§ 5.18 p.m.
§ Read a third time.
§ Clause 2 [Guarantee credit]:
§ Baroness Turner of Camden moved Amendment No. 1:
Page 2, line 28, after "cases," insert "which shall not include a patient,"
§ The noble Baroness said: My Lords, in moving the amendment, I shall speak also to Amendment No. 8, which is grouped with it.
§ On Report, the noble Baroness, Lady Greengross-who is unfortunately unable to be present; she is abroad—moved an amendment designed to deal with the problems that arise when old and vulnerable people suffer cuts in their benefits, including state retirement pension, when in hospital for six weeks or more. The amendment was supported by Age Concern, which has also briefed me in the absence of the noble Baroness, Lady Greengross. The wording of the amendment has been altered in an endeavour to meet the objections raised on Report.
§ There is a strong case for re-examining the regulations. They have, after all, been in operation for over 50 years. It is clear that they cause hardship for many old and vulnerable people at a time when they are least able to cope with the bureaucracy that is often involved in establishing whatever rights they may have.
§ Downratings during hospital stays have been part of the social security system since 1948. Successive governments have justified them as necessary to prevent double provision. The argument is that if the state is providing hospital food and accommodation, it need not provide full state benefits as well.
§ That argument fails to take account of the continuing costs incurred by people in hospital. Age Concern points out that after six weeks in hospital, a single person can be left with just £18.15 after paying rent and council tax. They will have ongoing costs that do not disappear because they are in hospital. There will be water rates, TV and telephone rental—although a person aged 75 or over will get a free TV licence—as well as insurance costs, possibly warden charges, some heating and similar costs, plus the personal costs of being in hospital. Couples report that any small saving in food is taken up by travel costs to visit a sick spouse in hospital. There are also costs when patients leave hospital, particularly if they need continuing care.
§ The case was made strongly on Report and I hope that the Minister will be able to say something to assuage the concerns that many of us have about the continuing use of downrating for hospital stays. Age Concern has supplied me with many examples of individuals who have suffered stress and real poverty as a result of the downrating operated after long hospital stays. The cuts in retirement pension cause real resentment—perhaps more than in the case of means-tested benefits such as income support. The 1267 basic state pension is based on contribution records. People ask why it has to be cut when they believe that they have contributed, just as they would have done for a private pension, which would not be cut.
§ I hope that the Minister agrees that the time has come for a fresh look at the arrangements. I beg to move.
§ Lord Higgins
My Lords, I have a great deal of sympathy with the points made by the noble Baroness and by others at earlier stages in our proceedings on the Bill. I do not need to go over the ground that the noble Baroness has set out clearly, but I shall deal with the points raised in my Amendments Nos. 2 and 3.
On Report on 12th February, I pointed out that there were three issues. The first is the principle. It is common ground between the two Front Benches that there is a strong argument against double provision. Secondly, I raised the question of the amount of the deduction. The third point related to the procedures under which overpayments were reclaimed by the Government and the time that it took for benefits to be resumed after someone was discharged from hospital.
Amendment No. 2 would specify on the face of the Bill that there should be no reduction in the savings credit element of the state pension credit for hospital in-patients. I understand that the Minister has already agreed that and I hope that she will accept the amendment.
Amendment No. 3 relates to the updating of the uprating. As we have noted on previous occasions, many of the items that are now part of normal family expenditure did not exist when the orders were originally introduced. I asked the Minister previously what research had been done on the arrangements for uprating the deductions that people in such circumstances suffer. I hope that she will be able to give us some assurances on that and will tell us how the various deduction calculations are currently kept up to date. The aim of the amendment is to ensure that that is done on a regular basis so that people are not unfairly penalised on the basis of out of date data.
The speed of resumption of benefits and the arrangements for getting back overpayments remain matters of concern, but they can probably be pursued outside the ambit of the Bill in the normal course of our parliamentary business. I strongly agree that the issue ought to be reviewed, because it has not adequately been reviewed for a long time.
§ Baroness Barker
My Lords, I begin by making my usual declaration that I work for Age Concern England. This is the first time that I have dealt with a Third Reading from the Front Bench. My understanding is that this is an opportunity for all sides to reflect on the debate so far and to make relevant points.
§ Baroness Barker
Unlike Report stage, my Lords.
1268 Throughout our consideration of the Bill, a number of points have been made that deserve further discussion. As the noble Baroness, Lady Turner, rightly said, the system was set up in 1948 and has never been reviewed, although life is very different these days. The current system takes into account what the Government consider to be savings for the purposes of double provision, but it does not take account of expenses that occur as a result of being in hospital, either for the patient or for their carer.
It has become clear from our debates and the many Written Questions that have been tabled that one of the main problems is the lack of co-ordination between local authorities and the Department for Work and Pensions. That is the real cause of hardship in many cases.
Further to that, it has become evident throughout our debates that information provided to patients and their carers by hospitals and local authorities is thoroughly inadequate. The Minister said that the Department for Work and Pensions provided a great deal of information, but that information is inevitably lessened in its efficacy because the other two parts of the system do not work together.
This is a time of great structural change in health and social care. In the past it has been very clear when a person has left hospital, but those differentiation points will not be so obvious in the future, particularly as intermediate care becomes more of a reality. It will not necessarily be clear whether a person is receiving hospital treatment, because they may not be in a hospital setting.
It is apparent to all that the current system gives rise to great confusion. That in turn not only causes financial hardship, but also has a severe impact on the health of people who are very ill. They would not be in hospital for more than six weeks were they not.
The conclusion of all our debates is that it is high time that the whole system was reviewed. I ask the Minister to take account of that when she responds.
