Good morning, Mr Caton. It is a pleasure to be back. Clauses 16, 17 and 18 deal with not claiming the state pension at state pension age. I was tempted to put off the discussion, but I think that we ought to get on with it. The current system is complicated. I happen to have with me the 64-page explanatory document that we have published on the topic of deferring the state pension. It is a real rip-snorter. I will not read it all out, but just give the Committee a feel for some of the issues that arise.
Under the current system, there is a choice between drawing the state pension later and receiving a higher pension, or drawing the state pension later and receiving a lump sum. The way in which the deferral increments are worked out means that there is an extra percentage on the pension when it is drawn, while the way in which the lump sum is worked out is different and, bizarrely, relates to the Bank of England base rate. There are times when, if an actuary were making such a decision, the person should choose increments and there are other times, depending on interest rates, when the person should choose the lump sum.
Matters also depend on the person’s tax position. I shall spare the Committee from hearing the full version of the process in respect of the tax treatment of the lump sum, but give a flavour of its complexity. Under the heading, “Tax on your lump sum payments”, the advice states:
“If you choose a lump-sum payment after putting off claiming your State Pension, you will have to pay tax on it, but the amount of tax you may have to pay on your lump sum is worked out differently.”—
Differently from what, I am not sure. It continues:
“The lump sum is not added to the rest of your income to work out your total income for tax. Instead, the rate of tax due on your lump sum will be the highest main rate of tax that you pay on your other income. That includes any weekly State Pension you get once you have started to claim it. Special rates of tax that apply to savings and dividends you may get are not counted”.
We have an odd situation. We recognise that people might not want to take their state pension on time but that what to do is a difficult decision to make and that, sometimes, according to what the base rate of the Bank of England happens to be, they should make a different decision.
Clauses 16, 17 and 18 provide for the delay in taking the single-tier pension, but make the process more simple. Under the provisions, when people defer their state pension, they receive a bigger pension when they draw it. We envisage that the rate of deferral will be broadly actuarially fair. At the moment, there is a financial incentive to defer that is equivalent to about 10% on the pension per year of deferral, but we believe that the right figure would be in the order of 5% although a lot depends on changes in longevity and so on.
We have not outlined such figures in the Bill, and we will discuss the regulatory process for making such changes when we reach a later amendment. However, the basic idea is that single tier is all about simplicity, and about people knowing where they stand. All we are doing under the clauses is not replicating the rules on lump sums and, principally, making matters more simple. The popularity of lump sums has been declining in recent years, partly because of low interest rates, as a result of which people receive a lower lump sum that they would have received.
When I first approached the issue of deferring a state pension, I assumed that it was all about people making carefully calculated decisions about extending their working lives, coinciding that with retirement and so on. It turns out to be a lot messier than that. It concerns people who do not claim, people who forget to claim and people who—for as long we are equalising men and women’s pension ages—wait until their partner is of pension age, and they both retire together. It is not fundamentally a simple incentive mechanism to encourage people to work longer. There are all sorts of strange reasons why people defer their pension. They sometimes do so accidentally; they sometimes do it for years.
If people want a lump sum at a later time, they can operate a do-it-yourself version of the lump sum. In other words, people can draw their pension at pension age and just put the money aside in an individual savings account, for example, and draw it when they would have drawn the lump sum. The complexity of the lump sum option does not give citizens a lot, as they can essentially do it for themselves and, particularly given current interest rates, might even get a better return if they invested their money somewhere else rather than at the rate we currently give of base rate plus 2%.
We are not, then, depriving anyone of the chance to build up a lump sum, as they can do that themselves. In addition, the tiny bit of the system we are discussing is massively complex. A streamlined system, in which if someone takes their pension late they get a bit more, and a fair amount more that is unsubsidised, is a cleaner basis on which to proceed.
Clauses 16 and 17 set out the fact that people can suspend their state pension. We will also allow people who have begun to draw their state pension to—I do not like this word—“de-retire”; they will have the option to say, “On reflection, I do not want my state pension” and go back into a period of deferral. However, we will not have a lump sum option. Clause 18 deals with a rather obscure feature of the current system, whereby the increments paid for deferred pensions overseas are uprated but the main pension is not; we are taking out that anomaly.
That gives the gist of clauses 16 to 18. I know that the hon. Member for Cumbernauld, Kilsyth and Kirkintilloch East wants to discuss the regulatory framework with regard to clause 17; we will come back to that. I hope the Committee will agree that the new system is cleaner, easier and cheaper to administer, and simpler for citizens.
I shall work on the assumption that we are dealing with clause 16 alone. I thank the Minister for the explanation he has given us. He is absolutely right that the current system is very complex. I was struck by his explanation of the different ways in which one can draw a greater state pension by deferring it; I certainly was not aware that if one draws one’s pension later on and gets a lump sum, it is calculated on the basis of the Bank of England base rate plus 2%. One learns something new every day.
The Minister referred to the calculations regarding what someone who defers their pension will be able to get in the future, but he is not putting the figures in the Bill; I will come back to that issue when we discuss clause 17. I was struck by his argument that deferral is not fundamentally an incentive mechanism to make people to work longer, but instead is often the product of a variety of personal and social circumstances. I took his overall argument to be that, on that basis, the complexity of the lump sum option is not necessary, because it does not necessarily act as an incentive to work longer. He also set out his view that individuals can build up a lump sum for themselves via ISAs and other savings vehicles.
The Minister is right to say that the system is complex. One thing he is keen on is that the Bill reduce complexity where possible without creating unintended consequences. I cannot see any unintended consequences of the simplification of the system in clause 16 and have no further observations on the clause.