave out '75' and insert '80'.

No. 238, in

schedule 28, page 428, line 4, leave out '75' and insert '80'.

No. 239, in

schedule 28, page 428, line 11, leave out '75' and insert '80'.

No. 240, in

schedule 28, page 428, line 15, leave out '75' and insert '80'.

No. 241, in

schedule 28, page 428, line 34, leave out '75' and insert '80'.

No. 295, in

schedule 28, page 428, line 36, leave out '75' and insert '80'.

No. 242, in

schedule 28, page 429, line 46, leave out '75' and insert '80'.

No. 243, in

schedule 29, page 431, line 1, leave out '75' and insert '80'.

No. 245, in

schedule 29, page 433, line 19, leave out '75' and insert '80'.

No. 296, in

schedule 29, page 434, line 27, leave out '75' and insert '80'.

No. 244, in

schedule 29, page 433, line 4, leave out '75' and insert '80'.

No. 246, in

schedule 29, page 435, line 35, leave out '75' and insert '80'.

No. 247, in

schedule 29, page 436, line 15, leave out '75' and insert '80'.

No. 248, in

schedule 29, page 436, line 36, leave out '75' and insert '80'.

No. 249, in

schedule 29, page 437, line 4, leave out '75' and insert '80'.

No. 250, in

schedule 29, page 437, line 29, leave out '75' and insert '80'.

No. 251, in

schedule 29, page 438, line 6, leave out '75' and insert '80'.

No. 253, in

schedule 29, page 438, line 27, leave out '75' and insert '80'.

No. 254, in

schedule 29, page 438, line 34, leave out '75' and insert '80'.

No. 255, in

schedule 29, page 439, line 3, leave out '75' and insert '80'.

No. 256, in

schedule 29, page 439, line 12, leave out '75' and insert '80'.

No. 257, in

schedule 29, page 439, line 31, leave out '75' and insert '80'.

No. 258, in

schedule 29, page 440, line 24, leave out '75' and insert '80'.

No. 259, in

schedule 29, page 440, line 29, leave out '75' and insert '80'.

No. 260, in

schedule 29, page 450, line 3, leave out '75' and insert '80'.

No. 261, in

schedule 32, page 450, line 5, leave out '75' and insert '80'.

No. 262, in

schedule 32, page 450, line 25, leave out '75' and insert '80'.

No. 227, in

clause 177, page 151, line 36, leave out '75' and insert '80'.

No. 228, in

clause 205, page 172, line 27, leave out '75' and insert '80'.

No. 263, in

schedule 32, page 453, line 4, leave out '75' and insert '80'.

No. 264, in

schedule 34, page 474, line 24, leave out '7' and insert '6'.

No. 266, in

schedule 34, page 482, line 17, leave out '75' and insert '80'.

Photo of George Osborne George Osborne Conservative, Tatton

Clause 155 is one of the most important clauses in this area of the Bill. It sets out the pension rules and the terms under which payments can be made to members. The Government have set out seven rules. My amendments try to achieve two things. The first is relatively straightforward: to advance the cause of simplification, to pick up on a theme from this morning's sitting. We are trying to achieve that by merging pension rules 4 and 6 into a simple rule about the kind of pension payments that are allowable to members or dependants—there are links with amendments that affect the payment of pensions to dependants. In our view, it is more elegant to have one rule about the payment of pensions, rather than two.

The only reason for having a separate pension rule 6 is to draw a distinction between an unsecured pension, which is available only up to a specified age of 75—we will come to that—and an alternatively secured pension, which is available only after the specified age. Our amendments would simplify matters and merge

the two pension rules, which we think can be dealt with at the same time. We want to help the Financial Secretary to simplify things.

The much larger purpose of the amendments—this is a much more substantial point—is to raise the age at which people can no longer draw down an unsecured pension from 75 to 80. This is the first of three attempts that we are going to make to deal with the annuity issue. I can see hon. Members getting excited about that. The other two attempts will be made when we deal with the next two groups of amendments, one of which deals with alternatively secured pensions. The other is a catch-all group that would remove the requirement to purchase an annuity altogether.

Opposition Members, the industry and more generally the public are disappointed that the Government have not taken the opportunity of these pension provisions to remove the outdated rule that prevents responsible people who have saved for their retirement and provided themselves with a pension from continuing to draw down sensibly from a pension fund and to invest the funds. There have been many attempts in this House in recent years—the Financial Secretary has rebutted most of them—to change the rules, Mr. McWilliam. Your fellow Chairman, my hon. Friend the Member for Bournemouth, West (Sir John Butterfill), introduced a private Member's Bill to try to achieve that, and my hon. Friend the Member for Grantham and Stamford (Mr. Davies), who is taking part in a Select Committee this afternoon, tried to achieve it in 1999. That is the broader point about the requirement to buy an annuity.

We are discussing the cut-off age of 75. Surely there is no logical case for keeping the age at 75. As I understand it, the age of 75 was first identified in the 1988 legislation that established the upper and lower limits of retirement. It established that people could retire at 50, but by 75 they had to take on a compulsory annuity. In legislation in 1995, there was a substantial change: the compulsory annuitisation requirement was removed. By the way, there was always the possibility of taking a lump sump, which we will discuss later. The requirement of compulsory annuitisation in the 1988 legislation was removed in the 1995 legislation and people could draw down their income until they reached the age of 75. So, the age of 75 was a feature of legislation introduced by previous Conservative Governments.

However, two big things have changed. First, life expectancy has continued to increase—I assume that that is something that we all welcome—over the past 16 years. It has increased quite a lot, even on the Government's figures. It is always heartening to read about increasing life expectancy. The graph on page 20 of the Government's December 2002 consultation document does not provide an absolutely accurate scale on the left-hand side. However, it shows that a man aged 50 in 1991 could expect to live a further 26 years. By 2001, that increased to 28 years, and the prediction is that by 2011 it will increase to 30 years. The document does not have a table for life expectancy of women. I understand that the life expectancies of men and women are converging.

Photo of Mr John McWilliam Mr John McWilliam Labour, Blaydon

Order. Although the hon. Gentleman is cheering me enormously at my age, he really must relate his comments to the 75 mark, as 74, 76 or any number either side of 75 does not really matter.

Photo of George Osborne George Osborne Conservative, Tatton

Thank you for your guidance, Mr. McWilliam. My point is that, when the age of 75 was introduced in legislation, life expectancy was lower than it is now. Therefore, there is a strong case for raising the age from 75 to 80, which is what our amendments seek to achieve. Of course, that was precisely the argument used by the Government in their consultation paper and in legislation for raising the minimum retirement age by five years, from 50 to 55. Indeed, the consultation document states:

''At the moment the tax rules permit pension schemes to allow early retirement for people as young as 50. This age was set when life expectancies were much shorter''.

It then provides the chart.

If the Government raised the minimum retirement age by five years because life expectancies changed, why do they not raise the age at which one is required to buy an annuity by five years, from 75 to 80? Based on their logic, I would have thought that that was absolute, plain common sense. One can understand why 75 was chosen in 1988. I was not involved in the decision, as I was taking my A-levels at the time.

Photo of Steve Pound Steve Pound Labour, Ealing North

There is not much evidence of it.

