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With this it will be convenient to consider the following:
New Clause 8—Pension flexibility: Treasury analysis—
‘(1) The Chancellor of the Exchequer shall, within six months of this Act receiving Royal Assent, publish and lay before the House of Commons any analysis prepared by the Treasury prior to the publication of Budget 2014 relating to the impact of changes made by sections 39 to 43 of this Act to Schedules 28 and 29 to the Finance Act 2004.
(2) The information published under subsection (1) must include—
(a) any assessment made of the impact of the provision for independent face to face guidance on the 2004 Act;
(b) the distributional impact, by income decile of the population, of changes made by sections 39 to 43 of this Act;
(c) a behavioural analysis; and
(d) the financial risk assessment.’.
Clause 40 stand part.
It is a pleasure, Mr Caton, to be yet again in the exciting environment of the Finance Bill Committee—[Hon. Members: “Hear, hear.”] Everyone is now awake and ready for our debate ahead.
We are coming on to very important clauses. Of course, every clause in the Bill is important, but there are quite a few aspects of its pensions clauses that we want to explore in detail. We cannot predict what will be in the Queen’s Speech, but we expect further pensions legislation. Clauses 39 to 42 introduce a number of transitional measures that will be effective immediately. If pension scheme rules allow, they will give pension savers more flexibility in how they access their defined contribution schemes and savings.
The changes in the Bill follow on from measures affecting the pension regime in recent years, most notably the triple lock, changes to public sector pension schemes, the auto-enrolment scheme for workplace pensions and the introduction of a new flat-rate pension. I mention that because I will want to probe the consistency of approach in the Government’s proposals.
It is worth having something on record about the current pensions regime under which savers are entitled to take up to 25% of their pension tax-free. For the remainder there are four main options. Those aged 60 and over with overall pension savings of less than £18,000 can take that in a lump sum, which is known as trivial commutation. People can also draw down a set annual sum for their pension up to a maximum yearly allowance of up to 120% of an equivalent annuity, which is known as the cap drawdown. Wealthier savers have no set limit on the amount they can draw down from their pot each year but, to qualify, they must have a guaranteed annual income in excess of £20,000 in retirement—that is the flexible drawdown.
The majority of savers—some 75%, it is estimated—purchase an annuity, which is an insurance product through which a fixed sum of money is paid to someone each year, typically for the rest of their life. The Opposition have consistently called for reform of the annuities market because we believe that the cost of savers not shopping around could be as much as £1 billion. Clauses 39 and 40 increase the amounts that savers can access through trivial commutation, cap drawdown and flexible drawdown.
Clause 39 allows those in defined contribution pension schemes to withdraw more money from their pensions annually and reduces the income threshold at which wealthier savers can have unlimited access to their pension pots. For schemes that allow members to take their pension via a drawdown, from 27 March 2014, the cap drawdown limit has been increased from 120% of the amount of an equivalent annuity to 150%.
Before my hon. Friend moves to the detail of the provisions, may I ask whether she shares my concern that these clauses have become necessary because of the sudden introduction of changes that have not been consulted on, researched or trailed? They are necessary because of an outcry from some people that they would find themselves on a cliff edge and denied a better deal.
My hon. Friend makes a good point. Constituents have contacted me about that issue because they worry about the so-called cliff edge. When the overall announcement about pensions was made in the Budget, some organisations suggested that they were “perplexed” at how the announcement had been made. We are now in a scenario in which we have to move on and look at the detail in front of us, but I share my hon. Friend’s concerns.
Clause 39 also reduces the amount of guaranteed annual income that savers must have to draw down their pensions flexibly from the current minimum of £20,000 to £12,000.
The Minister might well say that he is not surprised about the nature of new clause 8, because we are once again asking the Government,
“within six months of this Act receiving Royal Assent”,
“publish and lay before the House any analysis prepared by the Treasury, prior to the publication of Budget 2014 relating to the impact of changes made by sections 39 to 43 of this Act” and the relevant schedules.
