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Finance (No. 2) Bill

I am pleased to respond to the debate, and to have an opportunity to restate the Government’s policy on annuities. However, I shall first answer the point made by the hon. Member for Northavon (Steve Webb). I shall resist all temptation to stray on to the philosophy of Mr. Davidson or the economics of Mr. Pareto. The hon. Gentleman defined a Pareto improvement as something that left no one worse off and a number of people better off, which sounds to me like the definition of a Labour Government. We estimate that the cost of the new clause would be around £100 million. It is certainly not cost free. To implement and pay for it, the Liberal Democrats would have to raise from capital gains tax increases not £12 billion but £12.1 billion. Moreover, we discussed the Conservative idea of abolishing inheritance tax—at a cost of £1 billion—when we considered the previous group of amendments. Adopting new clause 3 would cause that total to rise to £1.1 billion. I therefore counsel hon. Members of both Opposition parties to be cautious about adopting policies that would cost £100 million, given that some of the other commitments that they have made would require substantial tax increases elsewhere. I said that I wanted to restate the Government’s approach to annuities, and to reiterate the response to the recommendations of the Pensions Commission made by my right hon. Friend the Secretary of State for Work and Pensions in his recently published White Paper. In that document, we reiterated our policy of securing an income in retirement, and we rejected the principle underlying this new clause—that people aged 75 should not have to buy an annuity. At the same time, in response to some of the points made by the commission, we undertook to publish later in the year a detailed paper setting out the evidence base for our policy. The Government’s policy on annuities is very clear. Very generous tax reliefs are provided to encourage people to save for their retirement. Contributions may be paid with the benefit of tax relief and investment income and growth may accumulate in a pension fund tax free. In addition, when people come to take their pension benefits, they can take up to 25 per cent. of their total pension pot as a tax-free lump sum. In return for those generous tax incentives on the way in, there are long-standing rules that require a person, by the age of 75 at the latest, to convert the remainder of the pension pot into a secure retirement income for life, or to provide for dependants’ benefits. Over 90 per cent. of people aged 70 have already bought an annuity, so only a very small number of people have to make such decisions when they reach 75. I shall deal later with the Pensions Commission’s recommendations on annuities, but its report endorsed the fundamental principle that a retirement income should be secured by an annuity, in return for tax relief on the way in. It said:"““Since the whole objective of either compelling or encouraging people to save, and of providing tax relief as an incentive is to ensure people make adequate provision, it is reasonable to require that pension saving is turned into regular pension income at some time.””" For the vast majority of people who do not get a pension paid directly from their scheme, an annuity will be the best way to secure an income for their retirement. The most recent evidence suggests that annuities are fairly priced and value for money. People do not know how long they will live after they retire, and tend to underestimate their longevity. Without a requirement to secure an income, there is a danger that they will run down their retirement savings either too fast or too slowly. Insurance companies know, broadly and on average, how long people will live, and offer products that pool the risk. Welfare is therefore improved at the aggregate level.