Photo of Mr John McWilliam Mr John McWilliam Labour, Blaydon

Order. I was chairing the Finance Bill Committee.

Photo of George Osborne George Osborne Conservative, Tatton

In 1988, a man aged 50 could expect to live another 25 years. Now, a man aged 50 can expect to live a further 30 years. The logic of keeping the number at 75 defeats me.

The Government are reducing choice and flexibility by reducing the period during which people can draw down income with an unsecured pension. If the legislation goes through unamended, the potential draw-down period will decrease from 25 years to 20 years. Legislation that is supposed to increase choice and flexibility will actually achieve precisely the opposite.

Photo of Rob Marris Rob Marris Labour, Wolverhampton South West

Will the hon. Gentleman explain to me, because I do not know, what would happen in the current situation if someone drawing down their pension dies aged 74—or, under his amendment, aged 79? What would happen to the pension pot and to the tax?

Photo of George Osborne George Osborne Conservative, Tatton

Either the pension, or a lump sum with a 35 per cent. tax charge, will be passed to the dependant, or something like that will happen. I shall leave it to the Financial Secretary to answer that question. Frankly, as it is all a long way off for me, I do not have to focus on such matters. I believe that my answer is right, but the Financial Secretary can correct me if it is wrong.

Based on the logic of the Government's argument, they should use the legislation to increase the mark, if not to abolish the requirement to buy annuities. I grant that the alternatively secured pension is a chink—

[Interruption.] It effectively does that, as my hon. Friend the Member for Arundel and South Downs says, but the requirement either to choose an alternatively secured pension or an annuity at the age of 75 is a little anachronistic, even according to the Government's own logic. At the least, they should be increasing the age to 80, which would have a similar effect to the introduction of the 75-age mark in 1988. A similar number of people would be affected. A lot of people would be taken out of the requirement to buy an annuity or an alternatively secured pension because they would die between the ages of 75 to 80. Fixing the 75-age mark in 1988 had a similar result.

Owing to the logic of the Government's argument set out in their consultation documents, I am extremely confident that the Financial Secretary is about to accept my amendments.

Photo of Ruth Kelly Ruth Kelly Financial Secretary, HM Treasury 3:15 pm, 8th June 2004

When looking at the amendments, I rather suspected that this might turn out to be a rehash of the debate that we have had so many times across the Floor of the House about the requirement to annuitise at the age of 75. I shall deal with some of the points that the hon. Gentleman raised. He is right to say that life expectancy has risen. That was not, however, the reason that we increased the minimum pension age to 55. We did that because we wanted to encourage active ageing. We wanted people to be part of the labour force for longer and to give them more opportunity to use their skills and talents, in this place as elsewhere.

Photo of Mr John McWilliam Mr John McWilliam Labour, Blaydon

Order. As someone who is actively ageing, I hope the Financial Secretary is not having a go.

Photo of Ruth Kelly Ruth Kelly Financial Secretary, HM Treasury

I certainly aspire to be in your position in future, Mr. McWilliam. We ought to give such opportunities to people much more widely. Far too many people are currently forced out of the labour market unduly early. We want to give them opportunities to use their creative talents to contribute to the economy, to fulfil themselves and to save more in the process, so that they can better fund their retirement when they choose to retire.

Photo of George Osborne George Osborne Conservative, Tatton

The Financial Secretary is talking all this guff about giving people the chance to work longer and so on. It is a mandatory requirement, which we shall come on to. She says that it has nothing to do with life expectancy, but the Government's consultation document says that the age of 50

''was set when life expectancies were much shorter.''

It then includes a great big chart about life expectancy. Therefore, life expectancy is the argument used by the Government for the minimum pension age. Why is it not the argument used for raising the top end of the pension range from 75 to 80?

Photo of Mr John McWilliam Mr John McWilliam Labour, Blaydon

Order. The phrase, ''all this guff'' is not of itself unparliamentary, but it is certainly ungentlemanly.

Photo of Ruth Kelly Ruth Kelly Financial Secretary, HM Treasury

Of course, if life expectancy had fallen, we would not be in a position to advance our argument. The fact is that people are living longer and we want them to be able to use their talents and skills in the work force to contribute to the economy and to develop themselves in the process. It is only right that they should have the opportunity to do that and, while doing that, to save better to fund their retirement in future. However, the argument about the age at which they are to annuitise their income and secure an income for the rest of their lives is a completely different one. Out of every £100 that goes into someone's pension fund, £30 is Government money in the form of tax relief, designed to enable people to secure an income for the rest of their lives. We give that money for no other reason than to ensure that people are able to support themselves in retirement. We expect people, by a certain age, to avail themselves of the opportunity of an annuity.

Photo of Mr Howard Flight Mr Howard Flight Shadow Chief Secretary To the Treasury, Economic Affairs, Shadow Chief Secretary to the Treasury

First, with the greatest respect, it is not Government money that she refers to. It is people's own money, and it is a question of whether they are allowed to keep it or not. Secondly, the age of 75 was knowingly set as being at or around life expectancy at the time. There is a sound argument for saying that, if it has risen by five years and the same principle is retained, whatever the opinion about that, the age at which people are compelled to buy an annuity should be 80, which is today's equivalent of 75. It is a valid proposition to update that aspect without sacrificing the Government's beloved but mistaken principle that an annuity must be bought.

Photo of Ruth Kelly Ruth Kelly Financial Secretary, HM Treasury

The hon. Gentleman should have contained himself for a moment longer because I did not even begin to address the point about the age of 75 and whether it was a reasonable assumption in today's climate. I was arguing that the minimum pension age may have been increased because of longer life expectancy, but the rationale driving the reform was that we wanted people to have the opportunity of actively using their skills and talents in the work force for longer. Part of the process of active ageing is to encourage and to enable people to stay in the work force for longer. Pensioners benefit not only from £30 from the Exchequer for every £100 in their pension pot, but from the tax-free environment, so it is arguable that the benefit is significantly greater than that sum. We could have a long debate on whether that is Exchequer money or individuals' money, but we are not here to discuss the semantics of that point.

The hon. Member for Tatton argued that there was no logical reason for keeping the age at 75. I suggest that there is. In preparation for this afternoon's debate, I spent some time over lunch revisiting the February 2002 consultation document, ''Modernising Annuities'' to refresh my memory about the concept of mortality drag, which I know will be of interest to hon. Members. Rather than rehearsing all the arguments about mortality drag, perhaps I could merely refer hon. Members to that document, which contains a useful box explaining precisely what that is.

The essence of the argument is that, while annuity rates increase as people age and some pensioners believe that it is in their interests to wait for a higher annuity rate when they have a shorter time to live—insurance companies provide higher annuity rates for older pensioners—it becomes more difficult for them to obtain a similar investment growth on their investments to that offered by an annuity. In the early years of retirement, it is possible to achieve higher rates from investment funds, but in the later years of retirement it becomes increasingly difficult. Deciding where the cut-off comes is not a precise science, but the consensus today is that it is around the age of 75, just as when the matter was considered previously.

We certainly considered the matter in some depth when preparing the consultation document, ''Modernising Annuities''. Good financial advice today would still advise people to take an annuity at or around the age of 75. That makes good commercial sense.

