Queen's Speech

Baroness Hollis of Heigham Excerpts

Thursday 3rd June 2010 Lords Chamber

[Baroness Hollis of Heigham]

My Lords, I, too, join in warmly welcoming the noble Earl, Lord Howe, and the noble Lord, Lord Hill, to their new posts. I remember the noble Earl when he was a Minister the first time around. People have mentioned that he has seen off a number of Ministers while he was in opposition; I firmly recall the battles that he had with the noble Countess, Lady Mar, and will merely mention sheep-dip to him. Such issues will no doubt reoccur.

I shall talk about pensions. Post-Turner and amid both the financial and longevity crises, as the number of pensioners will have doubled by 2050, we need a new, all-party pensions settlement—led, I hope, by the much respected Steve Webb. My assumptions, which I hope the House will share, are that we wish to continue reducing pensioner poverty, that we wish to reduce means-testing and to encourage people to save for their retirement, and that we can put together a settlement which is relatively simple, fair, easy to understand, affordable and—because it is based on consensus—has staying power. Yes, I believe it is possible. If your Lordships will allow me, I shall sketch the outlines of such a settlement.

The first essential is a new state pension similar to the NAPS foundation pension. I very much welcome the new Government’s commitment to the earnings link of the basic state pension next year. That is much to be welcomed—well done. However, almost 50 per cent of pensioners may face means-testing to close the gap between that state pension of £97 a week and the pension credit figure of £132 a week. That means that any modest savings cost you 40p in the pound in lost pension credit, so unless you have a pot of some £50,000 floating you off pension credit altogether—the average pot is half that, at £26,000—it is simply not worth saving, so people do not. Sixty per cent of all pensioners have savings of less than £10,000.

What to do? People on low incomes or on credits simply cannot save their way off future means-testing. Pension credit has rescued hundreds of thousands of pensioners from retirement poverty, which is wonderful, but at the price of too high a hurdle for working people to save. But there is an alternative, and I hope your Lordships will forgive me if I urge a proposal outlined in my recent pamphlet, A New State Pension, to which the Minister, Steve Webb, was a contributor in his previous incarnation.

Put into one pot the state pension, the state second pension capped at 2020—this is key—and the £8 billion or so that we are now going to be spending on pension credit. Then, within the same broad cost envelope, you can pay all pensioners with a 30-year record of national insurance—some 90 per cent of them, in due course—a new state pension of £132 a week, at or fractionally above the means-tested pension credit level. That would mean a state pension that, as of right through the NI system, would lift most pensioners out of poverty and out of means-testing.

Few would need pension credit unless they had special needs. NEST, the new auto-enrolment scheme, would be safe from mis-selling because, unless you were on housing benefit, you would get every penny of value from it. Removing annuitisation at 75, which I greatly welcome, would also be safe because even if a few individuals did blow their pots on cruises or whatever, the new state pension would still lift them clear of means-tested benefits, so it would be up to them and not us. Incidentally, I would be happy to see their children inherit any residual pot, provided, of course, that it was ring-fenced for their own pension solely and was subject to IHT so it did not become a tax loophole. Above all, with a new state pension at or above pension credit level, we would make it pay to save. As they stand, private pensions are high-risk for small savers because of the benefits trap. A new state pension would remove that risk at a stroke.

The first step, therefore, is a new state pension, a foundation underpinning all else that we need to do. The second step is to make pension saving attractive. Over half the workforce are not contributing to any pension scheme. One way would be to ensure early access to at least the pension tax-free lump sum. At a stroke, that would turn the pension into a lifetime savings account, proposals long and rightly espoused by the government party. Why is it OK to use the lump sum at 55 to build a conservatory, but not at 45 to save your home from repossession? If modest savers knew that 75 per cent of their savings was ring-fenced for retirement but the other 25 per cent was available as an accessible savings slice, then women, the low-paid, young people and the self-employed might save for the first time.

Over and beyond a new state pension and early access to a pension slice, we also need to connect ISAs and pensions more intelligently, as a forthcoming pamphlet from Michael Johnson of the Centre for Policy Studies, familiar to Members opposite, argues most effectively; it will be called Simplification is the Key. Pensions, as your Lordships are well aware, attract tax relief on the way in, while ISAs attract it on the way out. However, five out of six higher-rate taxpayers become standard-rate taxpayers in retirement. You could reduce tax relief on pensions to the standard rate and save, even after the 2009 and 2010 Budget changes, some £3.5 billion. However, if pensions, like ISAs, were tax-exempt only on the way out—that is, on payment—you could probably save closer to £8.5 billion a year and build a simplified, attractive retirement package.

Please do not say that this would destroy pension savings. ISAs, which are tax-exempt only on the way out, already attract more money than pensions every year, even though there is no employer’s contribution to them and, therefore, they represent less obvious value. Such integration would work. There would be a new state pension, early access to pension savings, greater integration of ISAs and pensions, and no compulsory annuitisation at 75. What is there not to like? It is fair, flexible, simple, supportive of women and the low-paid, and it could even save rather a lot of money.