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The amendments seek to alter the Bill with one important change. The Bill states that
“an authorised Retirement Income Fund provider must set an annual maximum withdrawal allowance for each member, based on an assessment of each member’s life expectancy, and a member’s withdrawals from the fund in any one year must not exceed that allowance.”
If, having set up a retirement income fund, someone is diagnosed with a serious illness and their life expectancy dramatically shortens, it is in their interest and that of public policy to increase the maximum amount they are allowed to withdraw.
The amendments seek to allow for the maximum amount to be regularly reassessed in line with their shortened life expectancy, so that they are not short-changed by the bureaucracy.
My hon. Friend’s amendment is not only practical but humanitarian. It would be sensible to be able to respond to the special circumstances to which he referred, so I am happy to accept his amendment.
I beg to move amendment No. 26, in page 9, line 38, at end insert—
‘(9B)A SaRA may be converted into a Retirement Income Fund at the account holder’s sole discretion, providing that he is either—
(a)over the age of 60, or
The amendments are motivated mainly by the recently published Turner report. They seek to allow people to specify the time at which they wish to begin their retirement. At any point after 60, someone should be able to say that they wish to convert their SaRA into a retirement income fund. Importantly, however, that date should not be specified. They may wish to convert at 61, 71 or, indeed, 81, depending on their personal circumstances.
There seems to be unanimity throughout the House about allowing people to choose their own date of retirement and to choose a later date if they want to. If someone chooses to retire at 71, it is in everybody’s interests to allow them to continue working until 71. Under age discrimination laws, companies can fire somebody without any come back when they reach 65. The amendments seek to remove that exemption, so if someone has not opted to retire or had not converted their SaRA to a retirement income fund, they could not be fired by their employer simply on grounds of age.
Yet again, my hon. Friend has put forward some changes to the Bill which, at first inspection, seem to benefit the way in which the retirement income fund would operate. Between now and Report, we shall have time to consider the wider implications and, if necessary, table any further amendments.
The clause is the first of part 2 and relates to the proposed retirement income funds. The provision is a response to remarks made about previous private Members’ Bills and previous attempts to remove the compulsory annuitisation provisions.
In the past, the Government have made their objections clear, and we have sought to endorse at least one aspect of their concerns. The concern expressed has been that in trying to meet the wishes and to provide flexibility for those who do not wish to take out annuities up to the age of 75, we might be introducing new obligations for the higher number of people who have happily taken annuities and are likely to be willing to wish to continue to do so over the years to come. It is no part of the Bill’s purpose to impose obligations on anyone. We seek maximum flexibility, and the retirement income fund is a way of meeting that need.
The provision once again draws on north American experience. That is important, because when introducing a new provision in a complex area, it is reassuring to know that the proposal has worked satisfactorily for a good number of years in another western, highly developed country with a developed pension structure. The Committee can be confident that the proposals would meet the need.
Clause 9 would amend the Finance Act 2004 to allow the creation of retirement income funds. They could be operated only by or on behalf of the person authorised to operate a registered pension scheme, and only investments approved by the Inland Revenue could be made by such a fund. It would have to meet certain conditions. The funds held should be invested and withdrawn when the scheme member so requests, and an authorised provider must set an annual maximum and minimum withdrawal allowance for each member, based on an assessment of each member’s life expectancy. A member’s withdrawals from the fund in any one year should not exceed that maximum allowance.
Other additional conditions have been included to prevent someone who has a fund from falling back on means-tested benefits at any point in the future, which has been one of the Government’s prime concerns in recent times. The annual maximum withdrawal allowance must be set so that no member’s total future income falls below the minimum retirement income level and so that each person’s total income is at least equivalent to the MRI. If a member chooses not declare his total annual income, he must withdraw funds equivalent to the MRI level or his annual minimum withdrawal allowance, whichever is lower.
Finally, additional conditions provide for situations in which individuals have small retirement income funds, which means that they will need to claim means-tested benefits in the future if they live as long as expected. It should be noted that some people with small annuities can also find themselves in need of means-tested benefits, either when there are insufficient funds to enable the annual minimum withdrawal allowance to be set so that a member’s total income is at least equivalent to the MRI level, in which case the allowance should be set at the highest level consistent with the member’s assessed life expectancy, or if a member’s total annual income, including his maximum withdrawal allowance, is lower than the MRI level, in which case the maximum and minimum level allowances must be identical.
