Finance Bill

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Mr. David Laws (Yeovil) (LD): We join the hon. Gentleman in welcoming the broad thrust of this part of the Finance Bill, and in particular its attempts to simplify the existing pension tax regimes. The measures are an attempt to simplify and to codify existing Inland Revenue rules.

It is notable that the measures in their existing form have been welcomed by most of the professional bodies that have commented. They see the proposals as a simplification of existing rules and feel that the

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Government have gone out of their way to listen to some of the concerns that were expressed at an earlier stage.

We still have a fairly generous regime on tax relief and pensions in this country, particularly by international standards. As the Financial Secretary suggested, the measures make the existing regime slightly more generous, starting with a cost of £25 million in 2006-07, rising to £165 million by 2008-09.

The first issue that I want to raise at this stage is the £1.5 million lifetime limit. We think that that reflects a sensible balance between the constraints on the Chancellor of the Exchequer in relation to public expenditure and tax reliefs on the one hand, and the need to ensure incentives for people right up the income scale on the other.

Now that the Government have made the adjustments that the Chancellor announced in the Budget, we do not have a problem about the overall magnitude of the £1.5 million limit. We do, perhaps, have a more fundamental concern about the fact that the £1.5 million relates to the total pot of money in pension investments rather than to the amount going in. We are concerned, and perhaps the Government should be as well, about whether, at a time when there is significant asset price inflation, a large number of people moving up into what would be seen as quite penal tax bands in relation to their pensions will cause a problem. There remains an issue about whether we are giving tax relief in relation to pensions in the right way and whether, if there is another surge in the stock market, the Government's chosen mechanism will not create a few problems.

We are frequently teased by Treasury Ministers and by the Prime Minister for having a policy of a 50 per cent. top rate of tax on earnings of more than £100,000 a year. However, as many people have noticed—including noble Lords in another place—the Government are implementing a tax charge of around 55 per cent. in relation to pension fund assets above the £1.5 million cut-off. That is something that we will remind them of in the future.

Our second concern is wider. It relates to the point that the hon. Member for Tatton (Mr. Osborne) made when he said that the Bill is largely about people with the largest pension pots. Much of the discussion that we have had and that we will no doubt continue to have about the measures in the Bill—the £1.5 million cap, the ceiling of £215,000 on annual contributions and so on—will seem completely irrelevant and bizarre to most people in most parts of the country, for whom the idea of having a pension pot of £1.5 million or being able to contribute £215,000 in any one year would be cloud cuckoo land.

I have a great deal of affection for the hon. Member for Arundel and South Downs (Mr. Flight), but in some of his contributions on the Bill so far he has spoken rather in Press Gallery terms, as if the average person in this country was on an income of £100,000 or £200,000 per year. He spoke passionately about country estates and public access to them. In the real

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world, which most of our constituents inhabit, average income and earnings are far lower than we in this place and certainly most of the press assume.

I read with some amusement recently an article that appeared in The Daily Telegraph, which I must confess is not my normal read. I could not get my usual paper that day, so I read The Daily Telegraph. As it was a quiet day, I turned to the ''City Comment'' section. Imagine my surprise when I read an article entitled, ''The Chancellor's munificence seems too good to be true''. It began:

    ''We read it in the Budget Red Book but we didn't quite believe it. Now it's in the Finance Bill, it really does seem that our dear Chancellor has opened up a quite splendid tax loophole for the affluent middle-aged, a group of people for whom he's had little good news for much of the past seven years.''

The article went on to describe how this Chancellor has not only maintained the tax-free lump sum, which a previous Chancellor referred to as a ''much-loved anomaly'', but has extended its influence so that more people can take advantage of it. The article discusses the risk that, in their last year before retirement, people will transfer to their pension funds huge sums that they then will be able to draw down as a tax-exempt sum. Presumably, such people are not average members of the population but those who are on particularly high earnings or who have a large number of assets. Hon. Members may wish to read the article, which also gives details about the prospects for investing pension fund money in second homes and retirement homes.

My concern, which may not be the same as that of the hon. Member for Tatton—we shall explore that in the course of the debate—is that in our debates about pensions and pension tax relief we talk much too much about a tiny proportion of the population. Of course, it is important that the system should be fair for everyone, regardless of how much money they earn. Everyone is entitled to expect the Government to consider their financial interests in a fair and reasonable way, but we spend a great deal of time thinking about the financial interests of and tax relief on pensions for 1 per cent. or 0.5 per cent. of the population. The problem for the vast majority of people is that they do not have incomes that allow them to save easily, and they probably do not understand the existing pension system or tax reliefs because of their complexity, which has got far worse.

Mr. Osborne: I share the hon. Gentleman's concern about those who do not have anything like the sums talked about in some parts of the Bill. Just so we know where we stand, could he explain his party's policy on the basic state pension? Is it still the position of Liberal Democrats to link it to earnings, or have they changed their mind on that?

Mr. Laws: I have exciting news for the hon. Gentleman. I shall be going to a meeting later this morning to discuss the final touches to a paper, to be unveiled at our conference, on that very issue. I shall send him a copy—perhaps even an early copy, before the conference—which he will be able to read in great detail. He will be interested to know that the proposals

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will all be carefully costed and worked through, in contrast with the shadow Chancellor's proposals, the pages of which seem to have been glued together for a couple of years. You may be getting slightly impatient with the detour on which the hon. Member for Tatton has taken us, Sir John. I promise not to go any further down it.

My point is simply that we must give more attention to tax reliefs for the majority of people who have pensions and for those who should be incentivised to contribute to pensions. Perhaps it is unreasonable of us to expect the Government to do that in this exercise, which is largely about simplification and codification of the existing rules. However, I hope that they will return to pensions tax reliefs in future Finance Bills and make proposals that have more relevance to the majority of our constituents, rather than a very small group.

Mr. Howard Flight (Arundel and South Downs) (Con): May I add my welcome to you this morning, Sir John?

I want to make a few points in addition to the main points raised by my hon. Friend the Member for Tatton. First, I am pleased that the retained benefits rule has gone. I had endless stick from my constituents about the rule, which affected people who had been in the armed services or whose career finished at, say, the age of 50, and then took another job and received another pension. They were constrained in what they could enjoy from that pension, and in a world in which more and more people will have two, if not more, careers, that could cause unfairness. It is not explicit in the Bill that the rule will go, so I was pleased to hear the Financial Secretary confirm that it will.

My second point concerns the £1.5 million cap, which is rising to £1.8 million. The sums for those with final salary schemes and those with money purchase schemes are very different, and the Committee will need to look at that in detail because there is scope for unfairness in treatment between the two, depending on annuity rates.

In previous debates on the Bill, I have tried to achieve legislation that is not retrospective and is fair rather than unfair. That principle is right, whatever anyone's means, but when we come to the transitional arrangements, I am mindful that when the Conservative Government introduced the principle of the pension cap in 1989, it grandfathered the situation for those with pension arrangements prior to that and the new cap was not retrospective. As we come to that part of the Bill dealing with transitional arrangements, it is an important principle that that should remain so until people retire if they stay in their pension schemes. It would be an extremely retrospective step if the legislation ended up damaging people's rights.

My hon. Friend the Member for Tatton has already commented on annuities and I look forward to making a contribution when we come to that. One of my primary objectives since arriving in this place has been to get rid of an out-of-date, patronising requirement that has become an increasing cause of concern to people as they approach the age at which that will have an impact on them. We have a lot to deal with, but,

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echoing my hon. Friend, there are some improvements in the new structure and the industry broadly welcomes that.

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