I beg to move, That the Bill be now read a Second time.
Security in retirement has been a central part of the Government’s agenda. It is important that we adapt to the needs of a population who live longer and who are increasingly active in old age. In the course of this Parliament we have significantly improved the state support on offer to pensioners. From April 2016, the new state pension will give people certainty about what they can expect from the state during their retirement and reduce the likelihood that they will require means-tested benefits. The triple lock introduced at the beginning of this Parliament ensures that increases for the basic state pension will not be outstripped by earnings, growth or inflation. This means that pensioners are now £440 a year better off than they would have been had the state pension only been increased by average earnings since 2011.
We have also taken steps to help people saving for their retirement. Automatic enrolment, introduced in 2012, gives all employers a duty to enrol all eligible employees into a qualifying pension scheme. In the past two years, approximately 4 million people have been newly enrolled into a pension. By the time the programme is fully rolled out in 2016 up to 9 million will be newly saving for their retirement. This radical reform will transform our culture of saving and increase the amount being saved in workplace pensions by about £11 billion a year.
Automatic enrolment will ensure that individuals have the opportunity to save into a pension, but we also need to ensure that when they come to access those savings they get a fair deal. This Government have always believed in personal responsibility. If people work hard and save all their lives, when they reach retirement they should be given the freedom to choose how they spend those savings. Through the Bill, we are introducing fundamental reforms to how people can access their defined contribution pension savings. This is the most radical change in the way people take their pensions for almost a century. The Bill contains provisions to: remove the limits on withdrawals from drawdown; make annuities more flexible; create a new way to take money directly from one’s pension savings; prevent the reforms from being exploited for unintended tax purposes; and restrict and reduce tax charges payable on certain lump sum death benefits.
We have consulted extensively on how best to implement these changes. Given that it is a highly technical and complex area, we have also taken the step of publishing a briefing, available on gov.uk, which explains clearly what each section of the Bill does. Alongside that, Her Majesty’s Revenue and Customs guidance, which is also on the gov.uk website, explains in more detail how the changes are intended to work. The Department for Work and Pensions’ Pension Schemes Bill, which is in Committee, covers the regulatory side to those freedoms, notably the guidance guarantee. These issues are being debated thoroughly as part of the Bill.
Will the Minister explain why there has been a change in terminology from “advice”—which the Chancellor mentioned in his introduction of the proposed measures—to “guidance”, which, unlike advice, legal protections are not associated with?
We made it clear, in the documentation that was published at the time of the March Budget, that the legal status of the support we have provided is “guidance”. That means that there is not a recommendation of a specific product; none the less, that support will be hugely helpful for those who will face choices. It is right that the role that we play—or facilitate—is about providing support in the form of guidance, rather than making recommendations of particular products.
I would like to provide Members with an overview of the different parts of the Bill. At Budget 2014, the Chancellor announced that everyone with a defined contribution pension could take it as they wished from age 55, and would no longer be subject to drawdown limits or income tests before being able to take their money flexibly. The current system denies people flexibility at the point of taking their pension. For those with the smallest and largest pension savings, there is the option to take their pension as cash, but for everyone else there are considerable restrictions. They have two main options: purchase an annuity or enter capped drawdown. Capped drawdown limits how much someone can take out each year to an amount calculated by reference to the amount they might have received from an annuity purchased with their fund.
Flexible drawdown already lets those with very high levels of savings to take their money however they want, taxed at their marginal rate, if they can prove that they have a guaranteed pension income for the rest of their life of at least £12,000. The Government have already reduced that from £20,000 to give many more people flexibility, but the first main change provided for in the Bill goes much further, making unlimited drawdown available to anyone with a defined-contribution pension and removing the limits on what can be withdrawn from those funds.
The Bill also ensures that existing drawdown funds can, if the individual wants, be converted to flexi-access drawdown, so that those currently in capped drawdown will be able to benefit too. The aim of the changes is to give all the 320,000 people who retire every year with defined contribution savings greater choice about how to access those savings, regardless of how big their pension pot is. The changes will take effect from 6 April 2015.
Some people think that this change—allowing everyone access to their own hard-earned money—will cause people to spend recklessly what they made sacrifices to save. The Government do not agree. Those who have saved the money over a lifetime should be trusted to make their own decisions about how best to use it to provide themselves with an income in retirement. Through the guidance guarantee, we are making sure that customers have access to impartial guidance on how to make the most of their money.
We agree that it is important that people can access their money and use it how they best see fit, but might not the introduction of these flexibilities lead to there being so many products on offer that some unscrupulous people might offer individuals unsuitable products? What will the Government do to ensure that people are not mis-sold products that are not suitable for them or, indeed, that err on the side of illegality?
The hon. Lady raises an important point. First, the guidance guarantee will ensure that guidance is available to people on what their options might be, to point them in the right direction. Secondly, we recognise that the regulators have an important role to play. The Financial Conduct Authority is very engaged in this matter, setting standards and ensuring proper enforcement. She is right that we must deal seriously with any unscrupulous businesses out there that seek to exploit people, but we have a regulatory regime in place to address that very point.
Will the Minister elaborate on the tax implications for the Treasury of these legislative and policy changes?
At the time of the Budget, we set out our estimates of the implications for the public finances, certified by the Office for Budget Responsibility. We have also made a number of announcements since the Budget that will have a revenue impact. The Office for Budget Responsibility will return to this issue at the autumn statement, when it will set out its numbers in the usual way. The estimates have yet to be certified by the Office for Budget Responsibility—as one would expect, given that we are still some way from the autumn statement—but an update on the numbers that were published in March will also be set out in December.
The changes we have announced have resulted in moving some revenue from one year to another, rather than fundamentally changing the face of the public finances, so in broad terms their overall tax impact is not considerable, certainly when compared with the substantial changes that the Government have made, such as increasing the state retirement age or reforming public sector pensions.
To follow up the question from my hon. Friend the Member for Middlesbrough South and East Cleveland (Tom Blenkinsop), there has been a suggestion that the change could lead to a windfall for the Treasury at a time when that would be very helpful for future Budgets. What does the Minister say to that suggestion, which has been made by some in the real world out there?
The numbers that we and the OBR believe are likely to be changed as a consequence of the policy were set out in the March document. We very much doubt that there will be a huge windfall for the Exchequer as a consequence of these changes, whatever the appeal of that might be. As I have said, some revenues have been moved from future years into earlier years, but some of the claims about the impact are somewhat exaggerated and highly unlikely.
To pick up on the important point made by the Chair of the Work and Pensions Committee, will the Minister seriously consider putting on the face of the Bill a criminal offence of trying to deceive people out of their pension savings? That will act as a deterrent to unscrupulous organisations or individuals from the moment the legislation goes on to the statute book.
The Financial Conduct Authority has already made it clear that if, for example, anyone attempts to present themselves as providing guidance under the guidance guarantee when they are not in a position to do so, that will be looked at very seriously. There is a strong determination to ensure that the dishonest, the unscrupulous and those seeking to mislead people are treated very seriously indeed. We are talking, after all, about a regulated sector, and those who try to conduct regulated activities who are not properly regulated already face offences. I recognise the hon. Lady’s concern about whether we are determined to address those who try to defraud our constituents. Yes, we are absolutely determined to address that, and the FCA is very engaged in that process.
I, too, would like to press the Minister on the issue of consumer protection. At the moment, if someone gets bad advice from a financial adviser, they have a degree of protection through the FCA. If people receive advice from those who are not professionals in financial matters—the Minister has conceded that these are complex matters—what comeback will they have?
As I say, the FCA is very engaged in this area and has already set out its determination to ensure that those seeking to mislead face punishment. The FCA has responsibility for ensuring that regulated firms treat their customers fairly and communicate in a way that is clear and not misleading. We believe that it has considerable powers here. Of course, the Pension Schemes Bill is also important in ensuring that the FCA puts in place standards for the guidance guarantee—standards that anyone delivering that service must comply with.
I am extremely grateful to the Minister for taking a second intervention so quickly. He has been careful in his words regarding the FCA. We are talking about those who are manipulative and try to deceive people out of their entire life’s pension; it is a really serious issue. I would like him to confirm that when he refers to “serious” punishment and this being taken “very seriously”, it means a criminal conviction for these people. Will he confirm that that is how seriously the FCA will treat this offence?
The FCA will certainly treat this extremely seriously. I entirely share the hon. Lady’s view that this is an important matter and that it is right to take the strongest action to ensure that those who attempt to defraud our constituents of their life savings face severe sanctions. This Bill is about the tax changes; the Pension Schemes Bill deals with the wider issues, and it gives the FCA powers to set standards for the guidance guarantee. Regulated firms have responsibilities to treat their customers fairly, and the FCA has made it clear that it expects firms to comply with that, in this context as in others.
We of course engage closely with the ABI and other bodies involved in this area. Indeed, the work in this Bill and in the Pension Schemes Bill is a result of close engagement with the ABI. The Government are determined to ensure that we have a regulatory system that protects our constituents from the unscrupulous. This is principally an issue for the FCA, but we are determined to ensure that it has the powers that it needs. Much in the Pension Schemes Bill relates to that.
May I remind the Minister that one reason for bringing forward these freedoms was to try to tackle the mis-selling that already goes on, whereby people are effectively forced by the law to buy annuities, which in many cases are totally unsuitable for them? That has led to real cases of detriment. The mis-selling issues under these freedoms are not new; they have been around for a long time.
I would like to make a little progress. That brings me to the second main change in the Bill, which is to make annuities more flexible. Current tax legislation caters for two broad categories of retirement income: lifetime annuities and drawdown. As I have set out, we are making drawdown much more flexible. Let me explain how we are doing the same for annuities.
We think annuities will still be the right product for many people, as they provide the valuable security of a guaranteed income for life. The current requirements for a lifetime annuity, however, lead to an inflexible and restrictive product, and there is a clear demand for more flexible ways of getting income from one’s pension pot. We want these reforms to stimulate competition and innovation in the retirement income market. We want providers to innovate and create new products that will more closely reflect the changing needs of their customers. We have consulted extensively with industry on the changes that it would like us to make to enable this kind of innovation. The Bill will deliver those changes by allowing annuities to decrease, and by removing the 10-year guarantee period for guaranteed annuities. That gives significantly more flexibility to providers to offer products that meet individuals’ needs more closely. Those changes will apply to annuities sold after 6 April 2015.
The third major change in the Bill is a new method by which people can access their pension. Currently, people who want to take their pension as cash have to take their whole tax-free lump sum—25% of their fund—and place the other 75% in a drawdown fund. Any money they then draw down is taxed at their marginal rate. The Bill will introduce a new option by giving individuals the flexibility to take one or more lump sums from their pension fund—with 25% of each payment tax-free and 75% taxed at their marginal rate—without having to enter into drawdown. This lump sum is known as an uncrystallised funds pension lump sum, or an UFPLS. [Interruption.] It is perhaps not the most elegant of names, but try doing better with “uncrystallised funds pension lump sum”. These payments can be taken from funds that are uncrystallised—that is, have not yet been accessed. It will be open to schemes to provide this option from 6 April 2015 onwards. This does not change the amount of tax people pay on their pension, but it does provide them with extra flexibility and further choice about when and how to access their savings in a way that suits them.
I want highlight changes that we are making through the Bill to ensure that these reforms, which are intended to give individuals more choices about their income in retirement, are not exploited for tax purposes. If the Government were to take no action, an individual over the age of 55 could divert their salary each year into their pension, take it out immediately and receive 25% of it tax-free, thus avoiding income tax and national insurance contributions on their employment income. That is not the intention of the reforms.
