Ruth Kelly: Our aim is to provide clear rules showing what payments a pension scheme may make which accord with our purpose of giving tax relief. Those are called authorised payments. We also want to identify clearly which payments do not accord with that purposeunauthorised payments. The rules on unauthorised payments that are made by direct payment ensure that the effect of those clauses continue after the death of the member to which the payments relate. The amendments ensure that similar rules apply to the clauses that deem unauthorised payments to apply to transactions other than direct payment.
As part of the pension rules, we need to make it clear what constitutes a payment. Clause 151 provides that definition and makes it clear that it includes a payment
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of money, and money's worth. The clause also provides that assets held by those connected with members are deemed as being held by that member. The clause is an integral part of the new, clear framework and rules that will guide registered schemes through what they may or may not pay out.
Clause 161 ensures that where rights under registered pension schemes are assigned, the scheme is treated as having made an unauthorised payment at the time of the assignment. Amendments Nos. 317 and 318 clarify that position where it is the member's personal representative who assigns the benefits from a pension scheme. In such circumstances, the amendments ensure that the assignment by the personal representative is treated as being in respect of a member and so will be an unauthorised payment for the purposes of clause 150.
Clause 162 is the second of three clauses that provide for unauthorised payments to arise in specific circumstances. It sets out the specific circumstances in which unauthorised payments are deemed to arise. It deals with cases where the assets of a pension scheme are used to provide a benefit to the member, their family or their household. The new regime will provide a much freer choice for tax-favoured pension schemes over what sort of investment they make. We believe that schemes should as far as possible be left to decide, in light of market developments, their own investment strategy and choice of investment assets. The new simplified regime significantly reduces the current number of restrictions and the investments that can be held by pension schemes.
In the new simplified regime, a registered pension scheme may, if it wishes, invest in an asset that may be used to provide a benefit to a member of the family or household. However, if a benefit is provided in that way, clause 162 deems an unauthorised payment from the scheme to arise, which will attract an income tax charge. The clause provides for the amount of an unauthorised payment of this type to be valued for tax purposes in the same way as amounts under the existing benefit-in-kind tax legislation, which applies when an employee obtains a non-monetary benefit from their employer.
Clause 163 deals with a case where value passes out of the scheme without an actual physical payment being made. One way of doing that is through value-shifting arrangements. There are many ways in which value shifting might occur. To pick a simple one, a scheme might alter the terms of a lease, which increases the value of the member's asset and reduces that of the scheme. Clauses 161 to 163 apply to transactions carried out by registered pension schemes with members of that scheme and with those connected with members.
The amendments are designed to ensure that the clauses continue to apply to transactions undertaken with those connected with members after the death of the member. The new pension regime sets out detailed rules on what payments a registered pension scheme may make to dependants after the death of a member. It provides generous rules to enable members to provide for their dependants in a tax-efficient manner.
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The benefits include tax-free lump sums, to be paid out if the member had not begun to receive benefits, and allow the continuation of tax benefits to be paid if the member had begun to receive them. However, the rules are designed to prevent registered pension schemes from being used purely as a method of passing tax relief funds to dependants, so they do not allow any tax-free payments to be made if the member was over 75 when he or she died.
The amendments are designed to ensure that those who are connected to members do not receive benefits from pension schemes after the death of the member in ways not intended by the pension rules, and they therefore protect the integrity of the rules. They narrow the rules on unauthorised payments made by cash payments and ensure that the rules related to transactions that pass value by means other than direct payment also work after the death of a member. The amendments will not affect the legitimate and generous benefits due to dependants. They are designed to ensure that the rules are not abused by unauthorised payments being made. I commend them to the Committee.
Amendment agreed to.
Amendment made: No. 299, in
clause 151, page 137, line 34, after 'employer' insert
Mr. George Osborne (Tatton) (Con): I beg to move amendment No. 292, in
'(or who was connected with a member at the date of the member's death)'.[Ruth Kelly.]
Clause 151, as amended, ordered to stand part of the Bill.
Meaning of ''loan''
clause 152, page 138, line 16, at end insert 'except in prescribed circumstances'.
