My Lords, I would like to move Amendment 21 in the names of my noble friends Lord Bradley and Lord McAvoy and the noble Baroness, Lady Greengross, who apologises for having to leave early. I hope, as this is a modest amendment asking for guidance, that the Government will accept it. I really do. There are huge issues to be untangled.
The Government are proposing that, at 55, people should have full access to their DC—defined contribution —pots, without, I believe, fully considering how this affects entitlement to means-tested, income-related benefits, IRBs, as well as payment for social care. Clearly, if a warehouseman of 56, earning perhaps £20,000 per year and living in private rented accommodation with a DC pot of £25,000, in future extracts £8,000 of it to buy a new car, that £8,000 will count as extra income in that year. Some of it will be taxable and it will affect any income-related benefits he may have, such as housing benefit. Obviously, guidance is absolutely essential, so that people with modest pots understand this. Taking some capital from their DC pot adds to their income—no question. It can both be taxed and affect any benefits.
So far, so simple—sort of. But what if our warehouseman can access the £25,000 in his pension pot but chooses not to do so, so that it sits there as capital? The social security capital rules of people of working age are clear: you are allowed £6,000 of savings without affecting your income-related benefits; from £6,000 to £16,000 your savings are assumed to generate an additional income of £1 for every £250 of capital per week; more than £16,000, you lose entitlement to means-tested benefits altogether. If, therefore, our warehouseman has savings, say, in an ISA worth £25,000, he has to spend down £10,000 of that to become eligible, say, for some housing benefit.
The question then is: what counts as accessible capital or savings such that they affect working-age benefits? Not your home—I will not raise issues of equity release here—nor an inaccessible pension pot; but savings accounts, unit trusts, stocks and shares, and ISAs do count, sensibly, so that one cannot shelter large savings, say of £100,000, while claiming taxpayer-funded benefits. The rules are there for a purpose. If you deliberately deprive yourself of capital—perhaps buying that Lamborghini—in order to claim housing benefit, you are treated as though that capital is still available to you.
However, from April you can access your DC money purchase pot at 55 in exactly the same way as you can access your ISA. Both pensions and ISAs are tax privileged. From 55, the only difference will be that with pensions you get tax relief when putting money in, and with ISAs when taking money out. Growth in either a pension or an ISA pot is tax-privileged in exactly the same way.
We know, however, that £25,000 in an ISA pot debars you from IRBs. What will happen now to a £25,000 pension pot equally accessible at 55? Under the existing rules on social security, having such a pot should stop you claiming IRBs until you have spent it down to below £16,000. Our warehouseman, who after 20 years with the same firm injured his back at 53, gets ESA and housing benefit, but at 55, because he can access his DC pot of £25,000, exactly like ISAs, he should lose his benefit—until, exactly like ISAs, he has spent it down to £15,000, whether or not he actually takes money out of the pot.
However, the Government do not like that; it rather spoils the pensions party. So they seek—irrationally, in my view—to treat pensions and ISAs differently, because, as the letter to me of 22 January from the noble Lord, Lord Bourne, of which other noble Lords have also received copies, states:
“The key difference between the classification of pensions and ISAs rests on the tax treatment. Pensions have never been taxed, and so are effectively deferred income which has yet to be taken. As the primary purpose of pensions is for retirement, this is not assumed to generate an income until pension credit age. ISAs on the other hand are treated as capital rather than income, because they have been saved for out of already-taxed income. Although ISAs and pensions may appear more similar in the light of flexibility, they remain fundamentally distinct”.
But they do not; the argument is patently absurd. The key difference between pensions and ISAs in the past has not been their tax treatment, which is effectively identical if you are a basic rate taxpayer, both in work and in retirement, with the same tax relief on the way in and on the way out. That makes no difference at all, despite the letter from the Minister. The key difference has always been that ISAs are accessible and pensions are not. Because ISAs were accessible, they counted—rightly, in my view—against income-related benefits. Because pensions have not been accessible but were ring-fenced for retirement, they rightly did not count against income-related benefits.
