Clause 221 - Deferral of retirement pensions and

Pensions Bill – in a Public Bill Committee at 2:30 pm on 16th March 2004.

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Photo of Steve Webb Steve Webb Shadow Secretary of State for Work and Pensions 2:30 pm, 16th March 2004

I beg to move amendment No. 8, in

clause 221, page 147, line 26, at end add—

'(5) At the end of section 15 (3) of the State Pension Credit Act 2002, insert ''but capital shall be deemed to exclude lump sums payable under Schedule 5 or 5A to the Social Security Contributions and Benefits Act 1992 (c.4)''.'.

It is a pleasure to serve under your chairmanship, Mr. Cran. It was thought that this could be a Conservative amendment, which would not be inappropriate because some unselected Conservative amendments are in the same spirit. All Opposition Committee members want certain matters to be clarified.

The amendment refers back to the aforementioned 1992 Act, where an earlier Government dropped the ball, because that is what is being amended. The clause amends the application of schedule 5 and 5A to the 1992 Act. The amendment would change a reference to the 1992 Act contained in the State Pension Credit Act 2002. As amendment No. 7 shows, we had one go at that and got it wrong. We may well have got it wrong in this amendment as well.

However, there is an issue of substance to consider: the very narrow issue of how the lump sum allowed under clause 221 is to be treated in the rest of the benefits system. After discussing that, we should have a separate and substantive debate on the clause itself because it involves a much wider range of issues. At the moment, however, I shall restrict my comments to the narrow terms of the amendment.

The Bill will create a new thing: a state pension lump sum, which would be created by deferring a state pension and later, instead of drawing a higher state pension, converting it into a lump sum. The

Government have presented that—inaccurately, in my view—as a great new option for the poor. They have said that only the rich used to have lump sums and now the poor can have them, which is nonsense, but more of that later.

Somebody aged 65 will want to know whether it is a good idea to take the lump sum. Governments always pay lip service to simplifying pensions, but this is yet another complexity and involves another tricky decision. People spend most of their working lives making difficult decisions about pensions and just when they think it is safe to come out from under the eiderdown, here comes another one: a person reaches pension age and, instead of simply taking or deferring their pension, they have the further option of taking the lump sum. They will want to know what effect deferring the pension for five years and drawing a lump sum of £25,000, or whatever, will have on their state pension credit entitlement.

Despite the woeful take-up of the state pension credit so far, we are moving to a world in which between half and two thirds of all pensioners will be within the scope of means-testing. Therefore this is not a peripheral, nit-picking, marginal issue, but is absolutely central, because the majority of pensioners deciding whether to take a lump sum instead of their weekly pension will be within the scope of the means test.

If pensioners have a lump sum of £25,000, will the Government say, ''We will ignore the first £6,000, and impute you a socking great income from the rest, and you will not get pension credits''? The person would have to make a mental calculation: ''I will do without my pension for five years, I will take a lump sum, and, although I will enjoy that, I will deprive myself of quite substantial amounts of pension credit.'' If that issue is not made clear—it is not clear in the Bill as it stands—people will not know what to do. They may be well advised not to take advantage of the provision because it might only deprive them of future means-tested benefits.

We have probed that issue before. When I asked Ministers about the matter, they were a little vague. I think that they were not entirely sure themselves. So we visited the departmental website. I will not read the full URL of the relevant bit, just part of the fact sheet entitled ''State Pension deferral—taking up your State Pension later''. Page 3—it is in a question-and-answer format—discusses the impact of the lump sum on the pension credit. It states:

''we want to help people plan for their retirement in the most straightforward way,''— ho, ho—

''so that they can get the best deal for themselves. Most people who are entitled to Pension Credit will not have to pay tax on the lump sum'',

and we will talk about tax in a separate debate. This is the key sentence:

''We also want to make sure that the lump sum is ignored''—

that is the spirit of the amendment—

''when most people claim Pension Credit, Housing Benefit and Council Tax Benefit''.

Which people? When, how and why, and where is that stated in the Bill?

The amendment tries get behind the Government's thinking. They say ''most people''. So some people, in contravention of what our amendment would do, will have the lump sum taken into account. Will people at the age of 65 know five years down the line whether they will be among the ''most people'' or the remainder? Will that depend on their circumstances at 70, or will they know at 65 for sure? Will they have to guess—to speculate?

So something presented as offering whole new vistas for pensioners turns into a rather complex and convoluted choice, on which people have incomplete information and the Bill is of little use. I hope that we will get a clear answer from the Minister about who are ''most people'', who are the rest, whether people will know in advance which category they will fit into, and how the Government plan to treat lump sums for the purposes of the pension credit and other means-tested benefits.

Photo of Nigel Waterson Nigel Waterson Conservative, Eastbourne

Unusually, I should like to row in behind the amendment, but I shall add some thoughts of my own.

Let me put down a marker immediately, as the hon. Gentleman did: there is a much broader discussion to be had in the stand part debate. We are talking about a particularly narrow point and, as you will have seen, Mr. Cran, we Conservatives tabled amendments on it ourselves. However, we did so with such a monumental lack of skill that they were not selected. We were basically trying to achieve the objective that the hon. Gentleman seeks to achieve in the amendment.

