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Standing Committee A
Tuesday 8 June 2004
[Sir John Butterfill in the Chair]
(except clauses 4, 5, 20, 28, 57 to 77, 86, 111 and 282 to 289, and schedules 1, 3, 11, 12, 21 and 37 to 39)
Overview of Part 4
Question proposed, That the clause stand part of the Bill.
The Financial Secretary to the Treasury (Ruth Kelly): I am delighted to see you in the Chair, Sir John. Not only do I look forward to your expert guidance, but I know how much of an interest you take in this set of clauses. I am sure that, in your wisdom, you will keep us on a safe course.
I will start by introducing the pension simplification provisions. At present, there are eight different sets of rules for pension schemes. The system is complex, expensive to administer and confusing for members, employers and providers. We are sweeping away the existing rules and regulations and replacing them with a single regime for all tax-privileged pension saving. That represents a hugely positive step for those saving or looking to save towards their retirement.
Simplification will introduce greater individual choice and flexibility. For the first time, everyone will have the same opportunity to make tax-relieved pension savings over a lifetime. Our proposals will create a transparent, consistent and flexible system that is readily understood. That will make it easier for people to concentrate on things that matter, such as when and how much to save for their retirement, rather than on trying to understand anomalies between the different tax regimes.
Simplification will reduce the administrative burdens and regulatory cost for pension schemes, their members, operators and sponsors, and will create opportunities for people to save more towards a pension and a retirement lump sum. The new rules will allow everyone to pay what they can afford when they can afford it.
The pension simplification provisions represent the outcome of two formal consultations and extensive informal consultation. At every stage, we have had regard to the views of those who will be affected, whether individuals, employers or pension providers.
The new regime will consist of two key controls: a lifetime allowance and an annual allowance for the amount of tax-relieved savings that can be made. It is important to recognise that the allowances will not prevent people from saving more in registered schemes
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if they wish to. The lifetime allowance will initially be set at £1.5 million and will rise to £1.8 million by 2010. The annual allowance will initially be set at £215,000 and will increase to £255,000 by 2010. Those allowances represent very generous levels of tax-relieved savings. They are far in excess of what 99 per cent. of the population currently save or are ever likely to. However, they limit the amount of tax relief that very high earners can obtain, which is fair.
When someone saves more than the lifetime or annual allowance, they will have to pay a charge. There will be a lifetime allowance charge of 25 per cent. on pension funds in excess of the lifetime allowance. The charge will be 55 per cent. if the benefits are taken as a lump sum. There will be an annual allowance charge of 40 per cent. on funds in excess of the annual allowance. Neither of those charges is intended to be punitive. They are simply intended to remove the benefits of the tax advantage given to savings in registered pension schemes.
The two allowances replace a multitude of controls and restrictions in the existing regime. Currently, there are controls on contributions by members, the rate of funding, the level of benefits that can be paid and the amounts of transfers. Different regimes apply depending on the type of pension and when the member joins the scheme. All those restrictions will go, as will the retained benefits rules and all the other rules that arise from the discretionary approval of schemes by the Board of Inland Revenue.
We are replacing regimes that restrict benefits and contributions quite tightly with a regime that restricts tax relief and nothing else. That is a fundamental change and gives schemes much greater freedom when it comes to how they design pensions.
There is a range of other positive measures, including protection of pre-A-day rights from the lifetime allowance charge, the opportunity for schemes to offer all their members a tax-free lump sum of up to 25 per cent.in most cases, that is far more generous than the current rulesand new flexible retirement rules, which will mean that, for the first time, members of occupational pension schemes will be able to draw retirement benefits while continuing to work for the same employer.
We are also simplifying the administration associated with securing tax privileges for pension funds. There will be new, simpler processes for scheme registration and reporting. The new rules will reduce the regulatory burden on pension administrators and encourage innovation in pension design. The provision for flexible retirement will help to promote active ageing, which will allow the economy to benefit from the skills and experience of older workers, while encouraging them to save more to boost their retirement.
The provisions represent a radical and fundamental simplification of the tax regime on pensions. The responses that we have received to the proposals have been generally positive. I trust the Committee will welcome them with similar enthusiasm.
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Mr. George Osborne (Tatton) (Con): May I say what a pleasure it is to take part in the proceedings? Although I have been a member of the Committee, I have not been a particularly visible member in recent weeks. I have a very good excuse: I have been serving on the Committee considering the Pensions Bill. It is a particular pleasure to be serving under your chairmanship, Sir John, because I know that you are a great expert on pensions. I am delighted that you are in the Chair rather than behind me, because you would intervene on me to point out where I had got things wrong and correct my mistakes.
It is a delight to shadow the Financial Secretary. Under the Leader of the Opposition's new arrangements for shadowing, I seem to have ended up shadowing about five Ministers, but the Financial Secretary is undoubtedly my favourite. We had a very good time on the Child Trust Funds Bill with the hon. Member for Yeovil (Mr. Laws) earlier this year. I thought that she conducted herself with great moderation, was very sensible and listened to my arguments. She even accepted one or two of my amendments, which is all one can hope for in opposition. I am sure that I speak for everyone when I say that there is nowhere we would rather be today than in this Committee.
As the Financial Secretary said, we are dealing with the largest single item in the Bill, the pension simplification process. I shall explain why I call it not a simplification process, but a new tax regime for pensions. We generally support what the Government are doing, and we do not object in principle to the overall package. By and large, we think that they have put together something that the industry welcomes. They have consulted. In a number of key areas, they have changed their mind and listened to the industry. Therefore, we shall be giving the provisions, in their broadest sense, our support.