§ Earl Russell
My Lords, I should like to add a footnote to my noble friend's remarks. The Minister's argument has rested throughout on the concept of double provision—that one is getting something extra because of being in hospital, in which a financial benefit is implied. The Department for Work and Pensions and historians both know that there are some people who will do almost anything for money. If the Minister's argument were correct, we would find some people without the benefit provision that we are dealing with who would wish to prolong their stay in hospital for the sake of financial advantage. Is she aware of any such cases?
§ Baroness Hollis of Heigham
My Lords, I have never argued that people would stay in hospital for financial advantage. I have merely said that there is an issue of double provision and the social security system overall has always insisted that a person cannot receive two payments from the same source, even if they are simultaneously a widow and a carer. I was trying to uphold consistency with that.
1269 Amendments Nos. 1, 2, 3 and 8 raise the issue of hospital downrating—a subject that the noble Lord, Lord Higgins, and the noble Baroness, Lady Greengross, raised in Committee and on Report. Today, my noble friend Lady Turner has taken the place of the noble Baroness, Lady Greengross, on the subject. If your Lordships agree, I shall respond to the amendments in this group together.
Your Lordships will recall that, on Report, I undertook to re-examine the hospital downrating issue, which is why we are again discussing it. As I explained in earlier debates, the consequence of these amendments would be double payment: it would mean that a person in hospital whose living expenses are met by the state is put on exactly the same footing as a person living in his own home and meeting all the attendant costs. Most noble Lords have agreed that there should not be double provision of benefits. The Government still believe in that principle.
Although hospital care obviates the need for self-provision of food, laundry and heating, I accept the points made by my noble friend Lady Turner that other costs—from the television licence to council tax—continue. I said that I would re-examine the issue, and I accept that, unlike in 1948, most people including pensioners no longer budget or receive bills on a weekly basis. Instead, most people now expect to pay bills monthly or quarterly or by other methods of payment.
I am therefore pleased to say that, today, my right honourable colleague the Minister of State for Pensions, Mr McCartney, has announced in another place that the Government intend to change the rule by which benefits are downrated at six weeks. That rule will be replaced by downrating of all benefits, and not only for pensioners, after 13 weeks in hospital. Of the 35,000 people who at a point in time are affected by the six-week rule and experience a benefit cut at six weeks, about 26,000 are pensioners and about 9,000 are of working age. In other words, the vast majority of them are pensioners. We expect that 26,000 people previously affected by the six-week rule will Leave hospital by 13 weeks; 20,000 of them will be of pensionable age and 6,000 of working age. We therefore surmise that only 9,000 will continue to be affected by downrating at the 13-week stage, 6,000 of whom will be pensioners and 3,000 of working age. Of the 27,000 people affected by the 52-week rule, 11,000 will be of pension age and 16,000 of working age. The change will ensure that, on average, of the 26,000 pensioners whose benefit is reduced at six weeks, 20,000 will not in future experience that reduction. Most of them will leave hospital within 13 weeks.
We are, however, holding firm to the principle that we should not have double provision. We believe that, after 13 weeks, which is three months, people are beginning to become "longer-stay"—I shall not say long-stay—patients.
We nevertheless accept that the way in which people deal with their bills and financial responsibilities has changed from the days of the weekly ration book. We have listened and responded. Consequently, 20,000 of 1270 the 26,000 pensioners affected by the arrangements will no longer be so affected. I hope that your Lordships agree that the Government have moved very significantly, in a decent, sensible and generous manner, while recognising the principle that there should not be double provision, particularly for those who are longer-stay patients in hospital. I am delighted by the Government's wise and sensible move, and I hope that your Lordships share my pleasure in it.
For completeness I shall deal with the substance of Amendments Nos. 2, 3 and 8. Amendment No. 2, which I think is a probing amendment, provides that no reduction in the savings credit should be made under the provisions of the Social Security (Hospital In-patients) Regulations. Pension credit will not be subject to those regulations. Just as income support and jobseeker's allowance currently have their own provisions relating to hospital downrating, so will pension credit. The amendment would therefore not achieve its desired effect. None the less, I presume that the noble Lord was more concerned with probing the effect of periods in hospital on the savings credit than with precision in the drafting of his amendments. I am happy to give him that assurance.
Amendment No. 3 has a similar defect. I realise that the noble Lord, Lord Higgins, is seeking in this amendment to require that the rate of hospital downrating in pension credit should be reviewed every three years. While Amendment No. I would, in the case of patients, remove the regulatory powers designed to enable the Secretary of State to prescribe a lower amount in place of the standard minimum guarantee that would be payable to the claimant, I do not think that Amendment No. 8 defines the term "patient" in the legislation.
As noble Lords will recall, I have already given assurances that the savings credit will not be subject to hospital downrating. Similarly, as I stated, the arguments put forward have not fallen on deaf ears. I therefore hope that the additional amendments tabled by the noble Lord, Lord Higgins, are now unnecessary. Given that the Government have moved to recognise your Lordships' concerns while still seeking to protect the position on no double provision—which must be secured within social security—I hope that noble Lords will not press their amendments and will join me in being pleased at the Government's response.
§ Lord Higgins
My Lords, before the Minister sits down, I should like to express our appreciation for the change. Although it has been made in another place, it undoubtedly reflects both what has happened in this place and the Minister's influence.
On Amendment No. 3, however, I am not quite clear why we should not have a regular review of the amounts that are deducted and so on. I did not quite understand her reply to the amendment. Such review seems sensible, and without it the position would be consistently out of date.