Photo of Rob Marris Rob Marris Labour, Wolverhampton South West

Does the Minister share my surprise that the Opposition's amendment seems to be more or less to force men to buy an annuity on the day before they drop dead at the age of 80?

Photo of Ruth Kelly Ruth Kelly Financial Secretary, HM Treasury

My hon. Friend makes his own point.

If the intention is to pass capital on to heirs because people die before they are forced to buy an annuity, this is not the place for that debate. We had that debate, which is altogether different, on the Floor of the House. I have argued several times that that reform could cost the Exchequer hundreds of millions of pounds. I am sure that we shall return to the matter, but there is no provision for people who do not believe in the pooling of risk to take an alternatively secured pension after the age of 75, although I suggest that good financial advice would be that people take out an annuity by that age. For those reasons, the amendments are inconsistent with Government policy.

Photo of David Laws David Laws Shadow Chief Secretary to the Treasury

Since the Financial Secretary has said that longevity is not a factor in setting the annuity rate at age 75, can she clarify what changes in economic circumstances or retirement age would change her view about the age that has been set?

Photo of Ruth Kelly Ruth Kelly Financial Secretary, HM Treasury

Clearly, if the impact of mortality drag were to change significantly and good financial advice were to suggest that 75 was no longer a reasonable assumption, that would be the time to reopen the debate. At the moment, that is not the case. There has not been a fundamental change. Good financial advice still suggests that people should buy an annuity at around the age of 75. It is the efficient way to secure oneself a decent income in retirement. Given the amount of Exchequer support for pensions, that is what we expect the money to be used for.

The hon. Member for Tatton made a point about the simplification of the rules. The two rules, however, provide for completely different situations. One provides for unsecured income up to the age of 75, the other provides for an alternatively secured pension after the age of 75. I am advised that, as they cover

different circumstances, the rules could not be merged satisfactorily. If he provides evidence to the contrary, I will be willing to listen. However, on grounds of principle, I urge hon. Members to reject his amendments.

Photo of George Osborne George Osborne Conservative, Tatton

I am afraid that I am not entirely convinced by the Financial Secretary's arguments. She did not address a couple of my points. It had to be pointed out to her that the Government used life expectancy as a reason to raise the minimum retirement age. I know that she talks about people having a more active working life in their older age, but what the Government are talking about is a mandatory increase in retirement age by five years. They base their argument for that on life expectancy. It defeats me why the same logic does not apply to the 75 mark.

Nor did the Financial Secretary respond to my point about the constriction of choice. Under the proposals, the period in which people can draw down unsecured income will be cut from 25 years to 20 years. That is a restriction of choice in what is supposed to be a package of reforms that increases choice and flexibility.

Much of the Financial Secretary's argument rested on the fact that good financial advice suggests that one should buy an annuity. That may be the case, and people are perfectly entitled to take good financial advice or not to do so. Other people may disagree with that advice. Other advisers may say, ''Go on drawing down the income, or investing it in the way that you have''.

Photo of Mr Howard Flight Mr Howard Flight Shadow Chief Secretary To the Treasury, Economic Affairs, Shadow Chief Secretary to the Treasury

It seems strange that the Financial Secretary takes no notice of the fact that all the surveys that have been done show an overwhelming wish by those approaching 75 not to be forced to buy an annuity. Indeed, if they are doing a draw-down, they are likely to be capable of looking after their affairs satisfactorily.

Photo of George Osborne George Osborne Conservative, Tatton

My hon. Friend makes a crucial point, which is that we are talking about people who have been responsible enough to provide for their old age, have a pension and manage their affairs successfully throughout their life. They are not about to spend the whole lot, run out of money and fall back on the Exchequer. Indeed, in previous legislation, devices were used to protect the interests of the Exchequer by, for example, requiring people to take out an annuity that covered at least the minimum pensioner income.

I am not convinced by what the Financial Secretary said. I think that the provision is a hangover from the past. It is a shame that she has not used the opportunity, if not to abolish the compulsory annuitisation requirement, at least to increase the age at which it kicks in from 75 to 80. Therefore, with your permission, Mr. McWilliam, I will press the amendment to a Division.

Question put, That the amendment be made:—

The Committee divided: Ayes 5, Noes 14.

Division number 3 Adults Abused in Childhood — Clause 155 - Pension rules

Aye: 5 MPs

No: 14 MPs

Ayes: A-Z by last name

Nos: A-Z by last name

Question accordingly negatived.

Photo of George Osborne George Osborne Conservative, Tatton

I beg to move amendment No. 332, in

clause 155, page 139, line 45, leave out '70%' and insert '100%'.

Photo of Mr John McWilliam Mr John McWilliam Labour, Blaydon

With this it will be convenient to discuss amendment No. 334, in

clause 157, page 141, line 24, leave out '70%' and insert '100%'.

Photo of George Osborne George Osborne Conservative, Tatton

We now come to two amendments to the new concept of an alternatively secured pension. It is a fairly innocuous name for a pretty radical departure from everything that the Government and the Financial Secretary have ever said about the requirement for people over 75 to buy an annuity.

The concept of an alternatively secured pension appeared out of the blue in the second consultation paper in December 2003. It appeared without its own heading or section, and it just said in passing that

''some religious groups have principled objections to the pooling of mortality risk and need to be accommodated by the new rules. The Government, therefore, proposes to allow pension income to be delivered after age 75 through Alternatively Secured Income (ASI).''

In other words, despite the debate that we have just had in Committee, the Government are actually scrapping the requirement to buy an annuity and going a long way towards what my hon. Friend the Member for Arundel and South Downs has been calling for over many years. We have trooped through the Division Lobbies on Fridays, turned up to support private Members' Bills

Photo of Richard Bacon Richard Bacon Conservative, South Norfolk

And defeated the Government.

Photo of George Osborne George Osborne Conservative, Tatton

My hon. Friend reminds me that on occasion we have defeated the Government—on a Friday. That is not quite the same achievement as defeating a government on a Monday to Thursday, but it is still good when it happens. We have done all those things and tabled amendments in Committee sittings for private Members' Bills all to achieve something that the Government are now implementing, although they do not go far enough, hence my amendments.

The Government say that they are introducing the measure to respond to the genuine concerns of certain religious organisations, principally the Christian

Brethren, who have deeply held beliefs preventing them from participating in insurance products because they involve the pooling of mortality risk. For those who are interested, the Brethren have held that view since 1828. They take their guidance from Corinthians, where we are told:

''Ye are not your own for ye are bought with a price.''

Apparently, the Brethren have interpreted that as, ''You cannot have an annuity.'' The Book of Timothy says:

''if any provide not for his own, and specially for those of his own house, he hath denied the faith, and is worse than an infidel.''

Obviously, the Christian Brethren have a bit of a disincentive to take out annuities.

Over the past couple of days, I read the Hansard reports of our debates on the subject, and it is clear from them and from what the Financial Secretary says that she takes a personal interest in the subject and has worked hard to find a solution to the Brethren's problem; she deserves credit for introducing the proposal. The Christian Brethren are extremely grateful. They sent a letter to my hon. Friend the Member for Arundel and South Downs, which says:

''We would like to thank you, on behalf of the Brethren, for your constant support in our appeal to Ministers to obtain a pension provision that would accord with our beliefs.

