Pensions Bill

My answer to that is no, because the Government’s starting point is, as I said, that the deal on pensions, and the tax structure that surrounds it, is tax relief on the way in, tax-free accumulation up to a point in time and then the need to convert that into secure income. My objections to this are several—I shall come to some of the practicalities, certainly the potential tax effects—and indeed it violates what we see as the clear principle in all this. I would explain the attraction of the RIF for those individuals who could afford not to use their pension scheme to provide an income, but I shall skip that point, as I have already touched on it. However, if the noble Lord wants me to, I shall continue. Those who do not need to use their pension funds to provide an income could instead let it build up tax-free in their pension scheme and pass it on, in due course, to their heirs. Current tax rules do not permit lump sums to be paid out where a member dies after age 75, so any such payments will attract unauthorised payment charges of up to 70 per cent. In the context of the deal that I have just described, noble Lords will see that this charge recoups all reliefs given when the money went into the fund and on the income and capital growth while it was there. As I have said, the amendment before us is silent on what payments can be made out of the fund on death and how those might be taxed. I do not know what the mover of the amendment had in mind—I would invite him to help us on that, but I am sure that he will do so when he winds up. It is clearly envisaged that a person can build up capital in their RIF without drawing an income. That leads me to conclude that the intention is that funds may be paid out of the RIF when the member dies after age 75 without unauthorised payment charges. As I have said, there is no rationale for the general body of taxpayers to subsidise bequests through tax relief on pensions. Those who want to save for bequests have a range of savings and investment vehicles available to them. The features of the RIF also give us a clue as to whom this amendment is aimed at. Anyone taking out a RIF would need to absorb simultaneously investment and longevity risk and it is likely that they would need alternative assets to do so. The ongoing charges of managing a RIF are likely to be significantly more than for conventional annuities. In many ways, the RIF resembles income drawdown—currently available up to age 75—whereby the pension fund remains invested and parts of it, within limits, can be withdrawn. It is likely to have a similar charge profile to the RIF’s. We know, as this is documented in the Annuities Market publication, that income drawdown in its current form tends to be economic for funds of over £100,000—currently less than 5 per cent of pension funds. This is not a vehicle that will be of benefit or use to a whole range of pension savers. I now turn to another aspect of the RIF. As I understand it, under the proposed RIF, no individual's total future income could fall below a minimum income requirement. We could have an entire debate on what constitutes a reasonable level, but I will limit myself to pointing out that such a process would be bureaucratic. Another flaw of the RIF is the risk of runningout of money in retirement. I note the noble Lord's faith in insurers' ability to predict accurately an individual's life expectancy. Surely no one can do that. Insurers can predict average life expectancy of particular cohorts. That enables them to provide a guaranteed income for life, regardless of how long that life is. The RIF seeks to take an individual view on an individual’s life expectancy, which seems to me to be a very difficult thing to propose as being possible. One can envisage someone well into their 90s, whose pension pot has run out, pursuing their pension advisers, saying, ““You told me I would only live to 85””. Some very strange circumstances could flow from that. Insurers efficiently spread, or pool, this so-called longevity risk across individuals. As some people in a pool of annuitants die earlier than expected, the insurer can carry on paying those living longer than expected. So early death does not result in ““profit””for the insurer, but pays the pensions of thoseliving longer than expected. Annuities are effectively insurance contracts, insuring individuals against the risk of outliving their pension funds. I can only conclude that the RIF would be a complex product aimed at the wealthy at the expense of the taxpayer. By contrast, the Government are committed to promoting better outcomes for all pensioners in retirement. For example, the Government have set out proposals on personal accounts as a simple low-cost pension savings vehicle, which we hope and believe will lead to significant accumulation over time, as my noble friend Lady Hollis identified. The Government welcome innovative ideas for retirement income products for all.