Pension Schemes Bill — House of Lords, 2015-01-27
Topic: Social Welfare
Patricia Hollis (Labour, Centre-left): 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.