We started with two concerns about the lump sum. The first related to the tax situation, and that issue seems to have been clarified, although the Minister may wish to touch on the subject again. The second related to how the lump sum is to be treated for the purpose of means-tested benefits. As the hon. Member for Northavon (Mr. Webb) said, that is an important issue. Only yesterday, we saw the latest figures for the take-up of pension credit. Although the numbers have gone up—with £47 million having been spent on advertising, why would they not have done?—they are still a long way short of what they could and should be. Not many more than half of those entitled are actually claiming. It is a Treasury assumption, or target, that 1.4 million pensioners will never get round to claiming it.

Photo of Nigel Waterson Nigel Waterson Conservative, Eastbourne

But that number is set out in the Government's own figures. Indeed, the figure was described not as a planning assumption but as a target by the Under-Secretary of State for Work and Pensions, the hon. Member for Liverpool, Garston (Maria Eagle), in a debate that I attended in Westminster Hall. She did not try to withdraw that term, and has not sought to withdraw it since, despite having the opportunity to do so.

We are talking about a benefit that is both complex and subject to means-testing, and we all meet people in our constituencies who are put off for either or both of those reasons. I am the first to encourage any of my constituents who might be entitled to means-tested benefits to apply for them. The most chronic problem is the take-up of council tax benefit. The Under-Secretary of State for Work and Pensions, the hon. Member for Gravesham (Mr. Pond), is launching a programme to try to increase take-up, and that is good, but it is in the nature of means-tested benefits that we have to spend money on boosting take-up. We know that there is nearly—or so near as to make no difference—100 per cent. take-up of the state retirement pension.

Another issue is how the lump sum is to be treated. We know that a major problem facing pensioners and troubling the pensions industry is the question of how much people have to save for their retirement before they can be sure that they will not be subject to means-tested benefits. Let us imagine two sets of neighbours. One set has additional foreign holidays and perhaps buys a boat, while the other puts money aside for a pension. They may ultimately end up in much the same position, thanks to the means-tested system.

Some time ago, Conservative Members came up with the figure, given to us by actuaries, of £180,000 for the amount that a working couple would have to put aside in their working lives to be sure of not being subject to means-testing. The Government have been good enough to rubbish that figure on every opportunity that I have given them, but they are yet to come up with their own figure. They may not do so in response to my successive invitations, but sooner or later they will have to give a figure to the rest of the world and the industry, which is worried about issues such as mis-selling.

I concur with what the hon. Member for Northavon says. It is important that we have some clarity about how the lump sum is to be treated for pension credit purposes or in relation to means-testing generally. Our preference is for the lump sum to be put aside and not taken into account, but if it is to be taken into account, that needs to be made very clear; otherwise, what seems to be a headline issue, and a good thing for pensioners, particularly those who are poorer, may turn out not to be such a good thing after all.

Photo of Malcolm Wicks Malcolm Wicks Minister for pensions, Department for Work and Pensions 2:45 pm, 16th March 2004

I agree with the hon. Member for Northavon that there is a substantive point about the interaction between the lump sum and pension credit. It might help if I talk in general terms about the purpose of this new policy development so that we can set the amendment in context and deal directly with it. However, I shall not speak in such general terms that I am tempted into a Second Reading speech, as others may have been. I do not want to go into the range of issues relating to means-testing and the Tory track record, by saying, ''I remember a pamphlet from Enoch Powell and Iain MacLeod''—

Photo of Mr James Cran Mr James Cran Conservative, Beverley and Holderness

Order. The Minister is doing what he said he would not do. Let us get back to the amendment.

Photo of Malcolm Wicks Malcolm Wicks Minister for pensions, Department for Work and Pensions

The clause and the schedule it introduces create a new lump sum option for people who defer their state pension. It also brings forward the enhanced rate of accrual for increments and removes the time limit on deferral that was due to take place in 2010. I welcome the fact that the Opposition gave broad, although conditional, support to the proposals in the debate on Second Reading. There is common ground on the need for policy to reflect demographic change and the aspirations of a new group of older people who want to break from the ideas of ageing and retirement of the 1940s. It is crucial for that group that we remove the barriers to working that are still associated with attaining state pension age and promote the concept of a more flexible retirement. Furthermore, we are providing more opportunities and more choice.

The new proposals for those who defer are part of that strategy, as are the new flexibilities in occupational pensions that will allow people to work on for their sponsoring employer. Those and other measures will be underpinned by the new age discrimination legislation. We expect that those progressive new measures will change over time the way in which people think about older life, which can only be good for them and will have a significant beneficial impact on society and the economy.

The measure is about giving people more options as they approach state pension age and improving the incentives that are currently on offer in the state scheme for people who want to extend their working life. An increased pension that is payable as a result of a delay in claiming the state pension has been part of the state scheme for decades.

Photo of Janet Dean Janet Dean Labour, Burton

Has my hon. Friend considered allowing women, in particular, who have been unable to pay enough years' worth of contributions, the option to continue to pay national insurance contributions if they remain in work past 60, which is the normal retirement age?

Photo of Malcolm Wicks Malcolm Wicks Minister for pensions, Department for Work and Pensions

I know about the issue, but I am not yet persuaded that we should throw away the established policy that we pay national insurance contributions up to the time when people qualify for the state pension. However, I am happy to discuss that with my hon. Friend outside the Committee. I know that she is interested in such matters.

Deferring the pension has been an established part of our pension policy for some time, but relatively few people take it up. Only around 3 per cent. of people reaching state pension age do not claim their pension from the outset. In providing a more generous rate of accrual by bringing forward the change in rate from 7.5 per cent. to 10.4 per cent. for each year of deferral we will make that a more attractive option.