We are also asking for the information published as a result to include
“any assessment made of the impact of the provisions for independent face to face guidance on the 2004 Act.”
We will come back to discuss that in due course. We are also asking that the information includes
“the distributional impact, by income decile of the population, of the changes made by sections 39 to 43…a behavioural analysis; and the financial risk assessment.”
Our reasons for asking for that are partly the points raised by my hon. Friend the Member for Edinburgh East. Given how the proposal was introduced, there was concern that not all the information would be available. It is reasonable to ask the Government to do what they can to put such information into the public domain so that additional scrutiny can take place before further legislation is considered.
Clause 40 will allow people over 60 with total pension savings of £30,000 or less to take all out all those savings as one or more lump sums. That is an increase from the current trivial commutation threshold of £18,000. In addition, the clause amends the Registered Pension Schemes (Authorised Payments) Regulations 2009 to increase the amount that can be paid out in small lump sums, irrespective of the overall value of an individual’s pension savings, to £10,000, which is an increase from the current limit of £2,000. It also increases from two to three the number of small lump sum payments that an individual can receive from registered pension schemes other than occupational pension schemes or public service pension schemes.
It may seem to those of us who follow such things in detail, who have some knowledge and information, and the opportunity to find out more about the world of pensions and what the Bill proposes, that these proposals are all well and good. However, we are worried that there is still some way to go to ensure that those people receive the further advice, guidance and information that will enable them to make the best use of the provisions.
We have made it clear that we are not in principle against the idea of increased flexibility for people in retirement and reform of the pensions market, as long as people get a better deal. However, we put to the Minister the real concern that the benefits of greater flexibility might be lost if they are not accompanied by measures and safeguards that will enable savers to make informed decisions about how they choose to save or invest for the future. That has been characterised as us not trusting people with their own money, but that is unfair. It is not enough simply to say, “There you are; on you go.” The Government have a duty to give people information and proper advice so that they can decide what is the best thing for them, rather than putting themselves and their long-term financial security at risk.
The hon. Lady talks about Labour Members being characterised as not trusting people with their money, but that view is held because it was what a senior Labour adviser said on “Newsnight”.
With all respect to whatever anyone has said on “Newsnight”, I am saying that we have concerns because if people do not access the correct advice, they might make decisions that will not benefit them in the long term. We have consistently called for reform to the annuities market and a cap on pension fund charges—certainly while I have been a Member—but our concern is that we have not seen reforms to the private pensions market to stop people feeling that they have been ripped off. We want a system in which people can have confidence and that they trust.
It is not the case that any Labour Member does not trust people to manage their own money, but when money is concerned, the sharks are always circling. The problem is that many sensible people have been caught up by con merchants posing as financial advisers or those who look after people’s assets—[ Interruption. ] From my perspective, such ready access to funds can only lead to a greater number of circling sharks in the highly infested waters of financial management.
There seemed to be some hilarity among Government Members while my hon. Friend was making his valid and valuable point, but I cannot comment on what was going on. Financial advisers in my constituency—I am sure that members of the Committee have encountered the same situation—have warned about people who should not even be describing themselves as financial advisers. None the less, because of a lack of proper regulation, such people might try to give advice to or to prey on people who have lump sums. Such a thing happened in my area following major redundancies after Diageo pulled out of the town that I represent. There is no reason to believe that the people who tried to prey on those individuals affected, some of whom had significant sums, would not do the same in other circumstances.
The hon. Lady makes a fair point because there are individuals who will try to prey on vulnerable people, but that is more a question of regulation. The Government have brought about a profound reform of the regulatory system to ensure that that does not happen. Her argument is rather like saying that we should close down shops because shoplifters are about.
I thought that the hon. Gentleman was about to make a valid point, so it was unfortunate that he ended his intervention as he did. I absolutely appreciate that work has been done to tighten regulation, but many people’s experience is that no matter how much regulation is tightened, there will always be individuals who try to get around it. We will support the Government when we think that they are doing the right thing not only to ensure that people get a better deal, but to give them appropriate protections.
