Only a few days to go: We’re raising £25,000 to keep TheyWorkForYou running and make sure people across the UK can hold their elected representatives to account.Donate to our crowdfunder
I remind the Committee that with this we are considering 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 to serve under your chairmanship, Mr Streeter. I should like to follow the remarks of the hon. Member for Dover, who expressed a common-sense view of the changes to annuities. [ Interruption. ] I used to sell these things and I can no longer pronounce the word. We are at a time of transition when the retirement income landscape is facing a massive upheaval. We should not forget the many tens of thousands of people who want to retire and most will need to switch on a regular income. Fixed-term—
They are one way of making the transition into retirement while waiting for the dust to settle. Under the current pension system, retirees typically exchange their entire pension savings for a lifetime—help me out again—[Hon. Members: “Annuity”]—that pays out a guaranteed income every year for the rest of their lives. This removes all the risk, in that they know exactly what they will get, year in, year out, but with annuity rates halving in 15 years, pensioners have been getting a raw deal. That is why we should support the Government’s move to allow more people to have control over their pension pot.
One thing I will say—I did some research into this during the recess—is that the industry has already moved to one-year annuities. They are intended as an interim measure for retirees who want to wait for new rules to kick in. With such major changes on the way, a short-term solution could work well if they need a reliable income now or if they want to bridge the gap between semi and full retirement without committing to a lifetime annuity or exposing their pension to an investment risk.
However, drawdown rules can make that more complicated, not least because if people do not take the 25% tax-free lump sum to which they are entitled at the start of the contract, they simply lose it. This is where I depart from the hon. Member for Dover. To me, comprehensive financial planning and advice is crucial. The costs may be prohibitive on a product that lasts for only one year—that is already beginning now. Another drawback is that the time scale leaves no opportunity for a return on investment, so people may be better off leaving their pension as it is until next April. If they will be getting a lifetime annuity in a year’s time anyway, there is a risk that annuity rates will be even smaller than they are now.
It could be six weeks by the time someone got their funds transferred to the new provider and benefits commenced, and by then they would have only about 10 months until the new rules came into play. Some people have predicted that the pension revolution will sound the death knell for annuities, but over the two or three years, new and more flexible products will come on to the market. There will be new vehicles. I fully support what has been said. If someone wants to draw down their pension pot for a house repair or to pay off their mortgage, that is their prerogative. It is their money and they can do what they want with it. It has already been pointed out that 353,000 annuities were sold last year and they offered a fixed income which is diminishing each and every year. Yes, there should be new entrants to the market and this is one way of doing it.
I am deeply concerned about what the Minister of State, Department for Work and Pensions, the hon. Member for Thornbury and Yate (Steve Webb) said when he appeared before the Select Committee on Work and Pensions on 29 April. He said that it was 15 minutes’ worth of guidance, to which £20 million was being committed over the next two years. It is only 15 minutes’ worth. When I had a customer in front of me, it took me two hours to work through their needs. When giving someone independent financial advice, it is not just their pensions that have to be looked at, but their investments, their income and what is the right product for them. It is not possible to do that in 15 minutes.
Equally, when the Pensions Minister appeared before that Committee, he said it was not independent financial advice. That concerns me. The hon. Member for Dover asked whether what was proposed was voluntary or compulsory. Personally, I think it should be voluntary. He also made a succinct point about product mis-selling. This is the major outcome of the change; we have to be careful about mis-selling. I cannot speak from experience anymore because I have not worked in the banking industry for 10 years, but the pressure for sales moves some people to make—to be kind—unwise choices when advising clients, such as suggesting bonds for them that were unacceptable. I remember an extreme case where someone said to a client who was coming up to retirement at 65 with £50,000 of life savings, “I’m going to put you in a savings account; I’m going to put you in a bond.” The client asked what a bond was. At that time we were just at the lip of the dotcom bubble, so we had a bond and were investing heavily in internet start-ups. That bond unfortunately did not return. The financial adviser said to the gentleman, who did not understand what a bond was, “It’s just a savings account without a card to draw out money.” That worries me.
The hon. Member for Wyre Forest said that financial advice is now better than it has ever been in this country, and I absolutely agree. I know that people sometimes think that I am on the left, but when the Government have done well, I will commend them. [Interruption.] I can see the hon. Member for Spelthorne smiling—I think that that is the first time I have ever said anything complimentary about the Government. [Hon. Members: “Sit down.”] I should stop now.
The rules that have been introduced are shoring things up, but I really want to see far cheaper and more accessible advice. I also want to see some solidness when it comes to financial advice. We have seen so many changes in the past 20 years. We have gone from tied agents, who would sell only the products of their bank, to independent financial advisers, who can charge a fee to show various products. I would like to see some sternness.
When the Minister responds, he must address the possibility that there could—I stress: “could”—be mis-selling of the complicated products that will come into the markets. I will not condemn the industry; it is fast-moving, as it was when I was there. The industry must provide products, and there is an opportunity for that. Products will be more complicated than ever before, just as—I will stray outside the content of the Bill—pensions are rather complicated; as someone who worked in the industry, I feel out of the loop even now, all these years later.