The Government spend a considerable amount a year on pensions tax relief and have a responsibility to ensure that the money is used for genuine pension saving. Under the current system, individuals in flexible drawdown have no annual allowance. They are not entitled to tax relief on anything that they contribute to their pension after they have accessed it flexibly. Extending this rule under the new system would be disproportionate and would disadvantage average savers. We are in an era of much more flexible retirement. An individual might access their pension flexibly and then decide to return to work, or access it while working. They might still want to save into a pension. They might be automatically enrolled into a pension and be subject to a tax charge on the amount contributed. If we kept the current system, there would be a strong incentive to opt out of auto-enrolment.
Instead of having no annual allowance, individuals who access their pensions flexibly will, under the new system, have a lower annual allowance of £10,000, which will apply to their defined contribution savings. This approach allows people the flexibility to contribute to their pension even when they have flexibly accessed their pension rights. At the same time, it ensures that individuals do not use the new flexibilities to avoid paying tax on their current earnings. It will prevent those with the means to divert large sums into pensions from doing so, while allowing the vast majority of individuals to continue to save. The Government have worked very closely with industry to develop this measure, and will continue to do so to ensure that it remains fair and proportionate.
The Minister will be aware that the Pension Schemes Bill is in Committee. I am a member of that Committee, and in our fourth sitting, on Thursday 23 October 2014, a gentleman called Mr John Greenwood, a Financial Times journalist who has written quite a lot on this subject, said that the Treasury’s new policy to limit the amount of money that could be taken out at once
“will impact on only 2% of the population”.
That is true. However, as I have said, we have tried to ensure that we do not give people an opportunity to use the new arrangements as a way of avoiding substantial amounts of tax, while also ensuring that, in an era of more flexible working, we do not prevent people from gaining access to their pensions and then making further contributions in the circumstances that I have described. We concluded that introducing a reduced £10,000 personal allowance was the best way of striking a balance between those two objectives. We will, of course, continue to look at the matter closely to ensure that the system is not exploited at a significant cost to the Exchequer.
The Minister is being very generous with his time. He is also, potentially, being very generous with the Treasury’s coffers. Mr Greenwood said that the allowance
“will impact on only 2% of the population, so it is a penalty with no teeth for 98% of the population.” ––[Official Report, Pension Schemes Public Bill Committee, 23 October 2014; c. 126, Q284.]
What is the Treasury’s forecast of the potential loss of national insurance contributions?
The Office for Budget Responsibility will return to the issue of the forecast at the time of the autumn statement. Mr Greenwood’s evidence featured some eye-watering numbers, but they were based on extraordinary assumptions about behaviour. All the changes resulting from the reforms that we have announced since the Budget will be announced in the autumn statement in the usual way. We certainly do not recognise some of the numbers that have been floated in relation to cost, but the numbers have not yet been certified by the OBR, so I cannot give the hon. Gentleman the answer that he seeks at this stage. Of course we have been mindful of the impact on the Exchequer, but we believe that our proposals will not put it at risk of losing substantial sums. As I have said, we are not preventing people over 55 from drawing down part of their pensions while continuing to make contributions, or retaining the flexibility to do so. We might have closed off that option, but we decided not to.
The Minister is indeed being generous with his time. May I ask when the Treasury is likely to publish its assessment of the risks associated with the delivery of this project? It has obviously identified a number of such risks, and it would be helpful for everyone to see the assessment.
A number of elements are involved. We have already estimated the costs resulting from the Budget announcement, and, as is customary, we will update the House about the cost of further changes that we have made in the autumn statement. We need to take account of a number of policy announcements that have been made since the Budget. The information will be available once the numbers have been certified by the Office for Budget Responsibility—that is, at the time of the autumn statement.
The last change that I want to explain is the change that the Government are making to the tax charges on pensions when someone dies. We will table amendments in due course to enact those changes in detail, but the Bill currently provides for certain lump sums to be paid from pension schemes when someone dies under the age of 75. It ensures that when someone dies with money in a drawdown account before reaching the age of 75 and a lump sum is paid from it, that sum can be paid tax-free. It also ensures that if someone dies with a pension after reaching the age of 75, the tax charge on a lump sum paid from it is reduced from 55% to 45%, and it reduces the tax charge when someone over 75 receives a serious ill-health lump sum to 45%.
The Bill makes a number of other changes, which I will summarise briefly. They include the introduction of a permissive statutory override, which will allow schemes to make the types of payments set out in this Bill without the need to change their scheme rules; provisions to ensure that the new system is reflected in the rules governing overseas schemes involving UK tax-relieved funds; allowing payments from guaranteed annuities to be paid to beneficiaries as a lump sum if they are under £30,000; and measures to ensure that people cannot gain an unintended tax advantage by becoming temporarily non-resident.
Our pension reforms have been extensive and fundamental. We have taken steps to provide a solid foundation for private saving by reforming the state support that is on offer and introducing automatic enrolment. However, it is also vital to give people an informed choice, and the Bill introduces welcome changes to ensure that that happens. It makes the tax system fairer by ensuring that people have more choice in regard to how they access their savings, while also preventing people from exploiting the new flexibility in order to gain unintended tax advantages. At the heart of it are three key principles: responsibility, fairness, and individual choice. I commend it to the House.
I look forward to an interesting debate on the detail of the Bill, both today and in Committee.
Opening the debate on Second Reading of the Pension Schemes Bill, the Minister for Pensions said:
“we will be very busy over the remaining months…taking the pensions system to a…better place.”—[Official Report, 2 September 2014; Vol. 585, c. 195.]
I agree with the first part of that statement: we will indeed be very busy. As for the second part, the extent to which we can improve the Bill remains to be seen. The efficacy of any Bill should be judged only according to its outcomes, and at this stage there are a number of concerns about the outcomes of this Bill, which are far from certain. There are a number of unanswered questions. My hon. Friends have asked a number of them today, and I am sure that more will arise during the Bill’s passage.
As the Institute for Fiscal Studies said at the time of the Budget, the reforms in the Bill will change the pensions landscape dramatically, in the ways in which people take income in retirement and the pensions industry is structured. As the Minister has explained, from 6 April 2015 those aged 55 and older—I should perhaps declare an interest, as I am a member of that age group—will be granted far more freedom. They will be able to gain access to as much of their pension savings as they wish, as often as they wish.
The Minister for Pensions has described the Opposition’s view of the new freedom as “ambivalent”, but that is something of a misrepresentation. We are not ambivalent about what the Bill purports to achieve. Since the reforms were announced in the Budget statement, our position has been consistent, but, for the avoidance of doubt, I shall restate it. We support increased flexibility and choice for savers, which is why we have long advocated reform of the annuities market to help people shop around to get a better deal. However, it would be remiss of us not to identify and highlight the potential problems and pitfalls that the Bill presents. One of my main concerns, which has already been raised today, relates not just to what it seeks to achieve, but to the speed at which it seeks to achieve it.
Does the shadow Minister agree that, given the increasing array of choices now available, one of the most important decisions anyone can make will be how comfortably can they live in retirement? The guidance and help the Government provide on making these difficult choices is very poor.
There is confusion as to what the proposals will mean in practice because there has not been the discussion across the political spectrum and among social partners that took place for the accumulation stage—making sure that more people save for their retirement. There has been little if any discussion about the decumulation stage, beyond criticising annuities. That is part of the problem with this process: the Government pulled a rabbit out of a hat at the Budget, without building a broad consensus to ensure that everybody is on board.
My hon. Friend makes a valuable point which I will address in due course. Before I do so, I want to put on the record one of the concerns expressed by the TUC, which, in keeping with the point made by my hon. Friend, said that it believes that
“the measures contained in the Bill are being rushed in, thus overturning the emphasis on consensus and consultation that has been a positive feature of pensions policy making over the last decade.”
There are two pension Bills running side by side in the House and I do not want to stray into discussing the detail of the other one which is being considered in Committee—I am sure you would not allow me to do so, Mr Deputy Speaker. However, my hon. Friend makes a valuable point.
The hon. Lady is being very generous in taking a number of interventions. She has the opportunity to confirm that the Labour party would support an amendment to the Bill to make it a specific criminal offence for unscrupulous, so-called pensions advisers to swindle innocent people out of their pensions and lifetime savings. Is that not a valuable amendment that could easily be made and confirmed by the Financial Secretary this afternoon?
The hon. Lady makes an important point, and I listened carefully to her intervention on the Financial Secretary. As a constituency MP, I am aware of people who have been swindled out of their life savings through unregulated, unscrupulous people giving them bad advice; indeed, the Financial Secretary has heard me talk about this issue when considering other Bills. I am very interested in what the hon. Lady said about such an amendment, which we would want to consider to give as much protection as possible to consumers.
A point that the Financial Secretary skirted round when he announced the changes to annuities was that they can now go down, as well as up, as a result of this legislation. Does that not bear out the concern raised by the hon. Member for North Down (Lady Hermon)? If such flexibility is provided for the providers, there is a real danger that people could be sold a pup and find that their income unexpectedly diminishes over time?
That is an important point, and these are exactly the reasons why it might have been useful if more time had been provided for discussion within the industry and with the partners in the process, so that we can get to that better place that I talked about at the outset. It is not just about giving people more choice; it is about giving them the ability to make choices that are wise not only at the moment when they choose to draw down or take part of the lump sum, but that are based on providing for the future.
One of our concerns is that although the reforms may well give greater choice, we have to consider whether that greater choice translates into better value and a better deal for those involved in the process. People making use of the flexibility will of course have new opportunities, but as we have heard, new opportunities potentially bring new risks. Those who purchase the wrong products, invest unwisely or fall victim to unscrupulous practices in the unregulated market will see their money swiftly evaporate. Those who use the new flexibility to take out cash from their pension savings may find that they are paying a higher rate of tax. We can also expect a deluge of new products to flood the market, and while some of them may well be good, by the very nature of things, some may well be less so. That is why it is important that people get good-quality guidance to help them make the right choice.
Is my hon. Friend concerned about the question of the capacity to deliver the advice that the guidance guarantee is meant to supply? According to evidence that the Pension Schemes Bill Committee took last week, the figure is less than 25%. It is not just that poor advice might be given; there may be none at all.
My hon. Friend makes an important point, and I read with interest the transcript of the Committee’s evidence session. People need good-quality guidance to help them make the right choices. We must guard against mis-selling, for example—we cannot afford a repeat of the payment protection insurance scandal. We must prevent people from falling victim to exploitation and illegality. We know that pension liberation fraud has already endangered millions of pounds in savings, affecting many people. That is the reason why I am concerned about the way the Government have handled these reforms, which to some seem a bit rushed and haphazard.
Is there not also the concern that people will end up spending a lot more of the pensions they have drawn down into savings accounts on social care? This Government have forcibly removed £4 billion from adult social care budgets, so we know that people are paying more for social care. If the money is held just in savings accounts, many more people will end up being liable for those costs.
The point my hon. Friend makes is absolutely crucial for many people, which it is why it is so important that they get guidance, so they can make sensible decisions to provide for the long term. I will say a bit more about social care and other services later, if I have the opportunity to do so.
After the Chancellor announced the overall pensions reforms to the House in the Budget statement, we set out three tests against which we believe they should be measured. The first was the advice test: would there be robust advice for people on providing for their retirement and measures to prevent mis-selling? The second was the fairness test: that the new system would be fair, with those on middle and low incomes still being able to access the products that give them the certainty in retirement that they want. The third was the cost test: that the Government must ensure that these reforms do not result in extra costs to the state, either through social care or pensioners falling back at a later stage on means-tested benefits such as housing benefit. We stand by those tests and would argue that so far, the Government have been unable to give assurances on any of those points.
Is my hon. Friend aware of a study carried out by Ipsos MORI which showed that 12% of those who were eligible to do so would withdraw their pension pot entirely next year? When asked what they would do with it, one in five suggested that they would use at least part of it for a holiday.
