There was a lot in the Budget that I would like to talk about this afternoon, including on the issue of welfare, but in the short time that I have, I will concentrate on the pensions announcements. The only thing that leaked out about the Budget was that a rabbit would come out of the hat. I suspect that the rabbit was the announcement about the annuities market.
Everybody has said that annuities need to be reformed. I have said that annuities need to be reformed, my Select Committee has said that annuities need to be reformed, Opposition Front Benchers have said that annuities need to be reformed, the shadow pensions Minister has said constantly that annuities need to be reformed and even the Government have said that annuities need to
be reformed. Indeed, the industry itself has said that annuities need to be reformed. The rabbit that came out of the hat was the reform of that important market. However, what the Chancellor said in his Budget went far further than anyone had been calling for or expected—particularly the industry, and also the stock market if its reaction to the announcement is anything to go by.
Why do annuities need reforming? They lack flexibility, and people are often tied in to an inappropriate amount and an inappropriate time and do not shop around. We want a system that is much more flexible, perhaps with an open-market option so that people have different choices available to them when they reach their pension age and the time comes for them to buy an annuity. We must also consider the high costs and charges that have existed, and the fact that people have needed a lot of advice.
As Government Members have emphasised again and again today, we need consumer choice so that people can make the right decision about how they will spend their own money. For some people who still have a high mortgage when they draw down their pension, paying it off might be the most sensible thing to do. Paying off another debt might be the most sensible thing to do. However, the best thing for many people to do is to buy an annuity. Annuities are an excellent principle—someone saves into a pot and then buys something that lasts them to the end of their life. We do not know how long we will live after reaching pension age, so an annuity provides insurance: we know it will not run out before we reach the end of our life. It insures against old age.
All of that is right. However—this is the big but—what if there is no annuity market? What will the many people for whom an annuity is the right choice do then? That is the question that I have for the Government. Did they intend to undermine and destroy the annuity market, or did they hope that a new form of annuity would rise phoenix-like out of the flames of their announcements last week? If the annuity market were to collapse, the choice that they say they want to give consumers will not be there for those for whom an annuity is absolutely the right choice. Do the Government anticipate that the annuity market will be undermined or strengthened?
The Minister of State, Department for Work and Pensions, the hon. Member for Thornbury and Yate (Steve Webb), has talked a lot recently about his “defined-ambition” pensions—his collective defined contribution schemes. Where does the Budget leave his great defined-ambition scheme? Collective schemes for investing money during the investment period might be possible, but I cannot see how the defined-ambition system can pay out on a collective DC scheme given the proposals in the Budget.
I wonder whether the Government have done any cost-benefit analysis of the increased benefits bill for older pensioners. If people go down a different route from annuities and then run out of money before they reach the end of their life, they will become dependent on more than just the basic state pension. I know that the Government have made great play of the fact that the basic state pension will be high enough to lift people out of means-tested benefit, but that is not true of housing benefit or council tax rebates, so there will be a cost. How much work has been done on that?
Annuities have got a bad name because there have been low interest rates and low returns, but other products have the same problem. Some of them might actually give a worse return than annuities. What guarantee can the Government give that people who buy another product will not get a worse return than if they had chosen an annuity? We know that high charges and costs need to be dealt with.
I wonder whether the Government thought about just rebranding annuities because they have such a bad name. Perhaps they could have called an annuity a pension for life, which might have changed people’s attitude. I wonder whether the Government intend to turn the UK private pension system into a saving system, and if they do, will tax reliefs remain? Was that the Government’s intention, or is it an accidental consequence of last week’s proposals?
I was going to say a great deal about the need for independent advice, because I am not sure that the guidance guarantee comes anywhere near what is required. There are a number of such questions, and I hope that the Government can answer them, because if they cannot, people will not perhaps be as keen about the Government changes as they may at first have appeared.
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