Taxation of Pensions Bill

Debate between Sammy Wilson and Cathy Jamieson

Wednesday 29th October 2014 Commons Chamber

[Cathy Jamieson (Kilmarnock and Loudoun) (Lab/Co-op)]

I look forward to an interesting debate on the detail of the Bill, both today and in Committee.

Opening the debate on Second Reading of the Pension Schemes Bill, the Minister for Pensions said:

“we will be very busy over the remaining months…taking the pensions system to a…better place.”—[Official Report, 2 September 2014; Vol. 585, c. 195.]

I agree with the first part of that statement: we will indeed be very busy. As for the second part, the extent to which we can improve the Bill remains to be seen. The efficacy of any Bill should be judged only according to its outcomes, and at this stage there are a number of concerns about the outcomes of this Bill, which are far from certain. There are a number of unanswered questions. My hon. Friends have asked a number of them today, and I am sure that more will arise during the Bill’s passage.

As the Institute for Fiscal Studies said at the time of the Budget, the reforms in the Bill will change the pensions landscape dramatically, in the ways in which people take income in retirement and the pensions industry is structured. As the Minister has explained, from 6 April 2015 those aged 55 and older—I should perhaps declare an interest, as I am a member of that age group—will be granted far more freedom. They will be able to gain access to as much of their pension savings as they wish, as often as they wish.

The Minister for Pensions has described the Opposition’s view of the new freedom as “ambivalent”, but that is something of a misrepresentation. We are not ambivalent about what the Bill purports to achieve. Since the reforms were announced in the Budget statement, our position has been consistent, but, for the avoidance of doubt, I shall restate it. We support increased flexibility and choice for savers, which is why we have long advocated reform of the annuities market to help people shop around to get a better deal. However, it would be remiss of us not to identify and highlight the potential problems and pitfalls that the Bill presents. One of my main concerns, which has already been raised today, relates not just to what it seeks to achieve, but to the speed at which it seeks to achieve it.

[Sammy Wilson (East Antrim) (DUP)]

Does the shadow Minister agree that, given the increasing array of choices now available, one of the most important decisions anyone can make will be how comfortably can they live in retirement? The guidance and help the Government provide on making these difficult choices is very poor.

[Cathy Jamieson]

The hon. Gentleman makes a very important point which I will deal with in some detail. It is one of the most crucial issues not just in respect of the Bill, but of the wider pensions landscape.

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[Cathy Jamieson]

The hon. Lady makes an important point, and I listened carefully to her intervention on the Financial Secretary. As a constituency MP, I am aware of people who have been swindled out of their life savings through unregulated, unscrupulous people giving them bad advice; indeed, the Financial Secretary has heard me talk about this issue when considering other Bills. I am very interested in what the hon. Lady said about such an amendment, which we would want to consider to give as much protection as possible to consumers.

[Sammy Wilson]

A point that the Financial Secretary skirted round when he announced the changes to annuities was that they can now go down, as well as up, as a result of this legislation. Does that not bear out the concern raised by the hon. Member for North Down (Lady Hermon)? If such flexibility is provided for the providers, there is a real danger that people could be sold a pup and find that their income unexpectedly diminishes over time?

[Cathy Jamieson]

That is an important point, and these are exactly the reasons why it might have been useful if more time had been provided for discussion within the industry and with the partners in the process, so that we can get to that better place that I talked about at the outset. It is not just about giving people more choice; it is about giving them the ability to make choices that are wise not only at the moment when they choose to draw down or take part of the lump sum, but that are based on providing for the future.

One of our concerns is that although the reforms may well give greater choice, we have to consider whether that greater choice translates into better value and a better deal for those involved in the process. People making use of the flexibility will of course have new opportunities, but as we have heard, new opportunities potentially bring new risks. Those who purchase the wrong products, invest unwisely or fall victim to unscrupulous practices in the unregulated market will see their money swiftly evaporate. Those who use the new flexibility to take out cash from their pension savings may find that they are paying a higher rate of tax. We can also expect a deluge of new products to flood the market, and while some of them may well be good, by the very nature of things, some may well be less so. That is why it is important that people get good-quality guidance to help them make the right choice.