§ Baroness Hollis of Heigham
My Lords, fairly soon, subject to your Lordships' diaries, we shall be debating 1271 the uprating statement. That is the appropriate time to consider such issues. I do not believe that it is appropriate to address it in this Bill.
§ Baroness Turner of Camden
My Lords, I thank my noble friend for what I believe to be a very substantial advance and I think that all of us who have been concerned about the issue will be absolutely delighted. I thank my noble friend personally because I am sure that she must have had a great deal to do with the change. It is great and I am very pleased. I am sure that Age Concern also will be absolutely delighted. I therefore beg leave to withdraw the amendment.
§ Amendment, by leave, withdrawn.
§ Clause 3 [Savings credit]:
§ [Amendments Nos. 2 and 3 not moved.]
§ Clause 15 [Income and capital]:
§ Baroness Barker moved Amendment No. 4:
Page 9, line 11, at end insert "(but only for claimants who have not attained state pension age)"
§ The noble Baroness said: My Lords, we have returned once again to the earnings issue, as we indicated we would at earlier stages. As noble Lords will be aware, we have consistently experienced difficulty in raising the issue. The Minister has been kind enough to share with us information on both the constraints under which she and the rest of us are working and the fact that the Treasury has yet to rule on the matter. Consequently, the noble Lord, Lord Higgins, and I are shooting in the dark in addressing the issue.
§ The amendment proposes that earnings for people over 65 should be discounted for purposes of the pension credit, and it seeks to make a couple of main points. We have had lengthy discussions on the Bill's detail, and we have also had many happy hours of hearing the Minister outline the cost of our proposals. In previous debates, she told us that Amendment No. 4 would cost between £200 million and £300 million. However, I should like to consider the proposal in terms of the wider policy perspective, which is important.
§ Noble Lords may have read the very good report from the Performance and Innovation Unit, entitled Winning the Generation Game, which focuses primarily on the issue of early retirement by those aged between 55 and 65. However, many of the report's observations on the reasons why people retire or are made redundant early, and why they subsequently cause higher Treasury expenditure in the form of benefits, are equally relevant to those who are above the state pension age. As I have said, we on these Benches subscribe to the policy objective of keeping people working, economically active and involved. That policy has not only fiscal benefits for the Treasury, as people will be tax contributors, but other benefits in terms of health and well-being.
§ So there is a cost which arises from people moving into the labour market, even though they may be older. The press cuttings I received this morning contained1272
§ the wonderful case of Britain's oldest paper round boy. He is 90 and has never had a day off in his life—an example to us all.
§ One other policy issue, as we have discussed previously, is that the rate at which people will be penalised under the pension credit is 40 per cent. I do not want to go back over the arguments in that regard. But people who, in work, have a tax rate of only 22 per cent may well be smart enough to figure out that if, under the pension credit, they would be worse off, it would be better for them to stop working.
§ Underpinning the whole of the Bill is the intention that people should be encouraged to retire having planned for that retirement as best they can. This amendment contains two or three very good policy objectives and it was tabled with that in mind. We shall be interested to hear the response from the noble Baroness. I beg to move.
§ Lord Higgins
My Lords, again I understand the argument put forward by the noble Baroness in favour of matching the micro-economic costs of the concession—if that is what it is—against the macroeconomic advantages of people working longer and the higher growth national product. This is an issue on which the Minister has been sympathetic throughout and it is a question of persuading the Treasury of the case for ensuring that people in part-time work do not suffer as a result of these arrangements.
Amendment No. 6 seeks to make a specific proposal with regard to the extent to which there should be relief, and I hope that the Minister can comment on that. More particularly, I hope that she can announce a further favourable outcome of her deliberations following the one we had on the previous amendment.
I raise one other point, and I apologise for not giving the Minister notice of it. It only came to my attention recently. The Preston case is concerned with access to pension schemes of part-time workers. The House will recall that the European Court of Justice ruled that the exclusion of part-time workers from an occupational scheme could amount to indirect sex discrimination. Is it possible that if we do not incorporate a provision of the kind embodied in the amendment this provision may also be held to be discriminatory to the extent that the number of part-time workers who are female is likely to be significantly higher than those who are male?
I raise the matter at this stage because we do not want to find ourselves going through the same legal process, which has been elaborate and slow in relation to Preston, on this particular aspect.
§ 5.45 p.m.
§ Baroness Hollis of Heigham
My Lords, first, on the Preston point, I shall give the noble Lord, Lord Higgins, my best understanding and, if I am wrong or mislead him, I shall write to him.
My understanding is that we have had the European judgment. What is now proposed is that the case will come back to the employment tribunals and be reconsidered by the chairman of the regional 1273 employment tribunals. I understand that that will take place in June or July. On the basis of that we will have a clearer position of what the law is. That is my understanding of where we are in relation to the Preston case. I cannot help the noble Lord beyond that. We do not yet know what the outcome will be.
Amendment No. 4 proposes a total disregard on earnings of those over state pension age. Amendment No. 6 seeks to introduce a disregard of the earnings of all those en titled to the pension credit equivalent to 16 hours a week at the national minimum wage. We discussed the issue of earnings, and these proposals in particular. at some length on Report. No doubt the noble Lord's purpose is to establish the Government's position on the treatment of earnings.
Amendment No. 4 is still subject to the same flaw I tried gently to point out on Report; that is, that somebody with very high earnings and no other savings would be exempt. The noble Baroness made it clear on Report that she was not seeking to reward those with high earnings, but the amendment does nothing to cap it, though I accept that mostly those with high earnings would have some other form of savings to rule them out.