However, the improved rate for increments alone will not be enough of an incentive to encourage more people to defer. A new lump sum will give more people that incentive; it certainly gives them a choice. It will comprise the pension that is forgone during deferment with a generous rate of interest added weekly and compounded. We have made it clear that we intend that interest rate not to be less than 2 per cent. above

the Bank of England base rate. At current rates that would give 6 per cent. a year, which is a very fair return. The rate of return is only one part of a carefully structured package that will, when all the elements are taken together, ensure that people will see the benefits from working on beyond state pension age.

New tax arrangements will remove potential disincentives for those aiming for a lump sum. The hon. Member for Eastbourne (Mr. Waterson) touched on that. First, the lump sum will not be added to other income received during the year in which it is paid out. It will not push the person into the next tax bracket. Instead, it will be taxed at the marginal rate that applies to the person's other income.

Secondly, the person will be able to choose when to receive his or her lump sum payment, either when he or she claims the pension or, if he or she wishes, at the start of the following year. People who would see their income fall in the year after they claimed their pension could, in effect, choose to have their lump sum taxed at the rate that would apply to their usual level of income in retirement, not at the higher rate that applied while they were in work. Lastly, the lump sum will not count as income against the higher personal allowance for people aged 65 and over.

The other key component of the package is the protection that we intend to provide for those who take the lump sum and then claim pension credit, to which the amendment refers. Currently, capital of more than £6,000 affects pension credit through the so-called tariff income rule, which deems £1 for every £500 above that figure to be income. We will change the capital rules of pension credit, as well of housing benefit and council tax benefit, to ensure that we do not take back with one hand what we have given with the other.

The lump sum, coupled with the generous tax treatment and safeguards in the income-related benefits, will mean that pensioners on lower incomes, in particular, have a tangible reward for working on past pension age. People who would otherwise not want to take the actuarial risk that increments inevitably entail can, for the first time, look forward to a substantial pot of cash in their retirement. I am not talking about compulsion, of course. No one will be forced to work longer. We accept that working longer is not an option that everyone will want to take and not everyone will have the opportunity to do so. We are not taking away any options. People who want to work on and take their pension at the same time will be able to do so.

Of course, we recognise that giving people an additional choice will also require them to weigh up their situation and make a decision. That is why we will ensure that the Department provides information that explains carefully the options and how they are treated for tax and other benefit purposes. Some people may say that that will increase complexity. We prefer to regard such a measure as creating a new opportunity.

I was slightly disappointed—as I am on rare occasions—by the hon. Member for Northavon, who suggested that giving working people a choice about whether to defer their pension or have it as a lump sum would be a terrible new burden on working people. Increasingly, people expect choices in all areas of their lives and we want to bring choice into the welfare state, even if we have to bring the Liberal Democrats kicking and screaming with us.

The amendment's aim is perfectly reasonable. It would prevent the lump sum from being taken into account in pension credit. Opposition Members will be pleased to know that we agree with them on the spirit of the issue, but for reasons that I will explain, I cannot support the amendment in its present form. The apparently simple solution that it offers is unfortunately not as simple as it looks. That is true of many social security matters. Let us consider equal treatment. If we ignore the lump sum derived from deferring the state pension, I am advised that we will also have to ignore some lump sums that may be derived from deferred occupational or private pensions, because the other forms of pensions are in many instances replacements for the additional pension component of the state scheme.

Although simple in theory, there are serious difficulties with ensuring that the sums that could be treated as broadly equivalent to the state pension lump sum are correctly identified. In many cases, they may be far from straightforward and require the pensioner or the scheme provider to supply us with detailed information at an unwelcome cost to the provider. That leads me to my second reason for resisting the amendment in such a form. Primary legislation is not the appropriate place for a provision that by its nature will need to be detailed and have the flexibility to respond to the arrival of new pension products or to new interpretations by the court.

Section 15(6) of the State Pension Credit Act 2002 already includes a power to make regulations that allow specified forms of income or capital to be ignored. In due course, we will introduce regulations that reflect our proposals for achieving the objectives expressed in the amendments. We also intend to make equivalent changes to housing benefit and council tax benefit. Members will have the opportunity to examine all of that in detail.

We accept the spirit of the amendment. I heard what the hon. Member for Eastbourne said. We are not in the business of creating new opportunities for working people as they contemplate retirement by providing a lump sum and then simply taking that money away from other benefits to which they may be entitled.

Photo of Steve Webb Steve Webb Shadow Secretary of State for Work and Pensions

The quote from the Department's website does not say, ''We want to make sure that the lump sum is ignored when everyone claims'' a certain benefit. Instead, it says ''when most people claim'' a certain benefit. The Minister has implied that he wants to table an amendment in the spirit of our amendment, so that the lump sum will not count when everyone claims such benefits. Which is it to be: most people or everyone?

Photo of Malcolm Wicks Malcolm Wicks Minister for pensions, Department for Work and Pensions

I would need to look at the appropriately named website. The hon. Gentleman, in his enthusiasm, may have made a contextual analysis of particular words that are not significant. It may be that we are assuming that most people will claim the lump sum, but some will not and they might have the deferred pension. Certainly, our intention is to ensure that we do not take with one hand what we give with the other.