The changes that have been made to benefit 9 million people who were entitled only to a state pension are to be welcomed, and they have been required for many years. However, I am concerned about the mis-selling that has occurred and is still perpetrated in the financial industry. It is not everyone—I do not want people thinking that—because there are some excellent financial advisers out there, and I hope that the people to whom I gave financial advice thought that about me, but that is for them to decide. Nevertheless, I would like those two issues addressed.
The provision of £20 million for 15 minutes of retirement advice for everyone should be commended, but I would like to see that advice given on the whole system.
I am listening carefully to the hon. Gentleman, who speaks with great experience. Has he considered the use of the internet as part of the initial fact-finding process? There will always be a need for face-to-face advice, but would internet-based fact finding reduce the amount of time taken, improve consistency and provide an audit trail to guard against potential mis-selling or poor advice?
That is an excellent idea, and it would also save money, although it is for the Minister to respond on rolling out such a scheme, rather than me. Nevertheless, the hon. Gentleman has a point that is worth investigating. I hope the Minister will look at that idea.
We have had our issues with legal aid, but I genuinely believe that we should look at whether the old legal aid system, whereby people were allowed half an hour of free advice, might be a model worth following. I do not know how much that would cost, but it is something to look at.
How will the Minister ensure that products are not mis-sold to pensioners? We have seen a lot of such abuse over the years. Yes, it has been cut out, but we do not want to see a repeat of the behaviour of Equitable Life, Barlow Clowes and other companies, so I hope the Minister will address that.
It is a pleasure to serve under your chairmanship, Mr Streeter. It is also a pleasure to respond to some of the mood music on this issue. When major changes were made to pensions in the 1980s and the state earnings-related pension scheme was effectively ripped apart, I suspect that many of the same things were said about how wonderful it was to give people freedom of choice and how people would not be constrained by having to contribute to something given to them by the nanny state. I am sure that was greatly applauded by the Government of the day. The problem for many of us, even at the time, was that we saw the downsides.
I well remember that my secretary at the time was keen to stop contributing to SERPS because of the cost and because she had teenage children and things were difficult. She was only in her mid-30s, so retirement seemed a long time away. She was not necessarily able to make huge savings, so her choice was to leave SERPS and take out some form of private pension. Many of the people who did that did not sustain or keep up their private pension for long, and some were clearly mis-sold pensions.
It has taken a long time to claw back from that position and ask, “What do we do next?” I say that before people feel too sure that this proposal is absolutely fantastic. It is seductive to say that we are giving people a chance and all these free choices and, if they do not buy into it, patronisingly to assume that they cannot think for themselves. There is a strong public interest in pensions. That is why, unless we decide that we will somehow back off altogether, we give tax relief to pension contributions. We want to encourage people to make savings in that format, which has been the case for many years. There is a clear public interest in what happens to money thus saved.
The other public interest is in where people are left when they retire. There are many reasons why people who retired in the past 10 years, or who may retire in the next 10 years, have had pension difficulties, and we all have our own pet theory of what is to blame. There are a load of reasons, and I suspect they are all right.
We have to be careful when making changes. One of my worries—this is why we are considering these clauses—is that the decision to make the change seems to have been arrived at in a fair degree of haste. The last Labour Government did a lot of work on pensions. There were many reports and a real attempt made to achieve consensus on pension policy. In some ways, those things have been continued by the current Government. The framework for auto-enrolment, for example, was set by the last Government and has been continued by this Government, which is a good thing. Decisions needed to be taken on things such as the rise in pension age. We might disagree on the speed of that rise, but the concepts behind it were considered by the work under the previous Government, who took many of the first steps.
The previous Government’s changes to the state second pension and the much maligned pension credit have created the basis for the single-tier pension because all that expenditure is now in place. If we were not already spending a considerable amount on pension credits, and if we did not already have people who have a state second pension, whether derived from the original SERPS or from subsequent schemes, it would be much more difficult for a Government to walk in and say, “We are going to create a single-tier pension.” The previous Government’s plan was to move towards that, albeit in a slightly different way. Nevertheless, a lot of the thinking on pensions was substantially shared, and there was a real feeling that there had to be a settlement for a generation.
We wanted to be in a position where people could have a certain degree of security. That sounds attractive, but in the Budget—we are picking up the pieces in a Finance Bill—the Government are saying, “We’ll just basically change all that without looking at the implications.” The measure might not cause problems in future, but we have yet to see any real modelling to suggest that that will be the case. We do not know whether people drawing down far more money in cash will have implications for those individuals and for all of us as a society, in terms of the costs that must be met.
We have a social care time bomb. For many people, the costs of social care are a big issue. Capital in the form of pensions is not taken into account, but capital in other forms might and probably will be under current rules. What are the implications for people’s future well-being, their families and the cost of our care system? Those are important issues. How many people might still be dependent on means-testing?