I do not refer to the process as one of simplification for a couple of reasons. First, it is difficult to describe 151 pages of primary legislation, 100 pages of secondary legislation and 350 pages of guidance notes as simplification. Some people in the industry have been quite critical of that. The National Association of Pension Funds has said:
''The quality of drafting of the Bill is also disappointing. It is not transparent, lacks clarity and is not always consistent, which makes for difficult reading. Considering the scope of the new provisions . . . and the amount of effort schemes would need to go through to implement the new regime, one would have expected that, as a minimum, the rules would be clear, consistent and easy to read.''
Secondly, it is not a question of sweeping away eight different pensions tax regimes and replacing them with just one. The new process will create about six regimes. That is certainly the view of PricewaterhouseCoopers, which says:
''Today's Finance Bill clearly illustrates the complexity of delivering pensions tax simplification. The Bill reveals that the Government's original intention to reduce eight tax regimes to one, has actually resulted in the creation of six separate regimes.''
I know that Committee members will be interested to learn that PricewaterhouseCoopers identifies those regimes as the registered schemes regime, the employer finance retirement benefit schemes, overseas
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recognised schemes, overseas unrecognised schemes, section 615 schemes and corresponding accepted schemes. That is the view of one of the largest accountants in the world.
Although the process will make pension planning easier for many, it will make it massively more complex for those with the largest pensions, which we shall touch on laterquite a lot of the Bill concerns those with very large pension pots. It is not a simplification, but it is new and it is welcome. We welcome the fact that the Government have made several significant changes since the consultation. They have reduced the recovery charge from 33 1/3 per cent. to 25 per cent. There has been a climbdown on the issue of the lifetime allowance. The Chancellor of the Exchequer dug his heels in and said that he would not shift from the figure of £1.4 million for the lifetime allowance. When the National Audit Office showed that he was 100 per cent. wrong in his estimates of how many people would be affected, he climbed down. We welcome the change to a simple valuation of defined benefitsthe 20:1 formulaand the more generous transitional arrangements that we will debate later.
We welcome any measure that supports saving. As we begin the sittings on these provisions, it is important to remember that the measures are being introducedrather like with the Pensions Billagainst a background of a savings crisis. The savings ratio has halved and confidence in pensions has collapsed for a range of reasons. It is interesting to hear what the chairman of Aviva, which operates Norwich Union, the largest life insurer in the country, said last month:
''We will have a generation of elderly people coming soon who will have a hard time to live above the poverty line. No one should be proud or pleased with that scenario.''
He also said that Aviva is seeing faster rates of savings growth in many continental European markets than in the UK because of people's reluctance to save in this country.
Last month, JP Morgan Fleming published a survey that found that 61 per cent. of the top 350 pension funds have closed or restricted availability to defined benefit schemes. We will talk about the balance between defined benefit and defined contribution schemes. The survey found that 60 per cent. of the top 350 funds have a defined contribution scheme. There has been a shift away from occupational pension schemes.
The Government made great play of the Pensions Bill providing security for people with pensions and dealing with the problem of people who lose their pensions. It is worth noting in passing that the Association of Consulting Actuaries survey on that Bill stated:
''Fewer than 1 in 10 firms felt that the measures will improve pensions coverage . . . 9 out of 10 firms say the Bill's measures will either add to costs . . . or make no difference''
to their position. That is the background against which we are examining this change to pensions law.
I will flag up areas of concern, where we will seek to push the Government. The largest area of concern and the greatest disappointment that we and the industry have is that the Government have not used the
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opportunity to scrap once and for all the requirement to buy an annuity at the age of 75that issue is dear to your heart, Sir John, as you introduced a private Member's Bill on it some years ago. The Government have opened the door a bit with the alternatively secured pensionwe shall see how much they have opened it when we debate the measure.
The Treasury has presented the measure as a response to the genuine concerns of religious groups such as the Christian Brethren about the pooling of mortality risk. However, many people to whom I have spoken in the industry think that the measure will drive a coach and horses through the requirement to buy an annuity. They think that a huge number of people will take up the opportunity that the measure presents, as death benefits can be exploited to allow people to pass their pension pot on to future generations.
We welcomed the Government's retreat from the figure of £1.4 million for the lifetime allowance. They could hardly have stuck to it once the National Audit Office showed that they were 100 per cent. wrong in their estimates of the number of people affected. When we commented on the consultation, we questioned the need for an allowance at all, provided that schemes were required to offer the same sort of pension with the same sort of benefits to people at every level of the companyfrom the boardroom to the shop floor. That might have been a way of encouraging the creation of whole company schemes. However, we will not die in a ditch fighting for that proposal in Committee.
I suppose that I will make the point again when we discuss the lifetime allowance but, if we are going to have a lifetime allowance, surely the Bill should include a mechanism for reviewing that allowance, regularly increasing it and linking it to earnings or, perhaps, to prices. At the moment, there is no mechanism for increasing it. Although the explanatory notes tell us what it will be for the first five years post A-day, that information is not in the Bill. We will seek to have it included.
We have some smaller concerns in other areas: for example, the impact of the legislation on occupational schemes with fewer than 50 members and the impact on the future of with-profit annuities. I look forward to explaining those during the next couple of weeks. It is our intention to turn a not bad set of reforms into an excellent set. We look forward to the co-operation of the Financial Secretary in achieving that.