Pensions Bill

I am grateful again to my noble friend Lady Hollis for tabling an amendment which enables us to discuss an important issue. Much has already been said about pension credit and the proportion of pensioners who may be subject to means testing in the future, but this brings an added dimension by introducing to the debate the current treatment of elements of income and capital within pension credit. I shall respond first to the amendment relating to earnings disregards. It seeks to increase the amount of the earnings disregards that apply and would require the Secretary of State to review and uprate them in line with earnings on an annual basis thereafter. As my noble friend is aware, we recognise that some people nominally ““in retirement”” may wish to take up work and keep in touch with the job market, so a small amount of earnings are disregarded within pension credit. We disregard £5 a week for most people and £10 for couples, although in certain circumstances this can be £20. My noble friend suggests that these levels should be increased. However, pension credit is not intended for people who do substantial amounts of work. While we fully support the principle of working and recognise that for many ““in retirement”” this is a positive step, pension credit is primarily a safety net entitlement. Pension credit provides cash help for the poorest pensioners, targeting money to where it is most needed. In doing so, we look at people’s income from all sources, whether employment, retirement provision, capital or savings, and provide a top-up to the level of the standard minimum guarantee—£119.05 a week, and £181.70 for couples. This may be higher if people are caring, have a severe disability or certain housing costs. As the Government have always made clear, the key priority is to ensure that everyone can be sure of a decent and secure income in retirement with a relatively generous minimum level of income guarantee, and this is what the guarantee credit element of pension credit provides. In addition, the savings credit rewards those aged over 65 with earnings, income or savings. Furthermore, pension credit is more generous than its predecessor as it does not have a limit on the number of hours someone can work and still claim pension credit. While I fully understand and appreciate what my noble friend is trying to do here, I should point out that raising the level of the disregards is likely to attract a considerable cost, particularly as this would have a knock-on effect for housing benefit and council tax benefit for pensioners. We would need to change those rules so that some people do not lose out as a result of these changes. I turn to Amendment No. 25 and its proposals with regard to trivially commuted lump sums. The amendment would introduce a new capital disregard in pension credit, housing benefit and council tax benefit for capital derived from trivially commuting a personal pension, an occupational pension, a stakeholder pension or a personal account for people aged 60 or over. The effect would be that such capital up to the current trivial commutation limit of £16,000 would be completely ignored when establishing entitlement to a means-tested benefit, and as it stands, this would be in addition to the current capital disregards that operate within these benefits. I shall start by setting out the current position. We already have generous capital rules for pensioners within the means-tested benefits. The pension credit rules are significantly more generous than those of its predecessor, the minimum income guarantee, which excluded pensioners with capital or savings in excess of £12,000. Unlike other means-tested provision, pension credit has no upper capital limit. We ignore the first £6,000 of capital, or £10,000 for those in care homes. This means that the vast majority of pension credit recipients, some 85 per cent who currently have capital below £6,000, do not have any notional income taken into account. For those with capital above £6,000, we assume income at a rate of £1 per £500 or part thereof, half the assumed rate of income under the minimum income guarantee. Indeed, my noble friend Lady Hollis outlined that. For the most part, housing benefit and council tax benefit rules for those over 60 are the same as the pension credit rules. However, they vary in one significant way—for housing benefit and council tax benefit, there is an upper capital limit of £16,000. This means that anyone with capital in excess of that sum would not be entitled to housing benefit or council tax benefit unless they get the guarantee credit. As I said a moment ago, the Government have always made it clear that a key priority has been to ensure that everyone can be sure of a decent and secure income in retirement, and these benefits play a key part in the Government’s strategy to tackle pensioner poverty. We believe that the current structure of the benefits is successful in targeting money for those vulnerable and poorest pensioners who need it most, while at the same time rewarding those who have made modest provision for their retirement. As a result of our measures to tackle poverty, we have lifted 1 million pensioners out of relative poverty. Looking to the future, we anticipate a different picture. Our reforms to the state pension and state second pension will mean that more people will receive state pensions which will lift them well above the means-tested minimum at the point of retirement. By 2050 we expect only 6 per cent of the pensioner population to be in receipt of guarantee credit only, and around half of those will have additional needs. Further, this estimate does not take account of the impact of personal accounts, so the proportion could be even less. In terms of the trivial commutation of small pension pots, very little is currently known about either the number or the characteristics of people opting trivially to commute their pension. It is therefore very difficult to determine how people might behave in the future. Any attempt to understand the costs associated with the implementation of this amendment is somewhat speculative because of the difficulties in predicting how many people in the future will be eligible for, and then actually choose, trivially to commute their pension pots. As it stands, my noble friend’s amendment raises a number of questions and issues that need careful thought and consideration. Aside from the cost issue, the amendment would create very different outcomes depending on the choices people make about saving. We need to be wary of inadvertently creating perverse incentives to save less. It would also introduce unnecessary complexity into the claims process for pension credit, housing benefit and council tax benefit based on the need to authenticate the origin of a portion of someone’s capital. Clearly these issues need further thought. While I share my noble friend’s concern to ensure that people with only limited funds to invest in pension schemes are not disadvantaged, it is important that we conduct further research on likely pension outcomes and interactions with means-tested benefits in a post-reform regime where private saving will be more accessible through personal accounts. Without this research, I do not think we should be seeking to tie ourselves to a solution that may not be the most appropriate. While both amendments are clearly aimed at providing additional support to those in low income groups, we cannot consider them in isolation. The reform package, as presented, represents a carefully considered package of measures and one which is both affordable and sustainable. The measures already proposed will bring benefit to many of the poorest by ensuring that more people will have a full basic state pension that will be uprated in line with earnings, and greater coverage of the state second pension. It will also see the earnings link for the standard minimum guarantee with pension credit continue into the future. Taken together, these measures will provide a solid state foundation on which people can build their retirement plans. We therefore do not want to add to it at this stage. Accordingly, I would ask my noble friend to withdraw the amendment.