Yes, I am indeed aware of that report. I shall go on to raise similar concerns and seek answers from the Minister to them in due course.
In addition to setting the three tests, we have also commissioned a retirement income taskforce, chaired by Professor David Blake of the pensions institute at the Cass business school. We wanted to look at how we could enhance retirement income and ensure that savers had access to good-value products alongside the support that they needed.
I would argue that our position on pensions has been consistent ever since our time in government. When the Labour Government took office in 1997, there was a crisis of pensioner poverty resulting from a decline in the value of the state pension under the Conservatives. There was also a crisis of trust in private pension provision following the mis-selling scandals that previous reforms had opened the way to. Responding to those challenges, the Labour Government built a robust regulatory framework to police and protect people’s pensions. That framework included the Pension Protection Fund. We also laid the groundwork for the universal state pension with a triple lock guarantee, and established the National Employment Savings Trust to help people to save for their retirement.
The reason that I mention those reforms is that none of them was rushed through. They were all based on sound evidence and consultation, and they had the common aim of helping people to make the right choices while affording them the certainty and security in retirement that they deserved. We now have to consider whether the present Government’s approach to pension reform has been consistent, or whether it seems at times to be erratic and contradictory.
To be fair, things began well for this Government. The single-tier pension and the auto-enrolment legislation represented positive steps to build on the progress made by the previous Government. Those reforms were based on evidence, consultation and consensus. That was acknowledged by, among others, Otto Thoresen, the director-general of the Association of British Insurers, who said that
“good consultation and a good period to execute”
improved the chances of legislation being successful.
However, the Government’s approach to the latest pension reforms, announced in the Budget statement, appears disjointed. Prior to announcing the reforms, they did not consult, either consumers or the industry. This has resulted in some of the issues that have been raised today not being flagged up at that time, and in the Government’s argument losing some of its intellectual rigour.
I would like to draw the House’s attention to the comments of the shadow Minister for Pensions, my hon. Friend the Member for Cumbernauld, Kilsyth and Kirkintilloch East on Second Reading of the Pension Schemes Bill, in which he highlighted the discord between the Government’s stance on pensions in the accumulation and retirement phases. That has been commented on today as well. In the accumulation phase, the Government’s approach—one that the Labour Government had fostered—is founded on the recognition that the pensions landscape is complex and difficult to navigate. That approach harnesses inertia to encourage pension savings, with individuals employed without pension schemes being placed on them by default. That is a sensible approach and it has proved effective.
However, the Government’s approach to the retirement stage, as outlined in the latest reforms, departs from that model, shifting the emphasis from the importance of accumulation to the ease of access. This Bill places the onus of choice back on the individual, working on the assumption that they will be able successfully to navigate what my hon. Friend the shadow Pensions Minister has called the “jungle of financial products”. He referred to there being a “tension” between the two approaches. He has been a friend of mine for many years, and I think that that is typical of his diplomatic way of expressing himself. The Association of British Insurers has also noted that tension, observing that:
“Automatic enrolment has seen millions more people saving for their retirement and further pension reforms should build on this. We are very concerned that the focus of recent discussion around the Freedom and Choice reforms is on early access to cash at age 55 rather than on building assets for income in retirement.”
The Minister referred to the fact that the Bill introduces the option of taking uncrystallised funds pension lump sums. I have to say that I have not been able to think of a better acronym than the one he came up with, try as I might. As he said, that provision will allow people to withdraw money directly from their pensions without first designating it for drawdown. Individuals will be able to take 75% of each withdrawal tax free, with the rest taxed at the marginal rate. This has been described by some as allowing people to use their pension almost like a bank account. More than any other measure in this Bill, it will expedite people’s access to their pension.
I should like to probe the Government’s thinking on this point a bit further. In searching for greater clarity, I repeat the question that my hon. Friend the shadow Minister put to the Pensions Minister in the earlier debate. He asked:
“If auto-enrolment policy was correct to assume that individuals need to be guided, helped and encouraged into better pension decisions, why do we no longer think that is the case at retirement?”—[Official Report, 2 September 2014; Vol. 585, c. 206.]
Perhaps the Minister will be able to respond to that question when he sums up the debate today.
In the meantime, I think we all agree that the Bill will increase innovation and result in a raft of new pension products entering the market. In many ways, that would be a good thing but, as I have said before, the flipside to freedom and choice is risk and complexity.
As ever, the hon. Lady is making a thoughtful and probing speech. It would be fair to say, however, that her tone is not one of great enthusiasm for greater flexibility and choice in the pensions system. Will she tell the House whether her party is considering reversing the changes that we are introducing today?
I am surprised by the Minister’s comment. I see it as my duty and responsibility as the shadow Minister to make thoughtful and probing speeches. I also said at the outset that we welcomed the opportunities that increased flexibility would bring, but people need to understand that the flipside to that freedom and choice will be risk and complexity. This is the place in which we should debate that, as we discuss the principles behind the Bill. We will also probe the matter further in Committee. The Financial Conduct Authority has observed that firms might devise
“complex, opaque and overpriced products”
that do not represent good value for customers. It is incumbent on us to understand that risk, and to ask questions about how such products would be regulated. Furthermore, the marketing of those new products might not always clearly articulate the risks involved.
I agree with my hon. Friend. That fiasco is a recent memory for many of us, and it is our responsibility to ensure that all the risks, as well as all the upsides, are explored.
I should like to quote the ABI, which has stated:
“Giving customers more choice is welcome but it is also imperative to recognise that good guidance and advice is vital to prevent people making decisions which could lead to retirement poverty and/or to them giving up valuable benefits.”
That is a very important point. People in the industry also recognise that we need to have some caution and ensure that we do the right thing.
That brings me neatly to the fraught issue of the guidance guarantee. The Minister talked a bit about that in responding to interventions, and although I recognise that it is not within the specific ambit of the Bill, it has a great bearing on it. That guarantee is integral to the measures in the Bill, because if the Bill is to be a success, the guidance must be fit for purpose. It is not unfair to say that the continuing concerns and confusion over the guidance guarantee do not give confidence to people who are worried about how they are going to access the guidance. It seems as though the guidance was a secondary consideration. As I have said, the pension reforms were announced without the prior consultation with the industry that we might have expected. Some of the confusion was added to when the Chancellor stated that his reforms would be accompanied by advice, given that we know that what he really meant to say, and what was promised in the Budget, was unregulated guidance.
We then had the unedifying and unhelpful intervention by the Pensions Minister, who appeared to make light of the need for guidance by saying:
“If people…get a Lamborghini, and end up on the state pension, the state is much less concerned about that, and that is their choice.”
That is not helpful at all and has not been during the process. On Second Reading of the Pension Schemes Bill, the hon. Member for Reigate (Crispin Blunt), who is in his place, asked for clarification on how the guidance guarantee would be funded. The Pensions Minister answered by saying that
“the £20 million is not an estimate of the annual recurring cost of providing guidance; it is a one-off seedcorn, getting-the-thing-going fund…if we need to set up websites, produce literature and create infrastructure, the £20 million will enable us to do so.”—[Official Report, 2 September 2014; Vol. 585, c. 198-99.]
That is a bit vague and non-specific. Less than a year from when this Bill comes into force, surely he should know exactly what the guidance will look like.
We now know that the Government propose to deliver the guidance across three platforms, only one of which will be face to-face guidance—that was what was initially promised. We also know that the Money Advice Service will not be involved in the delivery. The three agencies involved will be: the Pensions Advisory Service, which will provide over-the-phone guidance; Citizens Advice, providing face-to-face guidance; and gov.uk, to which this Minister referred. That raises the question of how the Government will ensure that guidance delivered across three different mediums will be of a consistent standard.
The crux of the matter, and what the consumer needs to understand, is: what will the guidance consist of? Will it be an interactive exchange, or will it be a list of questions that must be asked and areas that must be covered? The Financial Conduct Authority appears to think it will be the former, saying it should cover:
“the key facts and consequences of each”—
including financial consequences, e.g. tax implications.”
The Pensions Minister, however, seems to think it will be the latter. He has said that there is a “world of difference” between
“a guidance conversation to get people to base camp”
“sophisticated, individualised, tailored piece of…financial advice recommending products.”
The Pensions Minister has, however, been keen to assure us that the guidance is not being offered on the cheap—his preferred epithet is “budget”. The levy on the pensions industry will not be set at the level required to pay for
“full-blown, regulated, independent, tailored financial advice.”—[Official Report, 2 September 2014; Vol. 585, c. 199.]
Rather, it will be designed to generate only so much as is required to pay for what he terms the “cost-efficient” guidance version. To summarise, the guidance guarantee seems to amount to the following: it will not be regulated, personalised, or product-specific; it will be “cost efficient”, “substantially cheaper” than advice and funded by a “modest” levy on the industry—enough to get people to “base camp.”
That was what was said almost two months ago, but, sadly, judging by the evidence given to the Pension Schemes Bill Committee, things have not progressed much since. So bereft has been the Government’s approach to information gathering and analysis that we still do not know how many people are likely to take advantage of the new flexibilities. In evidence to the Work and Pensions Committee in April, the Pensions Minister was unable to give any firm indication. He said:
“I am not sure there is much point in me guessing. As I say, HMRC assumed that about 30% would take the cash...some of the annuity providers are saying it might be 70%- odd. We do not know.”
We are also reduced to guessing because, despite a freedom of information request from the shadow Pensions Minister, the Government have refused to publish any analysis they have conducted of the behavioural impact of these reforms. We do not know how many people are likely to make use of the new guidance, but a guidance pilot conducted by Legal & General found that only 2.5% of those offered guidance accepted it. The Pensions Advisory Service has estimated that take-up in the first year will be about 25%, so what happens in respect of the 75% who do not take the guidance? What backstop measures, or second line of defence, will be in place for those who do not take up the offer of guidance? In the first year at least, the answer appears that there will be none at all.
Again, the FCA has raised concerns about that, saying,
“we will have the usual supervisory work going on keeping a very close eye on products as they develop. If people choose not to take the guidance, they choose not to take the guidance.”
That means that, potentially, up to 75% of people using the flexibility in the first year will access their pensions and use the money without taking any guidance at all. I do not know whether the Minister finds that concerning, but I do, and I am not the only one. Just Retirement has described the lack of a backstop as
“a massive threat to the pensions freedom reforms.”
The need to install a second line of defence was endorsed by others within the pensions industry, including the ABI, which also expressed doubt about the rigour of the FCA’s consultation on guidance.
The ABI’s head of policy said:
“We have discussed it with our members. We are a little concerned the FCA consultation…was narrowly drawn, which is understandable because it didn’t have much time.”
Why did it not have much time? Is it because the Government are in such a terrific hurry to force these reforms through? We are being left in a situation where the first tranche of people taking advantage of these reforms could be seen to be the guinea pigs in this process, and that is not acceptable.
Let me deal with a point that my colleague raised about the Ipsos MORI research. The extent of the concern has been laid bare by that, because it found that up to 200,000 pension investors could take advantage of the new flexibility in the first year alone. It is estimated that that would generate an additional £1.6 billion of pension income for Treasury coffers, which is why I was asking the Minister what estimate he had made as to what the Treasury would receive. It might be seen as good news for the Treasury, but perhaps not as such great news for savers, because only 38% of these pension investors were able to state accurately how much tax would be deducted from a medium-sized pot and only 6% could accurately predict what rate of tax would be applied to large pension pots.
I know that the shadow spokesperson is not as cynical as I would be about some of this, but does she accept that HMRC’s own figures indicate that over the next budget period there will be a £4 billion windfall to the Treasury as a result of these changes? Of course, in the much longer term tax revenues will fall because there will be less income from the tax on annuities.
I would never suggest that the hon. Gentleman is cynical. He raises an important point, which again shows why I was trying to press the Minister on some of that.
