amendment of the law

Anne Begg Excerpts

Tuesday 25th March 2014 Commons Chamber

[Dame Anne Begg (Aberdeen South) (Lab)]

If the hon. Gentleman waits, he will hear that I will be asking the Government Front-Bench team rather a lot of questions. Perhaps at the end of today’s debate, Ministers will be able to answer them.

[Mr Harper]

All I said is that the hon. Lady is not as enthusiastic about our changes as the hon. Member for Leeds West suggested. It is clear that we on the Government Benches, as the Minister of State, Department for Work and Pensions, my hon. Friend the Member for Thornbury and Yate (Steve Webb) set out clearly, trust people to save their own money and we trust them to make sensible decisions in retirement about how to spend it. The idea that somebody who has spent their entire lifetime working hard and building up a pension pot is going to throw the money away when they reach retirement age is nonsense.

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[Mr Mike Weir (Angus) (SNP)]

The changes to pensions and annuities have caused a great deal of interest in my constituency, but many constituents are unsure what it means for them. This is dangerous, because the changes are being introduced quite quickly and many people will have to decide whether to defer taking their pensions until the changes come into play.

At one of my surgeries on Friday a constituent who had already bought an annuity asked me whether he could now take a lump sum instead. I fear that the answer to that is no as he had already entered into an annuity contract, but it shows that there may be some ill feeling about the sudden change among those who have only recently bought annuities.

It is also not clear to many constituents that the changes apply only to defined contribution schemes. Many are unsure what type of scheme they are in. Another constituent asked me how the changes affected his company scheme, but it seemed to me that that scheme was a hybrid, with elements of both defined contribution and defined benefit. Again, my understanding of the changes is that they would not apply to such schemes, at least at the moment. Have the Government given any thought to whether hybrid schemes will be affected? Will the possibility of taking a lump sum from such a scheme be limited, and if so, what impact is that likely to have on the scheme as a whole?

While I appreciate that anyone who is considering what to do would be well advised to seek professional advice, these are serious issues that require a clear answer to allow constituents in such schemes to determine what is in their best interests. They may have to do so fairly quickly. The changes could mean a huge change in how people save for their future, but I suspect that it will also mean a huge change in how such savings are viewed, both by the general public and, crucially, by future Governments.

[Dame Anne Begg]

The hon. Gentleman has rightly challenged the Government about the uncertainties caused by the changes proposed in the Budget. Can he enlighten the Scottish people as to the attitude of a Scottish National party Government on the proposals if, heaven forfend, there is a vote for independence?

[Mr Weir]

I may as well ask the hon. Lady what a future Labour Government would do, given that Labour has flip-flopped on the proposals since they were announced last week. When we achieve our independence, we will inherit these proposals, and a future Chancellor will improve them.

There is evidence from other countries that when such changes are made, a substantial number of people take their savings as a lump sum, rather than buying an annuity. There are very good reasons why people might choose to do so, and I accept the argument that we should allow them more choice over how they use their own savings. On Thursday, during the statement by the Minister of State, Department for Work and Pensions, the hon. Member for Thornbury and Yate (Steve Webb), I raised the question of whether these new pensions vehicles will be truly different from other forms of savings. That is important, because we have traditionally given greater tax incentives to allow savings for retirement that are not available for other savings products. If, however, someone entering a pension scheme can in future take the whole sum as a lump sum rather than as an annuity, what exactly makes that pension scheme any different from other long-term savings schemes? Will a future Government look at that and decide to end any tax reliefs, which could have a significant impact on future savings? In his response the Minister said:

“One of the differences between workplace pensions and other forms of saving is the employer contribution. Whereas someone of working age can save through any savings vehicle they like, it is only through workplace pensions that they get not only tax relief but the employer contribution.”—[Official Report, 20 March 2014; Vol. 577, c. 956.]

That is true to some extent, but it does not really address the question, as defined contribution pension schemes are not necessarily workplace schemes, so they do not all have an employer contribution. For example, many self-employed people may use such schemes. They get tax relief, but will that continue should the pension element of the scheme effectively be removed? Is it therefore the Government's intention to make a distinction between those schemes that have an employer contribution and those that do not? Do the Government intend to have a process for determining which schemes are pension savings and which are just ordinary savings? Again, some clarity on these points is much needed.

I also asked the Minister how someone, say in their late 50s, who comes to claim means-tested benefits would have their defined contribution scheme treated. I did not really get an answer to that point, so I shall put it again to the Exchequer Secretary. I put the question to the House of Commons Library, and it responded:

“Income from a defined contribution pension is treated as income for the purposes of means-tested benefits”.

So far, so good, and that is no surprise, but what is the position if someone has a defined contribution scheme and has the ability either to withdraw their money or take it as income? Up to now, that has not been an issue, as most people cannot get access to their funds until they reach retirement age, but the changes, as I understand them, will mean that anyone over 55 will have access to their fund.

