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Annuities - 11 January 2002

Mr. David Curry (Skipton and Ripon): I beg to move, That the Bill be now read a Second time.

When I was re-elected to the House, I made three serious, early mistakes. The first was to apply for a private Member's Bill, the second was to be successful, and the third was to choose probably the most complicated subject on offer. I regret that burst of intellectual vanity which led me to decide to choose a measure about which I knew nothing but which I thought would represent an intellectual challenge. At least I was not disappointed in the challenge that it represented, but the lesson to be learned is not to try to accommodate the Whips, because that leads to an enormous amount of additional work and effort.

I have also had to learn not merely a new language, but a new science. Not being a mathematician, I have encountered the science of stochastics. Hon. Members may not be immediately familiar with the word stochastics, but I am told that it means the assessment of probability against standard deviations, which ought to be a mandatory discipline for anyone aspiring to serve in any Whips Office or to be Leader of the House.

I acknowledge the enormous support of the Retirement Income Reform Campaign, in particular Mr. Stephen Lock, who must have wondered what he had got stuck with when the first question he received from me was, "What is an annuity?".

Many hon. Members will have received an enormous amount of mail on this subject. Some people are seriously concerned and I could easily spend an hour relating hardship cases and the anxieties of individuals, but I shall not do so because we need to get to the substance of this business. I could have brought a series of bulging ring binders into the Chamber, all of which would have provided evidence of the urgency of the matter that I wish to address.

It is not a startling insight to say that the pensions industry is in flux. Employers are retreating from final salary schemes, partly because of the impact of the new accounting requirement FRS 17, which requires companies to state their pensions assets and liabilities.

The Government are attempting to create accessible private pensions for people on modest earnings, but there is evidence that they are having only faltering success. Nicholas Timmins in Wednesday's Financial Times—that excellent newspaper for which I worked for 10 years—wrote an article with the headline "Compulsory pensions draw closer." We all know that the structure of pensions provision is in flux and is likely to move towards greater obligations on people to make provision to give them security in their old age.

Today, we have the final vote on what may bring to a close the Equitable Life debacle, which has affected the confidence of and faith in the insurance industry. On top of that, there is recognition of the fast-approaching crisis in private pension provision, because of the impact of changing circumstances on the annuity rules.

Richard Ottaway (Croydon, South): My right hon. Friend mentions Equitable Life. Does he agree that, if he is successful with his Bill, a crisis such as has occurred with Equitable Life could not happen?

Mr. Curry: I agree with my hon. Friend. I would also assert that, if the Bill is successful, the crises that would have descended upon us in future years will not happen—not merely the crises that individuals will have to face, but those with which the Government will have to deal.

Mr. Andrew Dismore (Hendon): I am interested in what the right hon. Gentleman said about Equitable Life. I declare an interest as an Equitable Life policyholder—in many ways I wish I was not—and I know that many other hon. Members are also policyholders. The right hon. Gentleman has just asserted that his Bill would prevent a repeat of the problems that have occurred in Equitable Life. Will he expand on the reasons why?

Mr. Curry: I am sure that the hon. Gentleman will listen attentively to the two and a half hours that remain of my speech, during the course of which he will receive a full explanation. If he is not satisfied then, the obvious answer is to take the Bill into Committee, where we will have a much greater opportunity to debate those issues.

The annuities crisis is commonly acknowledged. There have been parliamentary attempts to reform the rules, court action on human rights grounds, and the promise of a Government consultation paper on reform, which we are always told will turn up next week. I think that this time it may be next week, and we will wait with interest to see what it says.

There is a choice. We can try to squeeze a bit more performance out of the old banger. We can put in a new set of plugs, tighten the fan belt, put some new tyres on it, replace the cassette player with a CD player, and hope we can get another 10,000 miles on a wing and a prayer; or we can seek thoroughgoing reform.

I have doubts about how much more performance we can squeeze out of the existing system: because the difference between the best and worst annuities is 0.5 per cent. of yield, the extent to which achieving a better performance would deliver the long-term benefits that people are concerned about remains to be seen, so my Bill sets out a radical reform and I make no apologies for that. However, I emphasise equally that it does so in a deliberate spirit of seeking co-operation with the Government, unashamedly setting out to meet their legitimate concerns. Indeed, it specifically requires Government action to achieve its full architecture, notably the introduction of certain tax measures, which would give it complete effect.