--- Later in debate ---

[Cathy Jamieson]

I agree with my hon. Friend. That fiasco is a recent memory for many of us, and it is our responsibility to ensure that all the risks, as well as all the upsides, are explored.

I should like to quote the ABI, which has stated:

“Giving customers more choice is welcome but it is also imperative to recognise that good guidance and advice is vital to prevent people making decisions which could lead to retirement poverty and/or to them giving up valuable benefits.”

That is a very important point. People in the industry also recognise that we need to have some caution and ensure that we do the right thing.

That brings me neatly to the fraught issue of the guidance guarantee. The Minister talked a bit about that in responding to interventions, and although I recognise that it is not within the specific ambit of the Bill, it has a great bearing on it. That guarantee is integral to the measures in the Bill, because if the Bill is to be a success, the guidance must be fit for purpose. It is not unfair to say that the continuing concerns and confusion over the guidance guarantee do not give confidence to people who are worried about how they are going to access the guidance. It seems as though the guidance was a secondary consideration. As I have said, the pension reforms were announced without the prior consultation with the industry that we might have expected. Some of the confusion was added to when the Chancellor stated that his reforms would be accompanied by advice, given that we know that what he really meant to say, and what was promised in the Budget, was unregulated guidance.

We then had the unedifying and unhelpful intervention by the Pensions Minister, who appeared to make light of the need for guidance by saying:

“If people…get a Lamborghini, and end up on the state pension, the state is much less concerned about that, and that is their choice.”

That is not helpful at all and has not been during the process. On Second Reading of the Pension Schemes Bill, the hon. Member for Reigate (Crispin Blunt), who is in his place, asked for clarification on how the guidance guarantee would be funded. The Pensions Minister answered by saying that

“the £20 million is not an estimate of the annual recurring cost of providing guidance; it is a one-off seedcorn, getting-the-thing-going fund…if we need to set up websites, produce literature and create infrastructure, the £20 million will enable us to do so.”—[Official Report, 2 September 2014; Vol. 585, c. 198-99.]

That is a bit vague and non-specific. Less than a year from when this Bill comes into force, surely he should know exactly what the guidance will look like.

We now know that the Government propose to deliver the guidance across three platforms, only one of which will be face to-face guidance—that was what was initially promised. We also know that the Money Advice Service will not be involved in the delivery. The three agencies involved will be: the Pensions Advisory Service, which will provide over-the-phone guidance; Citizens Advice, providing face-to-face guidance; and gov.uk, to which this Minister referred. That raises the question of how the Government will ensure that guidance delivered across three different mediums will be of a consistent standard.

The crux of the matter, and what the consumer needs to understand, is: what will the guidance consist of? Will it be an interactive exchange, or will it be a list of questions that must be asked and areas that must be covered? The Financial Conduct Authority appears to think it will be the former, saying it should cover:

“the key facts and consequences of each”—

option—

including financial consequences, e.g. tax implications.”

The Pensions Minister, however, seems to think it will be the latter. He has said that there is a “world of difference” between

“a guidance conversation to get people to base camp”

and a

“sophisticated, individualised, tailored piece of…financial advice recommending products.”

The Pensions Minister has, however, been keen to assure us that the guidance is not being offered on the cheap—his preferred epithet is “budget”. The levy on the pensions industry will not be set at the level required to pay for

“full-blown, regulated, independent, tailored financial advice.”—[Official Report, 2 September 2014; Vol. 585, c. 199.]

Rather, it will be designed to generate only so much as is required to pay for what he terms the “cost-efficient” guidance version. To summarise, the guidance guarantee seems to amount to the following: it will not be regulated, personalised, or product-specific; it will be “cost efficient”, “substantially cheaper” than advice and funded by a “modest” levy on the industry—enough to get people to “base camp.”

That was what was said almost two months ago, but, sadly, judging by the evidence given to the Pension Schemes Bill Committee, things have not progressed much since. So bereft has been the Government’s approach to information gathering and analysis that we still do not know how many people are likely to take advantage of the new flexibilities. In evidence to the Work and Pensions Committee in April, the Pensions Minister was unable to give any firm indication. He said:

“I am not sure there is much point in me guessing. As I say, HMRC assumed that about 30% would take the cash...some of the annuity providers are saying it might be 70%- odd. We do not know.”