The noble Baroness quoted, and rightly so, Winning the Generation Game. We all believe it is a good thing for pensioners to work where they want to. The benefits for themselves, society as a whole and the economy are obvious. But I have to come back to the question of cost. The noble Baroness is right. It would cost in the region of £200 million if we accepted Amendment No. 4 and until the state pension age is equalised in 2020 some difficult equal treatment issues arise which I see no way to resolve. We go back to those same issues that we explored in earlier rounds. The cost of Amendment No. 6 would be £350 million. In part the increased costs are because the disregard would apply to all people aged 60 and over.
Perhaps I can spell out our approach on the treatment of earnings. We want to promote active ageing. We believe that working age benefits, particularly the new working tax credit, are the best way to support and encourage those aged 60 to 64 in work or who want to work. That is where the figures escalate.
In relation to pensions credit, those aged between 60 and 64 will have the existing MIG disregards applied to their earnings. Those aged over 65 will continue to have those disregards. We will also abolish the arbitrary remunerative work rule that excludes pensioners who work 16 hours a week or more for MIG. The earnings of those aged over 65, where they are relevant to the guarantee credit calculation, will be rewardable in the savings credit. That has been built into the £2 billion estimate.
Let me expand on that point. It may not have had the full attention of your Lordships' House that it requires. I shall give two examples, and noble Lords will see from the names we chose that we had some fun trying to work out the appropriate examples. The push of what I am going to say is that pension credit will make pensioners who are in work better off than they currently are if they have modest earnings.
1274 The first example is that of a single pensioner working one day a week at a minimum wage earning £35 a week, say, at the local supermarket. He has the full basic state pension of £77 a week. He has no other income except the minimum wage of £35 at the supermarket. After taking into account the £5 earnings disregard, to which he is entitled and which will continue, his relevant earnings are £30. At the moment that £77 plus £30 takes him above the MIG level, so he sees no gains from working. But Harry is entitled to a savings credit. As his earnings would count as qualifying income, his savings credit is £11. In other words, even though we would not be disregarding earnings, they would come into account for qualifying income for pension credit purposes, if it was a modest income, and, as a result in the case I have given, Harry would be better off by £11 a week or £572 a year.
The second example is that of a couple who have a basic retirement pension of £123 and earnings of £65 a week. Alfred is 68, married to Vera who is 65. Vera works as a cleaner for two days a week on the minimum wage earning £65 a week. They receive the full couple rate of retirement pension with no other income. They currently receive a £10 disregard on Vera's earnings but even after the disregard their current earnings take them above MIG reward and they would receive nothing. Under the pensions credit, their savings credit would be a further £9 a week or £468.
I have given two examples. So though I am not able to address what your Lordships would like (a disregard of earnings) because of the cost range—according to which amendment one goes for, either £200 million, or £350 million, one-third of a billion pounds— it is the case that people will continue to have their current disregard. In addition, under pension credit on the examples I have given—I believe that both of them are fairly realistic—one person would be £11 a week better off and the other £9 a week better off.
Therefore, I hope that your Lordships will not underestimate the benefit that comes from pension credit for earnings, even if I am not able to go as far as your Lordships would like. I am afraid that after reflection we have decided that the costs of both the amendments we are discussing are unacceptably high. None the less, the pension credit as designed still produces a useful and valuable extra award to those pensioners who increase their income by going out to work. I hope that in the light of that explanation the noble Baroness will feel able to withdraw her amendment.
§ Earl Russell
My Lords, before the noble Baroness sits down, does she accept that while she is clearly right to take costs into account, one should attempt to take all costs into account? Am I correct in believing that the disregard was originally introduced as an incentive to people to work after retirement and that its withdrawal might have a disincentive effect? The Minister may say that she cannot quantify that, but if she is caught in a taxi and late for a Division would she 1275 admit that the fact that she cannot quantify the cost of getting to the House still means that it will be fairly considerable?
§ Baroness Hollis of Heigham
My Lords, by now I know very well how much it costs to get to the House by various taxis from various points, having been for some time a Member of your Lordships' House. I take that point but I have no evidence to suggest that there is any distorting behavioural effect. People work for all kinds of reasons. What I would say—the noble Earl knows this perfectly well—is that the earnings disregards go back a long way. They are now £20 for a lone parent, £5 for a single person and £10 for a couple. That includes a pensioner couple. There are slightly different disregards for disabled people.
In the past we have increased the disregards for lone parents where we have sought to encourage them into mini-jobs as a step into full-time work. It is clear that that step has behavioural implications and that it does affect and help lone parents to make the decision to try out mini-jobs before going back into the labour market full time. However, we have no evidence, as suggested by the noble Earl, that pensioners are affected by such a step. Obviously, pensioners would prefer to keep more of their income, but when we are talking of sums of a third of a billion pounds being allocated to better-off pensioners, that is a high price to pay for something for which there is no evidential base. I repeat that pension credit usefully improves the position of those who are currently at work. As a result I hope that more pensioners will be encouraged to earn the kind of modest earnings that your Lordships have in mind. I hope that with that additional explanation the noble Baroness will feel able to withdraw the amendment.
§ Baroness Barker
My Lords, I suppose that it was always ambitious to hope for two good results in an afternoon. One of the many things that I have learnt during the passage of the Bill is that when the Minister heads off into a thicket of detail, one generally has an important point. I believe that we have an important point here. Apart from anything else, the common perception among older people and employers is that if they continue to work they will lose out on benefit. As we have said throughout the discussion on the Bill, the complexities into which the Minister has gone in some considerable detail to explain why that is not so are not easily translatable. Therefore, in future years when we consider the reports on the workings of the pension credit, I shall be interested to consider that matter to see whether any behavioural change, as the Minister put it, has occurred.
