Questions to the Deputy Prime Minister – Tuesday 14th October
Nigel Mills: What discussions he has with the D2N2 local enterprise partnership on devolving powers and responsibilities from Whitehall.
The Minister of State, Cabinet Office, Greg Clark: During negotiations on the growth deals, I met all local enterprise partnerships, including D2N2. The growth deal in my hon. Friend’s area will mean that £174 million previously held by central Government will be devolved to his area, creating jobs, investing in the skills needed by local employers, improving roads and supporting small businesses. I am determined to build on that deal and will visit the area shortly to discuss what further powers and resources can be devolved.
Nigel Mills: D2N2 has made Nottingham road in Ripley in my seat one of its key sites for growth. The area suffers terribly from traffic congestion. Is funding available to complete a bypass for Ripley and Codnor so that we can relieve that congestion?
The Minister of State, Cabinet Office, Greg Clark: I am familiar with that proposal. It was not put forward as a priority by the local enterprise partnership but, as I have said, I am keen to have a further look at what other schemes will make a big impact locally. My hon. Friend has made a powerful piece of advocacy for it today, and perhaps when I am in the area I will look at it.
Questions to the Secretary of State for Culture Olympics, Media and Sport – Thursday 16th October
Nigel Mills: What assessment he has made of the effectiveness of competition in the mobile network operators’ market.
The Minister of State, Department for Culture, Media and Sport, Edward Vaizey: It is for Ofcom to assess competition in the mobile communications market, and I am pleased to tell my hon. Friend that it has found the UK mobile market to be one of the most open and competitive in the world.
Nigel Mills: I thank the Minister for his answer, but he will know of the recent decisions by the big networks to bring their retailing in-house so that they can keep more of the profits, resulting in the closure of Phones 4u. These decisions risk reducing customer choice and raising prices. Is it not time to ask Ofcom to look at this again before we lose all our retail competitors and end up with a mobile phone market as rigged as the energy market?
The Minister of State, Department for Culture, Media and Sport, Edward Vaizey: It is not appropriate for me to comment on the commercial issues surrounding the decision of the owners of Phones 4u to put the company into receivership, but it is possible to purchase mobile phones not just through the operators’ shops but on the high street and from online outlets; and mobile virtual network operators are also providing a great deal of competition.
Questions to the Secretary of State for Transport – Thursday 23rd October
Nigel Mills: When he looks at the electrification of the midland main line, will the Secretary of State consider extending electrification to the line through Langley Mill and Alfreton in my seat, which has been missed out of the plan? That would improve the services for those stations and the resilience of the line.
The Minister of State for Transport, Patrick McLoughlin: My hon. Friend makes a very good point. I will look at that. However, I stand by what I have said. We have ambitious plans for electrification and it is right that we ensure they are delivered in a practical and timely manner.
Second Reading of the Taxation of Pensions Bill – Wednesday 29th October
Nigel Mills: May I remind the Minister that one reason for bringing forward these freedoms was to try to tackle the mis-selling that already goes on, whereby people are effectively forced by the law to buy annuities, which in many cases are totally unsuitable for them? That has led to real cases of detriment. The mis-selling issues under these freedoms are not new; they have been around for a long time.
Mr David Gauke MP, South West Hertfordshire (Conservative): My hon. Friend makes an important point. I do not think that anyone would be particularly attracted to the argument that the way to address mis-selling was to force people into a narrow range of products that ultimately did not meet their needs.
Nigel Mills: I speak as a member of the Pension Schemes Bill Committee; for me, this has been a week of complicated pension rules.
I welcome the freedoms that the Taxation of Pensions Bill provides. We want people to save for pensions to provide for their own retirements; it has to be right to give them the freedom to use the money they have saved as they want to, without there being penal tax charges that might force their behaviour into certain directions. It is absolutely right for these choices to be added to the whole landscape.