As a result of many representations over the last six years, Ministerial direction has been given to the Inland Revenue which has resulted in'' the relevant clauses. The letter continues:

''This scheme suits our conscience, and although we will then need to find a provider of the scheme, we are grateful for the provision in the Bill.

If it is opportune, and you so wished, any thanks that could be voiced to the Minister during discussion of these sections would be appreciated.''

We have fulfilled our duty to the Brethren by passing on our thanks. It is important to put that on the record.

The irony is that the Government's previous objections to helping the Christian Brethren drove the Brethren and those who supported them to find ever more complex and ingenious solutions to their problem and to getting round the objections of the Inland Revenue. In one recent piece of legislation, we came up with the idea of a retirement failsafe fund, in which people could invest their pensions, and which would be certain to provide an income at least equivalent to the minimum retirement income. That was put into a Bill promoted by my right hon. Friend the Member for Skipton and Ripon (Mr. Curry).

What was striking to those who followed what was happening was that the Government suddenly swept all that aside and said, ''There is a simple solution to this: we will introduce the alternatively secured pension,'' because that is what it is. By the way, it is not secured in any real sense of the word—that is a bit of a misnomer. It is unsecured income, as is income that one draws down before the age of 75. People will be able to draw down their income from the pension fund; the principal restriction, however, is that they must draw no more than 70 per cent. of what could be generated by an annuity bought for someone of the same age and sex.

The amendment would change the 70 per cent. to 100 per cent., so that someone on an alternatively secured income with the deeply held beliefs that we have discussed could draw down what would be available to them if they went out and purchased an annuity.

Of course, there is an important check; the Inland Revenue is concerned that people would dissipate their funds, so under the Bill there will be an annual check of how much is left in the pot. That will be recalculated annually. Given that, under the amendment, one could draw down a limit of 100 per cent. of what one could draw down under an equivalent annuity, and given that there will be an annual review, it would not be possible for people to fritter away their fund and fall back on the state. That is the thrust of the amendment.

The Government say—probably because of the 70 per cent. restriction—that alternatively secured income is likely to be an inferior choice for those who do not have a principled objection to the pooling of mortality risk. I think that they are wrong about that, and so does the industry; it could turn out to be an extremely popular alternative, and not because we are all about to become members of the Christian Brethren or because we all have a principled objection to the pooling of mortality risk. It is worth pointing out—as if it needs to be pointed out—that there is not a requirement in the legislation to be a member of one of these religious groups that have such an objection. It is just there as an option for everyone. The Government are not reintroducing the Test Acts.

This could be a very popular alternative to having an annuity, because of what happens when someone with an alternatively secured pension dies. If that person has a dependant, such as a spouse, the money passes to them and can be used to buy an annuity, or take an unsecured pension if they are under the age of 75, or buy another alternatively secured pension if they are over 75. There is nothing spectacular in that. However, if that person has no dependant—their spouse might have died or they might never have had one—the alternatively secured pension can go to a nominated charity or to other scheme members. In other words, a tontine can be created. That is an old concept—something is divided between the remaining members.

Let me give an example of how that might work that has been suggested to me by several people in the pensions industry. I could set up the Osborne family pension scheme, the only members of which are me, my wife and my two children. That is an extremely complicated financial product for me to purchase at the moment, but I imagine that providers will make them readily available and design products that make it easy for people to set them up. I set up that scheme, and when I reach 75 I take out an alternatively secured pension. Sadly, I then die, and it passes to my wife, who also has an alternatively secured pension—not least because she is older than me, so she will definitely be over 75 by this point. She then dies. Under these rules, the remaining pension pot passes down to my children, who are the two other members of the pension scheme. They pay no tax; they do not pay any

inheritance tax on this. It forms part of their pension pot and lifetime allowance, but it is not part of their annual allowance, so it is included in the general rules of pensions. The other thing is that they cannot touch it until they are 55. However, for the first time we have the concept of pension funds passing down through successive generations.

I want to be the first to congratulate the Financial Secretary on living up to the good old Tory idea of wealth cascading down through the generations. [Hon. Members: ''Hear, hear.''] I see that she has widespread support for that on both sides of the Committee.

I am not making some obscure point; in Financial Adviser—a magazine that I know we all read avidly—there is a huge article about how this might be available to people and the benefits that it might provide. My first question is, does the Financial Secretary accept that people can have significant death benefits as a result of taking out alternatively secured pensions? Secondly, can she explain why she chose the figure of 70 per cent. for the restriction? I imagine that she will say that that is all to do with protecting the Exchequer's interests, but how and why did she come up with that figure? We have had little explanation from the Government about the alternatively secured pension, and why it exists, and why they chose 70 per cent. What about 100 per cent.? Surely, there is sufficient protection from the facts that they will only be equivalent to what people can buy as an annuity and that there is an annual check to ensure that they do not run out of money.

I could have asked my third question at another time. Why can people not have an alternatively secured pension before the age of 75? Why is it being restricted to after that age, given that there are significant death benefits?

Fourthly, why will the basis amount—which is the phrase that the Government use to indicate the equivalent to an annuity—now be calculated by the Financial Services Authority? Why have they moved away from existing Government Actuary's Department tables, which most people seem to think work well, and which did not fluctuate every day with the annuity market? What annuity rate will the FSA use? Will it be the best annuity rate available at any one time, because we know that insurance companies sometimes have special offers, or will it be the average annuity rate?

My fifth question for the Financial Secretary relates to the fact that the legislation allows for a 10-year guarantee for an alternatively secured pension. If a person takes out a 10-year ASP at 75, and unfortunately dies at 80, that pension will go on being paid to their widow or widower for five more years. How is the 70 per cent. figure then calculated? Is it 70 per cent. of the amount that the deceased would have got, or of the amount that the current beneficiary will get? Is the 70 per cent. figure applied to me as a man on my death, or to my wife who is still alive?

The sixth important point is that the Government say in the consultation paper that the calculation of the equivalent annuity rate when the person gets beyond 75 will be based on the annuity rate of a 75-year-old. In other words, when somebody is 85, they will still be required to take out 70 per cent. of the annuity available to a 75-year-old. That is grossly unfair, as has been pointed out by, for example, the Association of Consulting Actuaries. It says:

''We are unhappy with the conditions for determining the amount of the payments . . . the basis proposed is far too penal and discriminates unfairly against those who do not wish to buy an annuity on religious grounds.''

The ACA points out that a 75-year-old will get 70 per cent. of the maximum annuity available to them, but an 80-year-old will get only 55 per cent. of the maximum annuity, and an 85-year-old will get only 43 per cent., as the sum will still be being calculated on the basis of a 75-year-old's annuity. I am sure that the Financial Services Authority, or indeed the market, will respond to the demand for annuities from people of a greater age, but why is there a requirement to link the 70 per cent. only to the annuity available to a 75-year-old? That dramatically penalises people with alternatively secured pensions as they get older.

