Taxation of Pensions Bill

Ian Swales Excerpts

Wednesday 29th October 2014 Commons Chamber

[Crispin Blunt]

The hon. Gentleman tempts me down the path of discussing what is in the Pension Schemes Bill, which, although not the subject of today’s debate, is closely linked with the Taxation of Pensions Bill. I presume by his presence that he is on the Committee, as is the hon. Member for Middlesbrough South and East Cleveland (Tom Blenkinsop). I sincerely hope that the Committee will carefully examine this matter. It is subject to a current consultation by the FCA, to which I have submitted my evidence. This is an immensely important issue. To make the reforms in the Bill successful, we have to make a success of the guidance. We will not get it right first time. It will have to be capable of being improved in the light of experience, so that we do not end up with a mis-selling disaster or simply consumers not being informed enough to make appropriate choices.

We are giving people freedom, and with freedom comes responsibility. Sadly, that means that some people will make poor choices. The hon. Member for Edmonton (Mr Love) has spoken about people making poor choices, or taking a holiday; at least, that was the implication behind his remarks. I think taking a holiday is probably a thoroughly good choice, but he and I may differ. His Scottish Presbyterian background may be coming into play there. I will leave that as speculation.

[Ian Swales (Redcar) (LD)]

The hon. Gentleman raised a point that I had not thought about, which is the tax consequences during payment. Normal annuities are paid out against a pre-determined tax code, and people have their tax deducted at source when they receive their payments. I know this from personal experience. Under the flexible rules, he suggests that the tax will be payable only at the time of self-assessment, much later. Does he believe that providers of these products should be looking at tax deductions at source?

[Crispin Blunt]

I would concede that this is not an area on which I feel a total authority. Hon. Members who have served on the Pension Schemes Bill Committee and made themselves authorities in this area must also take seriously the advice of experts and industry to address precisely the kind of question that my hon. Friend raises. We cannot afford to leave consumers adrift while we make the transition from a highly regulated, paternalistic and rather depressingly inefficient market to one that provides much better returns and is much more competitive, but which needs better informed consumers to drive it.

--- Later in debate ---

[Ian Swales (Redcar) (LD)]

I should start by declaring an interest: I am well over 55 and have a pension pot that is subject to these provisions. I very much welcome the Bill because its measures are undoubtedly needed. I praise my right hon. Friend the Member for Thornbury and Yate (Steve Webb), who has been campaigning on these issues since 1999 and has done a terrific job in reforming pensions in his years as Pensions Minister.

The Bill is a revolution in terms of freedom. I am glad that defined-benefit schemes are excluded, because they were the source of much of the mis-selling that took place during the scandals that occurred, with people who had very secure local authority or teachers’ pensions, for example, being encouraged by unscrupulous advisers to cash them in and take out risky products. We have to try to avoid that.

People arrive at the time when they want to take their pension in many different circumstances. They may want to spend their money at different rates depending on their view of how they want to spend their retirement. They may have health issues that determine how they spend their money. They may make various different choices. Even though I was brought up as a Presbyterian by my Scottish parents, I have nothing against holidays, which are a perfectly good choice when one initially retires.

I know from talking to constituents that one of the main things people do these days is make a capital transfer to their children, particularly to buy a property. I can well understand why people whose income is okay might want to do so, and given that the new rules on inheritance are much less penal in cases of early death, funds that they have saved up will still be available to their family.

However—there are quite a few howevers about this Bill—annuities have a deservedly bad name in terms of value, mainly because low gilt rates mean that annuity providers can only offer low rates. Annuities do have a purpose. They are a pool, which is one of the things that I find constituents have difficulty in understanding. Perhaps even the hon. Member for Amber Valley (Nigel Mills) has difficulty in understanding that, given what he said; I know he does not, because he is an expert in this area. When people die soon after taking out an annuity, the insurance company does not get the money; the person who gets the money is someone who is lucky enough to live to be 100. That is what pooled annuities are all about.

By demonising annuities, we have caused people to forget that they do not know how long they are going to live. On average these days, somebody aged 65 will live until they are 83, but a lot live longer and quite a lot live less than that. The whole point about annuities is that they are a pool, and people bet against how long they are going to live. I think that the industry will come up with annuity-type products to meet the desire of many people for a secure income for as long as they live.

In financial services, it is always worth asking what is the worst that could happen, because it usually does happen. That is why we need to think about some of the unintended consequences, difficulties or gaps. Several speakers have mentioned the world of guidance. I was disturbed to hear the hon. Member for Reigate (Crispin Blunt), who is not in his place, say:

“We will not get it right first time.”