Since I heard the announcement about access to pension pots, I have never thought that thousands of people would rush out and buy a Lamborghini. However, with access to a pension pot of that nature, people might be tempted to spend, say, 15% or 20% of it on a home improvement. There is nothing wrong with that, but perhaps the thinking behind this measure is the Chancellor’s desire for a pension pot-driven mini-boom in the economy.
My hon. Friend again makes a good point. It was unfortunate that some of the debate was couched in the terms of people going out to buy a Lamborghini or something else. The majority of people might be accessing their pension pots for home improvements, for example, that they wanted but could not afford, or to provide something for their family or whatever else. However, if they do not get the right advice on long-term financial planning—I will come to that in more detail—they could make the wrong decisions.
My hon. Friend makes a distinct point. The basis of the argument is not about trusting people with their money; the real issue is good, sound financial advice. I worked as a financial adviser in the past and I know that many investment products over the years have seen people lose their life savings owing to rum advice from poor advisers. If the Government push on with this proposal, does she agree that there needs to be even stricter regulation on the advice given to people?
I recognise my hon. Friend’s experience in this area. That is exactly why I think advice is so crucial. I will talk later about tests that we feel these measures ought to be judged against.
The home improvement example raises an important point. Home improvement is rational not only to improve the home, but as an investment to increase its value. How far does the hon. Lady want regulation to go? Does she want people to take advice before making a home improvement? Most people would regard that as manifestly absurd.
I am genuinely sorry that some of the valid points we are making about access to, and the availability of, advice are seemingly being trivialised. I am sure that the hon. Gentleman pays regular attention and knows to the penny what his position will be in retirement, but many people simply do not do that. One concern is that if people without proper advice make the wrong decisions too early on in the process, they could put themselves and their families at a disadvantage later on. It is in no sense unrealistic for us to ask the Government to take that into account and for that to be part of the process.
An interesting point can be raised about investing money in home improvements, as it all depends on people’s situations. I saw some statistics from the National Housing Federation only last week that showed that, of those who were forced into negative equity after the 2007-08 crash, only 0.8% in the south-east of England are still in negative equity, whereas the figure in the north-east is 56%. Is that an investment?
My hon. Friend makes another valuable point.
Let me come to our three tests. First, there is the advice test. We want to ensure that there is robust advice for people who are providing for their retirement, and that measures are in place to deal with mis-selling, which my hon. Friend mentioned earlier. We all agree that the comment about buying a Lamborghini was perhaps made in jest and not all that helpful, but let us put that to one side and say that we need to ensure that robust advice is available.
Just so that the Committee understands, does the hon. Lady believe that if I, as a pensioner, want to spend that money on a home improvement or a car, I should take advice—yes or no?
As I tried to explain earlier, perhaps the hon. Gentleman knows exactly to the penny how much he is going to have in retirement and what he wants to do with it. However, there will be people who will not have had the benefit of his experience and for whom it would be best to take proper advice. I do not think there is anything wrong in suggesting that advice ought to be available. At the end of the day, people may choose not to listen to advice, but they should be able to access it.
I am a little confused about the hon. Lady’s position. We know that advice is available and that people may take it, but is she suggesting that they should be required to take it? Is she not concerned that it might be slightly condescending towards people to say that, because they are retired, they must need to take advice?
Once again, I am genuinely disappointed that a Government Member is suggesting that it is condescending when we simply argue for proper advice to be available to try to ensure that people are not ripped off and mis-sold. I do not think it is condescending to say that advice should be available
Would it not be fair to say that the Opposition agree with the following statement:
“In expanding the range of choices available there is a corresponding need to help consumers navigate those choices”?
Those are the Government’s words and, for once, I agree with them.
I thank my hon. Friend because I will come on to some of the words in the Red Book, so that makes a neat link.