The Financial Secretary may not accept my suggestion that the issue will be widely taken up by the pensions industry, but she would be unwise not to, as I have anecdotal evidence of pensions advisers already advising people who are not members of the Christian Brethren on how to set up schemes. If her intention is to restrict this provision to people such as the Christian Brethren, having gone so far in helping them, it is completely unfair to penalise them and members of other religious groups as they get older and into their 80s and 90s and find that the alternatively secured pension becomes far less attractive. Increasing the amount to 100 per cent. would at least go some way towards dealing with that problem.

Photo of Rob Marris Rob Marris Labour, Wolverhampton South West 3:45 pm, 8th June 2004

The hon. Gentleman speaks with his usual eloquence. He knows far more about pensions than I do, but I fear that he does not understand annuities. An annuity is a bit like a mortgage in reverse. The income generated by an annuity is in part interest generated on the capital sum invested and in part capital. Contrary to what he suggested, if the figure went up from 70 to 100 per cent., an individual could run through their capital on their alternatively secured pension and become a charge on the state. The reason why annuity rates are better than simply investing the money in the stock market, for example, is precisely because the provider of the annuity gets all the capital and pays the individual part of the capital and part of the interest generated on the capital as an annuity. Ergo, unless one has a very incompetent annuity provider, the annual sum paid out must be higher under an annuity than it would be if the money was simply invested.

If the amendment was accepted and the figure went up to 100 per cent., it would be, on the alternatively secured pension, a draw-down on capital as the years went by, if the person was drawing on the whole

100 per cent. rather than the 70 per cent., and they could, at least in theory, become a charge on the state, which is the very thing that the hon. Gentleman said could not happen.

Photo of Ruth Kelly Ruth Kelly Financial Secretary, HM Treasury

We have had an interesting exchange of views so far. I am pleased that we have been able to accommodate the concerns of the Christian Brethren. Challenges have been put to the Government about our policy on compulsory annuitisation from our own side, from the Opposition Benches and from within the Government. I think that we have come to a sensible, workable compromise that allows people with strong principled objections to the pooling of risk to take advantage of pension tax relief in the system without providing an incentive for others to go down that route. I will attempt to explain why.

As the hon. Member for Tatton pointed out, the rules provide for the maximum amount that may be drawn each year, which is up to 70 per cent. of a comparable annuity. The rules ensure that the underlying pension fund assets are not depleted too quickly and that the member's pension fund may continue to provide an income throughout their retirement. The amendment would change the limit from 70 per cent. to 100 per cent.

That limit is one of the safeguards in the system to ensure that people who use this route have a relatively secure income. I will give an example of the impact of the amendment on the amount of income that may be available to a person who has taken the alternatively secured pension route. Where the maximum income at age 75 is 70 per cent. of the comparable annuity rate, and people take all of their fund into an alternatively secured pension at that age, 5 per cent. of the group could expect their maximum income to fall to a third of its initial value if they drew 70 per cent. of the comparable annuity each year. If the maximum annuity was increased to 100 per cent., as is suggested in the amendment, the proportion whose income would drop to a third would be 30 per cent. That is clearly a much more significant number.

As a Government, we have a responsibility not only to ensure that Exchequer funds are used wisely and that, as far as possible, people stay off means-tested benefits in retirement, but that people who have saved for retirement, have been cautious and have put money aside are then able to draw a decent income in retirement, without depleting their funds too early. We are talking about an extremely important safeguard in the system.

Photo of Mr Howard Flight Mr Howard Flight Shadow Chief Secretary To the Treasury, Economic Affairs, Shadow Chief Secretary to the Treasury

I asked our own pensions adviser the same point that was raised by the hon. Member for Wolverhampton, South-West (Rob Marris) and to which the Minister has just referred. The answer that was put to me was that by moving to an annual review the issue would not arise, because it would be for the Revenue to determine how much one could safely draw down under the new scheme year by year. The basic annuity principle, which could be used to argue for the 70 per cent., can be corrected by the annual Revenue check.

Photo of Ruth Kelly Ruth Kelly Financial Secretary, HM Treasury

The hon. Gentleman makes a reasonable point. However, as I was about to say, that is the second safeguard in the system. Not only do we require a maximum of 70 per cent. but we require that amount to be reviewed annually, to ensure that there is a sufficient income for life. He suggests replacing one with the other. We need both safeguards in the system to protect the security of people's income in retirement.

Perhaps we should consider for a minute why people choose to defer taking an annuity when good financial advice suggests that they should annuitise by the age of 75. Most people think about deferring the buying of an annuity. Before I come on to that, I would like to point out to Committee members that two thirds of all pensioners buy an annuity immediately on retirement, and the vast majority, 95 per cent., bought an annuity—I think—by the age of 70. Therefore, the category that we are talking about has a small number of people. Those who seek to defer buying an annuity till the latest possible moment are really trying to think of a way of using their pensions tax relief to support passing down the pension fund to subsequent generations. In other words, it is a tax-privileged form of the inheritance being passed from one generation to another. The hon. Member for Tatton suggests that somehow the alternatively secured pension can provide another route for that to happen. He gives the example of the Osborne pension fund, which has been set up for him, his wife and his dependants, and suggests that that may be an attractive vehicle for passing money down through the generations, to a large extent at the expense of the Exchequer.

Photo of Rob Marris Rob Marris Labour, Wolverhampton South West

Is the Financial Secretary aware that in Victorian times the tontine was a staple of detective stories? The question was who the last man—and it usually was a man—standing would be. People tended to get knocked off along the way so that someone could get the pot at the end of the rainbow.

Photo of Ruth Kelly Ruth Kelly Financial Secretary, HM Treasury

My hon. Friend makes an excellent point. Even if the financial advice was 100 per cent. on this matter, there would be other factors to be taken into consideration before families chose to go down this route. I do not believe that the alternatively secured pension rules allow funds to be returned to non-dependants in a tax-favoured manner. If the member dies with a living dependant, the remaining funds must be used to provide the dependant's pension and, of course, the original person benefiting from the pension is likely to have drawn down some of that limit, subject to the £1.5 million lifetime allowance. If there is no dependant, the fund can be returned to the scheme for the benefit of other members or paid to a charity nominated by the member before his death. Otherwise the funds would be a windfall to the scheme and taxed as such, and could be taxed again on distribution.

I think that the hon. Member for Tatton was arguing that his dependants might benefit from the pension fund in the future. The death of the last dependant is an extremely unpredictable event—one hopes that they will not die prematurely, as my hon.

Friend the Member for Wolverhampton, South-West suggests. The inherent risks in such a strategy make it extremely unlikely that good financial advice would suggest following that route.

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 that are needed to preserve the integrity of the tax system.

Photo of George Osborne George Osborne Conservative, Tatton

The Financial Secretary is defending her alternatively secured pension scheme, but is saying that what I suggest is not a good thing for people to choose. People will make their own judgments about that. Certainly, the industry is jumping all over the measure at the moment. I heard the threat at the end of her remarks: the Inland Revenue will keep this under review. It is a shame to take that tone, because the option may be a very popular one and we should not restrict it.

My hon. Friend the Member for Arundel and South Downs dealt with the point about the 100 per cent. There is the annual check. The Financial Secretary says that there are two checks. One check would work: the annual review to ensure that the person is not dissipating their fund. Of course, we are talking about a level of up to 100 per cent. People do not have to take 100 per cent. every year; they may take much less.

