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7 Mar 2003 : Column 1097—continued
Mr. Pound: My hon. Friend makes a point in connection with the number of people who might join the Brethren. From my knowledge of the Brethren, they are not an aggressive, proselytising group—
Mr. Deputy Speaker: Order. That is quite outside the scope of the debate.
Mr. Dismore: In fact, the Plymouth Brethren have proposed a different solution to their problem in their submission to the Work and Pensions Committee. They propose a locked-in cash ISA, which would not be accessible until retirement: payments into the plan would be made out of tax income, but withdrawals would not be subject to tax.
Bearing in mind your previous ruling, Mr. Deputy Speaker, I do not propose to go through the Select Committee evidence in detail. However, if the Bill goes forward, the hon. and learned Gentleman would be well advised—instead of copying slavishly from the previous Bill—to consider the evidence from the Plymouth Brethren. They offer an attractive solution not only to their own problem but to the problems of those with limited means, the people in whom I am interested. At a time of falling stock markets and equities, an alternative to an annuity would provide a useful mechanism for cash investment and would probably have a rather better yield. Similar schemes operate in countries such as America and Australia. The evidence can be found in volume III of the Select Committee minutes.
I now turn to the issue of taxation. In his very short introduction to the Bill, the hon. and learned Gentleman claimed that it was tax neutral. However, he is asking us to buy a pig in a poke. The Bill makes no detailed mention of tax provisions. The proposed new section 637B(5) of the Income and Corporation Taxes Act 1988 says:
- "Any withdrawal from the Fund by the member under subsection (2) shall be regarded as 'income' within section 1 of this Act."
Although the hon. and learned Gentleman may claim that the Bill is tax neutral from the Inland Revenue's point of view, we have no way of knowing that other than in extremely general terms. We have no way of knowing whether it is tax neutral at an individual level. Even more important, we have no way of knowing whether it is revenue neutral across the piece. Although a reform may be tax neutral for the individual concerned, it can have very different consequences for the bigger global picture. That point should be borne in mind in relation to pension tax relief generally.
At present, the tax relief on pensions exceeds the tax on pensions by a huge sum—£13 billion a year. On average, £30 of every £100 paid into people's pensions contributions comes from the Chancellor. More than half the tax relief on pension contributions goes to higher rate taxpayers who make up only 15 per cent. of the contributors. Removing the current annuity
purchase requirement for those aged 75 and permitting the remaining funds to be withdrawn at will or to be passed on to the pension fund member's estate on death—which is what the Bill provides—could encourage the well-off to increase their pension fund contributions substantially, even with the tax charge that the hon. and learned Gentleman has talked about in general terms. However, that charge is not referred to in the Bill and was not mentioned in his remarks today. People currently saving for a private pension use only a fraction of the possible amount of pension scheme tax reliefs available with the potential take-up of another £14 billion of reliefs within the current tax limits.
Lawrie Quinn: I am listening closely to this point. Is not the key question whether there is fiscal neutrality linked to the important issues of consumer behaviour that were clearly identified in the letter that I mentioned? The hon. and learned Gentleman appears to fail to recognise that point in the context of this debate.
Mr. Dismore: My hon. Friend is right. The hon. and learned Gentleman has not thought through the real-life consequences. Although one can create a great superstructure in theory, how people react to it might be very different. Some £5.6 billion of the unused tax relief relates to the high rate taxpayers who are likely to have substantial sums in other forms of savings and investment—big houses, for example. If only a small proportion of those savings were switched into pension schemes, the public cost of the pension scheme tax reliefs could rise by hundreds of millions of pounds each year, with the benefit going only to wealthy pensioners.
That would inevitably raise the question whether we should continue with higher tax relief for pension contributions. The only way in which the circle could be squared would, I suspect, be by abolishing higher rate tax relief. That would create far more problems than the hon. and learned Gentleman's proposals could possibly solve.
Although there could be tax charges many years down the line, when the funds finally revert to the member's estate on death there would be significant cash-flow problems for the Exchequer. Little, if any, of that extra up-front Exchequer cost would benefit the majority of people with modest pension funds who hold only limited amounts in other forms of savings.
Pensions should not become a tax-favoured savings vehicle for non-pension purposes. Tax-privileged pensions savings must be used to provide retirement income for life from no later than 75. For those with personal pension schemes, the most financially efficient way of achieving that is to buy an annuity. That is because annuities pool people's risks and ensure that they continue to receive an income from savings no matter how long they live, even if they have the great longevity of the father of my hon. Friend the Member for Battersea (Martin Linton) and, I hope, my hon. Friend in due course.