Photo of Nigel Waterson Nigel Waterson Conservative, Eastbourne

The Minister is becoming uncharacteristically vague on this precise point. The meaning of the amendment tabled by the hon. Member for Northavon and of our unselected amendments could not be clearer: the entirety of any lump sum taken on deferral of a state pension should be disregarded for the purposes of pension credit and other means-tested benefits. Will the spirit of that be enshrined in the amendments that the Minister will table on behalf of the Government, or will an exception be applied to some pensioners?

Photo of Malcolm Wicks Malcolm Wicks Minister for pensions, Department for Work and Pensions

The spirit of the amendment is that the lump sum should not be taken into account when assessing pension credit. However, the precise way to introduce that is more complex than it seems, as is so often the case. That is why we cannot accept what seems a perfectly reasonably amendment from the hon. Member for Northavon. However, we intend to put that point into practice.

Photo of Steve Webb Steve Webb Shadow Secretary of State for Work and Pensions

The Minister's reply is helpful in the sense that he accepts the spirit of what we are driving at. If he has any further insights as I comment on what he said, I will be happy to give way. The Department's fact sheet was unclear on the matter, so it is helpful to put it on the record that he does not want anybody's claim for pension credit to be affected. That is not what it says on the Department's website, but I am sure that that will be changed by nightfall.

The Minister gave two main reasons why he could not accept the amendment. One was that any exemption would have to apply not only to deferred lump sum state pensions, but to any private pensions that took their place. I understand that. It highlights again how many more pages of pensions law the Bill will create. I imagine that the regulations that implement what the Minister wants to do will have to be convoluted to cope with the situations that he describes. That adds to my feeling that we are creating complexity, so I am puzzled as to why we cannot implement the change in primary legislation. The Minister wants flexibility, but something is either ignored or it is not. I do not understand why he wants to reserve the right to change his mind quietly later. However, in line with the generous spirit in which the Committee has operated, I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Question proposed, That the clause stand part of the Bill.

Photo of Steve Webb Steve Webb Shadow Secretary of State for Work and Pensions

So far, at least on this side of the Committee, we have concentrated our remarks on how the lump sum should be treated for the purposes of the means-tested benefit system. The clause makes important changes to the retirement pension, some

of which are very welcome. However, other issues need to be dealt with and I hope that the Minister will respond to them.

The provisions in clause 221 that bring forward the enhanced accrual for those who defer their state pension are welcomed unreservedly. They will provide people with an extra incentive to defer their pension and that is in the spirit of giving people new choices about whether to work longer and enabling them to do so.

The Minister was understandably quite succinct about the issue of deferral, and it is fair to say that there is little understanding or knowledge about state pension deferral. Precious few people do it at the point when they become entitled. The Minister gave the figure of 3 per cent; I have seen others but it is in that order of magnitude, or about one in 40.

As far as I am aware, the anecdotal evidence is that people deferred by accident. They did so because they were out of the country and did not claim on time or because they were married women who did not realise that they could claim when they were 60 as they perhaps thought that they must wait for the married pension when their husband reached 65. There is evidence that deferral rates among women and among people who live overseas are much higher than the average and that deferral currently seems, to some extent, to be a bit of an accident.

While we welcome the enhanced accrual rate for people who defer, I can understand why the Government do not think that it will make much difference on its own. It is a welcome change, but it will not change the culture in regard to people working on.

Deferring one's state pension is currently not promoted by the Government. The option is there and is in the relevant legislation, but the Government do not push it. I would like the Minister to tell us whether the Government will start promoting deferral and the lump sum.

Malcolm Wicks indicated assent.

Photo of Steve Webb Steve Webb Shadow Secretary of State for Work and Pensions 3:00 pm, 16th March 2004

The Minister is nodding, indicating that the Government will start promoting them.

Of course, there is then the issue of mis-selling. There will be a set of people who should not defer or who should not take the lump sum—for example, someone who is terminally ill might be ill-advised to defer taking their pension. One can think of a raft of reasons why someone might be badly advised. If the Minister is going to promote such options—and in a sense the Government's whole rhetoric is about promoting people working longer, flexible retirement and so on—do the powers created in clause 221 risk the Government's finding that they have given people the wrong advice?

Deferral is a complex choice, because people have three options to choose from: to take one's pension now, take one's pension later, or take a lump sum. They have advantages and disadvantages for different people and the answer may be different for each individual. The Government implied that there would

be advice websites, but, as we have just heard, websites can be wrong. Therefore, how will that issue be handled?

A further question is: who is clause 221 meant to benefit? The Minister implied, and the Secretary of State's rhetoric was, ''Deferring one's pension brings lump sums within the reach of the poor; the rich have always been able to take lump sums and is it not great that the poor can have them?'' That is nonsense because the poor cannot afford to live without their pension. It is not rocket science that if they have no other money—[Interruption.]—they have to take their pension. If they were to defer taking their pension, they would not be able to claim pension credit, because they would be deemed to be in receipt of a pension. Therefore, when the Minister responded that the poor could now get a lump sum, several sedentary voices said, ''by working''. That is great, isn't it? The lifetime poor have suddenly got the option of a lump sum by working longer. Well, excuse me, but they had that option anyway. They could have worked longer and not taken their pension and spent it, but taken it, stuck it in a bank account and let it accrue for five years. Then it would be what is known in the trade as a lump sum. This measure does not give some exciting new opportunity to the poor, but says to them, ''Well, you have to work longer.'' The rich can have a lump sum because they can afford to defer their pension and live off their other income, but the poor cannot.