The Financial Secretary did not deal with my point about why the scheme has to be based on the annuity that a 75-year-old could buy—I do not blame her; she responded to many points. She might want to respond to that if she gets a chance. Even if she wants to restrict the scheme to people such as the Christian Brethren, that provision seems to make the scheme deeply unattractive to them, because the older they get, the poorer they will become. I am not sure that that is fair or necessary to protect their fund because, to put it bluntly, the older they get, the more likely they are to die.

Why is the Financial Services Authority given a new role? Why not use the existing GAD tables? Will the FSA use the best annuity rate available, or the average rate, or will it change every day, month or year?

Photo of Ruth Kelly Ruth Kelly Financial Secretary, HM Treasury 4:00 pm, 8th June 2004

I am happy to deal with both those points. I should have dealt with them earlier. Why is the annuity rate for a 75-year-old used for these purposes? It is to do with the impact of mortality drag. I urge the hon. Gentleman to read the section on that in the earlier consultation document. It is essential to fix the income at 75, or at least at some age, because of the impact of mortality drag. If the rate is increased with age and there is no mortality pulling, the income will fall and the funds will deplete. The annuity rate being fixed at a particular age is an essential part of the system.

The FSA provides continually updated comparative tables of annuity rates. Most of the rates are currently available in the market, freely accessible, well

understood and easy for individuals and providers to use. The regulations make it clear how to use the relevant annuity rate from those tables. The best rate in the tables will be used in these circumstances, which I am sure that the hon. Gentleman will think is right. I hope that I have reassured him on both those points.

Photo of George Osborne George Osborne Conservative, Tatton

I asked another question about guaranteed alternatively secured pensions and whether the 70 per cent. is calculated against the annuity of the person who died or the one who survived.

Photo of Ruth Kelly Ruth Kelly Financial Secretary, HM Treasury

It is the dependant's income.

Photo of George Osborne George Osborne Conservative, Tatton

That is useful.

This has been a useful debate on a brand new concept from the Government. There is a difference between us as to how widely this provision will be taken up and how attractive an option it is, and so on, and there is a disagreement about what percentage of equivalent annuity people could take. I suspect that future Finance Bill Committees, on which all Committee members may be privileged enough to sit, will return to this subject time and again, but I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Photo of George Osborne George Osborne Conservative, Tatton

I beg to move amendment No. 333, in

clause 155, page 139, line 46, at end insert—

'Pension rule 7

Notwithstanding anything to the contrary in the above pension rules, unsecured pension may be paid to a member who has reached the age of 75 in respect of a money purchase arrangement except in prescribed circumstances.'.

Photo of Mr John McWilliam Mr John McWilliam Labour, Blaydon

With this it will be convenient to discuss the following amendments:

No. 335, in

clause 157, page 141, line 25, at end insert—

'Pension death benefit rule 6

Notwithstanding anything to the contrary in the above pension death benefit rules, dependant's unsecured pension may be paid to a dependant who has reached the age of 80 in respect of a money purchase arrangement except in prescribed circumstances.'.

No. 339, in

schedule 28, page 423, line 1, leave out

'and ends before the member reaches the age of 75'.

No. 340, in

schedule 28, page 423, line 9, after '75', insert

'or if the member has reached that age except in prescribed circumstances'.

No. 341, in

schedule 28, page 423, line 13, at beginning insert 'in prescribed circumstances and'.

No. 342, in

schedule 28, page 423, line 24, at beginning insert 'In prescribed circumstances'.

No. 343, in

schedule 28, page 423, line 41, after 'reaches', insert 'in prescribed circumstances'.

No. 344, in

schedule 28, page 428, line 3, leave out

'and ends before the member reaches the age of 75 or dies'.

No. 345, in

schedule 28, page 428, line 11, after '75', insert

'or if the member has reached that age except in prescribed circumstances'.

No. 346, in

schedule 28, page 428, line 15, at beginning insert 'in prescribed circumstances'.

No. 347, in

schedule 28, page 428, line 34, after 'reaches', insert 'in prescribed circumstances'.

No. 331, in

clause 270, page 220, line 34, at end insert

'except that with effect from the date on which this Act receives Royal Assent no member of any pension scheme described in sub-paragraphs (a) to (g) of paragraph 1(1) to Schedule 34 will be required to buy an annuity on reaching any age and such a member may instead elect for income withdrawal (and Chapter 3 and Schedules 28 and 29 will have effect accordingly in such cases with effect from 6 April 2004).'.

Photo of George Osborne George Osborne Conservative, Tatton

This is my third attempt to deal with annuities today, and I have to confess that it is not particularly elegant, because we could not be bothered to draft lengthy amendments that would remove the requirement lock, stock and barrel, as my hon. Friend said, to get an annuity at 75, notwithstanding the debate that we have just had about alternatively secured incomes. It is inelegant because we simply included a catch-all new rule, saying:

''Notwithstanding anything to the contrary in the above,''

someone over 75 can have an unsecured pension. In other words, they do not have to buy an annuity.

As I was going through it late last night, I discovered a couple of inconsistencies, which were partly the result of our assuming, perhaps over-optimistically, that our point on age 80 would be accepted—it was not—and that we would manage to simplify the Bill by merging pension rules 4 and 6, which we failed to do.

With those apologies to the Committee, let me briefly run through the broad annuity argument. As I said, we have already heard it in a couple of forms today. It has been advanced not just by Opposition Members in a series of private Member's Bills but is also supported by, among others, the right hon. Member for Birkenhead (Mr. Field), who was appointed the day after the general election in 1997 to be the great pensions and welfare guru.

I sometimes think that the Labour party wants to forget that fact, but those of us who were watching TV at the time and had had our 10 Downing street passes rudely confiscated at about 3 in the morning saw that, along with the appointment of the new Cabinet, there was also the appointment of a Minister of State, the right hon. Member for Birkenhead. A great deal was made of it at the time. Actually, more was made of it than of any Cabinet appointment. Of course, he subsequently fell out of favour with the Government for telling them some blunt truths and, as the hon. Member for Yeovil (Mr. Laws) reminds us, he fell out of favour with the Chancellor. The right hon. Member for Birkenhead supports the removal of the requirement to buy an annuity.

I shall not detain the Committee with the basic argument, which we have already heard at length. Is not it time that the House of Commons and the Government recognised that people who have been

responsible enough to save for their pension during their lifetime should be trusted to choose the method of funding their retirement that suits them best?

Photo of Rob Marris Rob Marris Labour, Wolverhampton South West

Can the hon. Gentleman tell the Committee exactly how much that would cost in forgone tax revenue?

Photo of George Osborne George Osborne Conservative, Tatton

I do not think that it would cost anything in forgone tax revenue. This goes to one of the points that I made earlier about the inelegance of the amendment, which I freely accept. In previous attempts, efforts were made to guarantee the position of the Exchequer by, for example, requiring people to take out an annuity that would cover the minimum pension income, so there would be no cost to the Exchequer. In the Bill, the Government have tried to move away from the blanket requirement to purchase one kind of annuity at age 75, not just with alternatively secured income but also with short-term and value-protected annuities, thereby undermining many of their arguments against removing the requirement for compulsory annuitisation.