This is a missed opportunity on the part of the Government to do something constructive in the field of active ageing. I believe that there are economic advantages in keeping older people in work but I understand the reasons why that is not being done at the moment. The matter may turn out to be an academic exercise because if all the news that has emerged in the past two weeks about occupational 1276 pensions turns out to be correct, none of us will be able to retire at all and we shall have to continue working until we drop. We are disappointed by the response and I hope that we can return to the issue in some future debate on pensions policy which I am sure will arise. I beg leave to withdraw the amendment.
§ Amendment, by leave, withdrawn.
§ Lord Higgins moved Amendment No. 5:
Page 9, line 22, at end insert—
"( ) For the purposes of this Act neither a person's income nor his capital shall include any investment in or income arising from—
- (a) any plan which is a scheme of investment covered by the Personal Equity Plan Regulations 1989 (S.I. 1989/469); or
- (b) any plan which is in the form of an account covered by the Individual Savings Account Regulations 1998 (S.I. 1998/1870);
or such other regulations as may be issued in substitution for, or extension to, or amendment of, such regulations."
§ The noble Lord said: My Lords, this amendment is concerned with PEPs and ISAs. We debated the matter at some length on 29th January. The Minister in replying to debates is always extraordinarily plausible and her words emerge in a smooth flow. However, I made the mistake of reading what she actually said and that has given me cause to retable the amendment.
§ I think that we can all start from the proposition that saving is a good thing. That has been reflected in the policies of previous Chancellors and in the present Chancellor's policy on PEPs and ISAs which are specifically designed to encourage saving. It is therefore of some concern that the press suggested at the weekend that at present the sales of ISAs are some 40 per cent lower than a year ago. The Minister put forward the following arguments against the amendment in Committee. She said that,
"we would have to find a way to distinguish the proportion of a person's fund made up of interest and capital growth and how we broke it down between the two".—[Official Report, 29/1/02; col. 142.]
§ As I understand it, PEPs and ISAs are outwith the system which the Minister mentioned. The great advantage of PEPs and ISAs is that one does not have to distinguish between interest and capital growth as the Minister described. She then added that the suggested policy would have "complex incentive effects". However, complex incentive effects are the whole basis of PEPs and ISAs. The Minister then added that the suggested policy,
"in addition to distorting the financial products market, it would also make it extremely difficult for financial advisers to give clear information and advice".
§ Again, the whole basis of PEPs and ISAs is to alter the balance between various financial instruments and to encourage people to take out PEPs and ISAs. Therefore, the argument that was advanced is clearly not relevant. As regards whether it is possible for clear advice to be given in these circumstances, if one describes to one's financial adviser one's personal circumstances, as clearly one should, it is no more 1277 difficult for clear advice to be given in these circumstances than it is for it to be given as regards ISAs or PEPs generally.
§ The Minister then added that if such an amendment were accepted,
"the incentive to save in a pension for those who expected to be eligible for pension credit would be eroded".—[Official Report, 29/1/02: col. 143
§ However, that overlooks the fact that PEPs and 1SAs are effectively an alternative to a pension and, indeed, in many respects constitute a rather better form of pension provision. Therefore, the Minister's argument is not relevant.
§ I examined the arguments that were put against the amendment and found all of them wanting except perhaps that of cost. Although PEPs and ISAs may result in the Exchequer incurring some additional cost, if they lead to an increase in saving the effect of that in macro-economic terms is broadly the same as a reduction in taxation. For all those reasons I considered that it was worthwhile to return to the matter. I believe that it was dealt with too superficially in Committee. I beg to move.
§ 6 p.m.
§ Lord Hodgson of Astley Abbotts
My Lords, I also put my name to the amendment and I want to speak to it briefly. I believe that my noble friend dealt effectively with the arguments raised by the Minister in Committee. It appears that the rationale for ordinary taxpayers having a capital gains and income tax-free sum is very powerful. It has been an extremely successful way of encouraging people to save. Therefore, it is difficult for me to understand why people should suddenly move from being assessed on a capital gains and income tax-free basis to being assessed at the full rate when they cross the magic line at retirement.
As my noble friend said, the Minister has prayed in aid complexity and distortion. But the fact is that, if we do not agree to the amendment, there will be a distorting effect in the sense that on reaching retirement a person should no longer have a PEP and ISA. Hitherto, those have been extremely effective ways of saving. I am not clear why a poor pensioner should be treated relatively worse in tax terms than an affluent pensioner or saver. I believe that my noble friend has made some important points and I look forward to hearing the Minister's response.
§ Baroness Hollis of Heigham
My Lords, I was intrigued to see this matter return. Although I may have been, as the noble Lord kindly put it, plausible, I am sorry that I was clearly not persuasive.
I remind your Lordships that the provisions in Clause 15 abolish the rules that exclude from any help pensioners with £12,000 or more of savings. We are applying a notional rate of return of 10 per cent, which is half the present rate, on any capital sum over the first £6,000 which we shall disregard. That amount will be £10,000 for people in residential care and nursing homes. As 1 have told your Lordships on previous 1278 occasions, that means that 85 per cent of pensioners entitled to pension credit will see any income that they receive from their savings ignored entirely. I have also made the point that we estimate this treatment of savings to be approximately five times more generous than is currently the case.
The fundamental difficulty with the proposed amendment is that the Bill, as drafted, already takes no account of actual income from PEPs and [SAs. It applies a notional tariff of 10 per cent to capital sums over £6,000.The result would be a massive shift into those assets—a point on which I want to enlarge in a moment. Therefore, in the longer run we calculate that the effect on pension saving could give rise to a cost of £1 billion a year. For those who expected to be eligible for pension credit, the incentive to save in an ISA would be far greater than the incentive to save in a pension because the pension would be taken into account and an ISA would be disregarded. People who chose to put all their money into an ISA would receive full pension credit, no matter how much they had saved.