Photo of Nigel Waterson Nigel Waterson Conservative, Eastbourne

Does the hon. Gentleman agree that an additional bolster to his argument is the fact that poorer people tend to be more likely to do manual jobs where perhaps the last thing that they want is to work for another five years in some back-breaking manual job? Indeed, judging by the available statistics, they might have retired well before the state retirement age in any case.

Photo of Steve Webb Steve Webb Shadow Secretary of State for Work and Pensions

The hon. Member for Eastbourne makes a sensible point. He is right that the lifetime poor are more likely than others to reach pension age with a poor pension, so their lump sums are likely to be less attractive than the sorts of figures that the Secretary of State quotes; the lifetime poor will not get about £30,000. Secondly, the lifetime poor might be dead before they reach some of the ages that we are talking about, and many of them will have stopped working years beforehand. It is nonsense for the Government to say, ''This is a great new vista of opportunity for the poor; they can have a lump sum, but only if they start working at 65 and work on.''

This is not about the poor. It is about the rich. In two important respects, clause 221 is good news for the rich. It is a tax dodge for them; it is a nice little earner. Most of the public expenditure cost of clause 221 will be spent on assisting the rich. Why is that? There are two reasons. There are two options in clause 221—deferral or a lump sum. The rich can defer and pay less tax. A rich company director who wants to carry on working beyond the age of 65 can defer, and when he draws his pension, which will be enhanced under clause 221, he will get it at a higher rate, and because he does not have earnings to add on to it he will not

pay as much tax. As he is a higher rate taxpayer, if he drew his pension at 65 he would have to pay higher rate tax on all of it; if he defers, he will pay higher rate tax on his earnings, as he always would have done, but when he draws his pension after having stopped working he will pay standard rate tax, or whatever is the applicable rate. The option of deferring already exists but the clause makes it more attractive. It principally benefits the rich.

There is a second way in which the rich will benefit; it is potentially the sort of thing that we shall read about in the finance supplements of the Saturday and Sunday newspapers for years to come. It is a nice little wheeze. People might not defer; they might take the lump sum, and do so in a year when their marginal rate of tax is nil. Instead of taking their pension and paying tax on it—possibly at the highest rate—they might organise their affairs so that they work for as long as they want and then stop and draw a hefty lump sum after ensuring that they have hardly any income in that year by pushing some of it into the preceding year and some into the following year. What rate of tax will they pay on their lump sum, which could be £30,000? The answer is nil. They might have paid 40 per cent. if they had drawn it as a pension. So, guess where the public expenditure cost of clause 221 will go. The answer is, to the rich.

We support bringing forward the enhanced accrual, but we oppose the grotesque parody of what is contained in the clause that represents it as anything other than a source of new loopholes for the well advised and a trap for the ill advised. We probably will not oppose the clause, but although there are some good things in it there is a lot that is not.

Photo of Nigel Waterson Nigel Waterson Conservative, Eastbourne

I am happy to endorse much of what the hon. Gentleman said, but I hope that he will forgive me for saying that I am unsure why he is so supportive of the clause if he resents the fact that it will help richer people and not poorer people. It was apparent from what he said that the Liberal Democrats do not have much time for richer people, but in my opinion they do have a role in society.

I want to focus on some of the more significant issues. This is an important part of the Bill, or at least so the Government tell us; the Secretary of State made it a centre-piece of his last party conference speech. However, he has a slightly patchy track record with his party conference speeches. If I remember correctly, he made a commitment about not selling our skies shortly before the Government did a U-turn on air traffic control, but let us leave that in the past where it should be left. [Interruption.] There was a ripple of interest from the Labour Benches. Just because the Secretary of State chose to put something in his conference speech does not mean that we should assume that it is an important provision that will make a difference to a lot of people.

The appeal of the clause is limited. When the Minister winds up, it would be interesting to learn whether the Department has any projections or planning assumptions as to how many people are likely to take up this option. As we have already established, deferral has been around for a long time; it is nothing new. It is the lump sum that is the new

part. I broadly agree with what the hon. Gentleman says about the accrual rates, but there are three or four factors that might limit the appeal of deferral.

We have talked about means-testing. For the moment, and at least until we see the detailed provisions, I am prepared to take what the Minister says at face value. As I understand it—I shall be reading Hansard closely tomorrow—the Minister has made it clear on behalf of the Government that everyone who has a lump sum under the provision will have it totally disregarded for the purposes of pension credit and other means-tested benefits. I stress the words ''everyone'' and ''totally''. If I have got that wrong, the Minister will no doubt leap to his feet, and frantic notes will come his way on the subject, so let us assume that that part of the matter has been sorted out.

If my understanding is correct, that fact should be made abundantly clear in advertising, so as to avoid the fog of confusion and complexity that hangs over the pension credit in particular, and means-tested benefits in general. That way, no one would be in any doubt, and no one would be put off deferral by not knowing the answer to the conundrum. Not everyone lives, drinks, sleeps and breathes pensions, as the Committee is doing. It is important that that fact is made clear, so that doubt on the issue does not affect take-up of the option.

Another important factor is the actuarial approach. We tabled an unsuccessful amendment that did not make the grade, which suggested, in rather broad terms, that clause 221 should stipulate:

''Prior to the payment of any pension increase or lump sum under this section, there shall be a duty upon the Department of Work and Pensions to provide full actuarial and any other relevant information to any individual who may be considering deferring their pension''

under the provision. On an actuarial basis, the hon. Member for Northavon may well be right. If a person is engaged in a heavy, physical job, probably the last thing that they want is to carry on working for another five years, even if there is a lump sum at the end of it. Actuarially, they may not make it anyway. They may not even have made it that far. According to the statistics in the Library brief, the chances are that such a person has already given up work. The statistics suggest that many people leave the work force well before they reach state retirement age.