I have no ideological fixation—that has often been one of the accusations levelled against me—and my interest is in achieving reform that will work. If better and more achievable ideas emerge, I shall recognise them, but I am offering the Government a partnership in Parliament to secure the reform that we all know is necessary.

Why does the current crisis exist? Because people are locked in a one-off no-escape mechanism that no longer serves the purpose for which it was devised. People buy private pensions and receive tax relief on those contributions before the age of 75, but, with the exception of the tax-free lump sum of 25 per cent., they must then commit the whole fund to annuities. The purpose is to secure income in old age to keep the pensioner free of state benefits or welfare.

I agree with that proposition. I do not dispute that it should be central to the legislation. I reject completely the notion that, having benefited from support from the public purse, the pensioner should be acquitted of any obligation to make provident provision for old age, so let the first accusation not be that I am merely seeking to exploit a tax break without repaying the benefit of it.

The problem is not theory or principle, but practice. There is only one source of absolutely secure investment—Government stock. The vast majority of pensioners invest in an annuity that provides a flat-rate return, which cannot be inherited by a spouse, and is ravaged by inflation. Even in the benign environment of 3 per cent. annual inflation, an annuity's value halves over 20 years.

Mr. George Osborne (Tatton): Is my right hon. Friend aware that many hon. Members have received letters from constituents urging them to support his Bill, which is one reason for so many of us being present? I have received a letter from my constituent Mr. Desmond Williams, who says:

"Would you please give Mr. Curry's Bill your support. This reform is very overdue as it is very unfair that those people such as myself who have saved and put money into pensions should be forced to take an annuity at very low rates. If I should die, my wife will receive no benefit."

That is exactly my right hon. Friend's point.

Mr. Curry: I am grateful to my hon. Friend, because he has given a single example of the predicament in which people find themselves that could be multiplied thousands of times.

If annuities yield about 12 per cent., the problem is manageable. Such rates were available when the rule was devised following the introduction of the Income and Corporation Taxes Act 1988, but the situation has changed dramatically. The House of Commons Library points out that gilt yields have fallen sharply over the past decade with nominal yields on 10-year gilts falling from 10 per cent. throughout the 1990s to 7.5 per cent. in 1996 and 4.5 per cent. in 2000.

The reason for that is obvious. First, the structure of Government debt has changed. I remember the debates when the Chancellor decided that the revenue from the so-called 3G mobile phone auction should go towards eliminating debt. People said, "Is this wise? What will it do to liquidity in the gilts market?" The Government chose to reduce their debt, however, which means that there is less debt to purchase and the supply has shrunk.

Secondly, demand has grown. The Treasury estimates that 4 million people are in personal pension schemes, with 1.4 million in occupational money purchase schemes. The size of the annuities market stood at £8.5 billion in 2001, but it is estimated that it will hit £12 billion in 2005 and £35 billion plus in 2035. People are living longer, both men and women. However, from a starting point of 60 years of age rather than birth, life expectancy is much closer between the two sexes, which means that annuities become more expensive as dependence on them as life support schemes increases.

Mrs. Angela Browning (Tiverton and Honiton): I support my right hon. Friend's Bill, but I have one concern, which may simply be a matter of clarification. The principle of equality between men and women in annuity rates is worthy, but in actuarial terms men end up subsidising women because of the differential in life expectancy.

Mr. Curry: That is a perfectly valid point, but we made a deliberate decision to have a system that, to use an abbreviated term, may be described as unisex, because women suffer much more severely than men. [Interruption.] They may live longer, but that is not a sin, I hope, although it does mean that they receive much worse benefit from the schemes. We have anticipated the trend of international law, which is constantly against such differentiation between men and women. We deliberately built that aspect in, so, although I plead guilty, I am unapologetic over my hon. Friend's charge.

Mr. John Greenway (Ryedale): My right hon. Friend pleads guilty unnecessarily. Although current actuarial tables show that life expectancy for those in their 20s is greater for women than for men, once people reach 65, which is the age we are discussing, there is little difference between the life expectancy of both sexes.