The provisions meet the Government’s concern about avoiding any unnecessary dependence on state benefits. In response to a point made by the Minister on Second Reading, I emphasise that he cannot argue that the existing compulsory annuitisation always prevents dependency on benefits. There are circumstances in which, even with an annuity, some benefits are required and persons entitled to them. In the same way, that would be the consequence of these proposals. However, they would provide the flexibility that is an important objective.
I hope that the Minister, who is part of a Government who have consistently opposed such measures, will take account of the Turner commission’s views on this important area. The commission has recommended first that the age for first possible and last possible annuitisation should rise over time in line with life expectancy. In other words, the Government should not be committed to the 75-year requirement. Turner also urges a review of the case for a cash limit on the amount that individuals are required to annuitise at any age, so that a wider market for drawdown products can develop.
Turner is, I think, recognising that the Government’s position is increasingly unsustainable. The clause is a constructive way of providing an alternative, and I commend it to the Committee.
We entirely support the proposals, which are very much in line with—indeed, a refinement of—provisions in a series of private Members’ Bills presented by Conservative Back Benchers. They are a recognition that, in this day and age, there is a feeling that compulsory annuitisation, up to the age of 75, is outdated and unfair, and often brings very limited returns. We are almost the only developed country where it is still a legal requirement.
With all the conditions that my right hon. and learned Friend has explained in detail about ensuring that the Treasury will not be losers the clause seems to us to be the way forward. I believe that the Government see that, because they try constantly by spin to show that that their alternative secured pensions proposals achieve just the same. Of course, they do not. We need a clear, coherent proposal, like that in the clause, which sweeps away the obligation to annuitise at a certain age and gives people the flexibility that is so important. I hope that such a proposal will, in the longer run, play its part in encouraging people back into savings, which we badly need to do if we are to begin to deal with the pensions crisis.
I have just a couple of observations on the retirement income fund. It is another interesting idea and another reason for my welcoming our debate on the Bill, which is drawing, as the right hon. and learned Member for Kensington and Chelsea said, on Canadian experience. However, a concern that I raised on Second Reading was the danger that people would run out of money late in their lives. In the debate I drew attention to the advice issued by the Canadian Bankers Association:
“If you take out too much, too soon, you may outlive your RIF and may be short of funds.”
The prospect of that happening to someone in their mid-90s with no dependants is very alarming, and we should create safeguards against it.
I think that the right hon. Gentleman suggested on Second Reading that the risk would be theoretical, but that is not so. In Canada, it is a significant risk. I have had the opportunity, since Second Reading, to read the interesting paper by Professor Milevsky of the Fields institute in Toronto, called “How to Completely Avoid Outliving Your Money”. He goes into the issue at some length and concludes that what we need are annuities. There are real difficulties about the idea, which require further thought, beyond the provisions in the Bill.
I should also point out that quite a few changes are being introduced, such as the change to the trivial commutation limit; the change in the rules on income withdrawal from A-day; the innovations of limited period annuities and value-protected annuities whose attractions Professor Milevsky particularly celebrates; and, alternatively, secured pensions, which the hon. Member for Eastbourne mentioned. The right hon. Gentleman’s idea is interesting, but involves some serious difficulties that require further thought.
The Minister has put me at a disadvantage. I must confess that I am not familiar with the views of Professor Milevsky, and the Minister did not think to give me advance notice that that learned professor’s views would be almost the only argument that the Government could advance against the clause. The Minister has argued that some people might at a very elderly age run out of necessary funds. He is correct, of course, but that applies under the existing arrangements in the sense that even with an annuity, people might find themselves dependent on benefits because the annuity is very small. As the Minister knows, the vast majority of people will increasingly have several sources of income in their retirement. They will have some element of the state pension and an occupational or other pension, so they will not be entirely dependent on the retirement income fund in order to meet the minimum income guarantee.
My final point is that the fund is only an option available to people. No one will be required to go into a retirement income fund. If they wish to have an annuity, they will have the same rights as they do currently to continue doing so. On that basis, I commend the clause to the Committee.