A Department for Work and Pensions report produced in February last year, report No. 182, shows the percentage of men and women still in the labour market at various age groups. In the group aged 60 to 64, only 45 per cent. of men are still in the labour market. At 65 to 69, that has fallen to 13 per cent. Perhaps the provision will make that figure increase, but it is the 45 per cent. figure on which I am focusing. The trend begins even earlier, because at 50 to 54 years of age the figure is 82 per cent. That means that nearly a fifth of men have left the labour market, for whatever reason, by the time that they reach that age group.

For many people, deferral simply will not be an option. Despite the hon. Gentleman's slightly ''class warrior'' approach to the issue, he may well be correct

to say that large numbers of manual workers and poorer people will not benefit from the clause.

Another factor is the Government's lamentable failure on age discrimination. Prior to the 1997 election, I remember hearing, as might you, Mr. Cran, a clear manifesto commitment to legislating against age discrimination as a matter of urgency—I think that was the phrase. The Parliamentary Private Secretary may check that if he wants to, but I have the proof somewhere if there is any dispute about it. [Interruption.] I am talking about a clear manifesto commitment, which has not yet been met.

There is still enormous unfairness across the country because of age discrimination. People are being forced out of work when they hit 65. Someone once described that situation by saying that a person's birth certificate becomes their P45. Indeed, there is also the problem of much younger people losing their job and being unable to get another one. If the Government are to back up what is purported to be the aim behind the clause, they will have to do something soon on age discrimination. The reality is that they will have to do something. However, that will not be of their own volition because they are being forced to do so by the European Union and must have something in place by 2006.

The real issue is how serious the Government are about helping older workers who wish to continue working up to or beyond the usual retirement age. Let us not forget that there is no particular magic about the age of 65. It was conjured up in a different era. When Bismarck set up German pensions, he alighted on the age of 65 as the retirement age. A lot of people did not reach that age, but those who did only lived for a few years beyond it.

We are now in a different era. Indeed, only yesterday the Institute of Actuaries and the Faculty of Actuaries produced a chilling report about increased life expectancy, despite all the worries about obesity and so on.

Photo of Nigel Waterson Nigel Waterson Conservative, Eastbourne

The Minister is absolutely right. It is good that people now live longer and, on the whole, lead healthier lives. If they wish to continue working, it is important that they are encouraged to do so. I am pleased that the Government—at least for the moment—are setting their face against compelling people to work longer than the existing retirement age.

According to the Institute of Actuaries and the Faculty of Actuaries, the cost of purchasing an annuity for a male aged 65 beginning in 2019 could be anything from 34 per cent. to 60 per cent. higher than it is at present. That is staggering, given the unimpressive deal that is currently available for the purchase of annuities. Various suggestions are made in the report, including the abandonment of the concept of a retirement age altogether in favour of a more flexible formula in that individuals should draw a pension from the same scheme beginning at older ages. I hope that there is not a sub-plot and that the

Government are not just saying that we will all have to work longer just to afford a decent retirement. Much concern is felt about how we adjust the pension system to the increased life expectancy.

Photo of Mr James Cran Mr James Cran Conservative, Beverley and Holderness

Order. I hear far too many conversations in the Room. I wish to hear the person who is speaking, as I expect do other members of the Committee. If they do not, there is a Corridor outside.

Photo of Nigel Waterson Nigel Waterson Conservative, Eastbourne

That was nice of you, Mr. Cran. Clearly, the Government are keen to encourage people to work beyond the age of 65. As I suggested a moment ago, they must be careful that they are not sending the wrong signal to the wrong people. The hon. Member for Northavon seems outraged and says that the proposal is a charter for middle-class tax dodgers. Equally, there will be a raft of people, who the Government are purporting to help, for whom the provision will not be a realistic option.

When we reach the accompanying schedule, I hope that we shall have a more detailed discussion about how the lump sum is to be calculated. I return to our failed amendment No. 156. What arrangements does the Department intend to put in place to ensure that, when people make such a judgment, they are as fully informed as possible of the consequences? To what extent will they be advised whether they will be better off taking a weekly increase in their pension and whether that will be better for them in the long run or whether the lump sum is the safe alternative because it carries no actuarial risk? There is still the actuarial risk between the ages of 65 and 70. Am I right that, if a person passes away between the ages of 65 and 70, no tangible benefit will be gained at all from such an option? It cannot be passed on to one's nearest and dearest.

People need to be told about such issues. Matters certainly need to be brought to their attention. As we know, whether in the context of failed occupational pension schemes or whatever, most people are either too busy getting on with their lives when they are younger to ask a lot of these deep questions, or they take things at face value and carry on running their lives, with their jobs and families and so on. The Government are under a major obligation to be up front with people about the benefits and disbenefits of going for this option—unless this is merely something to stick in a party conference speech, which will not have much effect in the real world.

Photo of Malcolm Wicks Malcolm Wicks Minister for pensions, Department for Work and Pensions

I for one wanted to listen to the hon. Gentleman's speech. The fact that all his colleagues are in the Corridor is not something on which I wish to comment. However, I know that they will read his speech in Hansard tomorrow, as will we all.