It is easy to say, “We’re going to have a single-tier pension and that solves the problem,” but I served on the Pensions Bill Committee and the Work and Pensions Committee and have looked at the proposal in more detail, and things are not as clear-cut as is sometimes suggested. Not everybody will get the full amount of the single-tier pension immediately. Those who have reached pension age are not covered—that includes women over the age of 60 or 61 and men over 65. They are likely to live for another 20 to 30 years and are exactly the kind of people who will be involved in those decisions. They will not be beneficiaries of the single-tier pension because they are not covered by it, but they have probably not made their final decisions on what to do with their pension funds. Those people are approaching the age at which, under the current rules, they have to think about taking an annuity. That large population of people over pension age are involved, but they are not protected by the single-tier pension. We must not forget that.
Some people will retire under the single-tier pension but will not get the full amount. According to the Department for Work and Pensions impact assessment, the number of people who will get the full amount, but still be entitled to means-tested benefits of some kind—housing benefit or council tax assistance, for example—is quite high. That is clear in the impact assessment. It is not as if, in one bound, we are free of that problem and everything will be wonderful. Perhaps I am a pessimist; perhaps I am absolutely wrong and the changes will make no difference. However, not doing the work before making the changes is dangerous and has put us in this position.
This measure flies in the face of other provisions. The Work and Pensions Committee has had considerable discussions with the Pensions Minister about the possibility of improving defined contribution schemes and creating something between defined benefit pensions and defined contribution pensions, but that allows for a form of collective risk-sharing that enables people to get a better deal—the Minister has called it “defined ambition”. However, that seems to be put in jeopardy by these proposals. If there is no clarity about the sorts of funds there will be and whether they will be retained for a long time, how can we have such collective defined contribution schemes?
That was supposed to be the direction. In fact, we were promised legislation on precisely that. I know that because the Work and Pensions Committee was told to put some time aside to carry out pre-legislative scrutiny on a pensions Bill along those lines, to deal with things such as defined ambition schemes, which the Minister was keen on. We were asked to do that at the back end of last year, but the whole thing went into the long grass. If a view has been taken that that was the wrong thing to do and we should be moving in a different direction, that is all very well. However, if we do so on the back of a Budget proposal that is not fully fleshed out and has not been modelled, risk assessed or looked at alongside other options, we may well find ourselves in a difficult position in future.
Experience, sadly, tells us that however we control the schemes that go forward—and we certainly must control a lot of them—the variety of schemes that can be introduced and the way they tend to be sold means that a number of different products will almost certainly come forward that people will be tempted into. I do not think it is in any way patronising to say that people need extremely good advice, and I do not think it is enough to put guidance on the internet for people to look up. Of course they can do so, but there are lot of other implications to look at.
Does the hon. Lady acknowledge that greater choice already exists in markets in other sensible countries, such as Australia and Denmark, and that we are talking not about some highly experimental new system but about something that will extend choice for UK pensioners as well?
It exists in some countries, but I would not say that it is entirely problem-free. In Australia, for example, there is a compulsory superannuation scheme—it is not an opt-out scheme like auto-enrolment in this country—which has been in existence for considerably longer. Anybody who has been auto-enrolled in the past couple of years has not built up much at all; it will take some time for that to happen. In that wider context, the earnings-related superannuation scheme, which people join when they are really quite young, gives people a much firmer underpinning base than the contributory state pension. It has been running for some time, and it is compulsory, so people cannot decide that they will not be part of it. What I am saying is that if that was the right change to make, the decision would come after a lot of work had been done.
I am sorry to harp on about Australia, but we can learn a lesson from it. When the scheme was introduced there, there was a drive to pay off mortgages, which left a lot of people with a shortage in their pension pot because while they were in their house, they did not have a regular income to live on. Does my hon. Friend agree that we can learn lessons from Australia to ensure that we are not left with a situation in which people have a large amount of money in their properties, but no regular income?
That is certainly one factor to look at. Many of the people who may be affected are among the generation who were suckered into endowment schemes that were supposed to pay off their mortgages in full. However, many of them found that, when they got to retirement, the endowment policy did not pay off their mortgage, so the idea of another lump sum that they could use to pay off their mortgage may seem extremely attractive. There is a problem, however, when it comes to how they will make their income last for 20 or 30 years. The cost of living for those in their 80s or even older is higher, because they have higher heating costs, and they often have health issues and need care. The care that we supply as a society is relatively limited, so people have to be in a position to purchase care from their own resources. That must all be looked at very carefully.
It is not good to make pensions policy, which is a long-term issue. on the strength of saying, “Oh, isn’t it a good idea that people can draw down much more money than they could before?” As soon as the policy was announced, a lot of people started saying, “What about us? What about those of us who cannot wait till next year and might be on the point of having to make a decision now? We would rather be able to have some of that freedom now.” The outcry was not surprising, and it is partly why we have these provisions in the Bill with an even greater hurry than for the provisions to be implemented in 2015.