Let us remember that guidance in this area will be given only once for each individual. They cannot keep going back for more guidance: it happens once. If we do not get it right first time and the cohort of people in the first year do not get good advice, they will suffer for the rest of their lives. From our point of view, it might take a while to get the guidance right, but for the people getting the advice it must be right when they get it. The whole area of standards and regulation in relation to the Bill would bear more examination.

Advice needs to be impartial and transparent, and it should be based on straightforward products, but I worry about the level of knowledge of the people receiving advice. A few weeks ago, a constituent came to see me who had taken out a finance deal for some solar panels. It turned out that the combination of the savings on the solar panels and the finance deal meant that she had an overall penalty in her budget. The savings on the panels in no way paid for the cost of the finance, although she had been told that it would.

[Barbara Keeley]

The hon. Member for Amber Valley (Nigel Mills) spoke about someone who left work and needed their care costs to be covered at a certain point. In my view, that is another thing for which constituents do not plan. I have lost count of the number of my constituents who did not even know that they had to pay for social care and did not understand the thresholds. I am concerned that a lot of people will be tripped up if they draw down money and increase their savings, because they will suddenly find that they fall within the threshold at which they have to pay for social care. People commonly do not understand that, and it will not be covered by the guidance.

[Ian Swales]

That is a very good point. The guidance needs to be much more in the round on what may happen to people after retirement, but I suspect that that will not be mentioned in the guidance unless we can do something about it.

To go back to my example about the lady with the solar panels, I went through the documents with her, and they very clearly showed the numbers. There was no doubt: she had not been scammed. What she had signed up to was absolutely clear, and her signature was on all the documents. She said, “Oh, I just didn’t realise. I’ve an A-level in maths, so I should have realised.” What worries me is that we do not have to speak to many constituents before we realise that levels of knowledge about pensions are extremely low. As the hon. Member for Worsley and Eccles South (Barbara Keeley) has said, other consequential issues of getting older are sometimes even less clearly understood.

I am worried about the guidance, and I think that there will be concerns about whether it is appropriate and whether people have the financial awareness necessary to understand it. That goes back to the need to make people more financially literate from school onwards, but we will not solve that problem overnight. The industry is talking about having a second line of defence, and it needs to be listened to. It is a clear case of “They would say that, wouldn’t they?”—it is designed to get people to move towards the type of products that the industry is offering—but such a second line of defence might serve to protect people from themselves, as it were.

We need to watch out for scams. I listened carefully when the hon. Member for North Down (Lady Hermon) mentioned criminality in relation to people losing their pension savings. Pension release companies already impose extremely high charges for unlocking pension schemes and doing very little work. I am prepared to take an intervention from her if she so wishes, but I am a bit concerned about how to define criminality. People may make a bad decision, but that is not necessarily criminal. I agree with her, but I wonder what kind of products or service she means when she talks about criminalising those who end up losing their pension pots.

[Lady Hermon]

It is awfully nice of the hon. Gentleman and so kind of him to invite me to intervene. I absolutely do not want to criminalise people who draw down their pension. I am a huge fan of Radio 4, and I listen very carefully to its finance programmes. As has already been mentioned, we and many people—certainly constituents in my patch—are worried about unscrupulous so-called pension advisers who set themselves up so that people can go on to the internet, press a button and commit their life savings to them. I do not want to criminalise the person involved; I want to put into the Bill a deterrent against unscrupulous tax or pension advisers.

[Ian Swales]

I thank the hon. Lady for her clarification. I am sure that the Exchequer Secretary would be interested to hear more about how she defines “unscrupulous”. I agree with her, but there is more to do to be clear what that means or about conduct that the Financial Conduct Authority would regard as unscrupulous.

All this liberalisation of pensions, as the hon. Member for Amber Valley mentioned, makes pension savings more like other kinds of savings. We are also providing a big tax advantage. Removing restrictions on when pensions are taken and removing some of the tax charges and restrictions on death means that we are moving closer and closer to a simple tax-free savings market. Such a market is especially attractive for people who are very close to retirement. I have done some sums, and if one is about to take one’s pension pot, there is quite an incentive—because of the tax-free 25%—to throw in the maximum possible amount of money in the months before retirement. Somebody paying tax at the basic rate who puts a lot into their pension pot in March and starts their pension in April or May would make a 6% return on their money simply by putting it in and taking it back out again. A higher rate taxpayer would make a 16% return on their money simply by putting a lump sum into their pension pot immediately before they retire and then drawing it out again. There will therefore be clear consequences of the flexibility that we are creating. People will be more inclined to put their money in if they know that they will be able to get it out quickly. There are clear benefits to getting the tax-free amount very quickly.