Mr. Curry: I am extremely grateful for that mitigating evidence from a former policeman.

Bob Spink (Castle Point): My right hon. Friend has indeed pleaded guilty before being found guilty. The point made by my hon. Friend the Member for Tiverton and Honiton (Mrs. Browning) is a good one, but it is mitigated by the Bill's excellent inheritance clauses.

Mr. Curry: I am grateful for that anticipatory applause, which I shall be happy to receive again when I reach the appropriate point in my speech. Furthermore, when my hon. Friend the Member for Tiverton and Honiton intervened, I was about to say that those factors add to the sharp fall in gilts, which particularly hits women as they pay a premium owing to longer life expectancy.

The substantive point is that the rules are no longer delivering the security to the pensioner or the guarantee to the state for which they were designed, so while the pensioner is trapped, the state is equally trapped owing to the looming requirement to provide welfare for people who may no longer be able to meet their own welfare needs. The Government admit that. The hon. Member for Newcastle upon Tyne, Central (Mr. Cousins) asked about

"the size of a pension fund which would generate an annuity capable of establishing eligibility to an element of pension credit on its introduction in 2003".—[Official Report, 5 December 2001; Vol. 376, c. 431W.]

The Government replied that the sum required in a single flat-rate scheme, which is the most common, is £36,000 for a man and £39,000 for a woman. The figures for an index-linked single life fund rise to £48,000 and £52,000. That again shows the differential between what men and women must pay to secure equivalent benefit.
The Government have also given figures to show that a 40-year-old woman would need £100,000 to buy an annuity at 65 and stay off income support, even with the state pension. The pension credit will of course alter benefit entitlement, but it will not reduce the volume of savings required to keep off benefit. Equally, a single man with £100,000 in savings in annuities will be eligible for income support by 2017, sooner for women.

There is no real difference in the analysis of the problem. Change is needed, and the Government recognise that. The Inland Revenue has approved a scheme to overcome some difficulties—the so-called London and Colonial scheme, which provides for a fund that may be inherited. The problem is that the fund is offshore, high cost in its fees and requires a minimum of £250,000, so if any Labour Members are thinking of saying that I am engineering a scheme designed purely for the better-off, I hope that they will pause for thought before levelling that accusation.

Mr. Nigel Waterson (Eastbourne): On that point, does my right hon. Friend agree with my constituent Mr. B. L. Harris of Willingdon Road that many of the people who are suffering are those on lower and middle incomes? He asks why people like him should start making provision in their 20s and 30s and take the risk that, some 50 years on, they will be caught by a very low rate of annuity.

Mr. Curry: That is precisely the point. When my hon. Friend's constituent began his scheme it would have been indexed in the expectation that it would keep him in a relatively comfortable, but not exaggerated, lifestyle in his old age, but he may well find himself slipping towards income support, and that is the nub of the problem that we are trying to address today.

My scheme is aimed at the middling saver and at achieving a pot of between £80,000 and £150,000, but I include specific suggestions to allay the Government's concerns and to prevent abuse of the scheme, such as its use to promote tax evasion. My scheme would provide an option. If people wished to remain with the scheme provided by existing legislation, they would be able to do so, with one exception. I am not requiring a change; I am making a change available to those who want it.

My scheme would retain the 25 per cent. tax-free lump sum. There are intellectual arguments about whether the lump sum is sensible, but many people depend on it to pay off an endowment mortgage, and I doubt that any politician in the House has the courage at the moment to suggest that the option should be removed. I put down an intellectual marker that, at some stage, logic may require scrutiny of that.

By the age of 65—I repeat, 65—people would have to buy an annuity to keep off welfare, taking the state pension into account. The Government have to fix that level annually, so I am not pretending to do that. Today, making a reasonably generous calculation, we estimate that the amount would be about £140 a week, again including the state pension. The fund needed to generate that would be about £55,000, and the Bill describes that as the minimum retirement income. The annuity would be indexed, and it would be unisex. The key point is that what was left—not everybody would have anything left—could be invested in a retirement income fund. In other words, people could break out of the obligation to invest the whole sum in low-yielding bonds delivered in what is, in practice, a monopoly marketplace.

