Savings (Government Contributions) Bill

Baroness Altmann Excerpts

2nd reading (Hansard): House of Lords & 3rd reading (Hansard): House of Lords & Committee: 1st sitting (Hansard): House of Lords & Report stage (Hansard): House of Lords
Thursday 12th January 2017 Lords Chamber

[Baroness Altmann (Con)]

My Lords, this important debate has significant implications for younger generations. First, I congratulate the Government on the tremendous improvements they have made in recent years to the UK pensions landscape. As defined benefit schemes are on the brink of extinction in the private sector, I am delighted that the Government have made improvements that ensure defined contribution pension saving is now more user-friendly than it has ever been. Of course, if people have the opportunity of a good defined benefit pension, underwritten by their employer, that is hard to beat. However, some people with very small deferred entitlements in a final salary-type scheme may well be better off transferring their pension into a modern defined contribution scheme. We could not have said this a couple of years ago, but it can now be a sensible strategy for part of people’s past pension accruals.

Of course, defined benefit guaranteed pension income will not normally meet the costs of social care that many citizens will face. There is virtually no pre-funding of social care, either at public or private sector levels. Families are suddenly finding that a pension income is not all they need for a decent retirement. If you need looking after and have enough income or assets to be above the draconian care means test, you have to fund all your care costs yourself. That is why having some money saved up in case you need care is sensible advice for most families, especially baby boomers in our ageing population. But they do not know this. Most think the NHS will look after them from cradle to grave, as Beveridge’s national insurance scheme was often believed to achieve.

I am proud that this Government have acted to reform defined contribution pensions so that they can provide much better and more appropriate support for millions of people in later life. Some people will be able to use them to help to pay for social care, once the new pension freedom system is better understood, and perhaps with a little extra nudge from the Government. That would be a worthwhile focus of new saving incentives.

To be frank, I do not think the public or even the Government themselves, including my noble friend the Minister, have yet realised how positive the defined contribution pension changes are, how much better the landscape now is and how much more suitable for 21st-century realities. This is evidenced by last week’s astonishing infographic purporting to educate the public about retirement saving, which does not even mention the word “pension”, only lifetime ISAs, other ISAs and premium bonds. It is vital that the Government urgently revise this public guidance and recognise the important difference between short-term saving and long-term investment. Young people saving for retirement require the latter and also need extra money for care. Defined contribution pensions can offer more than just a guaranteed income. Of course, a pension is typically thought of as a lifelong income in old age but that is not necessarily enough to look after today’s or tomorrow’s elderly people.

With the new pension freedoms that ensure all pension savers should have flexibility and choice to use their pension savings as best suits themselves, the Government have already achieved the kind of flexibility that the Minister was talking about for younger people. Rather than effectively requiring most defined contribution pension savers to buy an annuity, pensions can better fit in with people’s changing lives.

The new regime does not stop anyone buying annuities if that is the right product for their circumstances, but they do not now have to do so and especially not when they are still relatively young. Most people reach their defined contribution scheme age and are still working. They will be best served by being in a pension and keeping it intact to grow, paying in more each year, so that they will have more money to support them after they finish working. That is also an important potential purpose of pension saving—to provide as much private resource as possible to support individuals during their retirement years.

There are also new behavioural nudges for people so that they do not have to worry about leaving money in their pensions for as long as possible. Under the old regime, with a 55% death tax, people would not want to die with money in their DC pension, because more than half would be lost in tax. Now, they can just leave the money there into their 80s and 90s. As I have said, if they need to pay for social care, they may have money in their pension fund. If they are lucky enough not to need care, the money passes on tax free to the next generation.

Pensions are now a product that we can be proud of and that can help people in different ways with the retirement costs they may face, rather than focusing only on ongoing income. We should be building on this success, not putting it at risk with the measures in this Bill. Of course, most people may not yet have enough money saved up, but as we look to the future and as the baby boomer generations reach later life, many of them will have—or could have—money that they could keep, rather than spending it too soon as will be encouraged by the lifetime ISA.

The combination of reforms we have seen since 2010 fits well with the theories of behavioural economics too. Behavioural science has proven powerful in driving much wider coverage of pensions across the workforce. The policy of auto-enrolment is just starting, bringing in millions more people to pension-saving, often for the first time, supplemented by a good employer contribution. The theory of inertia is ensuring that opt-out rates are far lower than anyone predicted, especially, as the noble Baroness, Lady Drake, said, among the young. The vast majority of those who are automatically enrolled into a pension are staying there. The young are clearly willing to stay in pensions, and this is a massive success so far. So it is simply not correct for Ministers to assert, as in the past, that people do not like pensions. That is yesterday’s story and is also partly a function of the fact that many do not yet understand just how good pensions are these days.

We are on the cusp of a major success in extending pension coverage for millions of people, but the measures of this savings Bill put us in danger of snatching defeat from the jaws of victory. Auto-enrolment is only just beginning, and has been a great success so far. Once again, the noble Baroness, Lady Drake, through her work with the Pensions Commission, can be rightly proud of sowing the seeds of this success. But it is work in progress—auto-enrolment will not reach all relevant workers and the full minimum contributions until 2019. Even at that stage, contributions will still be too low for most people, and millions, especially lower-paid women and the self-employed, will be left out altogether. More needs to be done, but the programme is working, and I and other former Ministers have had to battle to keep auto-enrolment in place. I congratulate the Government on doing this, but I truly fear the lifetime ISA in the Bill could derail the project before it is properly up and running.