The Minister says that the primary purpose of pensions, and therefore the reason for treating them differently from ISAs between 55 and 65, is that they are for retirement. That is true now, but it will not be after April 2015. That DC pot of £25,000 can be used
at 55 for anything—buying a car, helping a daughter with university fees or helping a son with a mortgage deposit—just like ISAs. The pension pot can be wiped out by 65 even before you hit retirement—just like ISAs. Equally, the pension pot and the ISA pot made by choice both remain untouched until 65—just like ISAs. There is no difference. To argue that they have a different purpose because “pensions are for retirement” is whistling in the wind. DC pensions need no longer be for retirement at all; they are just like ISAs. Much of the research so far suggests that some people will treat them in practice exactly like ISAs and use them for whatever they see fit. For the Government to treat them differently makes a mockery of fair and consistent rules in social security.
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But hold on; it gets worse. My warehouseman is in work at 53 but his back is troubling him badly and, in the next year or two, he fears that he will have to stop work and need to claim employment support allowance and housing benefit. Because he has worked in a firm for 15 or 20 years, he has £25,000 in ISAs and £25,000 in his pension pot. His ISAs, though not his pension pot, stop him getting benefits—ESA and HB—so, as we have seen, he will be incomeless. So he transfers all his ISAs into his pension before he is 55 and thus shelters £50,000 in his pension pot, any pound of which he can access at any time after 55, just like his ISAs in the past. Meanwhile, having sheltered that amount, he gets full income-related benefits if he needs them, as though that pension pot did not exist. He has lost no access and gained full IRBs, such as housing benefit.
Some 17.5 million people have ISAs; some 4.5 million people have DC pots. It is a no-brainer. Shelter your ISAs or any other savings by cycling them into your pension pot, especially if you rent privately and might be glad of some housing benefit because you are on a low income. Up goes the benefit bill. So either pensions are treated, after 55, like ISAs and people lose their income-related benefits, or they are treated differently, in which case the taxpayer may foot a large increase in benefit payments at a cost to us all.
But hold on; it gets still worse. My warehouseman at 56 has so badly damaged his back that he has, alas, become confined to a wheelchair. He is semi-paraplegic and needs social care and support. According to the Care Act 2014, this is currently means tested by the local authority. How will he be assessed for its cost? My noble friend Lord Hunt pressed this earlier, and the noble Baroness, Lady Jolly, replied on 12 January 2015. Her letter may assume that all those needing social care are pensioners, though the Act simply talks about adults and makes no distinction about what age one may seek social care. The letter makes it clear that, under Section 17 of the Care Act 2014, social care benefits will be income related—in other words, means tested.
So, if my warehouseman puts his pension pot into a savings account, under the Act this is taken into account for social care. However, if, after 65, he does not access his pension, the local authority will still treat his pot as generating income as though he has turned it into an annuity and he will pay towards his social care. So if my warehouseman at 55 needs only employment and support allowance, his pension pot
does not count—but, if he is more severely injured and needs social care, under this Act his pension pot must count as income and he has to pay. With a lesser injury, he gets full income-related benefits but, according to the Care Act, with a greater injury, he has to pay income-related social care. Is that fair?
Or does he? Are the Government going to have different rules for paying for social care before and after retirement? At 55 pensions do not count, even though you can access them, but at 65 they do, even though you have not accessed them. The elderly—anyone over 65—needing social care get hit and have to pay for it, whether they have accessed their pension or not. However, those of working age over 55 who could access their pension but have not done so and need social care, do not. This is simply because the untouched pension pot is not taken into account for social care between 55 and 65, but is after 65. So will my warehouseman in a wheelchair have his pension excluded until he is 65 and then suddenly be hit with social care bills thereafter? If the same social care is offered throughout from the age of 55 to 65 and from 65 thereafter, does this not amount to age discrimination and is it not illegal under equalities legislation?
This is a complete mess, and frankly, the Government should be embarrassed. They are tearing up the rulebook on the treatment of capital within DWP by tearing up the rulebook on access to pensions in HMRC. Once the Government have finally got their head clear, when we may have some consistent policy between DWP and HMRC, may we hope that that same luminous clarity will be conveyed in guidance to those millions who may be affected to their detriment and who do not know what to do? That guidance is essential. I beg to move.