I believe that it is helpful if I give examples of how people would be affected. Therefore, perhaps I may illustrate in three different ways what would happen if a person saved £2,000 a year from the age of 50 to 65. That is not an unreasonable scenario for future pensioners on modest incomes. If that person had put his money into a stakeholder pension, he would benefit from tax relief on the contributions. In this example, the basic rate of tax has been assumed. If a return of 4.5 per cent was achieved over and above inflation and a 1 per cent annual charge was levied on the fund, the final fund after 15 years would be approximately £50,000 in constant prices. Obviously, in a stakeholder pension the return on the pension investment is not taxed. That means that a lump sum of £12,500 could be taken and a weekly pension of about £48 per week could be purchased with the rest of the fund.
By saving in an ISA, the individual could expect to receive a rate of return on savings similar to that in the stakeholder pension example. There is also generally a fund management fee on equity-based ISAs. The main difference with stakeholder schemes is that tax relief is not given on the contributions, although the return is not taxed either. In this case, a final lump sum of approximately £39,000 would be generated.
If a cash ISA were purchased, the return would probably be lower—say, 2 per cent above inflation—but there would be no management fee. That would generate a lump sum of around £35,000. As a result, the ISA would be somewhat less generous than the stakeholder pension. However, it would of course be free to be disposed of as one saw fit. Similarly, after 15 years of saving in a building society, one could expect approximately £32,000.
Given those examples, I do not see how one could fail to skew the market. If a person put his money into a stakeholder pension and if his only other income was the basic state retirement pension, his total weekly income would be £137 and he would not be entitled to pension credit. The same sum of money turned into a 1279 stakeholder pension would take him out of the reach of pension credit. However, if he put that sum of money into an ISA, he would receive £23 credit in order to be brought up to the MIG level of £100. In addition, in a building society he would not be entitled to a guarantee credit but would be entitled to £2.20 in savings credit.
Given those scenarios, what would your Lordships prefer? Of course noble Lords would not enter a stakeholder scheme; they would go into an ISA, which is considerably better even than a building society account for such purposes. In that case, I do not see how one could avoid skewing the market.
Perhaps I may explain the matter in another way. Jessica at number 47 has placed £20,000 in an ISA, which the amendments have ignored. Alice next door at number 49 has placed the same amount in a building society. If all their circumstances were the same, under the amendment Alice would receive £14.20 a week less pension credit than Jessica. If I were Alice, I should transfer my money as quickly as possible to an ISA.
I give another example of Jessica's sister, Sara. Sara has placed £100,000 over 15 years into PEPs and ISAs and then at the age of, say, 65 or 67 inherits a further lump sum of £60,000—perhaps because she has been left a terraced property which she has sold. If over the next five years she puts that money into ISAs, she could have £160,000 in capital—not an implausible scenario—and, if she had no other income, still be entitled under the amendment to maximum pension credit. That credit may well be paid for by a young man of 30 with an income of £7,000, £8,000 or £9,000 a year and no capital at all; none the less he would be a taxpayer.
I ask your Lordships whether we want to see pensioners encouraged to put money into ISAs and PEPs not only in the period leading up to their retirement but subsequently as a shelter in order to maximise their entitlement. Pensioners could put £7,000 into an ISA each year for the rest of their lives every time additional capital came their way. By virtue of the amendment, a pensioner could have £150,000 or even more sheltered while other people with no such capital would have to cross-subsidise that through their taxes.
§ Lord Hodgson of Astley Abbotts
My Lords, of course, it is fair to say that while pensioners might have a capital sum, they could not draw any income from it. As soon as income is drawn from a PEP or ISA, it is taxed.
§ Baroness Hollis of Heigham
My Lords, the point is that they have the capital. It is reasonable for us to expect that when one has created a savings entitlement over the years, one will draw it at the point of need. That is normally when one enters old age. We are not seeking through pension credit to give people the opportunity to pass on assets to their heirs. We are seeking to return to them the benefit of modest savings by imputing a notional income so that they are no longer no better off than if they had never saved and were simply drawing 1280 MIG. That is the purpose: to reward modest savings so that, compared with people who have not saved and would otherwise be drawing down MIG, people find that it is worth saving in a modest pension or annuity or the like. At present, they see no benefit.
If one has a pension of £100 a month, at present one is no better off than if one had no such pension. One might just as well be on income support. In future, one will keep £60 of it. That seems to me to be decent and generous, and it chimes with people's instincts to help themselves. But the amendment seeks to do something totally different.
Effectively the amendment produces a tax shelter which is a pension credit shelter for people who are not only approaching pension age but are beyond it. That could mean—certainly on paper; I do not say that it would happen in a wide number of cases—that people could have a lump sum of £100,000, £150,000 and so on which they could draw down in modest amounts if they wished. But effectively it would become an inheritance device at the expense of younger people—taxpayers and so on—who had no such savings but who were asked to cross-subsidise because the pensioners would still be drawing their maximum pension credit of £23 a week. If the pensioners have no claim on pension credit, it is a matter for them to decide whether they put their money into an ISA and so on. We are talking about those who seek to claim pension credit, but who also are able to protect seriously large sums of money and have that money taken into account when their eligibility for pension credit, which is financed by poorer taxpayers, is taken into account.