For some people, the mood music may be, “This is marvellous. We are trusting people with their own money. It will all be fine.” Again, that is not a good way to make long-term policy. We must get our assessment right. We must review what is happening very quickly, rather than leaving it for 10, 20 or 30 years.
Many of the people affected by some of the worst pensions mis-selling and who got caught up in things like Equitable Life thought they were quite canny and able to cope. Some of those people are my constituents, who thought that they were safe and secure. The problem with financial advice remains, although the recent changes have had lots of advantages, one being that people are clear that the advice they are getting is not simply paid for through concealed commission. However, a lot of people will not pay for the financial advice on offer, however well trained people are, because it is an extra expense. It is also an overt expense, because although people were paying for such advice before, they did not realise that because they were paying through commission. Are we sure that people will always get the full advice that they need? Everyone has said that the guidance that has been proposed is clearly not financial advice, so we must be clear about what we are offering people and at what cost.
It is a pleasure to serve under your chairmanship again, Mr Streeter, and to follow my hon. Friends the Members for Islwyn, for Edinburgh East and for Kilmarnock and Loudoun. Unlike my hon. Friend the Member for Islwyn, however, I will not be complimentary about the Government in any way, shape or form.
The Government really have a job on their hands to convince a sceptical public about the true motivation behind their pension proposals. I say that because it is clear that the Conservative party has form on short-changing pensioners. My hon. Friend the Member for Edinburgh East referred to that when she talked about how the state earnings-related pension scheme was decimated as a consequence of the previous Conservative Government’s Social Security Act 1986.
Thank you for your advice, Mr Streeter. I am sure the hon. Gentleman will welcome the fact that current pension policy has led to an above-inflation rise for pensioners, which is not something I recall happening previously, without wanting to look into pension history.
I acknowledge that there has been some improvement on pensioner poverty since the 1990s, but the public will be sceptical because the Conservative Government’s policies and legislation created the opportunity for spivs and fraudsters to dupe people into giving up their occupational pensions. As we all know—my hon. Friend the Member for Edinburgh East referred to this—that led to the pensions mis-selling scandal. The hon. Member for Dover expressed his concern about pensioner poverty, but the truth is that, from 1979 and through the 1980s, pensioner poverty significantly increased, and there is ample evidence of that in many academic works, although I acknowledge that the situation started to improve in the 1990s. The situation is detailed in the Smith Institute report “From the Poor Law to welfare to work” by David Coats, with Nick Johnson and Paul Hackett, which is clear that there was a “significant rise” in pensioner poverty “in the 1980s” and that then followed
“falls in pensioner poverty from the early 1990s”.
It is clear that policies that previous Conservative Governments introduced resulted in real problems for many pensioners, which is why the public will be sceptical about the proposal before us today and why it is important that the Minister answers the questions asked by my hon. Friend the Member for Kilmarnock and Loudoun.
I just wanted to check that the hon. Gentleman was not accusing all financial advisers of being spivs or fraudsters. If he was, I think he owes the hon. Member for Islwyn an apology.
The hon. Gentleman had his tongue firmly in his cheek while making that intervention. I was clear that I was not saying that about all financial advisers, or that my hon. Friend the Member for Islwyn was anything approaching a spiv or a fraudster. It cannot be disputed, however, that the Social Security Act 1986 made available opportunities for spivs and fraudsters, and many thousands—if not hundreds of thousands, or perhaps millions—of people who opted out of their occupational pension schemes were mis-sold pensions and got a less good deal.
My hon. Friend the Member for Islwyn made a point about the advice that will be available when he said that the Minister of State, Department for Work and Pensions, the hon. Member for Thornbury and Yate, said in evidence to the Select Committee that the only 15 minutes’ advice would be available. That is clearly not very long to plan for the rest of one’s life; my hon. Friend, who has experience in these matters, said that at least two hours would be required to give such advice.
There are also questions about whether what is on offer is advice or guidance, and what the difference is. The Chancellor said in his Budget speech that “face-to-face advice” would be available, yet page 44 of the Red Book is clear that
“free and impartial face-to-face guidance” will be made available. The Minister owes us an explanation of what that will be. Will it be advice or guidance? What is the difference, and why is there a discrepancy between what the Chancellor said and what appears in the Red Book? The Minister is chuckling, but this is no laughing matter for many people planning their future incomes. He owes it to future pensioners to treat their situation seriously and with respect.
The hon. Gentleman talks about advice and people making serious decisions about their long-term futures. In that case, will he consider the merits of some de minimis value criteria? Surely he would not wish to place administrative burdens or expensive requirements that would not represent value for money on someone with a very small pension pot that cannot make a large difference to their future.
