Pensions Bill

My Lords, it depends upon the precise arrangements. In some instances it goes to charity but, if it goes to people with heirs, then there is an exit charge on it which does exactly what my noble friend was proposing: drawing and clawing back the benefits of the accumulative tax relief that has been achieved. That is how it works, so people must face three alternatives by the time they reach the age of 75. The additional flexibility introduced by the Government in 2006 allows people to leave their pension funds invested indefinitely beyond the age of 75 and an alternatively secured pension. The only requirement is to draw down an income from the fund of at least 55 per cent of that which would have been provided by an annuity. Consequently, suspension would only really benefit those who do not need to take any income from their pension savings and who may therefore wish to use them as a means of making bequests partly funded by the taxpayer. I see the noble Lord, Lord Forsyth, bristling at this point; let me see if I can help him. Should you sadly die before reaching the age of 75, and before an income has been crystallised, then, routinely, the fund goes tax-free—free of inheritance tax to survivors. Of course, once you are into an income-crystallisation event—whether annuitisation or an alternatively secured pension—that is not the case, as I have just discussed. I am aware of the strength of feeling on this issue; I have seen it in today’s debate. However, I ask noble Lords to consider the implications of such a suspension, the point that the noble Lord, Lord Oakeshott, focused on. A temporary suspension of the income requirements, either just for annuities or for all means of drawing an income, would add uncertainty, complexity and cost both to those making pension savings and the companies providing pensions and annuities. Those approaching retirement would face uncertainty about the choices that they must make and when they must make them. Annuity providers and pension companies would be faced with the same uncertainties and the additional costs in terms of system and literature changes that may well be passed on to consumers. There are systems in place that are currently geared to events at the age of 75. If you had to suspend them, not knowing when they were going to be reinstated or at what time, that would present real, practical commercial challenges to providers; go and talk to them and they will tell you that that is the case. We should also consider the message that would be sent out to people by instigating such a suspension. There is a risk that those approaching retirement would believe that taking an annuity is not the right thing to do. While delaying annuitisation may be something that some people decide is in their best interests, and which they are free to do under the current framework, there are vital issues that they would have to consider in taking such a decision. After all, there is no guarantee that their assets will improve or even maintain their value. It is also possible that annuity rates could fall, potentially reducing the income available. In combination, a stagnation or fall in asset prices alongside a fall in annuity rates would have a severe impact on the income available from a person’s pension savings. For anyone relying on their pension savings to support themselves in retirement, these are serious risks. It would be irresponsible for the Government to do anything which could lead people to delay taking their pension income and expose themselves to such risks without fully thinking through the consequences. There are also problems inherent in allowing an option to extend suspension. This would compound the uncertainty faced by consumers, companies and advisers. Those approaching retirement need certainty and stability. Those advising savers and those providing income products need to know that the rules which govern them are not subject to change on the basis of an undefined set of criteria. The approach to retirement is an important and potentially complex time for many people. Pension companies begin to contact people with their options up to a year before they reach retirement age. For a suspension to be introduced potentially without the necessary lead-in times would do little other than cause confusion and could send out the wrong message to those faced with a very important decision about their future income. I appreciate that in the current economic climate there are real concerns about the impact of the falls in the stock market on retirement incomes. However, the impact of these falls will not necessarily feed through directly into the value of an individual’s savings. The amount of income that a pension fund would provide via an annuity is based on two main items, annuity rates and fund size. Recently, rates on annuity levels—the most popular form—have increased due to rising corporate bond rates and are now around a five-year high. It is also important to remember that pension funds rarely invest exclusively in equities. Other investment methods have not been affected in the same way, and therefore not all pension funds will have suffered the same reductions. Indeed, many pension schemes offer a ““lifestyling”” option. For stakeholder schemes, it is mandatory for the default option to include lifestyling. I hope I have explained that a temporary suspension is unnecessary because current rules already allow flexibility to delay annuitisation beyond age 75, and potentially damaging because it would create enormous uncertainty impacting on all parts of the pension system, from individual savers to advisers to pension companies.