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8.30 pm

Mr. Edward Davey: I beg to move, That the clause be read a Second time.

Mr. Deputy Speaker: With this it will be convenient to discuss the following: Government amendments Nos. 83 and 84.

Amendment No. 145, in schedule 13, page 294, leave out lines 15 and 16.

Amendment No. 146, in page 294, line 18, at end add--


'(3) Subsection (1) shall not prevent the approval of the scheme which contains no requirement to purchase an annuity by a certain age.'.

Government amendments Nos. 85 and 86.

Mr. Davey: This group contains some significant amendments. Government amendments Nos. 83 to 86, which cover pension contributions to pension plans running concurrently, are incredibly important. I believe that the hon. Member for Arundel and South Downs (Mr. Flight) raised the matter in Committee. Amendments Nos. 145 and 146 cover the annuity issue. I do not intend to cover those two important issues. I shall leave them to my hon. Friend the Member for Northavon (Mr. Webb), who is far more eminently qualified than I am to cover them in detail.

I wish to speak to new clause 8, which is more modest. Again, it takes up the issue of unnecessary bureaucracy and the way in which that hits low-income pensioners. It makes a practice that is permitted by the Inland Revenue into a statutory requirement to help pensioners.

In specific detail, new clause 8 deals with the way in which retirement annuity income is administered. At the moment, tax on retirement annuity income is deducted at source at the basic rate, with a non-taxpayer option for gross payment on submission of form R89. That is different from the way in which other sources of pension income are administered for income tax.

I do not know how familiar right hon. and hon. Members are with the amazing number of different ways in which different forms of pensioner income are administered for income tax purposes. I am grateful to the

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low incomes tax reform group of the Chartered Institute of Taxation for the way in which it has set that out in its paper entitled, "Older people on low incomes. The case for a friendlier tax system." It bears reference to because it shows how complex the administration of income tax has become for pensioners, who often rely on a wide variety of often very small income sources.

Some sources of pensioner income are tax exempt: premium bonds, national savings certificates and, for National Savings bank ordinary accounts, the first £70 of interest. There are sources of pensioner income that are taxable, but paid without tax deducted at source. Those include National Savings bank ordinary accounts where the interest is more than £70, investment accounts, income bonds, capital bonds and pensioners bonds. There is a source of pensioner income that is taxable, but paid with tax deducted at source at 20 per cent: first option bonds.

When we go into the wider general investment market, we see another set of tax administrative arrangements related to pensioner incomes. Personal pensions and occupational pensions are taxable and paid with tax deducted by the pay-as-you-earn code number. Retirement annuities--the subject of the new clause--are taxable and paid with tax deducted at the basic rate of tax, with the non-taxpayer options that I have described. The income element of the return from purchased life annuities is taxed in yet another way: tax is paid and deducted at 20 per cent. The non-taxpayer has the option to ensure that the income is paid gross upon submission of yet another form: R89.

Building society and bank interest is taxable. The tax is paid at 20 per cent. at source. The non-taxpayer can apply to have it paid gross, but he has another form to fill in to do that: R85. United Kingdom company dividends are taxable and paid with a repayable credit of 20 per cent. The taxation on many overseas pensions and interest from overseas deposits is administered in yet another way. They are taxable, but received without tax deduction at source, because it is from an overseas source. I have not even begun to mention PEPs, TESSAs and ISAs, which we know are not taxable. We see from that long litany of examples what a complicated tax administrative system faces the ordinary pensioner.

The result of all that is that pensioners often pay too much tax, because they are faced with forms that they do not understand, so they do not apply to have the income and interest paid gross, and with a system that is so complex and such a minefield that they are made anxious by it. That complexity does not serve the Inland Revenue. It increases its administration costs, so the Government do not win by that minefield.

Let us look at different financial products for pensioners, be they ordinary pensions or other types. The administrative arrangements are so different, with some tax taken at source, some not, some taken at different rates and some with non-taxpayer options for payment gross. That complexity reduces transparency in comparing the returns from different financial products. Each marketing of each different product must try to explain the different tax arrangements to pensioners.

There is absolutely no reason for the system that we have. It has just grown. It has been given to us by history. It is time that it was reformed. New clause 8 is a small

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step in reforming that over-complex system. It relates just to the tax on retirement annuity income. It seeks to enshrine in statute law and to make mandatory something that the Inland Revenue already permits. It ensures that retirement annuity income can be paid through the PAYE system, so that the correct amount is taken and so that pensioners who do not owe any income tax on that retirement annuity income do not have to fill in forms. It ensures that they do not have to pay tax that is not due to the Exchequer. It is simple.

I am delighted that the Government were relatively positive when I raised the matter. In response, the Paymaster General said that the Government were


I was grateful for that reply. I hope that those discussions with the industry have taken place, or are soon to take place, and that soon we can get a bit more logic in the system, so that poor pensioners--we are talking about non-income tax paying pensioners; some of the poorest pensioners--do not pay tax when they are not supposed to.

I hope that the Government can make that relatively simple administrative change as a first step to reforming completely that bizarre aspect of the income tax system. If they do, pensioners throughout the country will applaud them.

Mr. Flight: I believe that the debate on this group is one of the more important this evening. It covers several territories related to pension arrangements.

I entirely support new clause 8, which addresses a practical issue. I cannot see why there should be any objections to it. I greatly welcome Government amendments Nos. 83, 84, 85 and 86, which, as kindly acknowledged, broadly address the issue of concurrent membership, which we discussed in Committee. I think that there will be some practical problems in establishing the demarcation level at £30,000. Although that figure will cause some injustices, at least it is a practical solution to the problem. It will be interesting to see how it works out, especially in relation to concurrent membership of final-salary occupational pension schemes and stakeholder schemes--which had previously been deemed not to be practical.

I shall, however, use my time to speak to amendments Nos. 145 and 146. Amendment No. 145 deals with a straightforward issue. I confess that, when first trying to get my brain round schedule 13, I had not taken in the fact that paragraph 9 will remove section 633(2), so that a pension scheme cannot provide insurance covering contributions that have not been made because of a member's illness or temporary redundancy. There will, however, be a grandfather provision for those who already have such arrangements.

I do not think that a case has ever been made why such a provision should not be part of the new tax rules covering stakeholder and other personal pensions. The removal of such a provision seems to be a bad idea. Surely it is thoroughly desirable that people have insurance to ensure that they are able to accumulate an adequate pension. I therefore ask the Minister at the very least to explain the logic behind removing the provision. Amendment No. 145 deletes that change.

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The major chestnut to crack is the issue of ending the obligation to buy an annuity by the age of 75. The Government seem to be burying their head in the sand. The official Opposition's policy on the issue has been clear for the past two years--to abolish the obligation subject to individuals having in place pension arrangements that will deliver a pension ensuring that they will not qualify for the pension guarantee. Therefore, we suggest--as the report commissioned by the Association of Unit Trusts and Investment Funds suggested--that the obligation should be abolished, subject to lesser annuities being taken out, when required, to deliver a pension up to a set level.

Ministers must be aware that millions of people are concerned about the issue, and that we are living in an age in which there is an explosion in demand for money purchase pensions. Additionally, the Government's stakeholder measures will have a major impact in increasing the number of companies that end final-salary schemes and create money purchase schemes.

In many ways, schedule 13 is extremely useful in providing a tax framework that encompasses both group personal pensions and occupational money purchase pensions. Many companies and their consultants have been waiting to see what the final stakeholder arrangements and obligations would be before taking the decision.


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