There are of course alternative mechanisms. One could prescribe the size of the fund to deliver the minimum income. We chose income rather than capital so that it would be easier for regulations to bring together the pensions pot, benefit under SERPS and defined benefit pensions. We thought that it would be easier, administratively, if we had the same genus, as it were, of provisions.

Under these proposals, drawdown schemes, in which people take income and capital from a fund up to the age of 75, when the fund is annuitised, would no longer be possible, although existing arrangements would run their course. If people were given the freedom over their funds, they would have first to satisfy the obligation to provide for support to remain free of benefit. That is one of the underlying principles of existing provision, and I would retain it. I am sure that there is common accord that that is necessary.

Mr. Steve Webb (Northavon): We shall support the Bill, but I am concerned that those who have a small pot and who now simply buy an annuity of their choice would be forced to buy an indexed annuity. Does the right hon. Gentleman accept that that would restrict choice, as compared with arrangements at present?

Mr. Curry: I accept that it is a restriction, but I would argue that it is a wise move to make in any event. I am trying to move the debate on a little. I accept that there will be elements of the Bill that people will dispute, and that is another reason for the Committee stage. In Committee, we can discuss precisely those modalities, to use, rather riskily, a word imported from the European Union.

Mr. Waterson: Just when you thought you were doing so well. [Laughter.]

Mr. Curry: Few of us thought that pension annuities were a subject so redolent of humour. I hope that it continues.

It should already be clear that I am not inventing a permissive wheeze to let rich people get away with tax murder. The constraints that I have built in are obvious, but the Government should also build in stringent tax provisions—provisions for which I have been attacked on the grounds of, for example, bending over too far backwards to meet the Government's needs. Once again, I am unapologetic. I think that people must provide for their old age, and I do not intend to resile from that and give people a further benefit when they would already have received a benefit in the form of tax concessions. They should not be able to pocket that benefit without making reciprocal arrangements to protect their position in old age.
I suggest the following tax regime. First, there would be an exit tax on the fund of 35 per cent. at death, unless it was passed on to the spouse, partner or dependent children. The residual fund would be counted towards the estate for the purposes of estate duty, which of course the spouse does not pay. That would be double taxation, and people may want to criticise that, but I am trying to acknowledge the Government's need to make sure that people make adequate provision and to address, in anticipation, the fear that a lot of new money would be going into schemes that would qualify for tax benefit and from which the Government would have no clawback.

I am suggesting measures to prevent the fund being wrapped up into a trust. The Bill seeks to make the trust incapable of assignment, which should effectively close off that option. I suggest that the Government may want to change the rules on gift or inter vivos donations, again to prevent the possibility of exploitation of the scheme to benefit dependants outside the former rules that I explained.

Who would benefit? Aberdeen Asset Management argues that 1.2 million people, or 7.5 per cent. of people between 35 and retirement age, would be assisted. It is estimated that someone starting a scheme today would need to save 11.4 per cent. of net average earnings to reach the minimum income through the annuity—less than the existing arrangements demand.

What would the Government get out of this? I keep emphasising what the Government would get out of my proposals, and I am becoming almost ashamed of how much I am trying to help them. [Interruption.] I am delighted to hear that murmur of dissent. First, the Government would get continued annuitisation to get the minimum income, with a kick-off point at age 65 not 75, and therefore the possibility of more taxable income from the payment of the retirement income fund. Secondly, the drawdown scheme, which can diminish the capital available for annuitisation, would end. Thirdly, the Government would get a tax resource to recover their investment, although there may be a time lag. The Treasury should applaud the Bill, and even the dour Scottish spirits at the Department for Work and Pensions should toast me in a wee congratulatory dram.

What are the criticisms of the scheme? The first is that only the rich would do well; the poor would still have to invest in an annuity that mopped up all their savings. But that is what happens now. It is an inevitable consequence of the Government's demand that a fund accumulated for tax benefit should deliver the income for which it is intended. I agree with that. Almost everyone with modest funds buys an annuity at age 65 in any case, and the existing provisions would remain for those who wanted to invest using that vehicle.