We should bear the context of the current situation in mind. Basically, we force people with relatively small and medium-sized pension pots to take an annuity. The tragic thing is that in many cases those annuities are not suitable—people are mis-sold them, do not understand them and do not shop around or get the best deal for themselves. People cost themselves large amounts of their retirement money because the market simply does not work in a fair manner.
The Work and Pensions Committee and others have been trying to find various ways in which to reform the annuity market, to make it fairer and make it work better for people—to encourage shopping around, to stop mis-selling and to get people to think about whether their life expectancy might be shorter than the average. We need people to think about what will happen if they predecease their spouse. Will the product that they are buying provide for that person?
Of all the solutions brought forward, the Government’s is by far the most radical. It effectively says, “You don’t need to buy an annuity any more if that is not right for you. You can draw down in a much simpler, cheaper way and try to live off and control the savings that you have produced for yourself.” That sounds a fairer approach. If people have chosen to save money for their retirement, they can now choose how and when they spend that, in a flexible way. We should all want that to be available. That is not to say that that would be right for everyone; it might be entirely wrong for many people. There is absolutely no reason why we should take products away, but we need people to make informed choices about what they want in their retirement—how much income they want, how they want to spend it and over how many years. In that way, they will not be locked into a totally unsuitable situation.
There are various nightmare scenarios. One is when someone has run out of money—they have drawn down and spent too much. They never thought they would live past 75, but live until they are 93. They run out of money in their later years and do not have the standard of living that they wanted. We absolutely do not want that to happen. The flip side, of course, is that if someone buys an annuity at 66 and dies at 67 and has no protection, they have burned their whole pension pot for them and their family.
We need to find a way of taking those two extremes out of the situation. We want new products to smooth the situation out. People should be able to say that they want a product that not only guarantees a certain income for life—so they know they can pay the heating and food bills, have the annual holiday and treat the grandchildren—but allows the flexibility to spend money on a cruise or an active lifestyle when they first retire. They might want funding for care costs in their very late life; during the previous years, their income could dip a bit as they would not be so active or have such big bills. How do we get people to understand that they can make those choices? How do we get the products that fit those choices? Those questions are key.
I entirely agree with the comments made so far: getting people to understand the choices—what they need, want to do and can do—at the point of retirement is the secret, but also probably the hardest bit. That is why we need to get the guidance guarantee to work. I have tabled amendments to the Pension Schemes Bill to try to strengthen how that guidance will work. But we need to be careful: it is not when someone is 65 and a half and about to retire at 66 that they need to understand what is going on. Under the rules as they are today, that might be fine—the person saves into a pension scheme, which will assume that funds will move into an annuity when retirement age comes so plans can be made on the basis that the person will need their pot at 66. Funds can start to de-risk when the person gets to 56 on the central assumption that they will want a safe pot when they retire.
Once the changes come in, however, people might not want to do anything with their pots at age 66; they might stay in work until they are 70. They may want to use other savings or defer their pensions for a while. Do they want their pension scheme by default to start de-risking and reducing investment return 15 years before they want to retire? That would be disastrous for the pension pot.
Choices will have to be made about which pension scheme to join, about risk profile and about when de-risking should start. People will have to understand that when they are 40 or perhaps 35, not 65 and a half. There needs to be clear guidance to which people can be signposted. Pension funds need to say to people, “You have important choices to make all the way along the process. Here is what you need to know, here is how you can find it and here is what you should be doing.” If people do not get the message earlier, the guidance for those aged 65 and a half might well be, “Here is what you could have won, but sadly you have not won it because you did not do the right things earlier on.” When the guidance providers come in, they need to provide clear, web-based guidance that people can access at any age, rather than being locked out until they are 65 and a half.
We also need the regulator to think carefully about what pension schemes will do with people who just do not engage. Some people will be enrolled automatically; they do not really understand the system but they do not opt out. They are saving money and get to 55. They are asked whether they want to de-risk, but there is no reply. They get to 65 and are told that they can draw their pensions, but there is still no reply. What should be done with the pension pot in that situation? An annuity will not be bought, so what should the default be? Should there be some kind of drawdown so that the money is left sitting somewhere for a while under some strange investment profile?
