Taxation of Pensions Bill

Debate between Hywel Williams and Cathy Jamieson

Wednesday 3rd December 2014 Commons Chamber

[Cathy Jamieson]

The purpose of the monitoring is to determine whether the Bill has unintended consequences. We would want the process to deal with our concerns of whether the market responds to the changes and if the products that people have envisaged will be available. There is the oft-quoted example of what happened in Australia: people drew down money, but many found that they had not properly planned for the future.

The hon. Gentleman asks what the Government would do, but I think that the Government have a responsibility to keep all legislation under review by looking at its effects and examining whether measures are fit for purpose and if they do what they say on the tin. If changes need to be made, the Government of the day will bring forward appropriate provisions. They have a responsibility to make themselves aware of any unintended consequences that might arise from the Bill and they should tell us how they will close any loopholes.

[Hywel Williams (Arfon) (PC)]

I am sure that the hon. Lady agrees with the TUC when it says that it believes that

“greater emphasis should be placed on developing strong default options at retirement. These may include a combination of drawdown and annuitisation.”

[Cathy Jamieson]

The hon. Gentleman makes a valuable point. The Public Bill Committee examined what options will be available to people and how we can ensure that the balance is right so that they are encouraged not only to take up pensions at the earliest possible stage, such as through auto-enrolment, but to think about planning for their long-term future. The aim was to ensure that people would not think that there was a windfall at age 55, perhaps make wrong decisions about it, and find by their 75th birthday that they had not done the correct planning. The new clause is very much about trying to see how the provisions will impact on real people when the time comes for them to make these decisions. That is why we were talking about behavioural analysis; we want to ensure that lessons are learned from it.

--- Later in debate ---

[Cathy Jamieson]

It is a bit chicken-and-egg: until we do the analysis, we do not really know the extent of the problem. The solution would come once the problems were identified. The hon. Gentleman makes an important point about annuities; that takes me back to the issue that I raised about the opportunity for new products. There is a relatively short period of time in which to develop them. The industry, of course, says that it will try to meet the “challenges”—it consistently uses that word—and ensure that there are options and products. None the less, I find it difficult to understand why the Government seem resistant to the new clauses.

I think it was Ernest Hemingway who said that his novels were like icebergs:

“There is seven-eighths of it under water for every part that shows.”

Sometimes the same can be said of legislation, because the devil is in the detail. One has to see the detail, and be on top of it over a period, to find out what the ongoing impact is. That is why, throughout the passage of the Bill, we have tried to identify and probe any fault-lines on the surface of the legislation.

The guidance guarantee has been the subject of considerable debate, although it essentially formed part of the Pension Schemes Bill. Although we have now seen information on the overarching standards and the apportioning of the levy, published on Friday by the Financial Conduct Authority, we have yet to see all the content of that guarantee. Of course, that is the responsibility of the Government, in tandem with delivery partners. It is vital that the guidance is up and running, and is equal to consumer needs, come April next year. The FCA policy statement published on Friday confirmed that, at least initially, there will be no “second line of defence”, as it was described, which makes it even more important that the guidance is fit for purpose.

In the Public Bill Committee, I talked about the potential impact of the reforms on eligibility for social care. We identified two separate but related points on social care that we believe the Government have not yet adequately addressed. The first is the impact that drawing down money under flexi-access may have on an individual’s entitlement to means-tested benefits and eligibility for social care. The second is a point that I raised earlier: the danger that too much emphasis has been placed on early access to funds. That may result in people taking too much, too quickly, and being left with insufficient funds to cover the cost of care later in life. That is why our review calls for a distributional impact of the reforms by income decile. That is also why we need behavioural analysis. Signs may emerge that consumers are accessing their pensions earlier, which increases the chance that they may be left short of money in later life.

As we heard in Committee, many individuals who access their pension flexibly risk being hit with an unexpected tax bill—a point that the Association of British Insurers highlighted:

“Many people will struggle to understand the tax consequences of these reforms. Apart from tax free lump sums, withdrawals from pension pots are taxable pension income…Not only may people find themselves unexpectedly paying higher rate tax, it is possible that some will be unaware that their tax may not be settled for a year after they have accessed their funds through a self-assessment process that they may be unfamiliar with.”

These risks have to be monitored and reviewed, so that any unintended consequences can be picked up and dealt with.

We also need to see—this comes back to the point raised earlier—whether the Bill results in a proliferation of new products. The impact of such products on consumer behaviour should be monitored. In its 2014 risk outlook the Financial Conduct Authority expressed concern that

“retirement income products and distribution may deliver poor customer outcomes”.

It said:

“While recent proposals for pension reform plan to allow consumers to access any amount of their pension pot at age 55, the need for consumers to understand the options available to them at retirement is still paramount. Any future innovation in decumulation products will compound these risks.”

The FCA was, again, trying to look to the future. We share those concerns. We do not want poor outcomes for consumers, and I am sure the Minister does not want that either.

A further issue is that new products may carry additional charges that eat away at an individual’s pension. Research from the House of Commons Library found that current income drawdown products could see 27% of an average pension pot of £30,000 eaten up in fees and charges. If the reforms lead to continued abuse of charges, the Government may have to consider the introduction of a charge cap.

The changes made in schedule 2 abolish the 55% tax on pension funds on the death of the member. We can see the Government’s reasons for doing this, but it would be worth monitoring the impact on consumer behaviour and Government revenue.

