Pensions Bill [HL]

Baroness Hollis of Heigham Excerpts

Wednesday 30th March 2011 Lords Chamber

Moved by

[Baroness Hollis of Heigham]

22: After Clause 13, insert the following new Clause—
“Power of trustees to allow early access to lump sums
After section 32 of the 2008 Act (power of trustees to modify by resolution) insert—
“32A Power of trustees to allow early access to lump sums
Providing that the jobholder has at least £10,000 in his or her pension scheme, upon application to the trustees of the qualifying scheme or automatic enrolment scheme a jobholder may withdraw up to 25% of the total sum accrued at the time of the application in the jobholder’s NEST.””

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[Baroness Hollis of Heigham]

My Lords, Amendment 22 is on early access. I had hoped to be able to move it only once, in Committee, but I found myself caught in another pensions obligation at that time. I apologise to your Lordships.

Those of us who can afford it try during our working lives to build three tiers of savings: instant access to about three months of income; ISAs for the medium term; and, finally, a pension pot for the longer term. Some of us may feed our ISAs into our pension pot in our 50s for tax benefits. To do all that and pay off the mortgage and, increasingly, university fees will require earnings probably well above the national average. Men who can hope to have a full working life and a decent occupational pension may be able to do most of that when mortgage pressures, especially, ease off. I rather doubt that any women earning below about £22,000 could begin to.

On this issue, I am asking your Lordships to hold up the gender filter because this is, for me, a gender point. We assume that the key point about saving into pensions is to transfer income from a financially more secure working life to a more insecure and impoverished retirement. That is true for men, but it is not particularly true for women, unless they are in professional jobs. Women who are in and out of the labour market and have unpredictable and fluctuating caring responsibilities may experience more of a financial rollercoaster during their working years than in their retirement when their income, though lower, is predictable and secure so that their experience during their working life is very different from that of men. Women are far less likely to save in any shape or form, hence the need for NEST. We have already been told today that the pensions pots of men in their late 50s are six times greater than those of women.

What stops a woman saving? This is very different from any analysis that you get when you ask the same question of men. It really is. First, she cannot afford it. Her earnings may be very low, part-time or intermittent. Secondly—and this is where you get a specifically female take on it—she regards it as selfish to save. Money is needed for trainers, and she would expect to put the children’s needs ahead of her own. In any case, she rather vaguely hopes her husband is looking after all of that. Thirdly, even if she does think about saving for a pension, Tracey’s mum who did save is, because of means-tested benefits, no better off than Tracey’s aunt who did not. That is one of the reasons one is so pleased about the prospective new state pension. Finally, and this is the point that this amendment addresses, even if she could afford to save modestly into a pension, her life is so unpredictable, given what I have already said, that she does not want to lock money away that she cannot touch for 40 years. She may face divorce, disability, debt or repossession. Through almost all of that, her husband will keep working. She probably will not. She might lose her home, her husband or her health, and through all of that, she cannot touch her money in the pension scheme, even though her need now is greater by far than her need in retirement and she has no alternative savings. Far more than most men, she may need a modest pot of £5,000 or £10,000 that she can access in hard times but cannot afford to build it alongside a pension.

Why is it that people are putting more money into ISAs than into pensions, even though they are forgoing the employer’s contribution and more generous tax reliefs? It is about access. We allow better-off men and better-off women to put their ISAs into their pensions. What poorer women need is exactly the opposite: the ability to turn part of their pension, so to speak, back into an ISA. There is no product on the market which allows them to do it. We need what David Willetts and Malcolm Rifkind first floated: a lifetime savings account.

Given this Bill, how would we do it? We already allow people early access to a slice of their pension—the tax-free lump sum—even if they are not drawing the rest of their pension. How might it work? I suggest that to encourage saving, when a woman has built a pot of, say, a minimum of £10,000, she could access a quarter of it—£2,500—and I would cap that right at a pot of about £100,000 so that it does not provide work for fancy accountants. She would not be able to draw any more until she had rebuilt her pension back up to, say, £14,000, at which point she could draw a quarter of the difference between the £10,000 and the £14,000, or a further £1,000. By the time she retires, she would have drawn no more than the equivalent that she would have got with her tax-free lump sum, but she would, if she thought it necessary, have had earlier access to it.

Why? First, it would give women especially the right to a savings slice as part of NEST or indeed any occupational pension. A woman would know that for every pound she put away, 75p would be ring-fenced for a pension, and 25p would be available as a savings slice. Knowing she had that rainy day slice does not mean to say that she would draw it, or need to—but if she did, it would be much cheaper to borrow from herself than from someone else at such extortionate interest rates as would squeeze out her ability to continue to pay into a pension. Allow a woman access to a lump sum within her pension and she is far more likely to continue saving and build, eventually, a larger pension.