I have already mentioned what the advice test ought to be, and we also think that there should be a fairness test. The new system has to be fair to those on low and middle incomes, which means that they should still be able to access products that give them the certainty in retirement that they want. The billions we spend in pensions tax relief must not benefit just those at the very top, which is why we have already called for a restriction on pensions tax relief for people earning more than £150,000.
There is also a cost test. The Government must ensure that this policy does not result in extra costs to the state, either through social care or pensioners falling back on means-tested benefits such as housing benefit. I find it difficult to understand why the Government are reluctant to look at the situation in the round and to think about how people live their lives and will have to plan for the future.
What is going to happen with this market is what happens with every market. Now that there is an opportunity, companies will come together and create new investment vehicles. As someone who worked in the industry, I know that such vehicles can be extremely complicated. They can often be very risky, involving investment in the stock market that can go up as well as down, so annuities will still have a role to play as a low-risk investment. There will be more need for good advice. Perhaps I may be so bold as to answer the question from the hon. Member for Dover: if someone does not need advice, they do not have to take it, but good advice has to be available—
Kwasi Kwarteng (Spelthorne) (Con) It still is.
Perhaps I can continue. In a market in which there have been a number of shady deals, equity release will become more of a player, so good advice must be available. Unfortunately, there are sharks in that market, although that is not the case for everybody.
Once again my hon. Friend shows the benefit of his previous work in this area. He gets to the nub of the issue. People do not need to take advice, but it must be available and it must be robust. We should remember that many workers who retire have been in low-income jobs all their working lives and have very modest pension pots, so we need to ensure that they get the best deal.
Let me finish on a point about the cost test. I said that I felt the Government should ensure that the policy does not result in extra costs to the state, which is why the Treasury should publish the analysis of the risks it considered when costing the policy, which the Office for Budget Responsibility described as “highly uncertain”.
I apologise for harking back to a couple of sentences ago, but the high-quality advice has got better under this Government with the delivery of the retail distribution review. All independent financial advisers are required to have a level 4 qualification, as opposed to level 3, as was previously the case.
I think that I acknowledged earlier the work that has been done in that context, but many of us—certainly Labour Members—are aware that that in itself does not fully stop those who will try to circumvent the regulation. People who are not regulated providers will try, in one way or another, to move in when people have money available. We have to be conscious of that and ensure that we do not inadvertently create further loopholes.
It is relevant that the hon. Lady mentioned that many of these pension pots are very small. Would she apply the requirement to take advice when considering purchasing replacement products, or would that apply simply to taking funds out of these pension pots? A constituent who recently came to my surgery was on a modest NHS pension, but also had a very small pension pot that, until now, she had not been able to access, despite being a cancer patient. For her it was a simple question of whether she wanted an appalling annuity rate from which she would never get value. She was not looking at purchasing a complicated product; she just wanted to get hold of her own money while she still was in a position to spend it.
The hon. Gentleman makes a valid point. There are circumstances in which individuals will be able to assess and then make decisions, presumably with guidance, if not advice, in the context of regulated scenarios. Again, I find it quite odd that Government Members seem to be suggesting that we are trying to put onerous requirements on individuals. I want to robust advice that people can trust to be available.
I shall now move on and ask some questions, because it is important to probe what the Government intend to do. Once we are sitting on the other side of the Committee following the election, the circumstances may well be different—[Interruption.] It is up to the Government to answer not only our questions, but those that professional organisations are raising.
I assume that the beady eyes of the Whips would be on me if I tried to go on too long.
Let me bring this back to the Red Book. The Red Book says that
“from April 2015, all individuals with defined contribution pension pots are offered free and impartial face-to-face guidance at the point of retirement”.
The budget for that is just £20 million: £10 million each for 2015-16 and for 2016-17.
Advice is significantly more expensive than guidance. The Association of Professional Financial Advisers estimates that the average flat fee charged by an adviser for annuities advice is £681. The Association of British Insurers estimates that 500,000 members of defined contribution pension schemes retire each year, which means that a full advice service would cost £340.5 million a year. Therefore, we clearly see that the £10 million annual budget is a small percentage of that. The Treasury’s estimates are based on an expected cost of £70-100 per individual, which equates to at least £35 million a year.
