Clause 221 - Deferral of retirement pensions and

Part of Pensions Bill – in a Public Bill Committee at 2:45 pm on 16 March 2004.

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

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.