Secondly, the tax-free lump sum is already separate, if the saver chooses, from drawing the actual pension. Until recently it was at the age of 50, now it is at 55 that you can draw the lump sum, even though you may not take your pension for another five or more years. So no new principle is involved: there is already a disjuncture between taking the tax-free lump sum if you choose and the pension payment. No fiscal adjustments have to be made. You do not have to fret about repayment; you do not have to have judgments about what is and is not good expenditure. Why is it okay at 55 to use your tax-free lump sum to build a conservatory, but not, at 45, to save your home from repossession?

I am often told that the obstacle or objection to this is that it would cost a woman a bigger pension if she has taken her tax-free lump sum earlier, and that this is not acceptable. That might be true—if the tax-free lump sum was usually added to the pension. It seldom is. Of the 76 per cent of people who drew their tax-free lump sum, nearly half spent much of it on the car or the holiday; 39 per cent used it to pay off mortgage or credit card debts; 31 per cent spent it on home improvements; 17 per cent helped their children; and about half put some of the lump sum into other and accessible savings forms, such as a building society. So we should not be reducing the woman’s pension if she were able to draw her tax-free lump sum, but merely freeing up the time at which she may draw down a slice of it, if she needs to—possibly for expenditure on things more significant than will occur at the ages of 55 or 60.

Finally, and above all, being able to access a tax-free slice of the sum would make saving into a pension more attractive. At 22, a young graduate going into their first job would hope that by the age of 30 he or she might have enough for a deposit on a flat. At 40, she may want it for running away money, following family break-up. At any time, it might help with adaptions to the home where there is sudden disability. In the USA’s 401(k) schemes, research shows that those who could access their schemes early—in some you can, in some you cannot—ended up saving up to 3 per cent more into their final pension.

For a low-paid woman wondering whether to opt out of NEST because she believes she cannot afford the 4 per cent contribution, knowing she was also building an accessible savings pot could encourage her to auto-enrol. We should be developing a savings and pension model for those who cannot afford each of those separately—as most of us can—that best fits their needs.

There is currently a consultation paper from HMT which discusses this model, among other models, for early access. The other models—for example, loans and repayment, or channelling money into ISAs which can then be fed into pensions—have their merits, but they add to the fees and complexity and largely benefit those better-off people who can manage both savings and pensions alongside each other. I am concerned for those who cannot manage both. For women between the earnings threshold and, say, average earnings, only the tax-free lump sum model makes sense.

As I have said several times today, as have others of your Lordships, I am thrilled by the £140 proposals, which would make it safe to save. Access to a tax-free lump sum within your pension would make it even more attractive to save. There is no additional cost to the Treasury, no additional risk to the woman saver as she would not from experience have spent that tax-free lump on adding to her pension, and no increased fees because she is supposed to have a different, parallel and separate sort of product. I believe that it would transform her willingness to save in a pension. Many people in the industry tell me that with such a scheme more people would save and they would save more. I beg to move.

[Lord Boswell of Aynho]

My Lords, the noble Baroness, Lady Hollis, has performed a signal service to the House in bringing this issue to our attention. She was kind enough to refer to work done by David Willetts and Sir Malcolm Rifkind. I was privileged to be part of their Front Bench team at that time, although I cannot claim any real credit for the genesis of the thinking. As the noble Baroness said in referring to the consultation paper, it is now beginning to sink into the mainstream. I am a strong supporter of greater flexibility in this area so I am glad that she has raised it.

I have some slight reservation as to whether the issue is as gender specific as the noble Baroness feels that it is. I think that she is conceding that point and, indeed, she did not say that it was exclusively so. I can imagine situations where men, for example, perhaps have overlapping earnings and have acquired a certain pension capacity or pot. In Committee, we debated some of the difficulties that can arise as regards smaller sums. It might be quite sensible, as well as convenient, for an individual of whatever gender who perhaps is starting a business or otherwise to access that money in order to provide starting capital. It is a wider and general interest. I very much look forward to the Minister’s response to how it is going.

In technical terms—I stress in technical terms, although not in any sense to derogate from it—I have some slight reservations. First, in terms of using this Bill as the vehicle for doing it, it is premature but that is not a reason for not ventilating issues. Secondly, I am not absolutely sure—because it appears annexed to a passage of the Bill which is about auto-enrolment, although I think that the noble Baroness indicated a wider remit—whether it is simply about NEST or more general. I think that it is probably more general and it would be clearly invidious if it was NEST specific.

There is also a technical problem in the wording of the amendment. I understand the point, which was developed during her speech, that there could be some rules which would avoid moral hazard and would get one to the same minimum assured level of pension or pension pot at the end. Nevertheless, the way in which the amendment is worded it seems to me to be at least conceivable that as long as the £10,000 limit were maintained, an individual pensioner could make serial applications to the fund and draw it down to the qualifying level. I know that that is not the noble Baroness’s intention. However, it is right that we should be starting to think about this and I hope that it will be even better when we have brought it to effect.