As the state pension is being cut—the new state pension will mean lower pensions in the long run for most younger people in this country—it is vital that we ensure more people have more private income to add to their basic level of state support. That is why it is so important to continue to incentivise saving for retirement and help people build up as much money as they can to see them through their ever-lengthening later life. Using pensions could best achieve that. Distracting them with a lifetime ISA risks it.

Pensions have the right behavioural nudges. Individuals are automatically enrolled, to take advantage of initial inertia, and they receive extra from their employer to add to their own contributions, and hopefully even more money in tax relief from the Government. So the individual who puts £1,000 of their own money into a workplace pension scheme where the employer matches their contributions could receive a further £1,000 from their employer and an extra £250 in basic-rate tax relief—or even more if they are on higher-rate tax—and possibly even more from salary sacrifice. This means their own £1,000 can be more than doubled on day one.

When they reach later life, the money they have saved up will be waiting for them. They can take a quarter tax free and can leave the rest invested. Any money withdrawn will be taxed as income in that year, so there is a built-in tax brake on taking the money out quickly. The pension tax structure deters early unnecessary spending. Future Governments should therefore have fewer poorer pensioners to support. Is that not what we incentivise retirement saving for? It is also important to mention that the new state pension does not just lift all pensioners above means testing; it only lifts them above pension credit. But if all they have is a new state pension, a future Government, and younger taxpayers, could still have to provide housing benefit, council tax benefit and other means-tested help. So those who have no other private resources will potentially fall back on the state.

That is why I am so concerned about the introduction of this so-called lifetime ISA and why I beg your Lordships’ indulgence for my long speech today. This is the only opportunity to put on record the strength of feeling on this matter. We do not have an opportunity to amend the Bill, but it is important to make these points. It is a dangerous distraction that could undermine pensions and increase future poverty. There are many concerns and all I can do is put on record what the problems are and hope that the Government will take notice before it is too late. This is a money Bill, so I cannot change it, but I believe that it needs radical rethinking.

If used for house purchase, this lifetime ISA is okay—but we already had a help-to-buy ISA, so why did we need something new to complicate the ISA landscape further? However, when masquerading as a pension, this product is dangerous. It is also a complex product and should not be sold carelessly—although I fear there will be inadequate suitability checks. “Lifetime” ISAs will not last a lifetime, even though the purpose of giving a taxpayer bonus is supposed to be to ensure that people can support themselves privately in their old age. Today’s taxpayers are subsidising the under-40s to build up a fund that is likely to be spent at around age 60. This new product has the wrong behavioural structure and I am warning now that it risks becoming a new mis-selling scandal in coming years.

I cannot see who will be better off in their old age saving in a lifetime ISA than if they had put the same money into a pension instead. But people will be confused. Young people I have spoken to—some of whom are on higher-rate tax and have access to a generous workplace pension—have already been attracted to the idea of using a lifetime ISA instead of a pension. Only when I explain that they will lose their employer’s contribution and higher-rate tax relief do they realise this could be a mistake. How many people will be misled and may come back in future years and complain about being mis-sold this product? I have spoken to 30-somethings who clearly misunderstand. Here are some further examples.

Workers on basic-rate tax mistakenly believe that the 25% Government bonus is better than 20% tax relief. Of course, they are exactly the same. A 20% grossing up is equivalent to a 25% extra bonus, but who will explain that to customers? I urge the pensions industry to do more to help people to see the extra money from government, or other taxpayers, which is paid into their pension.

Some people have been attracted to the idea that they can get their money back if they need to, whereas pensions are locked until age 55. What they do not understand is that the Government take a heavy “withdrawal charge” from their fund if they want to spend it before 55. Unless they are buying their first home or are terminally ill, they face this so-called 25% penalty. But people think that that is merely taking back the 25% bonus. Once again, who will explain that it is far worse than that? They will lose far more than the government bonus and, indeed, some of their original amount. If they put in £1,000 and saw no investment growth at all, it would be worth just £937.50—which is another big danger of using the lifetime ISA for saving for retirement.

The dual purpose of this lifetime ISA will confuse people. Just when we have the opportunity to capitalise on the success of pension reform—auto-enrolment, pension freedoms—and the Pension Wise service, which offers real value to people and can help them save money until their 80s and 90s, along comes a new product that adds complexity and is unlikely to last so long.

Using a lifetime ISA instead of a pension will mean less money being put in on day one, less money growing, especially as much of it will be in cash—we know that that is what ISAs are predominantly used for—and more money spent more quickly in later life. Indeed, this lifetime ISA seems such a waste of taxpayers’ money. It will be good for those who have already filled their pension pot or their annual allowance, but it will not be good for those younger people saving for retirement. LISA contributions must stop at age 50. Fifty is only the start of the second half of one’s adult life, when pension savings could be stepped up, rather than suddenly stopping. I know that the FCA will try to impose regulatory requirements to protect customers, but with the best will in the world, reams of new disclosure documents are hardly going to help in practical terms. I believe that the LISA product introduced by this Bill is a—perhaps inadvertent—mistake. I have studied, managed and advised on pensions and pensions policy for nearly 40 years, and I share with noble Lords today my fears that this Bill risks worse retirement outcomes for generations to come.