I do not know whether the noble Lord considers my reply plausible or persuasive, but I hope that it is the second. In the light of that, I hope that he will withdraw his amendment because it is a device for skewing savings away from pensions into ISAs and for redistributing from poorer taxpayers to people who are better off in terms of the capital assets that they hold. I cannot believe that your Lordships want to support that.
§ Lord Higgins
My Lords, as always, one is lost in admiration for anyone who can explain matters in such a way without reference to notes. As on the previous occasion, I believe that it will be worth reading carefully what the noble Baroness has said. Unless some amendments are passed in the other place, which seems unlikely, we in this House will not have a further opportunity to consider this matter. But it is helpful to have arguments, plausible or not, set out before the matter goes to another place for consideration. In the light of that, I beg leave to withdraw the amendment.
§ Amendment, by leave, withdrawn. [Amendment No. 6 not moved.]
§ Lord Hodgson of Astley Abbotts moved Amendment No. 7:
Page 9, line 24, at end insert ", having regard to the yield to redemption available on long-dated (over fifteen years) United Kingdom government bonds"1281
§ The noble Lord said: My Lords, this amendment takes me to an issue that was debated in Committee, the inter-relationship between deeming, where we have an assumed rate of interest, and the open-ended wording of the Bill as presently drafted. I understand the wish for simplicity and I quite understand the idea that there should be a deemed rate of earnings attributed to savings. I understand that and I see the advantages of it. However, reading the report of the Committee stage I am not sure that the noble Baroness understood what I was driving at.
§ Perhaps I may take the example that is contained in the Government's pension credit paper of someone who has £10,000 of savings. The paper points out that the first £6,000 is at the nil rate and that the balance of £4,000 is at 10 per cent, giving an income of £400 on £10,000 which is 4 per cent. That 4 per cent compares with what the Financial Times today gives as the rate on long-dated UK government bonds over 15 years of between 4.64 per cent and 4.94 per cent.
§ We are at the bottom of the interest rate cycle and we are offering a credit at 1 per cent below the current yield on long-dated government bonds. It may be considered fair to be offering someone with £10,000 that comparatively lower rate of interest, but what of the future? Clause 15(2), to which this amendment applies, gives the Secretary of State completely untrammelled powers about the way in which the yield on income shall be prescribed in the future.
§ On several occasions during the passage of the Bill, the noble Earl, Lord Russell, has warned the House of the dangers and temptations of such untrammelled powers. Therefore, this amendment requires the Secretary of State to have regard to rates of earnings available on the most comparable benchmark savings instruments. In her reply in Committee the Minister said:
"the implication of this amendment would be to halve the assumed rate of interest on capital. Applying such a low return to capital, as the amendment would suggest, would distort incentives to save away from pensions into other forms of capital".—[Official Report, 29/1/02; col. 184.]
§ That just is not true. The amendment asks the Secretary of State to "have regard to". Thus today should we he offering to someone who has saved £10,000 a savings credit 20 per cent below the long-dated gilt rate? It could be argued that that is not only unfair but also a potential disincentive. As for a future Secretary of State, should we not tie his or her hands, albeit lightly, by ensuring that he or she keeps in mind a benchmark by writing it on the face of the Bill and, therefore, has to consider that when he or she comes to set future rates for the savings credit. I beg to move.
§ 6.15 p.m.
§ Lord Higgins
My Lords, I support my noble friend who has set out the arguments clearly. I believe that it is sensible to have a requirement to have regard to 1282 what is happening in the real world, rather than to leave matters totally to the discretion of the Secretary of State.
§ Baroness Hollis of Heigham
My Lords, the noble Lord, Lord Higgins, is coping heroically given the state of his voice. As your Lordships know, Clause 15 deals with our treatment of income and capital. This is a similar issue to that raised in the previous debate.
We believe that Amendment No. 7 will disturb the balance in the personal finance market and skew it in ways that we find unacceptable. The amendment suggests that the assumed rate of return on capital should be set with reference to the yield on long-term UK government bonds. Frankly, it is a reference point that is irrelevant to the pensioners who will receive pension credit.
In Committee we talked about that approach. As I said then, long-term bonds are traded every day so their value alters daily. However, the yield on long-term bonds is approximately 5 per cent and corporate bond funds will give one a gain of about 5 per cent at the moment if they are cautiously invested. Therefore, the implication of the amendment would be to halve the assumed rate of interest on capital.
Applying such a low return to capital. as I said on the previous amendment, would distort incentives to save away from pensions to other forms of capital. particularly for those pensioners who are affluent enough and financially numerate enough to be able to enter the bond market. We have rehearsed this argument several times. We have consulted the FSA and it has pressed the importance of being able to give clear advice on the benefits of investment vehicles. To do that we need to have a rate of return on capital of at least 10 per cent above the £6,000 capital disregard.
It may be helpful if I quote what the FSA said to us in its formal response on this issue:Our over-riding concern is that we need to be in a position whereby we can give to those using decision trees unambiguous information/guidance about the purpose and effect of the Pension Credit from which they are able to work out its relevance to them in deciding whether to buy a stakeholder pension. The less they are able to do that, the more we will have to point out that they should take advice before deciding what to do. Of particular concern is whether an individual would be better-off using a different savings vehicle altogether.With a notional rate of 10%, we judge that we could make a reasonably positive statement in the decision trees to the effect that, for most people, most of the time, they would be better off saving through a stakeholder pension (provided that it was suitable in all other respects)."
The FSA is the body that is best qualified to give advice about the investment market. It seems to me that, having asked for that advice, it is sensible that the Government should take it and use it to inform our policy making, which is what we have done. That is why the Bill as drafted maintains the balance in the personal finance market. The proposed amendment would upset that balance and skew savings away from pensions into that form of investment.