The Government argue that the measure would benefit only a small number of better-off people; we heard some of that in the last debate. For a start, the number of people is growing all the time. The Government say that only one in 20 pensioners would benefit, but the number will rise as more and more people move into money purchase schemes. Moreover, even if the measure were to help only better-off pensioners, that is hardly a knock-down argument, provided that there is no cost to the Exchequer. Schedule 34, which we will debate later, is a lengthy schedule designed to protect people who have more than £1.5 million in their pension pot. The Government have consulted and gone to great lengths to help people who, by any definition, are the wealthiest in society.

The Government's second argument is that only annuities provide certainty of income. Of course, Equitable Life has destroyed that argument, as its annuity rates have been savagely cut. Then there is the risk of poor returns from annuities. It is worth reminding ourselves that a £100,000 pension pot that would have provided a £10,000 annuity in 1990 now provides an annuity closer to £4,500.

The Government's third argument is that removing some people from the annuity market will undermine the annuities available to the rest of the population. That is something that the Financial Secretary argues occasionally. It is a dubious, socialist argument at the best of times that everyone must be in the pot to help everyone else, but some of the provisions introduced by the Bill will undermine that, including the alternatively secured pension—we disagree on how much take-up there will be of that—short-term annuities, value-protected annuities and so on.

The fourth argument is that pensions are not designed to allow people to pass funds down through generations because that is not why tax relief is provided. Again, that is undermined by what the Government are starting to do and by alternatively secured pensions and value-protected annuities.

The Government have presented an ideological brick wall to any relaxation of the rule about compulsory annuities, and that wall is now cracking with the alternatively secured pension, short-term annuities and value-protected annuities. To paraphrase the late, great Ronald Reagan, it is time to tear down that wall.

Photo of Ruth Kelly Ruth Kelly Financial Secretary, HM Treasury

We have again heard a speech about whether there should be a requirement to take an annuity at the age of 75; I have heard the argument many times. When I first heard it made relatively persuasively by the Opposition and the Retirement Income Reform Campaign, I was persuaded that there was a case to consider and I considered it in great depth. I listened to their representations favourably but decided that it was impossible to accommodate them without severe detriment to 95 per cent. of the population.

The argument is not about whether it is possible to accommodate wealthy people in their retirement choices. It is about whether it is possible to accommodate them without doing damage to the 95 per cent. who remain in the previous system. Every proposal that I have heard from the Opposition and outside interests has been framed in such a way that the vast majority of the population would be forced, for the first time, to take out an index-linked annuity at age 65 to enable the top 5 per cent. of the population to have freedom for any surplus income that they may have available above the level which would see them float off means-tested benefits. Requiring the vast majority of the population to take out index-linked annuities at 65 would be a huge restriction on individual choice and would have untold consequences for the gilts market, which could not accommodate people being forced to take out index-linked gilts at 65.

Photo of Mr Howard Flight Mr Howard Flight Shadow Chief Secretary To the Treasury, Economic Affairs, Shadow Chief Secretary to the Treasury

The Financial Secretary may not have taken on board the fact that one of the main reasons for our policy moving towards linking the basic state pension to earnings is so that it will reach the level of the minimum income when the obligation to buy an annuity could be abolished without the hassle that she has just described. If her colleagues were to join us in that commitment, the amount of the modest annuity commitment to ensure that pensions were at the minimum income level would become less and less each year.

Photo of Ruth Kelly Ruth Kelly Financial Secretary, HM Treasury

We are certainly not in that position at present, and perhaps I should not spend too long discussing a policy that the hon. Gentleman's colleague has described as wildly opportunistic and uncosted. I can give him the reference if he chooses.

The second argument against the policy is that, given the amount of unused tax relief in the system, particularly for higher rate taxpayers, any additional incentive for higher rate taxpayers to pass their pension funds down through the generations could have significant behavioural effects and would mean

that more was saved in pensions than is currently the case. Inland Revenue estimates suggest that that could cost hundreds of millions of pounds.

The Opposition's proposals would not only be to the detriment of the vast majority of ordinary pensioners, but cost the Exchequer hundreds of millions of pounds. We have had a quick run through of the arguments. I do not think that now is the time to develop them further.

I urge the Committee to reject the amendments.

Photo of George Osborne George Osborne Conservative, Tatton 4:15 pm, 8th June 2004

We go through the boxing rounds: we make our case, and the Government reject it, but each time we get somewhere. We argued for several years for something to be done to help the Plymouth Brethren and time and again we were told that that was not possible. Out of the blue, the Government conceded on that point.

I think that the Government are slowly coming to terms with the fact that there needs to be much greater flexibility on annuities. I remain confident that, over time, we will win our case and persuade the Government—if not this one, a future Conservative one—about the issue. I would mention one of my amendments, but I cannot read what I have written. [Interruption.] Perhaps my hon. Friend the Member for Arundel and South Downs has an important intervention to make. [Laughter.]

Photo of Mr John McWilliam Mr John McWilliam Labour, Blaydon

Order. Just because the hon. Gentleman has learned to make sure that his eyes are going over his colleagues while he is speaking, does not mean that hon. Members should mock him.

Photo of Mr Howard Flight Mr Howard Flight Shadow Chief Secretary To the Treasury, Economic Affairs, Shadow Chief Secretary to the Treasury

I thank my hon. Friend for his politeness. Amendment No. 331 is, in essence, a probing amendment. It relates to all that has been talked about. It is important because, when the Government produced their Green Paper, they promised that they would implement the changes this year. They will not be implemented until 2006.

The Government have included in their measures the new, alternatively secured pension. The purpose of the amendment—in which, I admit, the wording includes a slight contradiction about whether the relevant date is the date of Royal Assent, which it should be, and not the beginning of this year—is to propose that that arrangement be put into effect from the date of Royal Assent.

The amendment also refers to the changes that we have talked about, which do not look like they will be included in the Bill. Certainly the Government's own alternatively secured pension will be included. We feel that the Government have a moral obligation to act because they said in the Green Paper that they would do something about the annuity issue. This is what they have done. The proposals in the Green Paper are relatively close to the proposals in the Bill, but suddenly it will be two years later. Many people are extremely upset that they will not be able to do what they want to do following the enactment of the Bill.

Photo of Mr John McWilliam Mr John McWilliam Labour, Blaydon

Order. That was a bit long for an intervention.

Photo of George Osborne George Osborne Conservative, Tatton

It was, however, very helpful. It would be good to hear what the Financial Secretary has to say in response, but she is looking blankly at me. Therefore, we need to make the point that we do not believe in compulsory annuitisation, even with the concession of the alternatively secured pension. We wish to push our amendment to a division.

Question put, That the amendment be made:—

The Committee divided: Ayes 3, Noes 14.

Division number 4 Adults Abused in Childhood — Clause 155 - Pension rules

Aye: 3 MPs

No: 14 MPs

Ayes: A-Z by last name

Nos: A-Z by last name

Question accordingly negatived.

Photo of Ruth Kelly Ruth Kelly Financial Secretary, HM Treasury

I beg to move amendment No. 300, in

clause 155, page 140, line 7, after 'person' insert 'first'.