It is not for me to say what should or should not be done; I am merely asking questions of the Government. The Government are coming forward with the proposals. In the fullness of time—from next May when, hopefully, we are in government—we will put forward our own proposals and answer for them in the House. However, we are here today to scrutinise what this Government—the Government whom the hon. Gentleman supports—are doing. It is incumbent on the Minister to explain whether it will be advice or guidance, and what the difference is. What form will that advice take? Will somebody be entitled to face-to-face advice if they live in a remote part of the Highlands of Scotland or Cornwall?
I am sure that the Minister will be grateful for that helpful explanation, but we are still to hear from him whether those words mean one and the same thing, or whether there is a difference. It is significant that the Chancellor chose to use one word while the Red Book included a different one. The important point, however, is whether people, irrespective of where they live, will be entitled to that face-to-face guidance or advice—whichever it is, and whether they are the same thing—so will the Minister address that point?
Who will benefit from this proposal? New clause 8 would help us to tease that out. It is important that we know who will benefit because, if we go back to the time of the Social Security Act 1986, it certainly was not people who opted out of their occupational pension schemes and took up personal pension plans but lost out as a consequence. We do not want a repetition of the mistake made by the Conservative Government of the 1980s.
Can we be certain of whether this proposal will end up costing more or less? We have heard Ministers saying that they are perfectly relaxed, but this illustrates how out of touch they are. They talk about people buying a Lamborghini, but in reality most pension pots are nowhere near sufficient to buy even half or a quarter of a Lamborghini. People might be able to buy a Lamborghini door, but not the full monty.
We have heard that people will be able to fall back on the state pension scheme, but are we going to have the situation whereby millions of pensioners will be living in poverty if they spend their pension pots unwisely? What protection is there to help people to make the right choices? Is the Minister certain that, in the long run, this will not end up costing the taxpayer more as a consequence of more people falling on hard times, because their pension pot has run out and they have to resort to means-tested pensions instead? These are important questions and people deserve to know the answers. Until they do, the public will remain sceptical about the Government’s intentions.
It is a pleasure to serve under your chairmanship, Mr Streeter. It is also a pleasure to follow my hon. Friend the Member for Derby North—or, as he is known on these Benches, the Member for the constituency of blue touch paper, thanks to the way he fires up the Opposition.
I never thought I would agree with Charles Moore from The Daily Telegraph, but he said the other week that the primary purpose of pension provisions for the long term was not to be deflected. So everyone being entitled to complete flexibility in respect of their pension provision is not an argument that is universally popular on the right. He makes the point that we live in an age of short-termism and that there will be meritorious pressures on that pension provision, whether people are paying university fees, trying to get their children on the housing ladder or, increasingly—as many hon. Members from all parties are seeing with their constituents—paying for long-term care for our elderly parents. Those are real pressures. I hate to make this party political, but people will be using their pension provision for the cost of living crisis, which is faced by many throughout the land.
What choice is this? It is a choice for certain people who are well-off and can draw down some of the pot, but it is not a choice for all people. The argument boils down to subsidiarity: it is about whether people want or need this power or will treat it with respect. Government Members would argue that every day of the week, but we only have to read what Michael Ward said in The HR Director, which was that the pension pot chasers are already on the move, making cold calls and telling people they can draw down their pension today. With the cost of living crisis and the pressures people face, that will be tempting.
I am terribly concerned that we are setting up another predatory capitalist industry in this country. I have campaigned for a couple of years against the payday lenders and their usurious rates of interest. They borrow on LIBOR at 5% and from Barclays at between 10% and 20% and pass that on to their customers at usurious rates of 5,000%.
It is a real concern that in four, five or 10 years’ time, the adverts that saturate TV will not feature old Wonga puppets looking for payday lenders—the Financial Conduct Authority yesterday and the Association of Chartered Certified Accountants have again criticised the practice of going after vulnerable repeat customers—but will be about people pulling down their pension to have the perfect life, the perfect opportunity or the thing they could never afford in another place. People, particularly low and middle income earners, are not immune to the market pressures that will come about because of this change in the Budget.
It is a great pleasure to serve under your chairmanship, Mr Streeter. I welcome you back to the Chair.
Clauses 39 and 40 give pension savers much greater choice and flexibility over how and when they access their savings. Let me set out a little bit of background. When this Government took office, we inherited a series of tax rules imposing tax up to 82% on older pension savers. We acted immediately to reduce these disproportionate and unfair charges. We removed a raft of other tax rules restricting the choices available to pension savers over the age of 75, while also giving draw-down pensioners with guaranteed retirement income of at least £20,000 a year full access to their pension savings. These steps have been important and successful, but given the changing shape and nature of retirement, it is time to go further. That is why, on Budget day, the Government announced a set of radical reforms, which will allow people more choice over how they access their defined contribution savings.
The hon. Member for Derby North said it was a big job for the Government to try to persuade people to support these measures. I am tempted to remind him that, in the course of some 48 hours, his party went from ignoring the changes to opposing them, back to supporting them—[Interruption.] Well, there was certainly quite a lot of muttering coming from Labour about its dislike of the policies.