We have heard about the possible later costs to the state in respect of care and so on. By definition, if people take more out of their pension pots earlier, more people will need state assistance later in life with health or care costs. I know that the Minister is aware of that issue, but I do not know whether the possible costs have been calculated or estimated.

I am more confident than most that the responsible part of the industry will come up with new products and innovations. As I said to somebody from Just Retirement last week, what people need is plain language. Even the word “annuity” is not plain language. People want a secure income in retirement. The vast majority of people who retire do not want to buy a sports car, but to have a certain income throughout their retirement. The more the industry wraps things up in mumbo-jumbo that people do not understand, the more suspicious people are of its motivations.

We are already seeing warning signs. For example, Fidelity is saying, “All this flexibility means complexity, which means higher costs, because we are not set up to run bank accounts.” I am concerned that the industry will see the changes as a new way to levy high charges. It will say that the very flexibility that the Government want to see is expensive to provide. I hope that we see the right level of competition in the market and that people come in who do not levy those high charges.

We have seen a huge fall in the number of annuities that have been taken out recently. Just Retirement has seen a 50% fall in demand for annuities. I suspect that that is partly due to uncertainty. People want to be clear what the new rules are before making a decision. Demand may pick up again, particularly if there are new products. However, there is no doubt that fewer people will take out annuity-type products.

[Cathy Jamieson]

I am listening carefully to what the hon. Gentleman is saying. Does he agree that there are concerns for people who have relatively small pots, because companies might feel that it is not in their financial interest to offer them products? How can we ensure that there is equality?

[Ian Swales]

The shadow Minister makes a good point. If we create a spectrum of products that is genuinely complex, the charges might be inappropriate even for those with medium-sized pots because of the flexibility that is offered. We need to hear more from the industry about that.

Finally, on timing, I know from personal experience that when the date that one has defined as a potential pension date is approaching, the industry offers what it calls warm-up packages. I have had my first warm-up package for next year. The industry is not waiting until April next year. It has to get on with this right now. If there is any uncertainty in the minds of Ministers, they had better get moving pretty quickly, because the industry has to get all its systems, documentation, regulations and new products in place so that it can offer them to the cohort that is approaching retirement in just a few months’ time—from April onwards. The ABI is already concerned that it is getting towards the eleventh hour, when clarity on all this will be needed.

Despite all the reservations that I have expressed, I very much support the Bill and commend it to the House. I am sure that when it emerges in its finished form, it will be an excellent piece of work.

[Shabana Mahmood (Birmingham, Ladywood) (Lab)]

It is a pleasure to close this debate for the Opposition.

There have been only a few Back-Bench speeches, but they have all been insightful and valuable. The hon. Member for Reigate (Crispin Blunt) was spot on when he spoke about a deficit of consumer awareness and said that the FCA will have to be alert to the needs of all consumers across the spectrum.

My hon. Friend the Member for Middlesbrough South and East Cleveland (Tom Blenkinsop) sits on the Pension Schemes Public Bill Committee. He spoke at length about the evidence that was given by Mr Greenwood. I am not on that Committee, but I found the points he made about that evidence telling and concerning. I hope that the Exchequer Secretary will respond to those issues.

In particular, my hon. Friend highlighted the potential opportunities for tax avoidance. I am sure that Members across the House will want to interrogate the measures in this Bill and the Pension Schemes Bill in detail to ensure that revenues to the Exchequer are protected. I hope that the Exchequer Secretary will say more about the Government’s view of the number of employers—my hon. Friend gave the figure of 192 from the evidence that was given to the Pension Schemes Public Bill Committee—who are looking at mechanisms to exploit the changes to the pension taxation rules as a ruse to reduce employer’s national insurance contributions.

The hon. Member for Amber Valley (Nigel Mills) was right to say that we want to avoid the two extremes that he highlighted. He was also right to speak about the importance of getting the guidance to work properly. He raised an important point in asking what will be the default setting for people who have been auto-enrolled and have a pot of money, but who simply do not engage with the process. It is important to get into the nitty-gritty of what will happen in practice in such scenarios. Again, I hope that the Exchequer Secretary will respond to those issues.

The hon. Member for Redcar (Ian Swales) was right to begin his speech by reminding us of previous scandals and the lengths to which unscrupulous individuals have gone, and he concentrated our minds on ensuring that such issues do not arise again. He was right to say that we must get the guidance right first time because it only happens once for each person. That should concentrate the minds of all Members on ensuring that we get the guidance absolutely right.