Sometimes one is disappointed, even someone as optimistic as I. Once again, I was disappointed by the approach of the hon. Member for Northavon, although there are some things for which we are grateful. He welcomed enhanced accrual and I welcome his welcome. That is important. He asked whether we would promote the new policy. Of course

we will promote it—not in the sense of telling people, ''You should take the lump sum'', or ''You should defer your pension'', but by saying, ''Here is a new choice. We are in the 21st century and there are now choices for you. We want to lay out what those choices are''. We as a Department cannot be people's actuarial advisers. However, we will certainly lay out the choices.

Why is the hon. Gentleman so against choice? I cannot understand that approach at all. It is a 1940s or 1950s approach; perhaps it is the approach of the National Insurance Act 1911, which was introduced by one of the more recent Liberal Governments—perhaps the most recent example of such a Government on which we wish to draw. It is as if he were to go into a shoe shop and the store manager said, ''Yes, we sell shoes, but we only have brown ones in this design, and you must have size 11''. That seems to be his approach to state pensions. However, we are trying to say to people, ''In the 21st century, when life expectancy is increasing, you have choices. You may want to take the basic state pension at the appropriate age—equalising up to 65 for men and women—or you may want to consider deferring it and, perhaps, taking it one day as an enhanced, deferred pension. You may even be attracted by the idea of a lump sum''. We want to give people those choices and promote choice, not one option. This is where our 21st century social politics has to get to. Although I am disappointed by what the hon. Gentleman said, I shall let him recant.

Photo of Steve Webb Steve Webb Shadow Secretary of State for Work and Pensions

One consequence of choice is that some people will make the wrong choice. Some people will make a choice that any fair-minded, independent person would say was clearly the wrong choice. A terminally ill person who chooses to defer would lose everything.

Will the Government take any responsibility for creating winners and losers through this new choice? People had the choice about personal pensions, and there was mis-selling. After that, the Government said that the providers should put it right because people made the wrong choice. Do the Government accept any responsibility, or are they happy to accept that some will gain and others will definitely lose?

Photo of Malcolm Wicks Malcolm Wicks Minister for pensions, Department for Work and Pensions

The Government of the day cannot nationalise the risks of making choices. We all make choices about our education, our employment, whether to rent or buy, and what house to buy. It would be absurd if we were to regard these choices as so awful and complex that it was a bad syndrome affecting society. We want to bring in these choices.

When someone approaches 65, many people—certainly most people for the time being—will decide to take their state pension. That is their choice. They might say, ''I have worked hard all my life. Here is an entitlement, and I want to take it''. Others who are still enjoying work and are able to work with an employer who wants them to continue might say, ''No, I want to work on. Why should I retire suddenly because it is my birthday, and regard myself as a retired person when I want to continue working?'' That is the choice that they make. If a year later they regret that choice, is it seriously being suggested that the Government would

be to blame and should pay compensation? That would be an absurdity.

Similarly, for those who defer by a year or five years, the choice whether to take the lump sum—it could be £5,000 or £25,000 depending on the number of years—or the deferred pension involves some thinking. People might want to take advice from friends, the citizens advice bureau or elsewhere. The idea that the Government should nationalise that risk and be responsible if someone chose to defer their pension but later felt that that was the wrong choice for whatever reason is absurd. People make choices about sending their children to this or that comprehensive school. Sometimes they make mistakes and, 10 years on, wish that they had chosen another school, but should the state be responsible for that? With all due respect, the hon. Member for Northavon is looking backwards to the early part of the previous century. I encourage him to be more optimistic and look forwards.

Photo of Nigel Waterson Nigel Waterson Conservative, Eastbourne

As always, I am following the Minister's comments carefully. Does he envisage that this is the sort of issue on which employers will be required to give information? Later in the Bill, we shall see that he is keen to ask employers to provide information and advice on pensions, and there is a lot of sense in that broad concept. However, the interaction between state and occupational pensions and means-tested benefits is one of the bugbears of the pension scene. Does the Minister expect employers to offer advice?

Photo of Malcolm Wicks Malcolm Wicks Minister for pensions, Department for Work and Pensions

It would not be an employer's task to say to a worker that they should make that choice. It is the responsibility of decent employers to counsel people about opportunities to continue working in the company and the associated pension implications. Many do that through occupational welfare advisory schemes.

I encourage Opposition Members to think through this important point. In the 20th century, British society and the British economy discovered retirement—as the hon. Member for Eastbourne said, it happened earlier in Germany. For the first time in our history, working people were outliving their working lives. Encouraged by the then pensioners movement, the state, in the personification of Lloyd George—one of the colleagues of the hon. Member for Northavon, although not a current one—introduced the old-age pension in 1908. We then saw a growth of state and occupational pensions. Not surprisingly for the era, those pensions tended to be tied to certain chronological dates. A person received his pension at 65 or whatever it was. He had to retire from the civil service at 60. Retirement was linked to particular ages.

To outline the broad social philosophy governing our approach to social policy in this area, our contention is that the connection between retirement and one particular age is debilitating and a nonsensical bit of one-size-fits-all welfare state-ism. We want to move away from that. I am more liberal about this than the hon. Member for Northavon, and we are already seeing in the 21st century that individuals are making proper choices about their working lives and retirement lives. I said earlier that we want to move to

a situation where at a certain age a person could draw their pension from a company or a public service, but still work for them. Why should it be one or t'other?

