Pensions Bill

Indeed we do, as noble Lords will see if they look at what has happened to the annuities market in recent years and the range of different products that have been developed. The Government are in continual discussion on these matters so that new products are in line with the principle of securing a retirement income. The Government are clear, however, that innovation must take place in line with the principle of tax-privileged pension savings being used to provide a retirement income. We believe that RIF clearly violates that principle. The Government’s opposition to this measure is driven by a matter of principle. I was asked to set that out. The proposal would also involve a cost to the Exchequer. In most cases I would expect the likely tax charge on RIF withdrawals to be less, often considerably, than the amount of tax relief enjoyed on these funds. It would be unfair to expect taxpayers to foot the bill for people who take tax relief for pension savings but who choose to spend the money on something else. On the repeal of Schedule 29(16)(1)(a), value-protected annuities were permitted from 6 April 2006. They allow providers to offer an annuity that includes a repayment on death before 75 of an amount representing the initial capital value of an individual's pension or annuity, less any income paid before the date of death. This repeal would abolish the current age limit of 75 where value protection can be offered. A common issue raised by consumers with annuities is the risk of dying soon after purchasing the annuity and the concern that the annuitant might not receive a financial benefit. Such concerns tendto misunderstand the basic insurance properties of annuities and the role of pooling. The benefit of buying insurance is the peace of mind provided that, even if an event did not occur and no claim was made, the income would be secure. But if the insured event does not occur—for example, in the case of someone living longer than expected—there is no return of the premium. So an annuitant’s early death does not result in profit for the insurer, as I said. Nevertheless, the Government have responded to concerns about early death by enabling providers to offer value-protected annuities in the early stages of retirement. This option expires at age 75. Abolishing the current age-75 limit would tend to benefit those more interested in using their pension fund for inheritance planning rather than for providing a retirement income. I have taken some time to set out the policy on this matter because I was particularly pressed on it and because of the range of comments made. In essence, these amendments seek to benefit those who willingly take advantage of tax reliefs given for pension savings to build up a substantial pension pot, but who want to break their part of the deal and use tax-privileged moneys for other purposes. I therefore urge the noble Lord to withdraw the amendment. I turn to the amendment on increasing the upper age limit of annuitisation from 75 to 85, proposed by the noble Lord, Lord Oakeshott. While this deals with a particular aspect of annuities policy, I fear that it is motivated by similar reasoning to that behind the RIF amendment, which I have already spoken about. As I set out, given that the Government provide generous tax incentives to encourage people to save for retirement, it is clearly important that we ensure that those moneys are used for the purpose for which they were granted. Annuities not only achieve this but provide the peace of mind of an income for life regardless of how long that life may be. Within those overarching principles, people have considerable latitude on when to purchase their annuity. As I said to the noble Lord, Lord Higgins, they currently have a 25-year window between the age of 50 and age 75 in which to annuitise. Even after 2010, when the lower limit rises to age 55, people will still have a 20-year period in which to choose to annuitise best to suit their circumstances. That is close to a quarter of the typical male life expectancy. That significant current flexibility is little used at the upper limit. Only 5 per cent of people annuitise after age 70. The reason for that is that the vast majority of people need to draw on their pension savings in retirement—after all, that is why they saved in the first place. However, a fortunate few who have made pension savings and taken the tax reliefs that go with them are able to delay annuitisation for a lengthy period post-retirement. They have sufficient wealth from other income and assets and are able to absorb the investment and longevity risks inherent in delaying annuitisation. Prior to annuitising, should the pension fundholder die, their nominated representative can inherit a tax-free lump sum, of which more than half could consist of tax relief granted for pension savings. By raising the age limit by which a person must annuitise from age 75 to age 85, the amendment would significantly weaken the principle that pension funds built up with generous tax relief should be converted into a secure retirement income for life. Those who would benefit would be the small group who could afford to take advantage of the considerable latitude to delay annuitisation beyond age 75. There is no rationale for taxpayers subsidising bequests. Individuals who want to pass on assets at death have a number of non-pension vehicles to choose from. I also draw the Committee's attention to the potential costs to the Exchequer of moving the age limit in that way. It is not possible to quantify that exactly because of uncertainties about behavioural effects, among other things, but although only relatively few people would benefit from the change, because they would typically be the better-off, the sums involved could amount to tens of millions of pounds, all for the benefit of the few individuals who would be using the relief given for pension savings as a means to pass on tax-advantaged lump sums to their heirs. The Government do not believe that there is currently a case for changing the upper limit. As working longer is an integral part of reforms to meet the pensions challenge, the Government will of course continue to keep both the lower and upper limits under review. In summary, the amendment, like the RIF, would undermine current policy on pension savings and decumulation. It would benefit those who willingly take advantage of tax reliefs given for pension savings to build up substantial pension pots but who want to break their part of the deal and use tax-privileged moneys for other purposes. Accordingly, I urge the noble Lord not to press his amendment. I shall try to ensure that I cover all the points raised. Several noble Lords asked about choice. There is choice to act within or without a pension regime. Even within the pension regime, there is the 25 per cent tax-free lump sum, which is an added opportunity for people to save outside the scheme at some point. I understand the point made by my noble friend Lady Hollis, but I do not believe that it is right to say, as of today, that the issue affects people on median earnings. She is absolutely right to say that the landscape in 20, 30 or 40 years could be different and may well call for a change in the regime, but that situation is not with us now. I hope that I have covered all the points raised but, if not, I shall certainly try again. I urge the noble Lord to withdraw the amendment.