I do not want to detain the Committee for too long, but does the Minister accept that people have long memories and will recall the mis-selling scandal that was a consequence of the Social Security Act 1986, which was delivered by the Conservative party? Does he not see that there will be a degree of scepticism? It does not matter whether there is scepticism from Labour Members; he needs to convince the general public. Several of my constituents have told me that they are nervous about the Government’s proposals. What will he do to reassure them?
The Treasury Committee will publish its report on the Budget in due course and it would be wrong of me to pre-empt it, but from all the witnesses who came in front of us in public session who were looking at pension reforms, it was obvious that it was not just a few or some who were in favour of the flexibility; it was every single witness, be it in written or oral evidence. There is overwhelming support; indeed, I suspect this is one of the most popular policies that the Government have come up with for some time.
My hon. Friend is right. I have been involved in one or two Budgets, and it is not always the case that Budget measures get the warm and overwhelming support that this set of policies has received in recent weeks. The hon. Member for Derby North may take a different view about where the public are on these measures, but I encourage him to campaign in Derby North against the policies with all the energy he can find—which is considerable, in particular, given his diet.
To help the Minister, I do not think it is case of people being against this policy in particular—people are generally confused by pensions anyway. It is difficult enough to get someone in their 20s, 30s or 40s to even think about pensions, which is a problem that goes beyond this and previous Governments. People tend to think of pensions only when they are coming up to retirement age, so annuities, for example, are something that people hear of only when they are that age. The problem is trying to show people that there are alternatives. How we do that is a challenge for the Government.
I will turn in greater detail to the guidance and information that will be available. We are consulting on the detail of our longer-term proposals for pensions, and most of our debate today has been on such proposals, rather than strictly on the clauses before us. We want to ensure that individuals who are approaching retirement now can benefit from the wider range of options, which is why these clauses will help pension savers this year by giving them more choice and control over their pension wealth.
From 27 March 2014, clauses 39 and 40 will increase the capped draw-down withdrawal limit from 120% to 150% of an equivalent annuity, reduce the minimum income requirement for entering flexible draw down from £20,000 to £12,000, increase the amount of total pension wealth that can be taken as lump sums from £18,000 to £30,000, increase the amount of pension wealth that can be taken as a lump sum, regardless of total pension wealth, five times from £2,000 to £10,000, and increase the number of personal pension pots that can be paid out in that way from two to three. All income received by people taking advantage of the new, more flexible rules will be subject to tax at savers’ marginal tax rates, just like other pension income.
As a result of the changes, an extra 85,000 people are expected to be able to access their pension wealth as a lump sum this tax year, if they so wish. Some 400,000 existing draw-down pensioners will be given the option of receiving significantly greater withdrawals from their pension funds. In the course of the debate, I would not want the Committee to miss out on the fact that that is what we are able to achieve this afternoon.
“of changes made by sections 39 to 43 of this Act to Schedules 28 and 29 to the Finance Act 2004.”
Only clauses 39 and 40 make changes to schedules 28 and 29 of the 2004 Act, so I will limit my comments to them. I am pleased to confirm that the Government published a tax information and impact note, “Increasing pension flexibility”, on Budget day, which covered the impact of the changes made by clauses 39 and 40. As the note sets out, the changes are likely to be of particular benefit to individuals with smaller pension wealth, including women. A number of consumer organisations have welcomed the changes and the flexibility they provide. For example, the Financial Services Consumer Panel said on the day of the Budget that it was “delighted” that the Government had taken action on the treatment of small pension pots.
I have already mentioned that the Government have published a consultation, “Freedom and Choice in Pensions”, on the broader measures announced in the Budget. The document sets out the rationale and relevant analysis behind the Government’s proposals and invites comments on the expected impacts. The consultation will inform the final shape of the Government’s proposals, including the guidance guarantee. The Government will set out further details in response to the consultation.
It is important that we ensure that consumers get good quality guidance that meets their needs and stimulates active and informed choices, as well as promoting consumer awareness of scams and helping to ensure that consumers are less vulnerable to mis-selling. That is one of the areas we are consulting on. The Government will introduce a new guarantee that all individuals with a defined-contribution pension in the UK approaching retirement will be offered guidance at the point of retirement. That guidance will be impartial and of consistently good quality. Those providing guidance will be barred from using that as a way of selling products. The guidance will cover the individual’s range of options, to help them to make sound decisions and equip them to take action, whether that is seeking further advice or purchasing a product. It is free to the consumer and is offered face to face. The FCA will work with the Pensions Regulator, consumer groups and other bodies to develop a robust set of standards and monitoring arrangements for that guidance.
Let me address some of the points raised in the debate. On funding and the £20 million, we have announced that guidance should be funded by pension providers and pension schemes. The £20 million is a development fund to help to get the guidance initiative up and running. It is not the entirety of what will happen, and we announced that in the Budget. On why there is no funding for advice after 2016—that is not part of these clauses, but it is important and is part of the consultation—the money is for setting up new systems, not for running them. We are consulting on all that.