I realise that I have taken up a considerable amount of time, and I want to give opportunities for other hon. Members to speak. However, I wish to raise just one other issue as I draw to a conclusion. I have mentioned the areas of uncertainty about the guidance versus advice debate, but I ask the Minister also to comment on the announcement about the abolition of the 55% tax on pensions at death—the so-called “death tax announcement”—made at the conference recently. I think that, at the time, the Minister said that annuities would not benefit from the tax cut. But it was certainly my understanding—the Minister can correct me if I have misunderstood—that the so-called value protected annuities will certainly so benefit, and that is still on the Treasury website. I have written to the Chancellor to ask for information, but I have not yet had a response. Clearly, uncertainty remains over the added potential for tax avoidance, which has been produced by the Bill.
In order to deter avoidance, the Government have introduced money purchase annual allowance rules, which, as the Minister said, places a £10,000 limit on the annual amount that can be saved tax free through money purchase agreements. The intention is to ensure that individuals do not use the new flexibilities to avoid tax on their current earnings. However, the rules still allow for £2,500 a year of salary to be “washed” tax free through salary sacrifice arrangements. I am interested to hear what the Government have done to address that risk and what further action they plan to take to guard against the new flexibilities being used in such a way.
When it was suggested to the Pension Schemes Bill Committee that there would be ways in which people, especially those over the age of 55, could use the new flexibilities to avoid taxation, the Minister did not seem to be at all concerned. Is the shadow Minister concerned, and will it be an issue for the Bill?
Yes, the shadow Minister is concerned as, I am sure, are the Ministers on the Front Bench, who will have to say something in response as they wind up the debate this afternoon. It is a matter that we will have to explore further in the Bill.
In conclusion, we are serious about getting pension reform right. We want people to have the freedom to choose the retirement product that works for them, and we want them to have good products from which to choose. It would have been better if the Government had consulted further on the reforms and conducted a full and thorough analysis of all the tax implications before they announced the Bill. None the less, we still have the opportunity to look at the Bill in greater detail and on that basis we will not be opposing it today.
I am obliged to the hon. Member for Kilmarnock and Loudoun (Cathy Jamieson) for her reference to my intervention on Second Reading of the Pensions Schemes Bill. Much of her speech was about the guidance, which is covered in that Bill. Obviously, there is a significant amount of overlap between the two pension Bills.
I represent four of the most significant players in the United Kingdom pensions market: Just Retirement, Legal & General, Partnership, and Fidelity, all of which provide a significant proportion of the jobs in my constituency. As specialist annuity providers, Partnership and Just Retirement have grown like Topsy over the past decade. They are creative and entrepreneurial companies that have found ways of providing different classes of annuitants with significantly enhanced value. The changes that the Bill introduces and that were announced in the Budget caught the whole market by surprise and have led to a particularly challenging six months for these two companies. Understandably, as more options will soon be available, there has been a significant reduction in the number of people buying annuities. Consumers and financial advisers are continuing to assess the best options for individuals as these reforms are developed.
Despite this difficult time, the very reasons that allowed those two companies to succeed so spectacularly over the past decade are the same as those that are enabling them to weather this sudden strategic change in the operating environment. The companies are well-led and fleet-footed and are now in the business of identifying new products to meet the new environment. However, they deserve certainty about the regulatory framework as soon as reasonably practicable so that they can bring new products to the market as soon as possible.
The Budget announcements made earlier this year were the culmination of a drive by both coalition partners towards greater consumer autonomy in the pensions market. For anyone who believes in freedom and responsibility, such a reform can only be right. The paternalistic status quo has long been out of step with a society that is happy with financial self-determination before retirement. Moreover, with annuity rates having dropped significantly over the past two decades, diversification, many hope, may be just what the market needs to invigorate it and produce the most innovative and well-suited options for consumers.
However, the pensions market has long been distorted by a deficit of consumer awareness. The 2012 survey of the Department for Work and Pensions, “Attitudes to Pensions”, found that 49% had no knowledge of the need to annuitise. Financial self-determination is an honourable and desirable goal, but the transition may be very bumpy if people purchasing pension products are unable to approach the open market with the requisite knowledge to plan for their retirement.
The Financial Conduct Authority, in its consultation “CP14/11: Retirement reforms and the guidance guarantee”, has identified that people who make large withdrawals from their defined contribution pension savings are at risk of not understanding the income tax implications of their decisions. Unsurprisingly, most people will be completely unaware that their tax may not be settled until a year after they have accessed their funds through a self-assessment process. There are a number of other equally important decisions that people must make, and if, through inertia or misunderstanding, they make a poor decision, it will be to their and their family’s material and financial detriment.
During the evidence presented to the Pensions Schemes Public Bill Committee last week, a number of experts called on the Financial Conduct Authority to use its existing powers to mandate those firms that hold people’s pensions savings to be required actively to engage with their customers who do not take up the Government’s guidance guarantee and to ask a small number of questions that would prompt them to consider the choices they are making. Hopefully, that will avoid the most common errors that have led to poor consumer outcomes. With current estimates of the guidance uptake veering from 4% to 92%, a range of basic security questions will be a necessity, not a luxury.
The Pensions Schemes Bill will have a major impact on the successful outcome of this legislation and vice versa. These reforms could provide an unhappy example of the costs of liberalisation if consumers are not aware of the freedoms that they now have.
There is a lot of debate in the Committee and on the Floor of the House today about a second line of defence. Would it not be appropriate that when an individual approaches a pension company and asks to take out either some or all of their pension pot, they are asked whether they have received the guidance guarantee? If they have not, they should be referred back to the guarantee before they take an irrevocable decision on their pension.
The hon. Gentleman tempts me down the path of discussing what is in the Pension Schemes Bill, which, although not the subject of today’s debate, is closely linked with the Taxation of Pensions Bill. I presume by his presence that he is on the Committee, as is the hon. Member for Middlesbrough South and East Cleveland (Tom Blenkinsop). I sincerely hope that the Committee will carefully examine this matter. It is subject to a current consultation by the FCA, to which I have submitted my evidence. This is an immensely important issue. To make the reforms in the Bill successful, we have to make a success of the guidance. We will not get it right first time. It will have to be capable of being improved in the light of experience, so that we do not end up with a mis-selling disaster or simply consumers not being informed enough to make appropriate choices.
We are giving people freedom, and with freedom comes responsibility. Sadly, that means that some people will make poor choices. The hon. Member for Edmonton (Mr Love) has spoken about people making poor choices, or taking a holiday; at least, that was the implication behind his remarks. I think taking a holiday is probably a thoroughly good choice, but he and I may differ. His Scottish Presbyterian background may be coming into play there. I will leave that as speculation.
The hon. Gentleman raised a point that I had not thought about, which is the tax consequences during payment. Normal annuities are paid out against a pre-determined tax code, and people have their tax deducted at source when they receive their payments. I know this from personal experience. Under the flexible rules, he suggests that the tax will be payable only at the time of self-assessment, much later. Does he believe that providers of these products should be looking at tax deductions at source?
I would concede that this is not an area on which I feel a total authority. Hon. Members who have served on the Pension Schemes Bill Committee and made themselves authorities in this area must also take seriously the advice of experts and industry to address precisely the kind of question that my hon. Friend raises. We cannot afford to leave consumers adrift while we make the transition from a highly regulated, paternalistic and rather depressingly inefficient market to one that provides much better returns and is much more competitive, but which needs better informed consumers to drive it.
Having worked in the industry myself, I share many of the hon. Gentleman’s frustrations. Does he believe that half an hour of independent guidance is enough for people on the journey of managing a pension pot that has to last them 30 years? How does he see that relationship developing so that they make the right decisions along that 30-year journey?
Obviously, the precise mechanism that ends up being set up by the FCA is immensely important. If it is as the hon. Gentleman characterises, and it does not lead people to come to a proper assessment of their situation, we will be left where we are now. Companies such as Partnership and Just Retirement, operating in the annuities industry, have been brilliantly successful because when people examine their situation it usually makes sense for them to move to such companies when they annuitise, rather than stay with their existing provider. The only problem is that people have been subject to consumer inertia and have not been aware that at that point they should be making the decision in the current market. The great thing about this liberalising reform, and the anxiety shared across the House to make sure that the guidance works, is that we will now be waking people up to the opportunities presented to them. If we have many tens of thousands of pounds in our retirement fund, a half-hour chat is probably insufficient. Many people will have hundreds of thousands of pounds available to them after a lifetime of saving into a pension fund, and it will pay them to take serious, proper, independent advice. They will need to pay for that, but it will represent serious value for money if they get proper advice. If the guidance can push people in that direction, to properly regulated and properly informed independent financial advisers, we will have properly informed consumers making proper choices.
The Financial Secretary and the Treasury will need to assure themselves that the FCA is alert to the needs of all consumers with direct-contribution pension benefits ahead of April 2015, and ensure that their delivery is closely monitored as these important reforms are made. As I said, we will not get this right first time, and whatever system is set up will need the capacity to improve as we learn how to improve the capacity of consumers to take informed decisions.
Additionally, the companies in my constituency continue to be concerned that the regulatory rules affecting a number of key changes in the Bill are still not clear. The Association of British Insurers is discussing these points with the Government and the FCA, but without clarity soon there is a risk of some customers not being able to access flexibility and there could be an uncertain environment and an uneven playing field between different types of product and providers. This is not solely the role of the FCA. It requires coherent and achievable measures from the Treasury, Her Majesty’s Revenue and Customs, the Department for Work and Pensions, the FCA and the Pensions Regulator.
For instance, the regulatory position on accessing a pension pot in one lump sum, whether through flexi-access drawdown, or an uncrystallised funds pension lump sum—I am grateful to the Financial Secretary for UFPLS. I had a go at “golden annuity uncrystallised kapital enhancement” fund, a GAUKE, which would rely on “capital” being spelled as in “Das Kapital”, which may mean it loses some of its attraction, but I guess we will have to settle for UFPLS. I am sorry that the imagination of Her Majesty’s Treasury officials was not able to produce a real GAUKE for him, to leave his impact on these highly important, liberalising measures for all time.
To return to the substantive point, the regulatory position around those two funds remains unclear, making it very difficult for providers to plan and develop requisite systems. This is despite taking a pension pot in this way being a key expectation raised as a result of the Budget reforms. Indeed, the whole regulatory regime around the uncrystallised funds pension lump sum route, which forms the basis of the Government’s pension bank account analogy, has yet to be resolved. In addition, there could be gaps in regulation between contract-based and trust-based schemes in two areas: how drawdown in trust-based schemes will be regulated, as well as protection for customers and expectations of providers if a customer wants to transfer out of a defined-benefit scheme after receiving advice not to do so.
My constituents welcomed the sensible reduction of the 55% tax charge on death, which the ABI had previously asked the Government to consider, which overtly conflicted with the wider Government policy of making pension saving more popular by giving people more options on how to use their retirement savings. However, without further clarification it creates an advantage for drawdown customers over annuity customers, which will change behaviour. To ensure that the policy is not skewed against income, tax on pension payments to a beneficiary after the customer’s death must be treated equally, whether paid through an annuity or drawdown, as income or as a lump sum.
I want to use the occasion of the Second Reading of this rather technical Bill, which in concert with the Pension Schemes Bill is a profoundly liberalising measure, to draw attention to other associated reforms that are interdependent. Our country has an obsession with investing in property, and there are vast reserves of wealth tied up in household equity. We face a growing crisis in our ability to provide decently for a rapidly growing older population. Failure to enable the equity release industry to grow in a competitive way to produce value-for-money products that look after the interests of the elderly and their families, rather than those of the estate agency industry, when we force people to realise their assets by expensively selling their homes when they do not need to do so and when they deserve stability in their lives with regard to their homes, will be critical to the well-being of every family in this country.
