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Pensions Bill

I understand that the issue has a long history in your Lordships’ House, certainly longer than I have been here, but just from the debates on last year’s Pensions Act I get a sense of déjà vu, or as the sports commentator said, ““It’s déjà vu all over again””. It falls to me to set out the Government’s position—maybe the Government’s mantra—on this. The purpose of pension saving is to provide individuals with an income in retirement. In order to encourage and assist people in saving for their retirement, generous tax incentives are given to pension savers. In 2007-08 this tax relief was estimated to be worth £17.5 billion. In addition to the tax relief given when a person makes a pension contribution and the tax-efficient environment in which their funds grow, you can take up to 25 per cent of your pension fund as a tax-free lump sum. In return for these generous incentives, the remainder of the pension fund must be, by the age of 75, converted into a secure retirement income for life, thereby achieving the purpose for which it was intended. In defined contribution schemes this secure income is usually in the form of an annuity. Annuities provide the peace of mind of a regular income for life, regardless of how long that may be. They provide simplicity, security and a guaranteed income and are low risk; in other words, they provide a pension. Between the ages of 50—rising to 55 from 2010—and 75, people are able to choose when to convert their funds into an annuity to suit their circumstances. There is a period of 20 years in which people can choose when to annuitise. The Pensions Commission has endorsed this policy. It stated: "““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 pensions savings is turned into regular pension income at some time””." An alternative is available for those who have a principled objection to the way that annuities work by pooling mortality risk. The alternatively secured pension offers a product with similar restrictions to an annuity and achieves broadly the same aim without the mortality pooling aspect. Both these options, as well as the scheme pension, more typically used for defined benefit pension schemes, offer a secure income guaranteed for life. They use the pension fund built up to provide an income in retirement. As the noble Lord, Lord Hunt, explained, his amendments would establish an alternative to annuities, scheme pensions or alternatively secured pensions: the so-called RIF. The intention is that the RIF product would remain invested and would permit withdrawals between an individual’s minimum and maximum level. An annual maximum withdrawal allowance would be set by the provider for each individual member, based on an assessment of their life expectancy. A member’s withdrawals from the fund could not in any year exceed that allowance. An annual minimum withdrawal allowance would also be set by the provider. In setting this the provider would have to ensure the member’s total income was at least equivalent to a minimum retirement income set by the Chancellor of the Exchequer. There appears to be nothing in the noble Lord’s proposal to prevent the minimum allowance being set at zero if the member’s income from other sources was greater than the MRI. In those circumstances it is unclear how the maximum withdrawal allowance would work. As it is impossible to accurately assess an individual’s life expectancy—one of the requirements of the proposal—and there is no express requirement that the RIF be spread over the whole of the individual’s expected lifetime, it would be possible for a provider to set a high maximum withdrawal allowance. The member could then withdraw large lump sums of tax-advantaged pension savings. Alternatively the member might choose not to draw any pension income at all from the RIF, in order to pass the fund on to heirs.