Andrew Love
Main Page: Andrew Love (Labour (Co-op) - Edmonton)Department Debates - View all Andrew Love's debates with the HM Treasury
Taxation of Pensions Bill
Andrew Love Excerpts(9 years, 6 months ago)
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Cathy Jamieson
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.
Mr Andrew Love (Edmonton) (Lab/Co-op)
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.
Cathy Jamieson
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.
Cathy Jamieson
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.
Cathy Jamieson
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”—
option—
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”
and a
“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.
Cathy Jamieson
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.
Mr Love
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?
Cathy Jamieson
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.
Crispin Blunt (Reigate) (Con)
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.
Mr Love
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.
Crispin Blunt
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.
Tom Blenkinsop (Middlesbrough South and East Cleveland) (Lab)
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%.
Tom Blenkinsop
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.
Nigel Mills (Amber Valley) (Con)
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.
Mr Love
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.
Nigel Mills
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.