In this landscape, we need to think about a lot of things on behalf of those who have choices to make and a pension pot about which it is worth making choices. I suspect that a sizeable number of people will have relatively small pension pots and that taking the cash, tax-free, will remain their best option. Those who have the pension choices but are not so well off that they can afford expensive advice are the ones who will need to understand the options and try to pick the right ones.
I am left thinking that guidance is the right answer and advice is the wrong one. The risk with advice is that it is incredibly expensive; it would cost several hundred pounds at best to give people advice. The last thing we want someone who has been auto-enrolled into a pension pot to do is spend a large percentage of their pension on advice that they really do not need, because they do not have enough money to take advice on. We have to try to keep the cost of the guidance scheme low and make it a way of getting people to their first understanding and thought process about what they could do, rather than trying to put in place a gold-plated system that everyone has to pay for, even though most people would not be taken that far forward. We have the right idea, although we probably have a long journey before people have anywhere near the knowledge and understanding that they need, and that we need them to have.
Mr Andrew Love MP, Edmonton (Labour): We have to keep guaranteed guidance at a reasonable cost, but for that guidance to be effective there has to be personalisation to the individual circumstances of the person involved. All the evidence suggests that. The one balances against the other. The challenge is to find a way to make the guidance both cheap and effective.
Nigel Mills: The hon. Gentleman has to be right. The issue was raised in the Pension Schemes Bill Committee evidence sessions last week, and we will get to it again when we discuss the provisions on guidance. It is hard to work out the line between advice, which might say, “The best thing for you is to do x,” and guidance, which just says, “Here are the options and the various things to think about. Make sure you shop around. Thanks for calling.” Guidance such as that will not help people, who will forget it by the time they put the phone down or walk out of the meeting room.
We need the people getting the guidance to have worked out their financial situation—their pension pots, their debts, their other income, their state pensions and other employer provisions—so that when they go to get their guidance, they can set out their circumstances to the person guiding them, and that guidance can be focused on the sorts of choices they could reasonably make. That is probably about as far as we could get, because once someone says, “You should pay off your debts first”, they are getting into giving advice, and that may not always be right; it risks creating liabilities and people being mis-sold things. This will be an extremely hard balance to strike.
Lady Sylvia Hermon MP, North Down, (Independent): I apologise for having to leave the Chamber briefly to go to the Select Committee on Northern Ireland Affairs; duty called. I entirely agree that this is a radical and fundamental change to pensions entitlement, as regards when people can benefit from and draw down their pensions. Given that it is such a radical and fundamental change, does the hon. Gentleman share my disappointment that the Bill, which runs to 54 pages, I think, and has three clauses and a schedule, is so highly technical that no ordinary person in the street could possibly understand their pension entitlement?
Nigel Mills: It is certainly interesting that the Bill is 57 pages long and has only three clauses, with the rest dropped into a schedule at the back. However, complicated rules are being changed, to take away some penal tax charges, among other things, and I guess it does not matter how the provisions are drafted; whether they are in a schedule or a clause, we get to the same position in the end. One of the problems with pensions is that everything is so fiendishly complicated that almost nobody can understand what all the rules are.