Last year, I led a delegation from the European equity release industry to lobby the European Parliament, the European Commission and the Council of Ministers, to seek changes in the trialogue stage of Solvency II to protect this industry. Under the leadership of my right hon. Friend the Member for Tunbridge Wells (Greg Clark), then the Paymaster General, the British team in Brussels helped to secure some useful space in the interpreting recitals to Solvency II that would help to ensure that the capitalisation demands placed on the equity release industry are significantly in the hands of national regulators. That is immensely important to this Bill, because the successful advance of the equity release industry and the successful development of freedom around pension provision go hand in hand. That relies on a sensible interpretation of the European Union’s Solvency II regime.
I am profoundly concerned that the hard-won space to enable the British equity release industry to advance, achieved by Ministers and their officials, alongside work done by the Equity Release Council, under the chairmanship of our former colleague Nigel Waterson, will, in the classic tradition of British gold-plating of European regulations and directives, be entirely undone by the implementation and regulation imposed by the FCA.
The Economic Secretary has assured me that the FCA is under thoroughly sensible and business-like leadership, and I believe that is the case, not least because last night I met the splendid Robert Taylor, who earlier this year became an excellent addition to the FCA’s senior leadership team. However, I have to say to the Financial Secretary that there are regrettable early signs, as the policy is being developed, that the overriding need to advance the equity release industry to support the reforms being implemented in the Bill, and unrealistic proposals around the matching adjustment that would apply to property as an asset, could seriously hamper the necessary growth of that industry.
If the FCA persists in its unnecessary programme of gold-plating, it will be all of us who have to pick up the bill, and it will be a profound missed opportunity for the United Kingdom, and not only for our citizens; it will be a missed opportunity for the industry to advance around the world, as many of our financial services industries have done, to the immense benefit of the people of the United Kingdom.
I joined the overwhelming tide of opinion that identified that measure as one of the most profound and welcome changes being made by this Administration. The Chancellor of the Exchequer is rightly winning the admiration of his fellow Finance Ministers for the remarkable transformation of the British economy under his leadership. That measure will be a profound part of his and his Treasury colleagues’ legacy. It remains up to them to ensure that it is delivered effectively in detail so that it can be an unalloyed adornment to their golden record.
As has been mentioned, I am a member of the Pension Schemes Bill Committee, as are a number of colleagues who are present today. We are here to find out about the technical elements that will affect that Bill, because some taxation issues have been brought to our attention during the Committee’s evidence sessions. I want to refer to the evidence given by Mr John Greenwood, who is editor of Corporate Adviser magazine—it is given out to pension professionals—author of the “Financial Times Guide to Pensions and Wealth in Retirement” and a freelance journalist for national newspapers.
The issue emerged between May and July this year and concerns how individuals can avoid national insurance contributions by using the Government’s newly announced scheme to divert their income through a pension fund, rather than receiving it in a traditional salary. I will dip in and out of the evidence Mr Greenwood gave during the Committee’s fourth sitting, on Thursday 23 October, because I think that it is pertinent to the Pension Schemes Bill Committee’s considerations and to the debate on the Taxation of Pensions Bill, both here and in Committee. Mr Greenwood, elaborating on his concerns, told the Pension Schemes Bill Committee:
“The new easy access rules create a huge risk of widespread tax avoidance. If everyone over 55 takes full advantage of them, the Treasury could lose £20 billion in 2015-16—obviously, that is a massive number. That will not happen, but if even a tenth of people do, that is still a £2 billion loss. That seems to make quite a hole in the Treasury’s optimistic projection of making £3 billion of profit out of the policy over the five years of the next Parliament.”––[Official Report, Pension Schemes Public Bill Committee, 23 October 2014; c. 117, Q249.]
The Financial Secretary said earlier that the Treasury had not yet given a forecast of how much it expects to make or lose on this policy, but we already know from Mr Greenwood’s inquiries that the Treasury had initially estimated a £3 billion profit. I think that is pertinent to today’s debate, because it is about the tax implications of the legislation and how they will affect the autumn statement, the Budget and what a future Government will be able to plan for with regard to incomings and outgoings.
Mr Greenwood went on to say:
“In layman’s terms, the Government’s position is that you can take your money as cash from 55. If you are an employee, you have two options. You could be paid into your current account through salary, which is taxed at 13.8% employer national insurance on everything over about £8,000 and the employee pays national insurance of 12% on everything above that figure, and then everything is taxed above the nil rate band. Obviously, you have to be paid the minimum wage of £11,500-ish, but above that, why would you be paid through your salary when you can pay into a pension and take it all out the next day? For payments into a pension, there is no employer or employee NI at all, and only three quarters of it is subject to income tax. The Bill effectively gives everyone over 55 a £10,000 NI-free allowance—four times that in the first year, if they draw their money early.
When the penny drops, people will suddenly realise how much loss there is there. If you are on £40,000 and you maximise this—there are currently no rules to say you cannot do this—the loss to the Treasury is 62% of the revenue they would have got from that person’s employment. That is quite a chunky amount. It is clear from the Budget documents that the Treasury had not spotted this, because if you look at the documents published alongside, and the risk assessment, there was no mention of national insurance at all. They have moved with a reduced annual allowance of £10,000 for those who take benefits early, which reduces it but does not stop it altogether.”––[Official Report, Pension Schemes Public Bill Committee, 23 October 2014; c. 117, Q250.]
I raised that point earlier with the Financial Secretary and asked whether he could tell me what percentage of people the £10,000 threshold would affect. He did not give me a response, so I told him that Mr Greenwood valued it at about 2% of the population, so 98% of the population would be exempted. The Financial Secretary responded that that was Mr Greenwood’s suggestion, but Mr Greenwood was actually referring to a response from the Treasury. That is deeply worrying, because we do not know the implications of the policy.
What we do know is that the Treasury’s policy at the moment is not to respond to Mr Greenwood, because he has written to the Treasury six or seven times without receiving a response. I understand that he has written to the Office for Budget Responsibility once to request a forecast but, as of last Thursday, has not yet received a reply—he might have had a phone call by now. I do not know about other colleagues in the Chamber, but I find that profoundly worrying, if we are potentially losing a considerable amount of money from the Treasury’s coffers—potentially £2 billion to £3 billion, if it is just 10%.
The most deeply worrying thing about the evidence presented to the Committee was the attitude of the Pensions Minister, who did not seem to think that there was a problem. Will my hon. Friend confirm that he spoke lightly about the potential consequences of this loophole?
I thank my hon. Friend, who, as a fellow member of the Committee, attended those evidence sessions. The Pensions Minister confirmed that people can already use this tax scheme—there is no legislation to stop them doing so. The only difference is that the industry is gearing up for next April, and getting the HR processes in place, so that it can give people advice all at once, rather than employer by employer. Mr Greenwood said that he has talked with several people in the industry and that one company had already talked with 192 employers that are looking at that.
The ability to avoid NI in that way already exists, and the Government have a threshold of only £10,000 and nothing planned until after July as a response. That gives them a big headache, because the Prime Minister’s £7 billion tax give-away has been blown out of the water due to borrowing fears. Now another £2 billion or £3 billion is missing. That is £10 billion. The Government like to call the Opposition the debt party, but in fact it is they who have doubled the national debt. Now they will considerably increase borrowing because of the very fact that their own figures are out by a minimum of £10 billion.
I speak as a member of the Pension Schemes Bill Committee; for me, this has been a week of complicated pension rules.
I welcome the freedoms that the Taxation of Pensions Bill provides. We want people to save for pensions to provide for their own retirements; it has to be right to give them the freedom to use the money they have saved as they want to, without there being penal tax charges that might force their behaviour into certain directions. It is absolutely right for these choices to be added to the whole landscape.
We should bear the context of the current situation in mind. Basically, we force people with relatively small and medium-sized pension pots to take an annuity. The tragic thing is that in many cases those annuities are not suitable—people are mis-sold them, do not understand them and do not shop around or get the best deal for themselves. People cost themselves large amounts of their retirement money because the market simply does not work in a fair manner.
The Work and Pensions Committee and others have been trying to find various ways in which to reform the annuity market, to make it fairer and make it work better for people—to encourage shopping around, to stop mis-selling and to get people to think about whether their life expectancy might be shorter than the average. We need people to think about what will happen if they predecease their spouse. Will the product that they are buying provide for that person?
Of all the solutions brought forward, the Government’s is by far the most radical. It effectively says, “You don’t need to buy an annuity any more if that is not right for you. You can draw down in a much simpler, cheaper way and try to live off and control the savings that you have produced for yourself.” That sounds a fairer approach. If people have chosen to save money for their retirement, they can now choose how and when they spend that, in a flexible way. We should all want that to be available. That is not to say that that would be right for everyone; it might be entirely wrong for many people. There is absolutely no reason why we should take products away, but we need people to make informed choices about what they want in their retirement—how much income they want, how they want to spend it and over how many years. In that way, they will not be locked into a totally unsuitable situation.
There are various nightmare scenarios. One is when someone has run out of money—they have drawn down and spent too much. They never thought they would live past 75, but live until they are 93. They run out of money in their later years and do not have the standard of living that they wanted. We absolutely do not want that to happen. The flip side, of course, is that if someone buys an annuity at 66 and dies at 67 and has no protection, they have burned their whole pension pot for them and their family.
We need to find a way of taking those two extremes out of the situation. We want new products to smooth the situation out. People should be able to say that they want a product that not only guarantees a certain income for life—so they know they can pay the heating and food bills, have the annual holiday and treat the grandchildren—but allows the flexibility to spend money on a cruise or an active lifestyle when they first retire. They might want funding for care costs in their very late life; during the previous years, their income could dip a bit as they would not be so active or have such big bills. How do we get people to understand that they can make those choices? How do we get the products that fit those choices? Those questions are key.
I entirely agree with the comments made so far: getting people to understand the choices—what they need, want to do and can do—at the point of retirement is the secret, but also probably the hardest bit. That is why we need to get the guidance guarantee to work. I have tabled amendments to the Pension Schemes Bill to try to strengthen how that guidance will work. But we need to be careful: it is not when someone is 65 and a half and about to retire at 66 that they need to understand what is going on. Under the rules as they are today, that might be fine—the person saves into a pension scheme, which will assume that funds will move into an annuity when retirement age comes so plans can be made on the basis that the person will need their pot at 66. Funds can start to de-risk when the person gets to 56 on the central assumption that they will want a safe pot when they retire.
Once the changes come in, however, people might not want to do anything with their pots at age 66; they might stay in work until they are 70. They may want to use other savings or defer their pensions for a while. Do they want their pension scheme by default to start de-risking and reducing investment return 15 years before they want to retire? That would be disastrous for the pension pot.
Choices will have to be made about which pension scheme to join, about risk profile and about when de-risking should start. People will have to understand that when they are 40 or perhaps 35, not 65 and a half. There needs to be clear guidance to which people can be signposted. Pension funds need to say to people, “You have important choices to make all the way along the process. Here is what you need to know, here is how you can find it and here is what you should be doing.” If people do not get the message earlier, the guidance for those aged 65 and a half might well be, “Here is what you could have won, but sadly you have not won it because you did not do the right things earlier on.” When the guidance providers come in, they need to provide clear, web-based guidance that people can access at any age, rather than being locked out until they are 65 and a half.
We also need the regulator to think carefully about what pension schemes will do with people who just do not engage. Some people will be enrolled automatically; they do not really understand the system but they do not opt out. They are saving money and get to 55. They are asked whether they want to de-risk, but there is no reply. They get to 65 and are told that they can draw their pensions, but there is still no reply. What should be done with the pension pot in that situation? An annuity will not be bought, so what should the default be? Should there be some kind of drawdown so that the money is left sitting somewhere for a while under some strange investment profile?