As I said in Committee, the amendment would cost an additional £300 million. The cost assumes that the noble Lord would want to see us retain I he £6.000 1283 capital disregard so as to avoid placing increased intrusion on the vast majority of those entitled to pension credit who have small amounts of capital, a position that Age Concern has pressed on us.
In addition to this substantial extra cost, I wonder whether the main Opposition Front Bench really wants to support an amendment at the cost of £300 million which appears to reward those who are financially able to enter the bond market in this way or to relate their savings in that way. In addition to that cost it would be impractical to link the assumed rate of return on capital to a price that changes every day. Pensioners would be required to report capital levels more frequently, imposing a new administrative burden on the pension service.
As I have said, we investigated the possibility of using the actual interest from capital in the pension credit assessment, but we listened when Age Concern told us that pensioners did not want the trouble of recording actual income from capital and would prefer a notional rate of return instead.
Therefore, I hope that I have persuaded the noble Lord that the Government are not able to move in the direction that he seeks. It would severely and substantially undermine the purpose of this amendment. Alternatively, it would cause us to revisit the commitment we made to Age Concern in terms of the £6,000 figure. I hope that with that explanation the noble Lord—I am sure that he does not think it at all plausible, but I suspect that we shall not have a meeting of minds on the matter—will feel able to withdraw his amendment.
§ Lord Hodgson of Astley Abbotts
My Lords, the Minister has repeated what she said in Committee. I did not find it convincing then. What we are seeking is that when the Minister comes to set the rate at which the pensions saving credit will be set in the future, he or she should have regard to what is available in the real world. At the moment at £10,000 someone is worse off. He will get a lower rate of imputed pension credit than he would if he had a comparable investment in long-dated Government bonds. That seems to me a strange way of incentivising people to save.
However, we have been around this course enough times. I do not think that the Minister has quite understood what I am driving at. Equally, I do not think that we will get any further today. Therefore, I beg leave to withdraw the amendment.
§ Amendment, by leave, withdrawn.
§ Clause 17 [Other interpretation provisions]:
§ [Amendment No. 8 not moved.]
§ Clause 19 [Regulations and orders]:
§ Baroness Hollis of Heigham moved Amendment No. 9:
Page 13, line 30, at end insert "or
( ) section 15(1)(e), (f) or (j), (2), (3), (4) or (6),"
§ The noble Baroness said: My Lords, I return to the House with an amendment that I promised at an earlier stage. Amendment No. 9 adds the powers 1284 provided for within Clause 15 to the list in Clause 19 that will require he affirmative procedure to be followed in both Houses of Parliament in order for the first regulations or orders to be made.
§ I could go on, but perhaps I do not need to. I have met the undertaking that I gave to the House. I hope that your Lordships will be delighted. I beg to move.
§ Lord Higgins
My Lords, we are grateful to the Minister for fulfilling the undertaking which she previously gave. It reflects the constructive attitude which she has displayed from the Government Front Bench throughout our deliberations on this Bill. I am sure that I speak on behalf of all the House in thanking her for the way in which she has dealt with the various amendments. Together with my noble friends on my side of the House who have obviously pursued these matters, we think that the Bill is better than it was when it started; unfortunately, it is not quite as good as it could be.
§ Baroness Barker
My Lords, I briefly interject to thank the Minister and both the noble Lord, Lord Higgins, and the noble Baroness, Lady Noakes, who throughout their amendments and in discussions have fought to make what I still think is a very complex Bill far more comprehensible. I believe that the debates that we have had in this House will stand other people in good stead when they come to interpret and to enact the Bill.
I thank the Minister very much. It must have been very tedious for her at times to give the lengthy explanations that some of us required to get through the Bill. It has been very much appreciated.
§ An amendment (privilege) made.
§ Baroness Hollis of Heigham
My Lords, I beg to move that the Bill do now pass. We, in this House, have now departed from the old convention of making long speeches at this stage of a Bill. However, perhaps I may make a couple of points. First, I should like to thank your Lordships, not just my noble friend Lady Turner, but the noble Lord, Lord Higgins, and the noble Baroness, Lady Barker, as well as our gadfly from the Back-Benches, the noble Lord, Lord Hodgson, for the way that they have pressed their amendments to probe the Government's views, and for the extent to which it has allowed us an opportunity, if not to amend the Bill, at least to expose it to proper scrutiny.
As this is the first House that is scrutinising the Bill, in other words, we are not receiving it from another place, that job of scrutiny is even more important than it would otherwise be. I welcome that. I thank your Lordships for that and as usual for the extraordinarily courteous and good-humoured way in which amendments have been pursued.
1285 There is one thing that I cannot resist saying. I was quite intrigued during the course of some of the amendments, although they were not actually moved to a vote. I am sure that the noble Lord, Lord Higgins, would like to know that so far the bill for his amendments—unless he has had any last minute thoughts—is £2.95 billion. That is leaving aside the £17.5 billion that he would have spent on a 40 per cent take up of all benefits. But I think that that was possibly a mistake. So if we overcome the mistake of the £17.5 billion, he has staked out a position for the Opposition Front Bench of additional expenditure of £2.95 billion. That, give or take a bit, more or less doubles the cost of pension credit, but let not some noughts stand in the way between friends on Front Benches.
That aside, I am very pleased to ask your Lordships' House to accept that the Bill do now pass.
Moved, That the Bill do now pass.—(Baroness Hollis.)
§ Lord Higgins
My Lords, it would be ungracious of me to say that the only arguments I found convincing from the other side have been those of cost, which is why we have not voted for the rather modest amendments which the Minister has just described.
§ On Question, Bill passed, and sent to the Commons.