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[Lord Freud]

I thank the noble Baroness, Lady Hollis, for raising this very important issue of allowing individuals early access to their pension saving. I was more or less as disconcerted as the noble Lord, Lord McKenzie, about the concept of it being “running away money”, not least because I thought that if the spouses of Members of this House got to hear of it, they might take advantage as we spent night after night in this place rather than at home with them.

The noble Baroness wishes to allow individuals to access a tax-free lump sum of up to 25 per cent, before the current minimum age of 55, when they have pension savings of at least £10,000. I am conscious that this is an issue to which the noble Baroness has repeatedly drawn our attention, and to which she returned at Second Reading when she asked where the Government's consultation paper on early access to pensions had got to. I can answer that particular question; I can report to my Lords that the Government published their call for evidence on early access to pension saving on 13 December last year. It set out the available evidence around early access and some of the potential benefits and risks, and then sought further evidence from interested parties. That call for evidence closed on 25 February. Drawing on the responses to the call for evidence, we will consider the arguments for and against allowing more flexible access to pension savings, based on firm evidence, before we consider further changes to the pensions tax framework.

It is too early to say what these changes might be. However, we need to bear in mind several principles. First, the purpose of tax-relieved pension saving should be, as the noble Lord would like me to say—I have to say it—primarily to provide an individual with an income in retirement. I think 75 per cent probably makes that point anyway. Secondly, any changes to the pensions tax rules must be affordable and sustainable for the Exchequer, and not, as the noble Lord, Lord McKenzie, pointed out rather vividly, create opportunities for tax avoidance. I was pretty impressed that he was able to knock up a tax avoidance scheme so quickly, but we can see where he is coming from. Thirdly, changes should not create disproportionate complexity or administrative burdens for individuals, pension providers and schemes, or indeed for Her Majesty’s Revenue and Customs.

I am sure the noble Baroness will agree with me that it is right for us to examine the evidence submitted before making changes to legislation. On that basis, I urge the noble Baroness to withdraw this amendment.

[Baroness Hollis of Heigham]

I am very grateful for the support around the House—equivocal support, perhaps, in some cases—on the significance of this issue. Of course, this is not exclusively a women’s issue by any means, and if it was attractive to anyone who wished to take it up, as far as I am concerned they would be able to do so with the agreement of their trustees. My noble friend Lord McKenzie anticipated the paragraph that we have all had to repeat—I have had to repeat, my noble friend has had to repeat, the noble Lord, Lord Freud, has had to repeat—about how pensions are designed and so on, but I tried to hold up a gender filter because I firmly believe that it is still an HMT model that is based on male working lives. However, let us not go down the route of asking why the Treasury might not understand.

When we are trying to encourage poor women—women earning possibly well below average earnings—into a savings model, I do not mind very much whether it is saving for their current life or their retirement. I do not mind very much whether it is income or capital. We get hung up on divisions that make sense in the click-in click-off world of conventional male work; the noble Lord, Lord Freud, is absolutely right, in the universal credit, to refuse to accept that simple dichotomy of “in work, out of work” and see it as a dial. The same situation applies to women in pensions. They do not have a male life, where they are in work, they contribute to a pension, they retire, they are then poor and where you have to distribute from one to another—that is not the experience of poorer women in and out of the labour market who may face more turmoil and roller-coaster finance in their working lives than they ever will in retirement.

The question is how we best encourage those women to build some protection for themselves against the contingencies in their working lives, as well as to prepare as best they can for savings in retirement. We want to do this in ways that do not either exploit their naivety or get them into oversaving at a risk to their current living expenses. The more research that I and others in this field have done the more I believe we need a simple single product—probably not called a pension, probably called something else—into which you put your money and where a proportion is ring-fenced for retirement and a proportion is available for savings. We happen to have a very easy way of modelling that based on the tax-free lump sum; the other versions that the Treasury have put out to consultation are more elaborate, possibly more adept, models but will not particularly meet the needs of this client group. We need something that is simple, understandable, attractive, affordable and fairly obvious in what it does.

I fully accept that the amendment is probably technically defective. I was of course never intending to do anything other than trying to focus the issue, given that we have the consultation paper. I was hoping to take your Lordships’ views on this so that this might in due course, perhaps, be fed into the Treasury’s response to this White Paper.

The provision is not gender-exclusive. It would not exclusively apply to NEST. I would have it available for all pensions and, again, I would not particularly get hung up about what it was used for. Nor would I worry too much about the issue of moral hazard, providing we cap the amount that people can withdraw, which is why I would not go for the 401(k) models, because too many of them run their schemes right down and that is undesirable.

I fear that too many women may opt out of NEST or—this is more likely—fail to continue in NEST when the first financial crisis of many hits them in their lives and they realise they cannot access the money and they have nothing else. At that point the contributions of those individuals will drop off like a stone. How do we prevent that? We prevent it by running the two alongside each other and produce a package for women where it is attractive to save.

We have discussed it. I am very grateful for the support and encouragement around the House tonight. With your Lordships’ permission, I beg leave to withdraw the amendment.

Amendment 22 withdrawn.