In this landscape, we need to think about a lot of things on behalf of those who have choices to make and a pension pot about which it is worth making choices. I suspect that a sizeable number of people will have relatively small pension pots and that taking the cash, tax-free, will remain their best option. Those who have the pension choices but are not so well off that they can afford expensive advice are the ones who will need to understand the options and try to pick the right ones.
I am left thinking that guidance is the right answer and advice is the wrong one. The risk with advice is that it is incredibly expensive; it would cost several hundred pounds at best to give people advice. The last thing we want someone who has been auto-enrolled into a pension pot to do is spend a large percentage of their pension on advice that they really do not need, because they do not have enough money to take advice on. We have to try to keep the cost of the guidance scheme low and make it a way of getting people to their first understanding and thought process about what they could do, rather than trying to put in place a gold-plated system that everyone has to pay for, even though most people would not be taken that far forward. We have the right idea, although we probably have a long journey before people have anywhere near the knowledge and understanding that they need, and that we need them to have.
We have to keep guaranteed guidance at a reasonable cost, but for that guidance to be effective there has to be personalisation to the individual circumstances of the person involved. All the evidence suggests that. The one balances against the other. The challenge is to find a way to make the guidance both cheap and effective.
The hon. Gentleman has to be right. The issue was raised in the Pension Schemes Bill Committee evidence sessions last week, and we will get to it again when we discuss the provisions on guidance. It is hard to work out the line between advice, which might say, “The best thing for you is to do x,” and guidance, which just says, “Here are the options and the various things to think about. Make sure you shop around. Thanks for calling.” Guidance such as that will not help people, who will forget it by the time they put the phone down or walk out of the meeting room.
We need the people getting the guidance to have worked out their financial situation—their pension pots, their debts, their other income, their state pensions and other employer provisions—so that when they go to get their guidance, they can set out their circumstances to the person guiding them, and that guidance can be focused on the sorts of choices they could reasonably make. That is probably about as far as we could get, because once someone says, “You should pay off your debts first”, they are getting into giving advice, and that may not always be right; it risks creating liabilities and people being mis-sold things. This will be an extremely hard balance to strike.
I apologise for having to leave the Chamber briefly to go to the Select Committee on Northern Ireland Affairs; duty called. I entirely agree that this is a radical and fundamental change to pensions entitlement, as regards when people can benefit from and draw down their pensions. Given that it is such a radical and fundamental change, does the hon. Gentleman share my disappointment that the Bill, which runs to 54 pages, I think, and has three clauses and a schedule, is so highly technical that no ordinary person in the street could possibly understand their pension entitlement?
It is certainly interesting that the Bill is 57 pages long and has only three clauses, with the rest dropped into a schedule at the back. However, complicated rules are being changed, to take away some penal tax charges, among other things, and I guess it does not matter how the provisions are drafted; whether they are in a schedule or a clause, we get to the same position in the end. One of the problems with pensions is that everything is so fiendishly complicated that almost nobody can understand what all the rules are.
I am concerned about the provision in which the Government seem to be repealing the requirement that people must, before buying an annuity, have had a chance to check the open market situation. Clearly, we are not taking away the chance for people to compare annuity rates, because we are not compelling them to buy an annuity, so that option will still be there. A fall-back is written into the rules that says that before somebody defaults into buying an annuity from their pension provider, they must, under regulations, have had the chance to shop around and to be given advice. That looks like a sensible provision that should perhaps be kept. Repealing it strikes me as being a little too optimistic about how well this market might work in the early years.
Moving on to the general principle of the Bill, these changes reopen the debate about how we use the tax system to encourage pensions. There is a huge annual bill for allowing people to put untaxed income into their pension scheme. According to the latest figure I have seen, the net cost is about £22.8 billion in income tax, plus £15 billion in national insurance, so we are talking about £38 billion of taxpayers’ money being used to incentivise pensions saving each year. Okay, some of that money comes back when pensions start to be drawn, but it is still a large amount. The more flexible we make savings arrangements, so that people can choose when they draw down their pension and can do so 10 years before they retire, the weaker we make the justification for saying, “We should do this pre-tax”, because we are distorting the savings market.
I suspect that the only reason most people would choose to save into a defined contribution pension, locking their money away at the whim of some unscrupulous pension provider who charges them for things they do not understand and finally getting their money back 30 years later, is that they get this huge tax advantage. If we are going to start enabling people to have large amounts of that money, tax-free, a long time before they retire, does that change the equation? Perhaps we should be thinking about these things. Is this the right way to distort the pensions market? Should we not equally incentivise people to put money into an individual savings account every year and have a bit more control over it and a bit more visibility? Is that better protection for them?
We desperately want people to save money for their retirement, and we want it locked away so that they cannot spend it each year, and I suspect that using the tax system to achieve that is still very much the right answer. However, we probably need to think again about how much we are spending on higher-rate tax relief on pension contributions in order to make the system more flexible.
I am blessed with articulate constituents who understand pensions issues. One of the issues raised with me is that we are allowing people to take out the tax benefit that they have been given for free by the Government. Does my hon. Friend think it is worth looking at putting the tax relief into something like the protected rights pot that used to, or still may, be in place for personal pensions, so that the tax relief element could not be withdrawn, and only the contributions could be withdrawn?
That is an interesting idea. I am not sure how we would hypothecate part of a pension pot, and do I really care whether the 25% I am taking out is the tax bit, the bit I paid in, or the bit my employer paid in? If my hon. Friend means that I could not take out the 25% of tax benefits—I could take out only 18% of the pension pot, rather than 25% tax-free in a lump sum—I can see a certain logic to that. In effect, it would just reduce the tax-free lump sum that people can have.
The flipside of rethinking how much tax relief we allow for pension contributions is that it is probably unfair not to give people full tax relief on the way in and then still subject them to higher-rate or top-rate tax when they start drawing their pension. That is an interesting double charge for the Chancellor. If people do not get relief on the higher rate, should they have to pay tax at a higher rate when they draw the pension contribution back out? Frankly, why would somebody who was in that situation pay that amount each year? They would be far better off using the cash—probably to drive up property prices.
At some point after these changes, there will need to be a debate about how we are using the tax system to incentivise pensions. Is that still the right thing to do? Is it worth the cost incurred? Is it encouraging the right behaviours? Is the tax relief really getting more people to save for pensions? Is there evidence of that, and should we continue with it? I suspect that the answer will clearly be yes—we should. However, we are making such radical changes to the pensions landscape that once we have got through this flurry of activity it is worth taking a step back to look at the situation and ask whether we are really in the right place, in terms of how we encourage people to save for their retirement. Are pensions uniquely the best thing for everybody, or could people take up other options that might encourage them to save even more, because they had more control over their funds during their lifetime?
This Bill is absolutely the right thing to do. There are clearly issues to do with making the system work and ensuring that people who need to make choices are not disadvantaged by making the wrong ones. We are moving from a situation where people have, in effect, been forced by the law into choosing something that, sadly, was often wrong for them, towards a situation in which they can choose what they think is right for them. We need them to do that on an informed and fair basis; they must not be ripped off by the next round of mis-selling. I fear that somewhere in these freedoms there is the possibility that that will happen in the next decade, but there are things we can do to try to mitigate that.
I should start by declaring an interest: I am well over 55 and have a pension pot that is subject to these provisions. I very much welcome the Bill because its measures are undoubtedly needed. I praise my right hon. Friend the Member for Thornbury and Yate (Steve Webb), who has been campaigning on these issues since 1999 and has done a terrific job in reforming pensions in his years as Pensions Minister.
The Bill is a revolution in terms of freedom. I am glad that defined-benefit schemes are excluded, because they were the source of much of the mis-selling that took place during the scandals that occurred, with people who had very secure local authority or teachers’ pensions, for example, being encouraged by unscrupulous advisers to cash them in and take out risky products. We have to try to avoid that.
People arrive at the time when they want to take their pension in many different circumstances. They may want to spend their money at different rates depending on their view of how they want to spend their retirement. They may have health issues that determine how they spend their money. They may make various different choices. Even though I was brought up as a Presbyterian by my Scottish parents, I have nothing against holidays, which are a perfectly good choice when one initially retires.
I know from talking to constituents that one of the main things people do these days is make a capital transfer to their children, particularly to buy a property. I can well understand why people whose income is okay might want to do so, and given that the new rules on inheritance are much less penal in cases of early death, funds that they have saved up will still be available to their family.
However—there are quite a few howevers about this Bill—annuities have a deservedly bad name in terms of value, mainly because low gilt rates mean that annuity providers can only offer low rates. Annuities do have a purpose. They are a pool, which is one of the things that I find constituents have difficulty in understanding. Perhaps even the hon. Member for Amber Valley (Nigel Mills) has difficulty in understanding that, given what he said; I know he does not, because he is an expert in this area. When people die soon after taking out an annuity, the insurance company does not get the money; the person who gets the money is someone who is lucky enough to live to be 100. That is what pooled annuities are all about.
By demonising annuities, we have caused people to forget that they do not know how long they are going to live. On average these days, somebody aged 65 will live until they are 83, but a lot live longer and quite a lot live less than that. The whole point about annuities is that they are a pool, and people bet against how long they are going to live. I think that the industry will come up with annuity-type products to meet the desire of many people for a secure income for as long as they live.
In financial services, it is always worth asking what is the worst that could happen, because it usually does happen. That is why we need to think about some of the unintended consequences, difficulties or gaps. Several speakers have mentioned the world of guidance. I was disturbed to hear the hon. Member for Reigate (Crispin Blunt), who is not in his place, say:
“We will not get it right first time.”
Let us remember that guidance in this area will be given only once for each individual. They cannot keep going back for more guidance: it happens once. If we do not get it right first time and the cohort of people in the first year do not get good advice, they will suffer for the rest of their lives. From our point of view, it might take a while to get the guidance right, but for the people getting the advice it must be right when they get it. The whole area of standards and regulation in relation to the Bill would bear more examination.
Advice needs to be impartial and transparent, and it should be based on straightforward products, but I worry about the level of knowledge of the people receiving advice. A few weeks ago, a constituent came to see me who had taken out a finance deal for some solar panels. It turned out that the combination of the savings on the solar panels and the finance deal meant that she had an overall penalty in her budget. The savings on the panels in no way paid for the cost of the finance, although she had been told that it would.
The hon. Member for Amber Valley (Nigel Mills) spoke about someone who left work and needed their care costs to be covered at a certain point. In my view, that is another thing for which constituents do not plan. I have lost count of the number of my constituents who did not even know that they had to pay for social care and did not understand the thresholds. I am concerned that a lot of people will be tripped up if they draw down money and increase their savings, because they will suddenly find that they fall within the threshold at which they have to pay for social care. People commonly do not understand that, and it will not be covered by the guidance.
That is a very good point. The guidance needs to be much more in the round on what may happen to people after retirement, but I suspect that that will not be mentioned in the guidance unless we can do something about it.
To go back to my example about the lady with the solar panels, I went through the documents with her, and they very clearly showed the numbers. There was no doubt: she had not been scammed. What she had signed up to was absolutely clear, and her signature was on all the documents. She said, “Oh, I just didn’t realise. I’ve an A-level in maths, so I should have realised.” What worries me is that we do not have to speak to many constituents before we realise that levels of knowledge about pensions are extremely low. As the hon. Member for Worsley and Eccles South (Barbara Keeley) has said, other consequential issues of getting older are sometimes even less clearly understood.