A clue to what might happen is to be found in the rules for pension credit, where a person can be treated as having pension income for which they have not yet applied. The leaflet from the Pension Service “A detailed guide to Pension Credit for advisers and others”, which was issued last September, states:

“Notional income is income your customer does not actually get but is treated as getting. We may treat them as having notional income when they have: not claimed state pension but are entitled to it; not taken income available to them under a personal pension plan or a retirement annuity contract; deferred payments from an occupational pension; given up their rights to an income (from a trust fund for example) because they wanted to get Pension Credit”.

At present, such rules do not apply to means-tested benefits for people of working age. In this case, the present rules specify that income from a personal pension should not be treated as income available on application. Will that remain the case once it is possible for anyone who has reached 55 to take their funds from their pension plan?

It may well be that some Government Members will be of the view that any potential income should be treated as income for the purpose of assessing state benefits, but the implications of that are that someone who has done what we all wish people to do and has saved towards their retirement but is then made redundant at a late stage in their working life, could have their whole retirement fund wiped out because of a period of unemployment. Again, clarity is needed on that point. Similar concerns arise over those who are in care and meeting care costs, which is a point raised by the hon. Member for New Forest East (Dr Lewis) on Thursday and also by Age UK and the Joseph Rowntree Foundation.

Of course, the situation in Scotland is slightly different from that in England, but Jane Vass of Age UK is quoted in The Guardian as saying:

“The pension pot is protected from means testing. So when it is in a pension it can’t be touched but there is a risk when it comes out of that wrapper.”

It is possible that many of those who have been saving for retirement find that they have to use the fund to meet care costs, or perhaps a substantial part of their pot will go on meeting the costs of an insurance policy to meet future care costs.

Those are real issues concerning the whole set of changes to annuities, pensions and pension pots. People who are thinking of what to do with pension schemes that are coming to an end—do they take an annuity or do they defer until the new changes come in?—need that information now. Although the Government have said that advice will be available, it is not yet available, and it will probably be some time before it is. Clarity is needed now; otherwise, many people could make the wrong decision. It may be that they should take an annuity, or maybe they want to take the lump sum. They need proper advice now before the changes come into effect, possibly in 2015.

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[Richard Fuller]

That is a fair comment, but we would hope for critical thought—a thoughtful Opposition going through the Budget and finding good reasons to oppose what is in it. Again, however, we heard nothing from the Opposition. It is all very well trotting the shadow Chief Secretary into the media studios to claim—despite the fact that growth is up, unemployment is down and inflation is down—that everything is going badly, like a latter-day Chemical Ali, but the truth is the Opposition have no coherent response to what will prove to be one of the strongest foundations for long-term stability in our economy.

That foundation is based on the sensible principle that people know best how to spend the money they have earned. This Government recognise that and, more importantly, in this Budget we recognise that people understand that when they have spent a lifetime saving money from their earnings, they are in the best position to decide how best to spend it. They do not want to be artificially constrained by someone else telling them how best way enjoy their retirement. This Budget delivers that freedom to them and should be applauded. It comes after years of socialist trickle-down, taking money from working people to put into Labour’s big bureaucratic plans—out of touch with the realities of people—to find out whether their Highgate polices are somehow going to deliver from the socialist graveyards in Highgate to the people of Bedford and Kempston. We have dismissed all that top-down, trickle-down, socialist rhetoric, in order to give people back the money they earned. This is a Budget for working people, and I am proud to support it.

The Budget also shows that the Government recognise that as we were so highly leveraged—with so much debt—in 2010, it will take a long time to recover. A few years ago, I would have urged the Chancellor to go further and cut expenditure more, but he chose a middle path on reducing public expenditure. We have made progress in bringing the deficit down, and sometimes we are now joined by people who said a few years ago that we were going too far, too fast. The Chancellor has found a middle way with that.

The Opposition’s level of coherence on this Budget is most starkly demonstrated by their position on the benefit cap. May I say to the shadow Chief Secretary—if he has the time—that I understand from the speech of the hon. Member for Leeds West (Rachel Reeves) that the Opposition are going to support the benefit cap? Page 88 of the Red Book contains a helpful listing of the benefits that will be included in the benefit cap, which include housing benefit, other than housing benefit passported from jobseeker’s allowance. I presume that that includes the spare room subsidy. So my question to the shadow Chief Secretary, who, let us face it, ought to have some economic competence, is: if the spare room subsidy is included as a benefit, how can he keep referring to it as a tax? Does he understand the difference between a tax and a benefit? If he does not, and if he is going to vote on this, will he stop—[Interruption.] He is saying from a sedentary position that it is not just him, but he is charged with coming up with economic policies. One core feature of economic policy is understanding the difference between a benefit and a tax.

[Dame Anne Begg]

I just want to make sure that the hon. Gentleman is clear about this. The reference is to housing benefit but not JSA, but most working people who get housing benefit do so as a result of their being on JSA, which does not fall under the cap. Most people on housing benefit in their old age might fall under the cap, but they are not subject to the spare room subsidy—the bedroom tax.