We are also reduced to guessing because, despite a freedom of information request from the shadow Pensions Minister, the Government have refused to publish any analysis they have conducted of the behavioural impact of these reforms. We do not know how many people are likely to make use of the new guidance, but a guidance pilot conducted by Legal & General found that only 2.5% of those offered guidance accepted it. The Pensions Advisory Service has estimated that take-up in the first year will be about 25%, so what happens in respect of the 75% who do not take the guidance? What backstop measures, or second line of defence, will be in place for those who do not take up the offer of guidance? In the first year at least, the answer appears that there will be none at all.

Again, the FCA has raised concerns about that, saying,

“we will have the usual supervisory work going on keeping a very close eye on products as they develop. If people choose not to take the guidance, they choose not to take the guidance.”

That means that, potentially, up to 75% of people using the flexibility in the first year will access their pensions and use the money without taking any guidance at all. I do not know whether the Minister finds that concerning, but I do, and I am not the only one. Just Retirement has described the lack of a backstop as

“a massive threat to the pensions freedom reforms.”

The need to install a second line of defence was endorsed by others within the pensions industry, including the ABI, which also expressed doubt about the rigour of the FCA’s consultation on guidance.

The ABI’s head of policy said:

“We have discussed it with our members. We are a little concerned the FCA consultation…was narrowly drawn, which is understandable because it didn’t have much time.”

Why did it not have much time? Is it because the Government are in such a terrific hurry to force these reforms through? We are being left in a situation where the first tranche of people taking advantage of these reforms could be seen to be the guinea pigs in this process, and that is not acceptable.

Let me deal with a point that my colleague raised about the Ipsos MORI research. The extent of the concern has been laid bare by that, because it found that up to 200,000 pension investors could take advantage of the new flexibility in the first year alone. It is estimated that that would generate an additional £1.6 billion of pension income for Treasury coffers, which is why I was asking the Minister what estimate he had made as to what the Treasury would receive. It might be seen as good news for the Treasury, but perhaps not as such great news for savers, because only 38% of these pension investors were able to state accurately how much tax would be deducted from a medium-sized pot and only 6% could accurately predict what rate of tax would be applied to large pension pots.

[Sammy Wilson]

I know that the shadow spokesperson is not as cynical as I would be about some of this, but does she accept that HMRC’s own figures indicate that over the next budget period there will be a £4 billion windfall to the Treasury as a result of these changes? Of course, in the much longer term tax revenues will fall because there will be less income from the tax on annuities.

[Cathy Jamieson]

I would never suggest that the hon. Gentleman is cynical. He raises an important point, which again shows why I was trying to press the Minister on some of that.

I realise that I have taken up a considerable amount of time, and I want to give opportunities for other hon. Members to speak. However, I wish to raise just one other issue as I draw to a conclusion. I have mentioned the areas of uncertainty about the guidance versus advice debate, but I ask the Minister also to comment on the announcement about the abolition of the 55% tax on pensions at death—the so-called “death tax announcement”—made at the conference recently. I think that, at the time, the Minister said that annuities would not benefit from the tax cut. But it was certainly my understanding—the Minister can correct me if I have misunderstood—that the so-called value protected annuities will certainly so benefit, and that is still on the Treasury website. I have written to the Chancellor to ask for information, but I have not yet had a response. Clearly, uncertainty remains over the added potential for tax avoidance, which has been produced by the Bill.

In order to deter avoidance, the Government have introduced money purchase annual allowance rules, which, as the Minister said, places a £10,000 limit on the annual amount that can be saved tax free through money purchase agreements. The intention is to ensure that individuals do not use the new flexibilities to avoid tax on their current earnings. However, the rules still allow for £2,500 a year of salary to be “washed” tax free through salary sacrifice arrangements. I am interested to hear what the Government have done to address that risk and what further action they plan to take to guard against the new flexibilities being used in such a way.