The Chairman: With this it will be convenient to discuss amendment No. 270, in
clause 160, page 142, line 29, at end add 'except in prescribed circumstances'.
Mr. Osborne: The amendments deal with the clause that sets out the definition of a loan and the circumstances under which an unauthorised payment is made. They seek to avoid something that we think may occur. Under subsection (4), if a member or employer of a scheme is liable to make payments to the scheme but does not, the debt is considered as a loan. Subsections (4) and (5) raise the possibility that a payment due from either a sponsoring employer or a member to a registered pension scheme that simply is not paid by the time that it falls due will be treated as a loan. Clause 168 would then kick in, making it an unauthorised loan with all the consequences that would follow from that. When we discussed clause 150, the Financial Secretary spelled out some of the various sanctions and surcharges that could be applied.
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Obviously, such powers should be in place, but it does not make sense for them to be applied if the sponsoring employer simply fails by accident to pay amounts dueeven though a person at arm's length would expect them to be paid promptlyand the pension scheme cannot recover the funds by the due date. We need some device, some carve-out, to avoid the unnecessary consequences of what is basically a failure by the sponsoring employer, not by the registered pension scheme. Similar comments apply to amendment No. 270 to clause 160, which deals with scheme administration payments.
Ruth Kelly: Under the new regime, registered pension schemes will be allowed to make certain loans, but other loans will be regarded as unauthorised payments and therefore subject to tax charges. For example, we recognise that pension schemes can provide a valuable source of business finance to sponsoring employers, so registered pension schemes will continue to be allowed to make such loans, but loans to scheme members do not have the same business purpose and so will not be allowed. Clause 152 sets out the rules for determining what is and what is not to be regarded as a loan for the purposes of applying the rules on loans.
First, the clause establishes that the transactions whereby schemes purchase certain financial instruments that are publicly available or that are listed on the stock exchange will be allowed and will not come within the rules on loans. Secondly, the clause brings certain other transactions within the rules on loans. Those are guarantees provided by the pension scheme over loans made by third parties to the member or sponsoring employer and debts owed to the schemes by a member or sponsoring employer where the debt is not paid on the normal date for payment. The clause provides clarity for schemes on the treatment of certain payment and other transactions that they may wish to make.
Subsection (4) prevents members or sponsoring employers deferring the payment of debt to pension schemes on non-commercial terms. It does that by treating debts that are outstanding for long periods as loans that are subject to the restrictions on loans set out in the Bill. The subsection will treat such debt as a loan only if it is not repaid on normal commercial terms and will take into account the circumstances of the debtor. The subsection ensures that the schemes collect debts on normal commercial terms from members and sponsoring employers. It ensures that the funds in those schemes, which have been built up with generous tax reliefs, are protected from non-commercial transactions.
Amendment No. 292 seeks to include a regulation-making power, which would mean that, in certain circumstances, the provisions of subsection (4) would not apply. That might mean that certain debts would be left outstanding for unspecified periods, providing what is, in effect, an interest-free loan for the employer or member concerned. Having that rule in place is an important protection for members. I do not believe
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that a regulation-making power to amend the commercial nature of the subsection would be appropriate. I urge the hon. Gentleman to withdraw the amendment.
Amendment No. 270 proposes a similar change to clause 160. It seeks to provide a power to prescribe circumstances whereby a registered pension scheme may make a loan to a member. Unlike loans to sponsoring employers, there are no commercial reasons why loans should be made to members. Sponsoring employers are closely linked to their pension schemes and there has for many years been provision for commercial loans to be made by pension schemes. We have had no representations from industry to extend the provisions to loans to members, as there is not, generally, the same business relationship. Loans to members involve an unnecessary financial risk for pension schemes. Many schemes are controlled or influenced by members and may make loans that will not be prudent investments.
Together, clauses 152 and 160 provide clarity for schemes on the type of loans that they can make and the treatment of them. I therefore urge the hon. Gentleman to withdraw his amendment and, if he does not do so, I urge the Committee to reject it.