Entry: "Pensions Speech: Retirement Income Reform Bill - 7 March 2003"
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Pensions speech: Retirement Income Reform Bill
This debate is about two critical areas
• Future pension provision
• The tax system and the allocation of tax benefits
Everyone agrees that future pension provision faces extreme difficulties. Everyone agrees we need reform.
• People are living longer
• The old age dependency ratio in the UK is due to increase by around 50%
• We’re not doing as badly as Europe, where it’s set to rise by 100%
I will come on to the particular issues around annuities as a method for providing secure income for the duration of someone’s retirement in a moment, but it is important to recognise the measures already in place to improve security in retirement:
• Minimum Income Guarantee – benefits nearly 2 million pensioners. From next month (April 2003), no single pensioner will live on less than £102 a week (£155.80 couples). This is a real increase for the poorest 37% since 1997. We will go further and increase MIG with earnings for the rest of Parliament.
• Pension Credit – will reward savings from October 2003. Benefits up to half of all pensioners and ends the scandal of pound-for-pound benefit withdrawal, whereby those saving modest amounts gained nothing from doing so.
• State Second Pension – Introduces in April 2002, the state second pension provides employees with a second-tier pension. It improves on the old SERPS system by boosting the accruing pension rights of low and moderate earners and extending provision to carers and disabled people without paid work.
• On top of the MIG and the Pension Credit, the Government has:
o Provided above inflation increases to the basic state pension and we are committed to increasing to by at least 2.5% each year. Basic pension now up by more than £5 week (£8 for couples) in real terms under Labour.
o Introduces winter fuel payments of £200 a year for those over 60
o Free TV licences for the over 75’s
o Free eye tests
o Cut the Tory’s favourite tax on pensioners – VAT on fuel
We need to do more, but no-one could say we haven’t made a very serious and important start. And we have also, of course, tackled:
• Pensions mis-selling – in 1997 we inherited the Tory disaster of pension mis-selling. Then only 2% of cases were resolved. Today, by naming and shaming the worst performers, over 99% of consumers with mis-selling claims will have been compensated.
• Stakeholder pensions – introduced in April 2001, provide a portable, flexible, low charge way for moderate to high earners to save for retirement. Employers with 5 or more employees have to provide access to them. Over 1 million have now been sold – very many to moderate earners. Stakeholders have driven down charges across the market.
Let’s have a look at what the bill we are discussing today provides for:
• It changes the way in which people receive tax benefits on their savings
• It would no longer require them to but an annuity securing guaranteed retirement income.
• It would allow people to purchase annuities at any age, therefore removing the current requirement of purchasing an annuity by age 75.
• The bill would also allow people to pass on funds to their estate.
I realise all this is quite arcane and esoteric, reserved for anoraks. But in a nutshell it drives a coach and horses through current provision to incentivise options that provide secure income for the whole of someone’s retirement.
Why do annuities contribute to this Government objective? It is because annuities pool risk. No one knows how long they will live. But everyone knows that an annuity will provide income for the duration of their retirement. It does this in the following manner: those that die sooner will subsidise those who die later. It is quite easy to understand.
However, the proposals would effectively mean that people could pass on the pooled capital to their heirs, rather than to other people in the scheme with which they have pooled risk. They would be dodging their responsibility.
It would encourage an affluent few to increase their pension contributions to get a tax-break. Significantly, they would be using that tax-break which they are given for their retirement, for lots of other purposes – perhaps holidays for their children in Mediterranean villas; who knows?
The only thing we know for sure is that pension tax privileges would be used for non-pension purposes. This is quite unacceptable.
That’s not to say annuities can’t be improved, and that’s why there are proposals to introduce the following:
• Value protected annuities that allow a proportion of someone’s pension pot to be paid to the pensioners estate if they die before age 75
• Limited period annuities that allow someone to use part of their personal pension fund to buy an annuity for a short period, as an alternative to income
We heard earlier that people should have ‘the freedom to choose’ which schemes they put their money into.
But the point is, the tax payer will not have (and in my view should not have) the freedom to choose whether to assist such pensioners if they do require state assistance. I personally am not prepared to live in a country where we deny elderly, vulnerable people help with their housing and subsistence.
So the tax-payer can, and should, subsidise those saving for their retirement, but must also insist that the most reliable savings vehicle is also used.
People do have the freedom to choose what they put their money into, but not if they want my taxes or other tax-payers money to subsidise them – i.e. not if they want tax privileges.
One Honourable Member opposite said that the only acceptable concern he treasury had was that ‘people would fall back onto state provision’
But that is not the only worry at all.
There is an equally important concern that it would impact negatively on those with lower incomes, due
to issues around pension credits and MIG, raised by the Honourable Member for Hendon at quite some length, it will compel them to put more of their money into an annuity.
It certainly will help some very rich people, but will do nothing for the vast majority.
My view is that we need to concern ourselves with measures that improve the prospects for security in retirement for the vast majority.
Change is needed. This isn’t it. I would urge all Honourable Members on all sides of this House, who want to deal effectively with the pensions problem, not to support this bill.