The shadow Financial Secretary, my hon. Friend the Member for Kilmarnock and Loudoun (Cathy Jamieson), made it clear that we support the principle of increased flexibility for people in retirement and the reform of the pensions market so that people get a better deal. We are therefore not against the principle that people should be allowed to exercise choice. However, this is a big Bill that contains big changes that will affect tens of thousands of people, if not more, immediately. Just this week, research published by Ipsos MORI suggested that 200,000 people may choose to take their entire pension in one go next April, creating a potential tax windfall for the Treasury of £1.6 billion.

It is fair to say that some issues that are debated in this place appear to be removed from the outside world. This is not one of those occasions, as the figures show. We therefore have a bigger immediate responsibility on this occasion to get the Bill absolutely right. Although I reiterate our support for increased flexibility, I do so with a word of caution, because that flexibility will be exercised by people who have a deeply variable understanding of the marketplace in which they are operating.

The Ipsos MORI poll also showed that only a third of those planning to take out their pension pot were aware of the tax that they would pay should they take out their entire sum in one go. The 2012 Department for Work and Pensions attitude to pensions survey noted that half the respondents had no prior knowledge of annuities before being asked the questions in the survey. The Financial Services Consumer Panel also published a report, in December 2013, which said that the

“market does not work well for the majority of consumers.”

One of its key findings was that consumers were poorly placed to drive effective competition among providers and distributers of annuities. It said:

“There are many barriers inhibiting consumers’ full engagement when they decide to annuitise: low financial capability; fear of product complexity and of making an irreversible, high-cost mistake; general distrust of professional advisers, and inability to find appropriate advice at acceptable cost.”

The Bill will operate in that context, not in some fantasy world in which the majority of the electorate has an in-depth understanding of the pension marketplace. That is not to say that a greater understanding cannot be fostered, because, as we know, the same DWP survey shows an increase in the awareness of annuities between 2012 and the previous survey in 2009. However, in some cases we start from a very low base.

We also have a social responsibility to get this right. This policy needs to be fair. Successive Governments have invested in pension relief to support people in retirement. As the Government have said, it is an annual investment of £22.8 billion, and it is important that we ensure that the taxpayer gets good value for money for that. It is money that belongs to all taxpayers, even those for whom a private pension or a workplace pension are out of reach. We must ensure that the relief given generates the consequences intended, the main one of which is income in retirement, not income for other things.

[Ian Swales]

The shadow Minister raises a good point about the relief, but pensions are taxable when they are paid out, so it is important not to suggest that £22.8 billion is the net cost of the pension system. The money may be taxed at a different rate, but it will be taxed when it comes out.

[Shabana Mahmood]

I was simply making the point that the reliefs are there for a reason and we have to ensure that they work for the benefit of all taxpayers, but the hon. Gentleman is right.

There is also the hard-nosed political test of making sure it is not the Government who are picking up the pieces if this all goes wrong. I reiterate our support for increased flexibility, but we have to acknowledge that this particular system has built-in risks. Under the new arrangements, a pension pot of £100,000 could be used to secure an annuity of about £6,500 that, added to the state pension, would yield the recipient a little over the UK’s national pension income, according to HMRC’s 2013 figures. Of course, it could be drawn out in one lump sum to buy the proverbial Lamborghini—it would probably have to be a second-hand one because they cost closer to £250,000 than £100,000. But what would happen then? If the recipient in question has not made the necessary contributions to receive the single-tier pension, when it comes in, will their pension be topped up to the accepted minimum level? That is not yet clear. This potentially leaves us in a dubious ethical position as well as a financially precarious one.

Our responsibilities to get this right are clear. It will affect many people, and we have both a social and financial responsibility to make sure that the changes work properly. Given that those changes are so significant, I would have expected extensive consultation by the Government before the announcements were made, but unfortunately that was not the case. As my hon. Friend the Member for Kilmarnock and Loudoun said, despite beginning well, with work on the single-tier pension and auto-enrolment—policies based on evidence, consultation and consensus, which built on the work of the previous Government—these reforms have been rushed and somewhat erratic. The Government did not consult before making the announcements, either with consumers or with the industry. Nor have the Government allowed sufficient time for the changes to be executed.

Despite the enormity of the change and the change of emphasis from the importance of accumulation to the ease of access, we are left in a situation in which outside experts are lamenting the lack of time to get this right. Regarding the need for proper guidance for consumers, the ABI’s director general said:

“The guidance guarantee is a crucial part of the Government’s pension reform, and the industry fully supports the Government’s intention to provide free, impartial guidance to savers on their options as from next April. But time is not on our side. No one should under-estimate the work that needs to be done to make this a reality, which is why the Government have some urgent decisions to make.”