Photo of Mr John McWilliam Mr John McWilliam Labour, Blaydon

With this it will be convenient to discuss the following:

Government amendment No. 301.

Amendment No. 217, in

schedule 28, page 421, line 25, after 'that', insert

', except to the extent permitted under this Act, the Pensions Act 1995 or otherwise'.

Government amendments Nos. 302 and 303.

Amendment No. 218, in

schedule 28, page 421, line 33, after 'payable', insert

'or be reduced where the provisions of the registered scheme so provide or, in any event'.

Government amendment No. 304.

Amendment No. 219, in

schedule 28, page 422, line 4, at end add

'or that the reduced rate applies from the date the member starts to receive a pension from the state'.

Government amendment No. 305.

Amendment No. 268, in

schedule 28, page 426, line 43, after 'that', insert

'except to the extent permitted under this Act, the Pensions Act 1995 or otherwise,'.

Government amendments Nos. 306 to 308.

Government amendments Nos. 326 and 327.

Government amendments Nos. 362 to 366.

Photo of Ruth Kelly Ruth Kelly Financial Secretary, HM Treasury

The amendments relate to the definition of a scheme pension, one of the key elements of which is that it will provide a stable, predictable stream of income for the member's life and, after that, for their dependants. The general rule is that scheme pensions must be payable until the member's death and may not

be reduced or stopped, except in limited circumstances specified in the Bill. The amendments seek to extend those circumstances.

The purpose of amendments Nos. 217 and 268 is to allow the scheme pension of a member or a dependant to be reduced or stopped where it is permitted under the Pensions Act 1995, or otherwise. The Act applies to occupational pension schemes and would, for example, permit a set-off against a member's pension to discharge an obligation due to the scheme arising from a member's fraud against the scheme. However, because the Act is relevant only to occupational schemes, different rules for occupational and personal pension schemes could be created, whereas the aim of simplification is, as far as possible, to bring the rules for these schemes into line. Furthermore, the amendment allows for reductions in scheme pensions permitted by the 1995 Act, or otherwise. I am sure that in this context the words ''or otherwise'' could allow pensions to be reduced or stopped in almost any circumstances, which is precisely what the scheme rules aim to prevent. A scheme pension should provide the member with a predictable stream of income.

Amendment No. 218 and Government amendments Nos. 300 to 304 would allow pensions that were previously paid on ill-health grounds to be reduced or stopped where the scheme rules provide. I have listened to representations from pension bodies saying that the condition in the Bill that would allow schemes to stop such pensions is too restrictive. The Government amendments address those problems and will allow schemes to stop the payment of such pensions until the member reaches the minimum pension age, where they have recovered sufficiently to the extent that they would no longer meet the scheme's terms of providing that pension.

Although I accept the purpose of amendment No. 218, it would unnecessarily complicate the scheme pension rules by providing two conditions for stopping ill-health pensions: first, where the scheme rules permit, and secondly, where the member provides medical evidence. It is not necessary to provide the second condition. Schemes may include it in their rules, if they wish to do so. The Government amendments, however, address the concerns of pension bodies and provide a single condition that will allow for ill-health pensions to be stopped or reduced. They also clarify that the entitlement to a pension paid early on grounds of ill health which is stopped because the member recovers occurs when the member first starts to draw the pension and not when the pension starts for the second time.

Amendments Nos. 218 and 219 and Government amendments Nos. 301 to 308, 326 and 327 are all designed to allow pension schemes to pay additional amounts as scheme pensions until the member reaches state pension age, at which point the scheme may reduce the amount of pension paid. Such pensions are known as bridging pensions, and schemes provide that facility under the current regime. It allows the pensioner's income to remain broadly the same throughout the retirement. We do not want to prevent

schemes from continuing that practice under the new simplified regime. The amendments also apply that facility to a dependant's scheme pension.

I accept the purpose of amendments Nos. 218 and 219, but the amendments go too far because they would allow a scheme pension to be reduced by any amount when the member starts to receive their state pension. The idea behind schemes paying the additional pension until state pension age is that the pensioner's income remains broadly constant throughout the period. I can see no reason, therefore, for providing for the pension to be reduced by any amount.

The Government amendments allow bridging pensions to be paid but will ensure that the amount by which the scheme pension is reduced is limited to the amount of the state pension. Government amendments Nos. 362 to 366 are required as a consequence of allowing bridging pensions. The amount of the tax-free lump sum the member is entitled to draw is based on the valuation of their scheme pension. Allowing pensions to be reduced at state pension age creates an opportunity for the rules to be manipulated to increase the amount of the tax-free pension commencement lump sum that may be drawn. That is clearly not the intention of the provision. Amendments Nos. 362 to 366 provide that where the main or sole purpose for a scheme providing a bridging pension is to create or augment the tax-free lump sum, the lump sum will be treated as an unauthorised payment.

I agree with the intention of some of the amendments tabled by the hon. Member for Tatton, but I have explained that the points raised are better addressed by Government amendments. I therefore hope that the hon. Gentleman accepts the case that has been made.

Photo of George Osborne George Osborne Conservative, Tatton

I welcome the Government amendments because they mainly replicate the amendments in this group that I had tabled. Sometimes in opposition one has to be satisfied with moral victories in Committee—sometimes one actually gets one's way—and it is very rare that the Government accept the wording of the amendments that we draft. That has happened to me only once or twice, but quite often we table amendments, and the Government either beforehand—I do not know the process—or when they draft their response to our amendments, realise that we are making a lot of sense.

As the Financial Secretary said, my amendments would achieve the same purpose as the Government amendments. Amendment No. 219 would allow bridging pensions to continue. As the hon. Lady explained, such pensions reduce once someone reaches the state retirement age and receives a state pension. They were originally prevented in legislation, and she did not make it clear whether that was a mistake or a deliberate policy decision that has now been changed having listened to the industry. We shall see about that. Nevertheless, I am glad the Government have seen sense and tabled their amendments, not least

because there would have been a massive impact on the pension schemes that offered bridging pensions and their funding.

Amendment No. 218 would allow some schemes to provide for ill-health pensions that are suspended or reduced when income is earned, which would have been prohibited by the Bill if the Government's amendments were not made.

The Financial Secretary might talk about ill health when she concludes this part of the debate. Ill health as defined by the Government in schedule 28 is effectively an inability to do one's own job—the ''member's occupation'', as described in paragraph 1. However, some schemes are even more restrictive and allow an ill-health pension to be suspended because a person is capable of any remunerative employment, rather than of continuing with their old employment. Have the Government examined that? Are they aware that as a result they will cut across the bows of some existing pension schemes? Have they consulted those schemes and what will be the impact on them?

My amendments Nos. 217 and 268 state that a person may be suspended in a range of circumstances including defrauding an employer, as covered in the Pensions Act 1995. My amendments refer to that excellent Act for the avoidance of any doubt. The Financial Secretary has anticipated the main thrust of my amendments, borrowing the doctrines of pre-emptive action and stealing Tory policies from the Prime Minister, and I am therefore happy not to do anything.

Amendment agreed to.

Clause 155, as amended, ordered to stand part of the Bill.

Clause 157 ordered to stand part of the Bill.