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Thursday, 28 February, 2002, 15:51 GMT
Labour defeated over annuities
Middle aged couple
Some people can't afford to retire because of poor annuity rates
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By Andrew Verity
BBC's Personal Finance reporter
line

The Government has been defeated for the second time over a rule which forces people to swap all their pension savings for an annuity by the age of 75.


Today's events show the level of support across all parties for reform on annuities

David Curry MP

A bill designed to scrap the rule, which has generated growing resentment among people with private pension savings, passed through its committee stage on Thursday morning.

Labour members of the House of Commons committee in charge of examining the bill unexpectedly voted in favour of it - against the wishes of the government.

It's the second time the government has failed to stop the progress of the bill, sponsored by the Conservative MP David Curry. It also passed its second reading in the House of Commons against government wishes.

Annuities crisis

People who save for private pensions currently benefit from tax relief on their savings, which means their pension savings grow more quickly and are worth more when they come to retire.

Under the "Age 75" rule, they must swap the capital they have built up for an annuity - a vehicle that ensures its holder has an income until they die.

But the incomes produced by annuities have dropped dramatically in the past decade. In 1990, a 65-year old pension saver might swap a fund of 100,000 for an annuity income of 13,000 a year.

Ruth Kelly MP
Ruth Kelly MP opposes the bill

This year, the same fund would produce barely 8,000 a year.

The reasons include increased life expectancy and lower interest rates. Because people are living longer, the same pot of pension money has to be eked out over a greater number of years. So the amount it can pay per year is reduced.

Lower interest rates also mean the same capital in a pension fund cannot generate as large an income as before.

Resentment against poor annuity rates has led to calls for the age 75 rule - devised in 1921 - to be scrapped.

But the Treasury, and specifically the Inland Revenue, has resisted reform. The government reasons that the Treasury - and therefore the taxpayer - should have the opportunity to recoup the tax relief it has given to private pensions while people were saving. That can only be done by taxing those pensions when they are paid out as income.

Second, the purpose of tax relief on pensions is partly to encourage people to look after themselves in retirement so there is no need to pay income support. Forcing people to buy an annuity ensures they have an income which keeps them off benefit.

Call for reform

The Retirement Income Reform Campaign, led by former Labour MP Dr Oonagh McDonald, has delivered a report calling for radical reforms - which are echoed in Mr Curry's bill.

Under their suggestion, people with private pension savings would only have to buy an annuity sufficient to keep them off income support. The rest of their savings could be used however they wish.

Ruth Kelly, the economic secretary to the Treasury, has made clear her opposition to the bill and the government is likely to take steps to prevent it getting through its final stage in the House of Commons, the Report Stage.

But campaigners said they were pleased to have got this far.

Mr Curry said: "The imminent crisis in pensions as the corporate sector withdraws from final salary schemes can only make the problems we have identified in the annuities market more acute as people take up private pensions and as those pensions are caught in the straitjacket of the annuities rule.

"Today's events show the level of support across all parties for reform on annuities."

Ooonagh McDonald said: "Pensions are desperate to see these changes pass, and we are strongly encouraged by backbench support for these reforms. Reforms are long overdue."

See also:

06 Feb 02 | Business
Pensions review launched
11 Jan 02 | UK Politics
MPs back pensions reform
17 Dec 01 | Business
Bid to change annuity rule
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