I said that I wanted to ask the Minister some particular questions in relation to the autumn statement and the figures that had been published. Throughout the Committee stage, when we were pressing for information and numbers, the Minister said that those would be published in due course. True to his word, that information is now available to us. What effect will the revisions have on the initial costings of the impact of these reforms? Has he had cause to reconsider the impact of the reforms? Can he explain why the tax take increases because of the annual allowance in 2015-16, but falls in subsequent years? What is the basis for those figures?

Can the Minister give us any more detail about the costing of the salary sacrifice and welfare forecast provisions? The numbers are there, but we do not have further information in the autumn statement policy costing document. In comparison to some of the figures provided in Committee, the estimates still seem low. Given that the Minister has revised his forecast to take into account salary sacrifice and welfare at such short notice that it is not included in the autumn statement documents, had the Government fully considered those factors when they initially drew up these reforms, or did they only later recognise the significance of those factors?

We have asked for a review, as set out in new clause 1, to show whether the Bill increases the scope for tax avoidance and the avoidance of national insurance contributions. In the light of the figures that have been published, is the Minister confident that all his projections will prove to be accurate?

I have had a fair opportunity to set out the case for new clauses 1 and 2, which will allow the Minister to keep his word and monitor, review and report information as appropriate. It is important that the clauses are added to the Bill to ensure that that happens. We need to keep a close watch on the progress of the reforms to make sure that they do not lead to adverse outcomes for consumers or place increased costs on the state. The Government have consistently assured us that they will closely monitor the impact of the Bill, so we see no reason why, even at this late stage, they cannot commit to make good on that assurance and accept the new clauses.

[Hywel Williams]

I rise to speak on behalf of Plaid Cymru and in support of amendment (a), which stands in my name, to Labour’s new clause 2. I agree with much of that new clause, but I wish to add that the Government should bring forward a report on the impact of the changes introduced by the Bill specifically on the housing market and introduce measures to rectify any problems, should it become apparent that there are negative consequences. I sincerely hope that my concerns are entirely unfounded.

Although we welcome the Government’s desire to reform the private pensions system, we in Plaid Cymru have concerns about the consequences of behavioural changes in the pensions industry, particularly in relation to individual pensioners taking large draw-downs of money. We are not against pension savers being able to access their pension pots as a lump sum. If that is how people wish to access their money, it is up to them to do as they see fit. Given the rates of return achieved these days, it is not surprising that many people will wish to take that route.

Our concern is that the effect might not be quite what the Government intend. Aside from consumer protection issues and stopping people being targeted by sharks and cowboys seeking to exploit those who are newly able to access comparatively large amounts of money, attention needs to be given to the longer-term possibility that those who draw down large amounts and whose subsequent investments fail, for whatever reason, will be left with little or no money on which to see out their final years, despite having contributed to a pension scheme for most of their lives, and that they will then become a burden on the public purse. It is fair enough to say that the buyer should beware, but we are not talking about purchasing a new television; a wrong decision in this case might have grave, long-term effects on people’s basic incomes.

As has already been mentioned, in Australia, where the Government have introduced changes similar to those intended here, many people took large draw-downs and invested the money in buy-to-let properties. As the TUC has noted, much evidence indicates that the same will happen here, despite Ministers’ talk of people making home improvements, buying new kitchens or going out and buying cars and other consumer goods that will boost the productive economy.

Research by the Australian investment management firm Challenger has found that one third of savers used their pension cash to buy a home, pay off an outstanding mortgage or make home improvements; one in five splashed out on a new car; and one in seven spent at least some of their pension on a holiday. The evidence from Australia is that, when given the choice, only one in 25 Australians now buy an annuity. In the US, another country where annuities are not mandatory, most people take their pension money as cash, rather than buying an annuity. Indeed, a buy-to-let property might appear to be one of the better options for many people, rather than keeping their money in their pension scheme or making other, more conservative investments.

Some large accountancy firms, such as PricewaterhouseCoopers, have said that the changes to the annuities system will be a net positive for the Treasury. They perhaps foresee the revenue raised through stamp duty and other associated taxes. But it is not the Treasury’s coffers that will suffer, at least not in the short term. It is the potential bubble in house prices that concerns me, particularly at a local level, and the potentially growing number of people who would then be unable to buy their own home, the strengthening of the historical over-reliance of the British economy on a buoyant housing market, and the potential effects on investors’ incomes should, or rather when, the bubble bursts.

I need hardly remind the House of the dangers of an over-inflated property market, of which buy-to-let is a significant factor, and indeed one of the significant causes of the financial crash in 2008. Even prior to the crash, in August 2007, Oxford Economics noted that buy to let

“is undoubtedly contributing to the overvaluation of housing.”

Were I cynical, I might even characterise inflation of the housing market as some sort of giant Ponzi scheme, helping to keep the economy afloat while doing little to contribute to productive capital, the epitome of the rentier society—if I were cynical.

Of more significance to my constituents, and to people throughout Wales and the more picturesque areas of the UK, is the potential that those taking large draw-downs would decide to buy holiday homes. I need not rehearse in any detail the arguments about the problems associated with an over-preponderance of holiday homes. Hon. Members who represent constituencies where that is a problem will be only too aware of the negative effects. Anyone who really wants to know about it might read my maiden speech from 2001, which addressed housing matters and this problem, in particular. To put it briefly, having too many holiday homes in an area has a negative, deadweight effect on the local economy. Local people, especially young people, are unable to afford homes because of price inflation and are forced to leave. In my constituency, and in much of rural Wales, there is the added dimension of the damaging effect that has on the Welsh language. We have been largely spared some of those effects over the years of economic difficulty, but now, if the Chancellor is to be believed, we are moving towards a new golden age of plenty, possibly financed in part by pension lump sums, with a consequent revival of these risks.