The press release issued by the hon. and learned Gentleman also covers what happens on death. It states:
- "On death, the capital sum, rather than going into the pensioner's estate for distribution under his/her will, is returned to the annuity provider."
The hon. and learned Gentleman has come up with little more than a sophisticated inheritance tax avoidance scam. The proposals' underlying aim is to allow access to a fund that is not used in order to secure the minimum pension or to stockpile it for inheritance by heirs. The majority of people have pension funds way below the amount needed to provide the minimum income and would not benefit from the Bill's proposals. It would be elitist in effect, allowing the affluent to build up tax-privileged bequests in addition to providing a retirement income. That is not the purpose for which the pension tax reliefs, which are to become even more generous, are given. Research by the ABI on reasons for delaying the purchase of annuity funds found that only 1 per cent. of those who deferred cited inheritance motivations as a reason for delay. That suggests that the problem of inheritance is not widespread, but confined to a relatively small number of extremely wealthy people.
Having said that, it is an understandable concern that the funds used to buy an annuity could be completely lost on early death. That is addressed in the Inland Revenue's simplification review, which includes the proposal that pensions that start before age 75—the vast majority begin many years earlier—will be value protected. In the case of an annuity, the death of an annuitant before 75 would, subject to a tax charge, return the difference between the original purchase price and the total of annuity payments made before death.
The Government have produced sensible alternative proposals, which is another reason why the Bill is inappropriate. I am sure that you, Mr. Deputy Speaker, have had the opportunity of reading their proposals on simplifying the taxation of pensions in the Treasury document published at the same time as the pensions Green Paper. I am equally sure that the hon. and learned Gentleman has failed to read it because, if he had, either he would have drafted his Bill differently or he would have given it up entirely. When coupled with the Green Paper, the document proposes a series of important changes to the tax regime and future pension provision which will completely change the pensions landscape.
Martin Linton: Does my hon. Friend agree that the time spent on the debate and, indeed, the time that the hon. and learned Gentleman put into the Bill would have been better spent composing a response to the Government's consultation paper, given that we have until 11 April to do so? That is clearly the way forward and would have ensured that our time was better rewarded.
Mr. Dismore: My hon. Friend is entirely right, and many people have made representations. Had the hon. and learned Member for Harborough not been so bull-headed, or so lazy as to pinch somebody else's Bill without even considering all the problems that arose from it, he might have done some homework and come to the same conclusion. As my hon. Friend says, the
Treasury document is still open for consultation, and those who are concerned about annuity provision can still make representations. Both that and the Green Paper, which also deals with the reform of annuities, provide credible, practical alternatives that would benefit all, not just the few very wealthy people who would benefit from the Bill.I do not intend to go into those other documents in great detail, Mr. Deputy Speaker, bearing in mind your earlier constraint, but I will indicate a few things that will happen. The Treasury document proposes radical simplification, which will sweep away the existing complexities of the tax rules and replace them with a straightforward lifetime limit on the amount of pension savings that can benefit from tax relief. It will allow top-ups to adjust for the vagaries of the market that we discussed earlier, and it will provide greater choice and flexibility. For the vast majority of people, the tax rules will cease to be a consideration in their pension planning.
If things go to plan and the proposals find general favour in the consultation, we will not have to wait long for reform. The Government have said that they will change the tax regime in the 2004 Finance Bill. The open-market option to which I referred earlier will become more widely available, enabling people to shop around and purchase a pension that is more advantageous to them. There will be tax simplification, including the lifetime limit of £1.4 million, which should be enough for anybody—except perhaps the hon. and learned Member for Harborough. There will be limited-period annuities and value-protected annuities. Income draw-down, which was referred to earlier, will be reformed.
The one proposal that the hon. and learned Gentleman should have been aware of, because it is the direct alternative to his Bill, is the permission to use income from unsecured funds in certain circumstances. People will no longer have to purchase an annuity when they reach 75, but their pension fund will still have to be used for pension provision. That is the answer to the Bill, as the hon. and learned Gentleman would know if he had bothered to read the Inland Revenue's taxation proposals. I have to assume that he has not read them; otherwise he would not have introduced the Bill.
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