I want to probe the Government with some general questions and some questions specifically related to the guidance. The Government recently introduced auto-enrolment for workplace pension schemes. Does the Minister think that there is any contradiction between encouraging people to invest in pension schemes throughout their working lives and the incentives that may encourage them to take money out of those schemes as soon as they retire? Will the Minister explain what financial analysis the Government have conducted on the impact of these clauses? The new clause would require such analysis in the future, but if he can answer that question now, perhaps we will not need to press it to a vote.
Does the Minister have anything to say on the comments made by the Minister with responsibility for pensions, the Minister of State, Department for Work and Pensions, the hon. Member for Thornbury and Yate (Steve Webb)? I do not want to go back to the Lamborghini issue, but does he have any comments on long-term planning as opposed to a quick fix? What was the Government’s thinking on that? The Minister with responsibility for pensions suggested that everything would be okay because people would be covered by their state pensions.
Will the Minister also confirm whether the Government have conducted any consultation on how and where savers will invest the money that they take out of their pension pots? That is important given the concerns expressed by many of my hon. Friends. What—if any—impact does he think that the changes in these clauses will have on the household savings ratio, which the OBR has projected will fall from 5% in 2013 to just under 3% at the end of the forecast period?
I will pose several questions now so that the Minister will have plenty of time for inspiration to arrive before he responds. Will he explain why the proposed guidance will be available only at retirement age and not at, for example, age 55 when many people will have access to their pensions under the increased flexibility? Professional associations have raised that with me.
In the Budget speech, the Chancellor said:
“We are going to introduce a new guarantee, enforced by law, that everyone who retires on these defined contribution schemes will be offered free, impartial, face-to-face advice on how to get the most from the choices they will now have.”—[Official Report, 19 March 2014; Vol. 577, c. 793.]
The Committee will see why we have spent so much time looking at what that statement means in practice, because advice and guidance are very different. The Chancellor used the term “advice”, but the Red Book refers to “free and impartial…guidance”. I would like to hear the Minister’s explanation of why the Budget speech referred to advice and the Red Book says guidance. Which will it be, and why is that? I am sure the Minister appreciates from a legal standpoint the fundamental difference between advice and guidance. In the Treasury Committee, one of my hon. Friends pointed out that advice is regulated and, as we have heard this morning, it carries significantly greater consumer weight than guidance does.
Was the use of the word “advice” in the Budget speech an oversight? Was it just one of those unfortunate things that happen and may lead to confusion? Will the Minister also inform us who should provide the guidance? If the guidance is given by pension providers, how will the Government ensure that the advice is impartial and in the interests of the saver? Will he also confirm that the Government intend everyone, regardless of where they live, to have access to face-to-face guidance? That is what has been said and I would like to hear that commitment again. I want to know how that will be offered in practice.
On cost, will the Minister confirm how the £20 million allocated to providing free and impartial guidance will be spent? According to the tax impact and information note, the measures in this year’s Bill will enable up to 400,000 people to draw down their pensions. Will the Minister explain why no money has been put aside for that free and impartial guidance in this financial year? Will the Minister say more about the difference in value between advice at an estimated cost of £681 per individual and guidance, set by the Treasury at £70 to £100 per individual? What is expected in return for that money paid?
The cost of guidance has been estimated at between £35 million and £50 million annually. That is significantly above the £10 million per year that the Red Book outlines. Will the Minister tell us how that gap is to be met? If it is raised by, for example, a levy on the pension providers, will not the cost inevitably be passed on to the customers? Will the Minister explain why there is no budget for advice beyond 2016-17? Are the Government looking only a couple of years ahead, or is there a specific reason why they have decided not to include it beyond that date?