To answer the hon. Member for Eastbourne, a policy on age discrimination will be introduced in 2006. He talks about our manifesto commitment, but later we shall consider his party's commitments. This Government are introducing law to outlaw age discrimination, and we are already working with employers to try to counter the debilitating consequences of such discrimination. I know from talking to my constituents that age discrimination is often as debilitating as sexism or racism in its effect on individual life chances.

There will be a choice. We are moving away from the absurd notion that someone has to retire at 65 and towards a situation in which someone can decide whether he or she wants to retire at a certain point or not. That also has implications for occupational pensions and retirement ages in general. If people want to retire, they will be able to do so. There are no plans to increase the state pension age. That is yesterday's politics, not today's social policy. Someone can also decide to take the deferred pension or have the lump sum. I hope that Committee members will reflect on that and consider supporting the clause.

Photo of Nigel Waterson Nigel Waterson Conservative, Eastbourne 3:30 pm, 16th March 2004

I want to pick up one of the Minister's themes. The Government seem to be sending a clear message that they want people to work longer. I leave aside the age discrimination issue. As a result of pressure from the European Union, they are doing something about that, albeit nine years too late.

The Government are raising the age of possible retirement to 70 for people who make that choice, and they are also raising the early retirement age, through the Finance Bill rather than this Bill, from 50 to 55. Is the Minister aware of the joint campaign of Equity, the actors union, and the Professional Footballers Association? They are both outraged that in the small print the Government intend to scrap a long-standing indulgence granted to professional sportsmen and women, dancers and others which enables them to retire relatively early—at 35, for example—because of the physical requirements of their professions. Will he confirm that that is the intention? What sort of overall message are they trying to send to people who are in work?

Photo of Malcolm Wicks Malcolm Wicks Minister for pensions, Department for Work and Pensions

After Saturday I am too embarrassed to mention the team that I support. Clearly, 10 or 11 of the players had retired halfway through the game.

My understanding is that about 1 million people work after state pension age. My guess is that the numbers will increase. I have lost my precise note on this, but from memory I believe that people's retirements after the state pension age last about 20 years. For women it is longer and for men slightly less. The length of retirements will increase as the century unfolds. The idea that we should have policies that do not give people choices about working after

the age of 65 is wrong. Opposition Members are arguing against the social and economic tide.

I understand the fears, but we need to counter them. This is not about surreptitiously raising the state pension age. The hon. Member for Northavon said that we were almost doing that through the lump sum. That is nonsense. People can take the basic state pension at 65. There are choices about whether to continue working and whether to take a lump sum.

The hon. Member for Northavon, in another moment of cynicism, tried to pour cold Liberal Democrat water on the lump sum idea. Speaking as an egalitarian and a socialist, I think that enabling people to have a lump sum is important in our pursuit of equality. The issue is about choice being enhanced in the pursuit of equality.

Many in our society and in this Room take it for granted that, as part of our pension entitlement, we can take a lump sum to do what we want with, as well as receive a good weekly pension. That has never been a choice for many of our constituents who have never seen £500, let alone £5,000 or £25,000. To enable people to have that option is a proper choice. It will liberate them and enable them to have the wonderful and happy old ages that they deserve.

Photo of Steve Webb Steve Webb Shadow Secretary of State for Work and Pensions

The Minister says that the poor now have the chance to get 500 quid. They have always been able to take their pension and, if they could manage without it, put it in an account and draw it out 10 or 20 weeks later when it had accrued to £500. That has always been an option. It is absolute nonsense to say that that is a new choice for the poor. He has not answered my question about the public expenditure cost of the provision.

Photo of Malcolm Wicks Malcolm Wicks Minister for pensions, Department for Work and Pensions

As a matter of logic, surely the hon. Gentleman accepts that the lump sum option did not exist before. It now exists, or will do so subject to the will of Parliament. By definition, that is a new choice for working people.

Photo of Steve Webb Steve Webb Shadow Secretary of State for Work and Pensions

I do not accept that the lump sum option did not exist before. As I said, people could always have the pension and, if they could manage without it, put it in an account, let it accrue and draw it out after one, two or five years. The only difference between that and what is in the Bill is a few per cent. extra on the interest rate, which we will return to when we discuss schedule 10. The principle is that that option has always been available to the rich because they can manage without their pension and the poor cannot.

The Minister has not told us the public expenditure costs of the clause and he has not answered the specific question about whether most of that will go to the well-heeled. This new choice is basically for the well-advised. I do not suppose that citizens advice bureaux will want to start advising poor people about those sorts of choices, as he suggested, because they will not be qualified to do so. It will be the well-advised who benefit.

Photo of Nigel Waterson Nigel Waterson Conservative, Eastbourne

Does the hon. Gentleman agree that despite being asked to do so, the one thing that the Minister has not given us is his Department's projections on how popular the choice is likely to be?

Photo of Steve Webb Steve Webb Shadow Secretary of State for Work and Pensions

I am sure that the Government are wary of making such projections, because that choice may not be widely taken up, and we all know who will take it up—the well-advised and the well-heeled.

As the clause at least contains an enhanced accrual brought forward, we will not try to remove it. However, the Minister is kidding himself if he thinks that it has anything to do with egalitarianism or socialism because it is a new tax dodge for the well-heeled and the well-advised.

Question put and agreed to.

Clause 221 ordered to stand part of the Bill.