I am worried about the guidance, and I think that there will be concerns about whether it is appropriate and whether people have the financial awareness necessary to understand it. That goes back to the need to make people more financially literate from school onwards, but we will not solve that problem overnight. The industry is talking about having a second line of defence, and it needs to be listened to. It is a clear case of “They would say that, wouldn’t they?”—it is designed to get people to move towards the type of products that the industry is offering—but such a second line of defence might serve to protect people from themselves, as it were.
We need to watch out for scams. I listened carefully when the hon. Member for North Down (Lady Hermon) mentioned criminality in relation to people losing their pension savings. Pension release companies already impose extremely high charges for unlocking pension schemes and doing very little work. I am prepared to take an intervention from her if she so wishes, but I am a bit concerned about how to define criminality. People may make a bad decision, but that is not necessarily criminal. I agree with her, but I wonder what kind of products or service she means when she talks about criminalising those who end up losing their pension pots.
It is awfully nice of the hon. Gentleman and so kind of him to invite me to intervene. I absolutely do not want to criminalise people who draw down their pension. I am a huge fan of Radio 4, and I listen very carefully to its finance programmes. As has already been mentioned, we and many people—certainly constituents in my patch—are worried about unscrupulous so-called pension advisers who set themselves up so that people can go on to the internet, press a button and commit their life savings to them. I do not want to criminalise the person involved; I want to put into the Bill a deterrent against unscrupulous tax or pension advisers.
I thank the hon. Lady for her clarification. I am sure that the Exchequer Secretary would be interested to hear more about how she defines “unscrupulous”. I agree with her, but there is more to do to be clear what that means or about conduct that the Financial Conduct Authority would regard as unscrupulous.
All this liberalisation of pensions, as the hon. Member for Amber Valley mentioned, makes pension savings more like other kinds of savings. We are also providing a big tax advantage. Removing restrictions on when pensions are taken and removing some of the tax charges and restrictions on death means that we are moving closer and closer to a simple tax-free savings market. Such a market is especially attractive for people who are very close to retirement. I have done some sums, and if one is about to take one’s pension pot, there is quite an incentive—because of the tax-free 25%—to throw in the maximum possible amount of money in the months before retirement. Somebody paying tax at the basic rate who puts a lot into their pension pot in March and starts their pension in April or May would make a 6% return on their money simply by putting it in and taking it back out again. A higher rate taxpayer would make a 16% return on their money simply by putting a lump sum into their pension pot immediately before they retire and then drawing it out again. There will therefore be clear consequences of the flexibility that we are creating. People will be more inclined to put their money in if they know that they will be able to get it out quickly. There are clear benefits to getting the tax-free amount very quickly.
We have heard about the possible later costs to the state in respect of care and so on. By definition, if people take more out of their pension pots earlier, more people will need state assistance later in life with health or care costs. I know that the Minister is aware of that issue, but I do not know whether the possible costs have been calculated or estimated.
I am more confident than most that the responsible part of the industry will come up with new products and innovations. As I said to somebody from Just Retirement last week, what people need is plain language. Even the word “annuity” is not plain language. People want a secure income in retirement. The vast majority of people who retire do not want to buy a sports car, but to have a certain income throughout their retirement. The more the industry wraps things up in mumbo-jumbo that people do not understand, the more suspicious people are of its motivations.
We are already seeing warning signs. For example, Fidelity is saying, “All this flexibility means complexity, which means higher costs, because we are not set up to run bank accounts.” I am concerned that the industry will see the changes as a new way to levy high charges. It will say that the very flexibility that the Government want to see is expensive to provide. I hope that we see the right level of competition in the market and that people come in who do not levy those high charges.
We have seen a huge fall in the number of annuities that have been taken out recently. Just Retirement has seen a 50% fall in demand for annuities. I suspect that that is partly due to uncertainty. People want to be clear what the new rules are before making a decision. Demand may pick up again, particularly if there are new products. However, there is no doubt that fewer people will take out annuity-type products.
I am listening carefully to what the hon. Gentleman is saying. Does he agree that there are concerns for people who have relatively small pots, because companies might feel that it is not in their financial interest to offer them products? How can we ensure that there is equality?
The shadow Minister makes a good point. If we create a spectrum of products that is genuinely complex, the charges might be inappropriate even for those with medium-sized pots because of the flexibility that is offered. We need to hear more from the industry about that.
Finally, on timing, I know from personal experience that when the date that one has defined as a potential pension date is approaching, the industry offers what it calls warm-up packages. I have had my first warm-up package for next year. The industry is not waiting until April next year. It has to get on with this right now. If there is any uncertainty in the minds of Ministers, they had better get moving pretty quickly, because the industry has to get all its systems, documentation, regulations and new products in place so that it can offer them to the cohort that is approaching retirement in just a few months’ time—from April onwards. The ABI is already concerned that it is getting towards the eleventh hour, when clarity on all this will be needed.
Despite all the reservations that I have expressed, I very much support the Bill and commend it to the House. I am sure that when it emerges in its finished form, it will be an excellent piece of work.
It is a pleasure to close this debate for the Opposition.
There have been only a few Back-Bench speeches, but they have all been insightful and valuable. The hon. Member for Reigate (Crispin Blunt) was spot on when he spoke about a deficit of consumer awareness and said that the FCA will have to be alert to the needs of all consumers across the spectrum.
My hon. Friend the Member for Middlesbrough South and East Cleveland (Tom Blenkinsop) sits on the Pension Schemes Public Bill Committee. He spoke at length about the evidence that was given by Mr Greenwood. I am not on that Committee, but I found the points he made about that evidence telling and concerning. I hope that the Exchequer Secretary will respond to those issues.
In particular, my hon. Friend highlighted the potential opportunities for tax avoidance. I am sure that Members across the House will want to interrogate the measures in this Bill and the Pension Schemes Bill in detail to ensure that revenues to the Exchequer are protected. I hope that the Exchequer Secretary will say more about the Government’s view of the number of employers—my hon. Friend gave the figure of 192 from the evidence that was given to the Pension Schemes Public Bill Committee—who are looking at mechanisms to exploit the changes to the pension taxation rules as a ruse to reduce employer’s national insurance contributions.
The hon. Member for Amber Valley (Nigel Mills) was right to say that we want to avoid the two extremes that he highlighted. He was also right to speak about the importance of getting the guidance to work properly. He raised an important point in asking what will be the default setting for people who have been auto-enrolled and have a pot of money, but who simply do not engage with the process. It is important to get into the nitty-gritty of what will happen in practice in such scenarios. Again, I hope that the Exchequer Secretary will respond to those issues.
The hon. Member for Redcar (Ian Swales) was right to begin his speech by reminding us of previous scandals and the lengths to which unscrupulous individuals have gone, and he concentrated our minds on ensuring that such issues do not arise again. He was right to say that we must get the guidance right first time because it only happens once for each person. That should concentrate the minds of all Members on ensuring that we get the guidance absolutely right.
The shadow Financial Secretary, my hon. Friend the Member for Kilmarnock and Loudoun (Cathy Jamieson), made it clear that we support the principle of increased flexibility for people in retirement and the reform of the pensions market so that people get a better deal. We are therefore not against the principle that people should be allowed to exercise choice. However, this is a big Bill that contains big changes that will affect tens of thousands of people, if not more, immediately. Just this week, research published by Ipsos MORI suggested that 200,000 people may choose to take their entire pension in one go next April, creating a potential tax windfall for the Treasury of £1.6 billion.
It is fair to say that some issues that are debated in this place appear to be removed from the outside world. This is not one of those occasions, as the figures show. We therefore have a bigger immediate responsibility on this occasion to get the Bill absolutely right. Although I reiterate our support for increased flexibility, I do so with a word of caution, because that flexibility will be exercised by people who have a deeply variable understanding of the marketplace in which they are operating.
The Ipsos MORI poll also showed that only a third of those planning to take out their pension pot were aware of the tax that they would pay should they take out their entire sum in one go. The 2012 Department for Work and Pensions attitude to pensions survey noted that half the respondents had no prior knowledge of annuities before being asked the questions in the survey. The Financial Services Consumer Panel also published a report, in December 2013, which said that the
“market does not work well for the majority of consumers.”
One of its key findings was that consumers were poorly placed to drive effective competition among providers and distributers of annuities. It said:
“There are many barriers inhibiting consumers’ full engagement when they decide to annuitise: low financial capability; fear of product complexity and of making an irreversible, high-cost mistake; general distrust of professional advisers, and inability to find appropriate advice at acceptable cost.”
The Bill will operate in that context, not in some fantasy world in which the majority of the electorate has an in-depth understanding of the pension marketplace. That is not to say that a greater understanding cannot be fostered, because, as we know, the same DWP survey shows an increase in the awareness of annuities between 2012 and the previous survey in 2009. However, in some cases we start from a very low base.
We also have a social responsibility to get this right. This policy needs to be fair. Successive Governments have invested in pension relief to support people in retirement. As the Government have said, it is an annual investment of £22.8 billion, and it is important that we ensure that the taxpayer gets good value for money for that. It is money that belongs to all taxpayers, even those for whom a private pension or a workplace pension are out of reach. We must ensure that the relief given generates the consequences intended, the main one of which is income in retirement, not income for other things.
The shadow Minister raises a good point about the relief, but pensions are taxable when they are paid out, so it is important not to suggest that £22.8 billion is the net cost of the pension system. The money may be taxed at a different rate, but it will be taxed when it comes out.
I was simply making the point that the reliefs are there for a reason and we have to ensure that they work for the benefit of all taxpayers, but the hon. Gentleman is right.
There is also the hard-nosed political test of making sure it is not the Government who are picking up the pieces if this all goes wrong. I reiterate our support for increased flexibility, but we have to acknowledge that this particular system has built-in risks. Under the new arrangements, a pension pot of £100,000 could be used to secure an annuity of about £6,500 that, added to the state pension, would yield the recipient a little over the UK’s national pension income, according to HMRC’s 2013 figures. Of course, it could be drawn out in one lump sum to buy the proverbial Lamborghini—it would probably have to be a second-hand one because they cost closer to £250,000 than £100,000. But what would happen then? If the recipient in question has not made the necessary contributions to receive the single-tier pension, when it comes in, will their pension be topped up to the accepted minimum level? That is not yet clear. This potentially leaves us in a dubious ethical position as well as a financially precarious one.
Our responsibilities to get this right are clear. It will affect many people, and we have both a social and financial responsibility to make sure that the changes work properly. Given that those changes are so significant, I would have expected extensive consultation by the Government before the announcements were made, but unfortunately that was not the case. As my hon. Friend the Member for Kilmarnock and Loudoun said, despite beginning well, with work on the single-tier pension and auto-enrolment—policies based on evidence, consultation and consensus, which built on the work of the previous Government—these reforms have been rushed and somewhat erratic. The Government did not consult before making the announcements, either with consumers or with the industry. Nor have the Government allowed sufficient time for the changes to be executed.
Despite the enormity of the change and the change of emphasis from the importance of accumulation to the ease of access, we are left in a situation in which outside experts are lamenting the lack of time to get this right. Regarding the need for proper guidance for consumers, the ABI’s director general said:
“The guidance guarantee is a crucial part of the Government’s pension reform, and the industry fully supports the Government’s intention to provide free, impartial guidance to savers on their options as from next April. But time is not on our side. No one should under-estimate the work that needs to be done to make this a reality, which is why the Government have some urgent decisions to make.”
We have to ask why the Government are in such a hurry to push through reforms when some of the essential underpinning to make them work seems to be missing. I have to say I am glad that I will not be in the first tranche of retirees to experience these reforms, unlike the hon. Member for Redcar.
