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Pensions Bill

I thank my noble friend for a typically thought-provoking contribution; I also thank all other noble Lords who have spoken in this short debate. I understand the basis on which the amendment has been moved; it is a probing amendment to get reaction to the concept, and I will seek to set out as clearly as I can the Government’s position. As my noble friend explained, the amendment proposes to allow individuals to access their pension savings, as a tax-free lump sum, at any point before they retire in order to encourage more individuals to participate in pension saving. I am sympathetic to my noble friend’s concern that some individuals, particularly the low paid and women, may be reluctant to commit to saving in a pension because their money would be ““locked away”” until their retirement. I was interested in what my noble friend said about less emphasis on smoothing income from women who are in work to retirement, and should like to reflect further on that component of her contribution. However, from a policy perspective and an operational viewpoint, this proposal goes against the underlying principles of reform at a time when it is paramount that we make pensions simpler and clearer. Pension saving in the UK is privileged through the tax system. Tax relief is worth up to £17.5 billion per annum. The Government provide generous tax relief to support pension saving and are able to do so because pensions are less flexible than other saving products. Tax relief in pension saving is not provided to support pre-retirement income, asset accumulation or inheritance. The trade-off for individuals making pension contributions is that from the age of 50—or 55 from 2010—they can get a tax-free cash lump sum of 25 per cent of their pension fund as well as an income in retirement. That is the deal—saving for retirement is a long-term investment. I acknowledge my noble friend’s point that access to the tax-free lump sum does not have to be accompanied by retirement or indeed by a pension at that time, but I suggest that it is the start of the decumulation process. The age has been changed from 50 to 55 because at age 55 it was increasingly difficult, given longevity, to sustain pensions. Given the demographic pressures facing the UK and a tendency by individuals to underestimate their longevity, increasing retirement incomes is very important. It is the central objective of all our reforms. Allowing individuals to withdraw some of their funds prematurely could not only undermine the purpose of providing tax relief for pension saving but reduce individuals’ income in retirement. It may also increase the risk of reliance on means-tested benefits in retirement. In addition to this fundamental objection to the proposal, I am concerned about the practical implications and repeat what others have said. Any pension schemes used under the employer duty would have to absorb the costs of this extra functionality, particularly if access were to be restricted to prescribed circumstances. That might involve costly changes to scheme rules and there would be additional processes around transactions, payback periods, deciding on the reasons for access, verifying those reasons for access, pursuing outstanding funds, and so on. This would lead to greater costs for employers or scheme members depending on how the scheme administration was paid for. This is not just an issue for personal accounts. If you had this facility, you could not just focus it on personal accounts, and how it would work for a defined benefit scheme would be a particular challenge. Of course we recognise that there are times when people need to access funds for emergencies, but to cope with the complexities of life, individuals have the option of saving for the long term in a pension and of putting something away in a shorter-term tax-free savings product, such as an ISA, for rainy days. I accept the comment that it might be a struggle for everyone to save in two different pots, but from 2010 the savings gateway will provide stronger savings incentives. Through a matched contribution the scheme aims to kick-start a saving habit among people on lower incomes, enabling them to plan for the future and cope with financial pressures. The savings gateway will provide a better way to target those who want to access liquid saving, rather than allowing everyone to have early access to their pensions. I remind noble Lords of the changes that have been made to help women in particular achieve a decent income in retirement. There have been transformational changes to the basic state pension, which we passed last year. There have been changes to S2P, and there is the whole concept of auto-enrolment and the scheme that we are discussing in this Bill, focused on people with low to medium earnings—the group, regrettably, within which women are overrepresented—to help them into saving. My noble friend referred to research. We believe that there is little evidence to support the assertion that low-paid individuals are unlikely to commit to pension saving because their money is locked in until retirement. Several sources, including DWP and international evidence, suggest that there is little demand for a facility that allows individuals to access their pension savings before retirement. DWP qualitative research in 2006 found that individuals felt strongly negative about the option of allowing people to access their pension funds for reasons other than their retirement. They felt that it was incongruous with the scheme’s aim of encouraging people to save. I believe that the US experience in the 401(k) accounts is that there was only 18 per cent take-up of the drawback facilities and no strong evidence to suggest an attraction to increased saving through that facility. Finally, we should not forget that from 2012 all individuals will retain the choice as to whether to save in a qualifying scheme or whether a more liquid product might better suit their needs. There is a range of pension and tax-efficient savings products to suit individuals in all circumstances. Trying to address all of life's potential future complexities in one financial product would make schemes administratively burdensome and costly. There are substantial downsides as well. People who get into financial difficulties and have the facility to access scheme funds earlier could put those funds in the hands of creditors whereas they would otherwise be protected through the pension scheme. It is paramount that our pension reforms focus on the key goal of increasing pension savings by providing simple and appropriate products. The amendment would undermine that. As I am sure my noble friend is well aware, it would be impossible to have a qualifying scheme if we adopted this proposal as it stands because you could not have a scheme that was registered under the Finance Act 2004 and that had these provisions. I know that she is aware of that. If we were ever to go down this route, the other place would have to change the tax rules to enable lump sums to be withdrawn from a pension scheme earlier. I am sure that she is aware that there is no great appetite for that. I know that my noble friend will withdraw her amendment, because it is a probing amendment. I have no doubt that she will not see this as the end of the debate and that she will continue to develop and articulate this issue. However, I earnestly say to her that wherever that debate leads, there is no great appetite for this within the industry that we can discern. I have raised it anecdotally with a few people, though other people's experience may be different. But whatever the appetite, I do not believe that this is a matter for this legislation. I do not doubt that my noble friend will continue to develop and campaign around the concept. Nevertheless, I would ask her to withdraw the amendment in the interim.