[Richard Fuller]

I am grateful for that clarification. I hope the hon. Lady also understands that when people turn an important issue such as the spare room subsidy into political slogans it makes it much harder to engage on where the policy perhaps is being applied too aggressively or not aggressively enough. I have found that a tremendous barrier to engaging with people about how we can make sure the Government are getting that policy right. I hope we can use language in a way that people can understand.

Youth unemployment has been mentioned by many Opposition Members, including the hon. Member for Darlington (Jenny Chapman). I agree that youth unemployment should be a priority not just for Government but for each of us as Members of Parliament. That is why I am so proud of Government Members and some Opposition Members, who have proactively gone out and encouraged local employers to give young people a start in their careers—whether it is in an apprenticeship, part-time work or work experience. We should not always look to Government to achieve changes in youth unemployment, particularly now with the national insurance changes that are coming in. There has never been a better time than today to get a young person into work.

It is important that we thank the Government for sticking with their long-term economic plan, for finding a course in the division of pain so that all people, regardless of their background, contribute and that those who have the broadest shoulders make the largest contribution of all. Most importantly, I encourage Ministers to recognise that the task is only half done and that many difficult decisions remain ahead. Will they maintain the same steadfastness of approach in the future as they have shown in the past?

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[Dame Anne Begg (Aberdeen South) (Lab)]

There was a lot in the Budget that I would like to talk about this afternoon, including on the issue of welfare, but in the short time that I have, I will concentrate on the pensions announcements. The only thing that leaked out about the Budget was that a rabbit would come out of the hat. I suspect that the rabbit was the announcement about the annuities market.

Everybody has said that annuities need to be reformed. I have said that annuities need to be reformed, my Select Committee has said that annuities need to be reformed, Opposition Front Benchers have said that annuities need to be reformed, the shadow pensions Minister has said constantly that annuities need to be reformed and even the Government have said that annuities need to be reformed. Indeed, the industry itself has said that annuities need to be reformed. The rabbit that came out of the hat was the reform of that important market. However, what the Chancellor said in his Budget went far further than anyone had been calling for or expected—particularly the industry, and also the stock market if its reaction to the announcement is anything to go by.

Why do annuities need reforming? They lack flexibility, and people are often tied in to an inappropriate amount and an inappropriate time and do not shop around. We want a system that is much more flexible, perhaps with an open-market option so that people have different choices available to them when they reach their pension age and the time comes for them to buy an annuity. We must also consider the high costs and charges that have existed, and the fact that people have needed a lot of advice.

As Government Members have emphasised again and again today, we need consumer choice so that people can make the right decision about how they will spend their own money. For some people who still have a high mortgage when they draw down their pension, paying it off might be the most sensible thing to do. Paying off another debt might be the most sensible thing to do. However, the best thing for many people to do is to buy an annuity. Annuities are an excellent principle—someone saves into a pot and then buys something that lasts them to the end of their life. We do not know how long we will live after reaching pension age, so an annuity provides insurance: we know it will not run out before we reach the end of our life. It insures against old age.

All of that is right. However—this is the big but—what if there is no annuity market? What will the many people for whom an annuity is the right choice do then? That is the question that I have for the Government. Did they intend to undermine and destroy the annuity market, or did they hope that a new form of annuity would rise phoenix-like out of the flames of their announcements last week? If the annuity market were to collapse, the choice that they say they want to give consumers will not be there for those for whom an annuity is absolutely the right choice. Do the Government anticipate that the annuity market will be undermined or strengthened?

The Minister of State, Department for Work and Pensions, the hon. Member for Thornbury and Yate (Steve Webb), has talked a lot recently about his “defined-ambition” pensions—his collective defined contribution schemes. Where does the Budget leave his great defined-ambition scheme? Collective schemes for investing money during the investment period might be possible, but I cannot see how the defined-ambition system can pay out on a collective DC scheme given the proposals in the Budget.

I wonder whether the Government have done any cost-benefit analysis of the increased benefits bill for older pensioners. If people go down a different route from annuities and then run out of money before they reach the end of their life, they will become dependent on more than just the basic state pension. I know that the Government have made great play of the fact that the basic state pension will be high enough to lift people out of means-tested benefit, but that is not true of housing benefit or council tax rebates, so there will be a cost. How much work has been done on that?

Annuities have got a bad name because there have been low interest rates and low returns, but other products have the same problem. Some of them might actually give a worse return than annuities. What guarantee can the Government give that people who buy another product will not get a worse return than if they had chosen an annuity? We know that high charges and costs need to be dealt with.

I wonder whether the Government thought about just rebranding annuities because they have such a bad name. Perhaps they could have called an annuity a pension for life, which might have changed people’s attitude. I wonder whether the Government intend to turn the UK private pension system into a saving system, and if they do, will tax reliefs remain? Was that the Government’s intention, or is it an accidental consequence of last week’s proposals?

I was going to say a great deal about the need for independent advice, because I am not sure that the guidance guarantee comes anywhere near what is required. There are a number of such questions, and I hope that the Government can answer them, because if they cannot, people will not perhaps be as keen about the Government changes as they may at first have appeared.