The second charge is that the Bill is just tinkering. It is not. It is a radical option. Tinkering would be simply to move the age 75 cut-off point to 80 or 85, but then people would be encouraged to consume even more capital and head with greater certainty towards benefit dependency. The third criticism is that the scheme is a recipe for tax avoidance. I have spent some time explaining the measures that I propose to ensure that that is not the case.
The fourth accusation is that if pensions are made more attractive or, to use the Government's word, the "disincentive" of the present scheme is mitigated, there would be a flood of new money waiting to pour into pension schemes, claiming tax relief and escalating the cost to the public funds. That is the Inland Revenue's nightmare. That claim is exaggerated for three reasons. First, it is not clear that the amount of disposable income is as great as the Revenue fears, especially if the definition of disposable income includes housing cost. There is an argument about what disposable income is. The Treasury and the Department for Work and Pensions do not employ the same definition.

Mrs. Jacqui Lait (Beckenham): I am following my right hon. Friend's argument very closely. Does he agree that part of the reason for the apparent failure of the Government's stakeholder pension policy is that the very group of people who may save £30,000 or £40,000 towards an annuity are precisely those who do not have the disposable income to invest in a stakeholder pension? My right hon. Friend's proposals would be a much better way of dealing with people in the middle income bracket.

Mr. Curry: I am grateful to my hon. Friend for discovering new reasons for me to approve of my own proposals.

The second reason why I believe that those fears are exaggerated is that it would be plain daft for people to over-invest in a pension given the rigorous fiscal regime that I propose to build around it. To use one of the current in-words, it would be counter-intuitive.

Thirdly, even if there is an increase in costs, the tax rules give the Government the eventual clawback on their investment. It is a crucial issue on which economists disagree—but when did economists not disagree? The Institute for Fiscal Studies argues that 75 per cent. of savings is not generated in lieu of consumption but by movement of funds from one investment to another. This is based on the operation of the so-called 401(k) scheme in the United States. So I do not believe that there is a footloose wad of new money waiting to cascade into pensions and claim tax relief.

Mr. John Butterfill (Bournemouth, West): Does my right hon. Friend agree that the statistics show that the existing availability is wholly underused, even by those who have surplus expendable income that would enable them to do that, and that if the rich wished to have vehicles for this purpose, the enterprise investment scheme or venture capital trusts provide a far more tax-efficient vehicle and do not have the long lock-in of pensions?

Mr. Curry: My hon. Friend makes an extremely valuable point and I am grateful to him for that additional information. In any case, it is evident that people are cautious about locking up capital in pension schemes when they may have emergency needs such as unemployment or divorce. To quote a personal example, two of my children are getting married this year. That could be described as an asymmetric financial shock. [Hon. Members: "Are they girls?"] One is a girl and one is a boy, so there is clearly some negotiation ahead. I put some money by in the Skipton building society, but I am afraid that the Chancellor has made sure that the return on that is much less than anticipated at the time of the investment. No doubt my children will benefit, but the old man is now having to scratch around in a fairly urgent way to finance these extraordinarily happy events. Certainly I would not have wished to lock up too much of my savings against such eventualities.
If the Government are really kept awake by fears of a new demand for rebate, they have the means to address it. They can simply set limits on the amount of income tax rebate on contributions which are lower than the limit on the contributions themselves, and they will have turned the trick in tax terms.

The Bill seeks to solve a real, growing problem, particularly for people of modest means. Moreover, the changes to the way in which businesses deal with pension entitlement accelerate the urgency of that problem. The Government have a legitimate concern: they have a legitimate demand and a real problem. Pensioners, too, have legitimate expectations and an acknowledged grievance. The Bill invites the Government to engage in a necessary debate and challenges them to adopt this solution or to offer a more effective one.

This is a private Member's Bill, so the Government have the whip hand. They can kill the Bill dramatically or they can engineer death by 1,000 amendments. I urge them to take on the challenge of addressing the issue and working to produce a reform in order to free a growing generation of elderly people from the fear that a civilised old age will descend into a struggle for survival.

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David Curry MP | House of Commons, London SW1A 0AA | tel: 020 7219 6202