That brings us to the issue of good guidance, or lack thereof. We know that changes of this magnitude will bring a significant number of new products to the market. That is not in itself a bad thing, as some products will be better than others; that is the nature of the marketplace. It is also well recognised that on the whole there is a requirement to ensure that consumers are far better informed—I have already outlined the evidence provided by the Financial Services Consumer Panel. However, in addition to extensive consultation, we would expect the Government to have done significant work on the guidance mechanisms before making the announcement in the Budget, but unfortunately that was not the case. From the start, a significant level of confusion has surrounded what the Government meant when they said that reforms would be accompanied by “advice”. It later transpired that it was not “advice” that would be provided, but rather “guidance”. That is an important distinction, as we have heard, since guidance carries none of the same legal protections as advice, which is regulated and therefore considerably more expensive to provide.
When the Government have been pushed on the matter, I am afraid their language has been far from reassuring, to the extent that the measure looks like a mere add-on to the whole pension reform programme. In my opinion, that suggests a slightly cavalier attitude, which may prove to be short-sighted. The Financial Conduct Authority’s consultation, “Retirement reforms and the Guidance Guarantee”, stated that,
“to be effective the guidance will need to be tailored, providing consumers with sufficient personalised information, so that they can understand their options and make confident, informed decisions about their retirement choices.”
We appear to be getting something far less useful. In evidence to the Work and Pensions Committee in April, the Pensions Minister suggested that guidance will be more general in nature:
“The thing we are talking about is free to the customer. There is no charge for it. It is what we call ‘guidance’, rather than independent financial advice, so it is not formal, detailed or product-specific; you can go and buy that if you want to, but this is familiarising people with the options they have, and some of the concepts, even. Most people do not know what an annuity is.”
There is much that we do not know. We do not know the detail of what will be funded, the level of levy used to pay for it, what the guidance will be expected to cover, or what it is expected to achieve. Even at the end of the debate, we appear to have more questions than answers—questions that go to the heart of issues that will be central to ensuring that the programme works. We will be picking up on those issues of detail, fairness and guidance when the Bill reaches Committee.
On a point of order, Madam Deputy Speaker. This is nothing to do with the debate—I apologise to my hon. Friend the Minister for interrupting it—but I was due to attend an event this evening at which I was, I believe, to receive an award. I understand at very short notice that I have been banned, along with a number of national journalists. The person who banned me was Mr Speaker, and I was wondering whether that is normal behaviour for a Speaker.
The hon. Gentleman has made his point most eloquently and the House has heard it. I confess to having no knowledge whatsoever of the matter to which he refers, and while I am certain that Mr Speaker would never wish any discourtesy to any Member of this House, the hon. Gentleman will understand that the matter he raises is not something on which the Chair can take any action at this moment.
This has been a wide-ranging and constructive debate; it has been engaged and informed, and I thank everybody who has participated. Before I address some of the specific points raised, I wish to reiterate the main purpose of the Bill.
The Bill is intended to put in place the most radical reform to the way people take their pensions for nearly a century. It is a fundamental principle for this Government that those who have worked hard and saved all their lives should be free when they reach retirement to choose how they spend those savings. That is because we believe in personal responsibility, and that the money someone has earned is their money.
The Bill will remove the limits on withdrawals from drawdown and the restrictions on the shape of annuities, and it will create new and more flexible ways for someone to put the money in their pension pot to good use and provide for their future as they wish. As a result of the reforms, people will rightly have the freedom to choose how to spend their savings. That, in turn, will incentivise the pension industry to provide real choice through a range of innovative new products.
I would like to address points raised by the Opposition; first, the myth that the Government have not consulted. The Government have consulted extensively on implementation and legislation, and we have received wide support from consumer groups and the industry. I note that the hon. Member for Birmingham, Ladywood (Shabana Mahmood) quoted the chief executive of the ABI. He has also said that the ABI
“welcomed the reforms as good for those who were faced with the double challenges of increased longevity and very low interest rates when they came to make retirement decisions. The industry is behind these reforms. We want them to be a success and our members are working flat out to get everything ready for April 2015.”
The Government are putting in place comprehensive guidance. There has been discussion on guidance—I will come on to it in more detail—and I want to make it abundantly clear that we have brought forward an amendment to the Pension Scheme Bill to achieve just that.
On fairness, the old system was unfair and it disadvantaged those with a moderate amount of savings. Our Government reforms will make the system more flexible and fairer for all. On cost, as the Financial Secretary has clearly stated, we set out the costings at the Budget. Since the Budget, and as a result of consultation, we have introduced further changes and the OBR-certified update will be provided at the autumn statement.
There have been a number of positive views from the industry. It is wrong and misleading to imply that there is no support from the industry. The consultation has been extensive. There has been a 12-week consultation on the best way to implement the changes, followed by consultation on the Bill itself. It is important to move quickly, because people are making binding decisions every day with what are, frankly, limited choices in the current marketplace.
I am sure the Minister did not intend to suggest that I, or any other Opposition Member, said there was no support from industry. For the record, that is not what we said. We recognised that concerns had been expressed. That is different from saying there was no support.
On that point, two companies in my constituency, Partnership and Just Retirement, are specialist annuity providers and will be significantly affected. They contributed to the consultation and I know that the Government moved in response to that. I am grateful to the Minister and her officials for the attention they paid in the consultation process.
I thank my hon. Friend for acknowledging that work and for his thoughtful contribution. He has many pension providers in his constituency. Those insights have helped to inform the debate and shape the Bill.
The aim of guidance is to empower consumers to make informed and confident decisions on how to use their pension savings in retirement. Information alone is not enough to change consumer behaviour. The Government are committed to maximising awareness of the guidance service. Key to that will be the regulatory requirements on providers and schemes to signpost to guidance at key points when individuals are trying to access their pension pot. In its recent consultation on the changes surrounding new pension flexibilities, the FCA has been clear about requiring genuine signposting, including rules that ensure firms cannot circumvent consumers’ right to guidance. An essential part of the development of the guidance will be determining what engages consumers effectively. The Government are assessing engagement and take-up rates, and testing different engagement strategies informed by behavioural insight teams as part of piloting work beginning this autumn. Again, this is about getting it right. My hon. Friend the Member for Redcar (Ian Swales) made an important point about that. We are getting one bite of the cherry and we need to make sure we get it right.
Can the Minister say a little more about the timing? She said that a consultation is under way; presumably its outcome will affect what the Government do. People who are due to take pensions in April will be considering their options from January and February onwards, so when will we be clearer about the nature of the guidance and the universality of provision, and when will people be told about that?
Let me assure my hon. Friend that guidance will be available in good time. It is also imperative that we get the guidance right, so we are working assiduously to do exactly that.
The scope of the high-level content of the guidance was set out in the FCA consultation that it ran in anticipation of its standard-setting role. The Treasury and its delivery partners, the Pensions Advisory Service and Citizens Advice, are working up the operational details and the context of the guidance while adhering to the FCA standards.
I will come to some of the other points raised by colleagues, but I would like first to touch on the Ipsos MORI poll that has been referred to. The poll also found that 88% of people would not draw down their entire fund. People said that rather than just spend their funds on a range of things, they would use them for good financial planning. That is exactly what these reforms are all about: trusting people with their money.
I thank the Minister for that answer, but if a supplier sold a product without offering any guidance and without checking whether that had happened—notwithstanding the question of its not being specific—would that be a problem and could it void the transaction?
The FCA will be clear in setting out standards. However, I will come to that point shortly, because we have also discussed the consequences of mis-selling and fraud.
I would like to reply to a number of points made in the debate. The hon. Member for Middlesbrough South and East Cleveland (Tom Blenkinsop) talked about the tax revenue implications of the annual allowance and highlighted the evidence given before the Pension Schemes Bill Committee on 23 October. As my hon. Friend the Financial Secretary outlined earlier, the assumptions made in that evidence generated a huge overestimation of the likely cost of the reforms to the Exchequer. The Government believe that the introduction of a £10,000 annual allowance is the appropriate approach to allow people the flexibility to withdraw or contribute to their pensions as they choose from age 55, while ensuring that individuals do not use the new flexibilities to avoid paying tax on current earnings. It will also avoid unnecessary complexity for both consumers and pension providers when the new system comes into place in April 2015.
I would like briefly to touch on the two other contributions. We heard from my hon. Friend the Member for Amber Valley (Nigel Mills), who I understand celebrated his 40th birthday yesterday. He seems far too young to be contributing to pensions debates, although I know he has specialist knowledge in this area. He made a thoughtful contribution and raised a number of points. He mentioned the open market option. To be clear, the open market option will continue to be highlighted in the information that pension schemes are required to provide to their members at retirement. We have simply removed the requirement under the tax rules for the member to have chosen the annuity provider in order for the annuity to be an authorised payment. It is not appropriate for the member to be charged tax because they have been deprived of the opportunity to select an annuity provider.
Other points were raised about a proposed criminal offence for mis-selling. FCA rules are clear and require the responsible sale of products to consumers in a way that is clear, fair and not misleading. The FCA also has powers to take action against firms engaged in authorised business, and is able to prosecute a number of criminal offences. I hope that clarification reassures the hon. Member for Kilmarnock and Loudoun (Cathy Jamieson), who was very explicit in her points. We are very clear on that. It goes without saying that the FCA and the Pensions Regulator will monitor this whole area to ensure that fraudsters do not use the reforms to take advantage of vulnerable people.
My hon. Friend the Member for Redcar touched on annuities, as did my hon. Friend the Member for Amber Valley. The Government are clear that annuities will remain the right choice for many at some point during their retirement. We believe that many people will still value the security of an annuity, but that is something that individuals—not the state—should decide. As all contributions have made clear, this is about individual choice and opening up the marketplace. As retirement changes, many people may, for example, opt to buy an annuity later in life, allowing them to benefit from higher annuity rates. It is for individuals to buy products that are best suited to their particular circumstances.
In response to my hon. Friend the Member for Redcar—who was firm on the need to get on with this—we understand the scale of the challenge. That is why we have appointed an implementation team in the Treasury for the guidance guarantee, and we are working closely with the industry to ensure that it is ready for April 2015.
Finally, the risk of people spending all their money at once was briefly mentioned. I would like to reiterate that the Government believe that people who have worked hard all their lives should have the freedom to decide how to use their savings and, importantly, should be trusted to do so. The Government do not dictate how people should spend their money generally, so why should it be any different when it comes to their pension savings?
I am grateful to have had the opportunity to explain the issues that have arisen today. We have had a good debate and look forward to more in Committee. A number of important points have been raised. I think all hon. Members have sensed that the main issue is the principle of empowerment and allowing individuals to make choices that are right for them, especially when they come to assess their pensions. The Bill is about choice and it will make that choice possible. I commend it to the House.
Question put and agreed to.
Bill accordingly read a Second time.
Taxation of Pensions Bill (programme)
Motion made, and Question put forthwith (Standing Order No. 83A(7)),
That the following provisions shall apply to the Taxation of Pensions Bill:
(1) The Bill shall be committed to a Public Bill Committee.
Proceedings in Public Bill Committee
(2) Proceedings in the Public Bill Committee shall (so far as not previously concluded) be brought to a conclusion on Thursday 20 November 2014.
(3) The Public Bill Committee shall have leave to sit twice on the first day on which it meets.
Consideration and Third Reading
(4) Proceedings on Consideration shall (so far as not previously concluded) be brought to a conclusion one hour before the moment of interruption on the day on which those proceedings are commenced.
(5) Proceedings on Third Reading shall (so far as not previously concluded) be brought to a conclusion at the moment of interruption on that day.
(6) Standing Order No. 83B (Programming committees) shall not apply to proceedings on Consideration and Third Reading.
(7) Any other proceedings on the Bill (including any proceedings on consideration of any message from the Lords) may be programmed.—(Mr Gauke.)
Taxation of Pensions Bill (Ways and Means)
That, for the purposes of any Act resulting from the Taxation of Pensions Bill, it is expedient to authorise the making of provision in connection with the taxation of pensions.—(Gavin Barwell.)