I understand that the Minister with responsibility for pensions told the Work and Pensions Committee that the provision of guidance will lead people to take more formal advice. I want to probe the Minister’s thinking on that. We have had a lot of discussion about whether people should have advice or should be required to take advice, how they will do so and how it will be provided. Does the Minister think that the provision of the guidance is simply a stepping stone that would encourage the individuals involved then to seek formal advice? We need to understand the Government’s thinking on that.
We also need to understand the costings, because the changes could potentially lead to individuals incurring expense at a later stage. I have left the Minister with a number of questions to answer. We have probed a number of the issues, and I will want to come back to points raised by other clauses.
I want to end with a point raised by the Low Incomes Tax Reform Group in its briefing on this set of clauses. It says it welcomes the extension of the limits for trivial commutation of small pots, which we have already mentioned. It has pointed out that it is concerned that there is an anomaly for the rest of this tax year, and that those at the bottom of the income distribution, with only small pots, will be constricted by “two shackles”, as it puts it. The first is that, with one or two minor exceptions, they must wait until they are aged 60 to effect a commutation, and the other is that, within the £30,000 limit, they must complete all commutations that they ever wish to take within a 12-month period. By waiting until April 2015, they will be able to exercise their choice at age 55, and at any time that suits them, perhaps making full withdrawal now from one fund and then, five years later, from another one.
The LITRG also asks whether it is unnecessarily onerous to continue with the restrictions for the rest of this tax year, at the inconvenience of those whose financial plans or circumstances would lead them to operate under the existing rules. Has the Minister considered those points, and the LITRG’s specific request to amend some of the rules to bring them into line with those for larger pension schemes? I have probably given the Minister enough food for thought just before lunch.
It is a pleasure to serve under your chairmanship, Mr Caton, and I will keep my remarks pithy, as is the wont of Government Back Benchers.
I welcome the clause and the intended reforms. Back in 2004, I wrote a paper entitled, “Ending Pensioner Poverty” for the Centre for Policy Studies, and I advocated an increase in the retirement age, a flat pension and the scrapping of the annuity requirement. I have a long been a troubadour for the kind of reforms that, a decade on, the Government are rightly making. It is a massive, important reform.
“There are clearly advantages to this liberalisation. It will allow people freedom to manage, and make choices over, their own affairs. It will likely increase the incentive to save in a pension. And some of the biggest worries that have traditionally held governments back from such a move are becoming less salient. In future fewer people are expected to be falling back onto means tested benefits in retirement, and so the incentives created by means testing to reduce income or assets in order to qualify for benefits are, for many, less salient than they were.”
That is the key issue. It is all about increasing pension saving. We saw the pensions tax, which destroyed confidence in savings for pensions, and pensions means-testing, which was massively corrosive to the savings culture that we had built up. We had such a great pensions system and so much damage was done.
The reform will, I hope, reignite the culture of saving for retirement, which was so hard won over such a long time and so quickly lost. The hon. Member for Kilmarnock and Loudoun spoke about advice. I asked whether someone should take advice on the money required for home improvement or to buy a car. The Opposition were not clear on whether seeking that advice should be voluntary or compulsory. I got the impression from the Opposition that it should be compulsory. No one would realistically argue that advice should be compulsorily taken on whether someone should spend money on home improvement or to buy a car. With respect to the Opposition, they muddled two things.
No, I would not accept that at all. The Red Book says on page 44, at 1.160:
“The government recognises that under the new system it will be important that people are equipped to make the decisions that best suit their personal circumstances. The Budget therefore announces that the government will introduce a new guarantee that everyone who retires with a defined contribution pension will be offered free and impartial face-to-face guidance on their choices at the point of retirement.”
To my mind, that means the availability of that advice, free, face to face, if people need it. I believe that the Opposition are slightly mistaken. One gets the impression that they are concerned about people being mis-sold products; that is a matter of product regulation and product marketing. It is not a matter of the person deciding whether they want to take their pension and spend it, and how that pension is spent. It is about the products they then buy and how those products are regulated and marketed. There is a big gulf between the Opposition’s real concern and the reality. Their concern is not about pensions and pension draw-down, but product regulation, which is a separate issue.