On who should provide the guidance, that is part of the consultation. We asked for views on the best way to implement our requirements. That might be through rigorous standards for providers or through outsourcing, but we are looking at the options. As for why the guidance is only at retirement, that is subject to consultation. It is not finally decided, but we will look at the response to the consultation to ensure that we get the right answer.
A simple question has just come to mind. The Minister said that there is a ban on selling products, but that there will be direction or advice to others. How will that direction or advice work out in practice? Will there be a list of approved IFAs to refer to, or something along those lines? It would be helpful if he could clear that matter up.
Again, that is a point for the consultation. I should also say, without wanting to pre-empt the Queen’s Speech, that when the consultation is completed and we have reached conclusions on how to proceed, it may well be necessary, working on the basis that the measures will be adopted, to legislate for the guidance guarantee. The House will have a full opportunity to debate the details of that and set them out. I am not downplaying the importance of this matter; indeed, the Government identified it in preparing the measure and in the announcement that we have made. We have been straightforward from day one about the fact that we recognise the need to ensure that proper guidance is in place.
I should also make it clear that in all the documentation that we have produced and the Red Book, we have consistently referred to “guidance”. I know the point has been made that the Chancellor used the expression “advice” in his speech, but the important thing is to convey the fact that people who will benefit from the additional flexibility and freedom will be getting help. This Government are determined to ensure that they get the right amount of help.
To help the hon. Member for Derby South—
I apologise; it is an important distinction. The hon. Member for Derby North was excited about the difference between advice and guidance, although he was not quite sure what it was. “Advice” has a particular technical meaning, involving the recommendation of a specific product, and it puts in place various rights and remedies enforced by the FCA. It is a more expensive process. We think it is right that there is guidance in place to point people in the right direction, so that they understand the options available. In some cases, they will want to take financial advice, but we are offering free, impartial financial guidance, which will give people the opportunity to assess what is right for them. It is absolutely right that we put that in place.
The purpose is for guidance to give people an understanding of their situation and the options available for them. The point made by my hon. Friend the Member for Chippenham is that the nature of the decision will depend on the particular circumstances. In some cases, an individual will decide for themselves whether they want to go on and get financial advice, with all that that involves, or whether they are satisfied that the guidance gives them the information that they need to make a decision.
I have been listening carefully to what the Minister has been saying. May I probe him further on face-to-face guidance? I think I heard him say that there would be face-to-face guidance, and that it would be free. Has the work done taken account of the different nature and geography of different parts of the country, and can we be assured that it will be face to face in absolutely every part of the country? Secondly, I think that he mentioned the possibility of outsourcing. Can he give us any assurance on how monitoring and evaluation will take place if the guidance is outsourced?
First, the three attributes of the guidance that we have been clear about since day one are that it will be free, impartial and face to face where people want that. I am happy to reiterate those points. In terms of the details of exactly how that will be delivered, I will come back to the point I made earlier. There is a consultation and all these points are ones that we wish to take into account. I am sure that Members on both sides of the Committee want to ensure that the appropriate guidance is provided to our constituents to enable them to make the right decisions. We will seek to achieve that.
May I urge the Minister to look very seriously at the use of online, even when there is face to face at the end? There is no sense in having a full-time, qualified adviser or financial services professional spending two hours going through a fact-find, taking down people’s date of birth and how many pensions they have. It is simply a waste of Government money. That element, for most people, will be relatively easy to do online. I urge him to consider that and to use the financial services face-to-face time for real, value-added activity.
I am grateful to my hon. Friend who makes an important point. It is also worth highlighting the work that the FCA is undertaking to ensure that there are not unnecessary costs here so that financial advice can be provided. The area that he highlighted is an important part of that. He made a practical comment about how we can ensure that the support provided to the public can be as well targeted and cost-effective as possible.
The Minister has clarified what he believes to be the difference between advice and guidance. Surely the ultimate difference is that one is heavily regulated and the other is not. The hon. Member for Rochford and Southend East talked about independent financial advisers going out to face-to-face meetings. But that is not what is on offer. I understand that what is on offer is guidance face to face, not advice. Is that correct?
I have been absolutely clear. What we are talking about here is guidance. We believe that that is the sensible approach. It may well follow that some people wish to seek advice, having received that guidance, but we think it is important that guidance is provided that will help people understand the retirement income market and the options available to them, thereby empowering them to make their own decisions.
May I follow on from my hon. Friend’s point and the difference between something that is regulated and something that is not? Just for the avoidance of doubt, are we therefore to understand that the guidance will be in the unregulated end of the market and will not be provided by qualified financial advisers?
The question of who will provide the advice is a matter for the consultation. The hon. Lady will be well aware that the Financial Services and Markets Act 2012 lists, or has provision for an order to list, what constitutes a regulated activity. Included in that list is the provision of investment advice. For these purposes, the provision of investment advice includes making recommendations as to specific products. What we are talking about here is not a system whereby there is a scheme that will come along and make recommendations about specific products, so it is not investment advice for the purposes of the Financial Services and Markets Act. It is about setting out the options that are available, the nature of the retirement market and placing individuals in a position to know what their options are. The support that is available has been very clear since the Budget.
