My Lords, from April the new pension freedoms at 55 may bring joy to many but, in my view, they are destroying the integrity of DWP benefit rules—and no one seems much to care. I find that a bit shocking. Many thousands of rather vulnerable people will not know where they stand or what they do; neither will their CAB or Pensions Advisory Service advisers. Yet time is running out, hence this amendment asking for guidance.
Clearly, and currently, DWP has sensible rules for those of working age needing means-tested benefits. Income, say from a mini-job, counts against your benefits, as do savings, say in a building society or in ISAs, which are above £6,000. They taper out benefit until at £16,000 of savings your entitlement to any means-tested benefit is abolished. DWP rules also stop you claiming benefit if you have deliberately got rid of your savings, perhaps by gifting them to your son. Any capital that is truly inaccessible, however, and which you cannot give away or spend—for example, your home and, until recently, your pension pot—is rightly ignored.
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These sensible rules have been blown apart by the new pension freedoms, which mean that at 55 you will be able to access your pension pot, just like a bank account or an ISA. What then? Given the savings cut-off point of £16,000, having £25,000 in ISAs would stop you getting income-related benefits, so should £25,000 in an equally accessible pension pot also stop you? What is the difference any more between a pension and an ISA, so that pensions are protected from affecting your income-related benefits and ISAs count against them?
Perhaps I may spell out just three issues. The first is income. Let us say that at 56, you have a modest wage of £20,000. You rent privately and get housing benefit as you have minimal savings. You have a small pension pot of £25,000 and, after April, you take £15,000 of that pension pot to pay off debt or buy a new car. Up to 25% of that pot, some £6,000, is obviously tax-free under pension rules but will count as income against your means-tested benefits under DWP rules. Above that £6,000, you will pay income tax as well as lose benefit on the rest of the £15,000. It is essential that anyone on means-tested benefits at 56 knows what the hit will be for accessing their pension pot. It will cost them—and most, I suspect, would not even begin to know how much. They will need a plain English leaflet from CAB offices, welfare rights offices, the local library or charities, for example.
So far, so sort-of simple—but then we come to a more difficult issue, which is that of capital. What happens if, instead of accessing your pension pot to count as income, it simply sits there as capital, fully accessible when you need it but not yet taken, just like an untouched ISA? Up until now, inaccessible pension pots have been ignored—quite sensibly, they do not count against DWP savings rules—whereas other
accessible income and savings such as ISAs do. That is sensible as it stops people having, say, £100,000 in building society accounts or ISAs and still getting means-tested benefits, paid for by the taxpayer. That is right, but now the rules of DWP on capital and the new provisions of the Treasury on pensions collide. It is a real mess.
Pensions and ISAs will from April, at age 55, become interchangeable. Pensions need no longer be for retirement; they have, like ISAs, become a savings pot. Both are similarly tax privileged, both are equally accessible and both—or neither—may be fully spent before retirement. There is no difference any more. Yet apparently ISAs will still count against means-tested benefits, while pension pots, though identical to ISAs, will not. Is this fair? No, because if you can access your savings in whatever form they take, you should be expected to do so rather than add to the taxpayer’s benefit bill. If you treat them differently, though, as the Government have arbitrarily and illogically decided, people can game the system.
Let us say that you are earning £25,000 a year, with £25,000 in ISAs and £25,000 in your pension pot. You have injured your back and need to stop work soon, and would want means-tested benefits—but your £25,000 of ISAs debar you. What do you do? It is a no-brainer: you cycle your ISAs into your pension pot and shelter them. When next year you retire at 56, you will get full means-tested benefits and potentially the same access to your savings that you had when half of them were ISAs. Great for that individual, but for the rest of us it means bigger benefit bills to be footed by the taxpayer—and no doubt youngsters of 20 will be blamed for the increase in the bills.
Worse, spending your ISAs on, say, helping your son with his university fees could count as deliberately depriving yourself of capital. Therefore, to check such cheating, you are treated as though you still possess that money, as you cannot give it away and still get means-tested benefits. So will sheltering your ISAs or indeed any savings in your fully accessible pension pot be regarded as deprivation of capital—in other words, cheating? How can the DWP track that? How can people understand all or any of this?
The third issue, and in many cases the most unfair and unpleasant, is social care. Social care at retirement, as noble Lords will know, is means-tested. At normal retirement age your pension pot, even if you have not touched it, is treated as though it was giving you a notional annuity income. This notional income is included when assessing what you pay for social care. Pension pots are not sheltered; okay, but if you are 55 and have built up a modest pension pot at work and now, alas, have broken your back and need social care, even though your pension pot is fully accessible, as if you were 65, your pension is not taken into account for social care means testing. Get injured at 55 and you pay little or nothing for your social care. Live on—as we hope—a few years longer, and your pension is taken into account and your social care bills soar. How is this fair? I reckon that it is age discrimination. How can we expect people to understand such perverse rules? I see judicial review ahead; this is a shambles.
We raised some of these issues three weeks ago in Committee. We pressed on Report and exchanged several emails, and finally we had a meeting two days ago with the Minister and staff which, although late in the day, we appreciated as it was helpful. However, problems and issues of clarity remain, and the rules are still fundamentally incoherent and inconsistent. In a few weeks’ time people, some of whom are on means-tested benefits but perhaps have a modest pension pot, are going to come into CABs, libraries or charities wanting to know how this affects them, and advisers will need and indeed want to help them do so.
Hence this completely anodyne amendment, whose mild language disguises, frankly, my very real anger at the mess we are in. There is no way that the new pension freedoms can be made consistent with DWP rules in ways that are fair, now that pensions and ISAs are interchangeable. The DWP is having to tear up its rules on capital because HMT has torn up its rules on pensions. So the DWP has simply decided to be arbitrary about it, and the rules become whatever it says they are, with no coherence, consistency or predictability. Policy is being made on the run. This is no way to run a business, let alone a bureaucracy that seeks to be transparent and clear. The DWP is having to pretend that pension rules have not changed, because it is too awkward to handle the consequences. The inconvenient truth is that nobody thought or, I fear, cared a toss about what would happen to DWP clients with a modest pension fund while those with major funds went about toasting themselves with champagne.
We are asking the Minister today for undertakings, and further meetings if necessary, to tease out the remaining issues and to discuss the content of a mass-produced, widely available leaflet for CAB and so on, which explains—it cannot, actually explain, but it could at least try to describe—these conflicting and unfair rules.
This is a mess, and I am deeply dismayed by it. This amendment may be the best we can do for the moment. I beg to move.