We have to ask why the Government are in such a hurry to push through reforms when some of the essential underpinning to make them work seems to be missing. I have to say I am glad that I will not be in the first tranche of retirees to experience these reforms, unlike the hon. Member for Redcar.

That brings us to the issue of good guidance, or lack thereof. We know that changes of this magnitude will bring a significant number of new products to the market. That is not in itself a bad thing, as some products will be better than others; that is the nature of the marketplace. It is also well recognised that on the whole there is a requirement to ensure that consumers are far better informed—I have already outlined the evidence provided by the Financial Services Consumer Panel. However, in addition to extensive consultation, we would expect the Government to have done significant work on the guidance mechanisms before making the announcement in the Budget, but unfortunately that was not the case. From the start, a significant level of confusion has surrounded what the Government meant when they said that reforms would be accompanied by “advice”. It later transpired that it was not “advice” that would be provided, but rather “guidance”. That is an important distinction, as we have heard, since guidance carries none of the same legal protections as advice, which is regulated and therefore considerably more expensive to provide.

When the Government have been pushed on the matter, I am afraid their language has been far from reassuring, to the extent that the measure looks like a mere add-on to the whole pension reform programme. In my opinion, that suggests a slightly cavalier attitude, which may prove to be short-sighted. The Financial Conduct Authority’s consultation, “Retirement reforms and the Guidance Guarantee”, stated that,

“to be effective the guidance will need to be tailored, providing consumers with sufficient personalised information, so that they can understand their options and make confident, informed decisions about their retirement choices.”

We appear to be getting something far less useful. In evidence to the Work and Pensions Committee in April, the Pensions Minister suggested that guidance will be more general in nature:

“The thing we are talking about is free to the customer. There is no charge for it. It is what we call ‘guidance’, rather than independent financial advice, so it is not formal, detailed or product-specific; you can go and buy that if you want to, but this is familiarising people with the options they have, and some of the concepts, even. Most people do not know what an annuity is.”

There is much that we do not know. We do not know the detail of what will be funded, the level of levy used to pay for it, what the guidance will be expected to cover, or what it is expected to achieve. Even at the end of the debate, we appear to have more questions than answers—questions that go to the heart of issues that will be central to ensuring that the programme works. We will be picking up on those issues of detail, fairness and guidance when the Bill reaches Committee.

--- Later in debate ---

[Priti Patel]

I thank my hon. Friend for acknowledging that work and for his thoughtful contribution. He has many pension providers in his constituency. Those insights have helped to inform the debate and shape the Bill.

The aim of guidance is to empower consumers to make informed and confident decisions on how to use their pension savings in retirement. Information alone is not enough to change consumer behaviour. The Government are committed to maximising awareness of the guidance service. Key to that will be the regulatory requirements on providers and schemes to signpost to guidance at key points when individuals are trying to access their pension pot. In its recent consultation on the changes surrounding new pension flexibilities, the FCA has been clear about requiring genuine signposting, including rules that ensure firms cannot circumvent consumers’ right to guidance. An essential part of the development of the guidance will be determining what engages consumers effectively. The Government are assessing engagement and take-up rates, and testing different engagement strategies informed by behavioural insight teams as part of piloting work beginning this autumn. Again, this is about getting it right. My hon. Friend the Member for Redcar (Ian Swales) made an important point about that. We are getting one bite of the cherry and we need to make sure we get it right.

[Ian Swales]

Can the Minister say a little more about the timing? She said that a consultation is under way; presumably its outcome will affect what the Government do. People who are due to take pensions in April will be considering their options from January and February onwards, so when will we be clearer about the nature of the guidance and the universality of provision, and when will people be told about that?

[Priti Patel]

Let me assure my hon. Friend that guidance will be available in good time. It is also imperative that we get the guidance right, so we are working assiduously to do exactly that.

The scope of the high-level content of the guidance was set out in the FCA consultation that it ran in anticipation of its standard-setting role. The Treasury and its delivery partners, the Pensions Advisory Service and Citizens Advice, are working up the operational details and the context of the guidance while adhering to the FCA standards.

I will come to some of the other points raised by colleagues, but I would like first to touch on the Ipsos MORI poll that has been referred to. The poll also found that 88% of people would not draw down their entire fund. People said that rather than just spend their funds on a range of things, they would use them for good financial planning. That is exactly what these reforms are all about: trusting people with their money.