I am concerned about the provision in which the Government seem to be repealing the requirement that people must, before buying an annuity, have had a chance to check the open market situation. Clearly, we are not taking away the chance for people to compare annuity rates, because we are not compelling them to buy an annuity, so that option will still be there. A fall-back is written into the rules that says that before somebody defaults into buying an annuity from their pension provider, they must, under regulations, have had the chance to shop around and to be given advice. That looks like a sensible provision that should perhaps be kept. Repealing it strikes me as being a little too optimistic about how well this market might work in the early years. Moving on to the general principle of the Bill, these changes reopen the debate about how we use the tax system to encourage pensions. There is a huge annual bill for allowing people to put untaxed income into their pension scheme. According to the latest figure I have seen, the net cost is about £22.8 billion in income tax, plus £15 billion in national insurance, so we are talking about £38 billion of taxpayers’ money being used to incentivise pensions saving each year. Okay, some of that money comes back when pensions start to be drawn, but it is still a large amount. The more flexible we make savings arrangements, so that people can choose when they draw down their pension and can do so 10 years before they retire, the weaker we make the justification for saying, “We should do this pre-tax”, because we are distorting the savings market.
I suspect that the only reason most people would choose to save into a defined contribution pension, locking their money away at the whim of some unscrupulous pension provider who charges them for things they do not understand and finally getting their money back 30 years later, is that they get this huge tax advantage. If we are going to start enabling people to have large amounts of that money, tax-free, a long time before they retire, does that change the equation? Perhaps we should be thinking about these things. Is this the right way to distort the pensions market? Should we not equally incentivise people to put money into an individual savings account every year and have a bit more control over it and a bit more visibility? Is that better protection for them?
We desperately want people to save money for their retirement, and we want it locked away so that they cannot spend it each year, and I suspect that using the tax system to achieve that is still very much the right answer. However, we probably need to think again about how much we are spending on higher-rate tax relief on pension contributions in order to make the system more flexible.
Mike Freer MP, Finchley and Golders Green, (Conservative): I am blessed with articulate constituents who understand pensions issues. One of the issues raised with me is that we are allowing people to take out the tax benefit that they have been given for free by the Government. Does my hon. Friend think it is worth looking at putting the tax relief into something like the protected rights pot that used to, or still may, be in place for personal pensions, so that the tax relief element could not be withdrawn, and only the contributions could be withdrawn?
Nigel Mills: That is an interesting idea. I am not sure how we would hypothecate part of a pension pot, and do I really care whether the 25% I am taking out is the tax bit, the bit I paid in, or the bit my employer paid in? If my hon. Friend means that I could not take out the 25% of tax benefits—I could take out only 18% of the pension pot, rather than 25% tax-free in a lump sum—I can see a certain logic to that. In effect, it would just reduce the tax-free lump sum that people can have.
The flipside of rethinking how much tax relief we allow for pension contributions is that it is probably unfair not to give people full tax relief on the way in and then still subject them to higher-rate or top-rate tax when they start drawing their pension. That is an interesting double charge for the Chancellor. If people do not get relief on the higher rate, should they have to pay tax at a higher rate when they draw the pension contribution back out? Frankly, why would somebody who was in that situation pay that amount each year? They would be far better off using the cash—probably to drive up property prices.
At some point after these changes, there will need to be a debate about how we are using the tax system to incentivise pensions. Is that still the right thing to do? Is it worth the cost incurred? Is it encouraging the right behaviours? Is the tax relief really getting more people to save for pensions? Is there evidence of that, and should we continue with it? I suspect that the answer will clearly be yes—we should. However, we are making such radical changes to the pensions landscape that once we have got through this flurry of activity it is worth taking a step back to look at the situation and ask whether we are really in the right place, in terms of how we encourage people to save for their retirement. Are pensions uniquely the best thing for everybody, or could people take up other options that might encourage them to save even more, because they had more control over their funds during their lifetime?
This Bill is absolutely the right thing to do. There are clearly issues to do with making the system work and ensuring that people who need to make choices are not disadvantaged by making the wrong ones. We are moving from a situation where people have, in effect, been forced by the law into choosing something that, sadly, was often wrong for them, towards a situation in which they can choose what they think is right for them. We need them to do that on an informed and fair basis; they must not be ripped off by the next round of mis-selling. I fear that somewhere in these freedoms there is the possibility that that will happen in the next decade, but there are things we can do to try to mitigate that.