Let me pick up some of the points that were raised in the debate. The hon. Member for Kilmarnock and Loudoun asked whether there is a contradiction between auto-enrolment and the pension flexibility measure. The answer is no. Auto-enrolment is designed to harness inertia and to support and encourage new and increased pension saving. The FCA found that the annuity market was not working for consumers, which is why we have introduced choice and flexibility. As more people save through auto-enrolment, it is important that they can make choices that best suit their circumstances.
On costings, the hon. Lady raised concerns about fiscal risks. In truth, the impact is difficult to predict, but the Government do not expect it to be significant in the context of steps taken to improve the sustainability of pension spending, including single tier, and the changes to the state pension age and public service provisions.
On the interaction with social care and whether people will be forced to take their pension to pay for the cost of care, the current rules on eligibility for social care funding were not written to account for such pension flexibility. The Government are committed to considering new financial services products when reviewing and developing new guidance and regulations on charging for care. It is not our intention that someone’s eligibility for social care support should be affected simply because they purchased certain flexible pension products as an alternative to annuities, and we will ensure that the appropriate updates are in place for the start of the new flexibilities in April 2015.
The hon. Member for Islwyn asked whether annuity rates will fall. Annuities will remain the right product for many people. The new flexibility will help consumers to get a better deal when choosing retirement income products in a much more competitive market. Many may choose to buy an annuity later in life, allowing them to benefit from higher rates at a time that suits them.
My hon. Friend raises a good point. Providing greater choice and flexibility is likely to have a beneficial effect on the market, encourage greater innovation and provide the type of products that our constituents want. The current restrictions force people into particular products that do not necessarily suit them, which stifles innovation.
The hon. Member for Edinburgh East argued that the single tier does not solve all the problems, but it will provide pensioners with much greater certainty on the state support they can expect. The Government are also introducing class 3A national insurance, which will allow people to top up their basic state pension.
I am sure the Minister is aware that the provision for those additional contributions is restricted to a very small age group. I have a constituent who has had to leave work due to ill health, but she will not reach pension age until about 2022. She has been told that she is not eligible for the additional contributions, which also do not apply to people who, as I said before, are already well into retirement.
To be fair, many people who are already retired will have taken an annuity, so this additional flexibility is not necessarily relevant to them. For some of the people about whom the hon. Lady is concerned, class 3A gives them an opportunity to top up their pension. She also raised defined ambition, which is also about creating choice and flexibility. Last year, the Government published a consultation on their defined ambition proposals, which are designed to give providers more choice about the types of pension that they can offer their employees. The Government are considering the responses to the consultation. We expect that allowing greater flexibility will lead to product innovation, which will result in greater choice and certainty for individuals.
The changes introduced by clauses 39 and 40 are precursors to the more radical reforms that we will introduce in April. We have spent much of our time this afternoon debating those measures, but let us not forget that these clauses are, in their own right, a significant step towards the creation of a tax system that recognises that people should be able to determine what to do with their money and that those who have earned it in the first place are best placed to make decisions about it. As I have said, a significant number of people will benefit from the additional flexibility provided by these clauses. I hope that clauses 39 and 40 will stand part of the Bill, and that new clause 8 will not be pressed to a Division.
Mike Kane rose—
I will be brief, because we have had a fairly extensive debate. As the Minister correctly pointed out, we have been discussing the clauses, which stand in their own right and which we will not oppose. It was right for us to have a wider debate to probe questions that we will have to discuss at a future date. It is important for us to understand where the Government are coming from so that we can take a view on the clauses.
It was appropriate to try to tease out some of the concerns that have been raised about language, such as the difference between advice and guidance, and the Minister has been helpful in explaining that. A great deal is still out to consultation, and I have no doubt that further proposals will be advanced. Opposition Members’ comments have been made in the spirit of ensuring that people have the opportunity to access advice and information if they need it, to enable them to make the correct decisions and not to put themselves at a disadvantage. We were also anxious to ensure that there are no loopholes or opportunities for less scrupulous parts of the market—I hesitate to use the word “spivs” again, because it has been much used today—to move in and make money inappropriately by mis-selling to people who do not have all the information at their fingertips.
I am concerned to ensure that the commitment to provide face-to-face guidance is delivered, notwithstanding what the hon. Member for Rochford and Southend East has said about online. Some people will be comfortable to go online to gather information or to give information about themselves in order to receive detailed information on options, but many would prefer to sit face to face, particularly when they are discussing something that is personal to them and they do not feel confident about using internet sources. I look forward to hearing more from the Minister about how that will work in practice and about outsourcing, or who will provide that guidance, because that is critical.
On new clause 8, it is important for us to press the Government on the work that was done before the announcement was made. When the time comes, we will therefore press it to a vote.