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Session 2003 - 04
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Standing Committee Debates
Finance Bill

Finance Bill

Column Number: 511

Standing Committee A

Tuesday 15 June 2004


[Mr. John McWilliam in the Chair]

Finance Bill
(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)

Schedule 29

Registered pension schemes: authorised lump

Amendment proposed [8 June]: No. 220, in

    schedule 29, page 430, line 41, leave out 'when' and insert

    'on or after the day on which'.—[Mr. George Osborne.]

9.30 am

Question again proposed, That the amendment be made.

The Chairman: I remind the Committee that with this we are discussing the following amendments: No. 225, in

    schedule 29, page 433, line 21, after 'scheme', insert

    'together with interest at a prescribed rate,'.

No. 226, in

    schedule 29, page 434, line 14, leave out paragraph 7 and insert—

    '7. (1) For the purposes of this Part a lump sum is a trivial commutation lump sum if—

    (a) on the nominated date, the value of the member's pension rights does not exceed the commutation limit,

    (b) it is paid when all or part of the amount which is the individual's lifetime allowance in relation to the member is available,

    (c) it extinguishes the member's entitlement to benefits under the pension scheme, and

    (d) it is paid when the member has reached the normal minimum pension age but has not reached the age of 80.

    (2) The nominated date is any day after the member has reached the normal minimum pension age but has not reached the age of 80 nominated by the member or by the scheme administrator (provided the scheme administrator has given the member at least one month's written notice of the intention to nominate a date and the member has not objected in writing before that date).

    (3) The commutation limit is 1 per cent. of the standard lifetime allowance on the nominated date.

    (4) The value of the member's pension rights on the nominated date is the aggregate of—

    (a) the value of the member's relevant crystallised pension rights on that date (calculated in accordance with paragraph 8), and

    (b) the value of the member's uncrystallised rights on that date (calculated in accordance with paragraph 9).'.

The Financial Secretary to the Treasury (Ruth Kelly): I thank the hon. Member for Tatton (Mr. Osborne) for his exposition of this group of amendments, which is intended to make changes to the lump sum rules in the schedule. Amendment No. 220 involves a minor change to the pension commencement lump sum rules. Pension commencement lump sums may be paid once the

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member has reached minimum pension age, or retires on the ground of ill health. The lump sum rules state that a lump sum is a pension commencement lump sum if

    ''it is paid when the member has reached normal minimum pension age''.

The amendment would change ''when'' to ''on or after''.

I am going to have to disappoint the hon. Gentleman. I am advised that it is absolutely clear from the pension rules that the term

    ''when the member has reached normal minimum pension age''

will permit the payment of a lump sum once the member has reached minimum pension age and, as provided in the lump sum rules, up until they reach age 75. So, the amendment is unnecessary.

Amendment No. 225 would extend the definition of an authorised short service refund lump sum to include in the amount refunded to the member not only a return of the member's contributions, but an element of interest on the contributions. A short service refund lump sum, which is taxable on the scheme administrator, is an authorised payment and including an element of interest in the lump sum refund would make the interest an authorised payment, too. We do not accept that amendment No. 225 is necessary.

A short service refund lump sum will arise when a member of an occupational pension scheme receives a refund of his or her pension contributions following a short period of pensionable employment that does not bring a right to pension benefits under pensions law. There is a similar provision in the current regime. It allows for interest to be added to the refund of contributions, but the amount of interest that may be paid is subject to Inland Revenue discretion. Therefore, when a refund of contributions is made that includes interest, both the refund of the contribution and the interest are taxable in the hands of the scheme administrator, who is allowed to make a payment to the member net of the tax already paid.

In the new simplified regime, we are codifying the rules on which payments are authorised, so that it is clear what payments can and cannot be made. We accept that a scheme should be able to pay genuine interest at a commercial rate on the refunds. In the new regime, if a scheme makes such a payment, that will be classed as a ''scheme administrator member payment''. Such interest would be taxable on the member at the marginal rate under the normal rules applicable to the payment of interest. Any excess over a commercial amount of interest would be charged as an unauthorised payment.

Therefore, the Bill already achieves the effect that amendment No. 225 is intended to achieve in that schemes can include an element of commercial interest in any refund of contributions to the member on account of short service. I do not, therefore, accept that amendment No. 225 is necessary.

Before turning to the final amendment, amendment No. 226, I will explain a little of the background to the changes to the trivial commutation rules. The current

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regime provides for two sets of trivial commutation rules. Occupational schemes may permit commutation of all benefits in respect of the employment, where they do not exceed the value of a pension of £260 per annum. For personal pensions, all the member's benefits in personal pension schemes must be brought together before they can be commuted. Then, if the arrangements do not include protected rights, they can be commuted where the member's fund does not exceed £2,500.

In the new regime, we propose a single set of rules. The new rules provide that, where the member's total benefit rights do not exceed 1 per cent. of the lifetime allowance, the member may commute all the benefits within one 12-month period between the age of 60 and 75.

Undoubtedly, this is a very tricky issue and the trivial commutation rules provided are based on extensive discussions with the industry. The proposals in the Bill differ from those in the second consultation document, which provided for commutation on a scheme-by-scheme basis rather than on a member basis. That did not receive a favourable response from the pensions industry, which suggested that it would lead to more, rather than fewer, trivial pensions being paid and allow the setting up of multiple schemes providing trivial benefits to strip out capital from pension funds.

The approach that we propose is practical. It ensures that administration and scope for abuse are minimised, while recognising the value of commutation for genuine small funds. The new rules will often be more generous than those of the old regime and will allow members greater flexibility in deciding if and when they should commute their pensions. They will, for example, allow a member with a single defined benefits arrangement to commute a benefit of up to £750 per annum, compared with the current limit of £260 per annum.

The hon. Member for Tatton raised a point about the pension protection fund levy. The number of members in a scheme is only one of the factors on which the levy may be based. Officials from the Department for Work and Pensions will work closely with the pension protection fund board during the next few months to ensure that issues such as the important one that he raised are taken into account in setting the levy.

Amendment No. 226 would, in essence, do two things. First, it would increase the value of the amount that can be commuted on the ground of triviality by allowing such commutations to occur at the age of 50. That age would rise to 55 in 2010. Secondly, it would extend the period in which a member may opt for trivial commutation from one 12-month period between the member's 60th and 75th birthday to a potential period of 25 or 30 years.

If we assume real growth of 3.5 per cent., £15,000—the limit that we propose, which is 1 per cent. of the lifetime allowance—at age 50 would be worth about £21,100 by the age of 60, and £15,000 at age 55 would

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be worth about £17,800 at the age of 60. That means that the potential number of pensions that can be trivially commuted would increase. I accept that that would not have a large tax cost, but it would mean that the cost to the state of providing social security benefits for those who chose to commute their pensions at the age of 50 and who no longer had a pension income would increase significantly.

The second effect of the amendment would be to allow trivial commutation at any time between the ages of 50 and 80, rather than in the 12-month window we propose. In discussion with the industry, we came to the conclusion that the record keeping for individuals, their advisers and the Revenue needed for such a long period would be disproportionate to the benefits that extending that window would bring. The one-year window for trivial commutation strikes a balance, in that it offers those with small pensions the opportunity to commute, while removing the need for schemes and individuals to keep comprehensive records about the amounts of capital paid out on the ground of trivial commutation.

Given that it would increase the cost of future state benefits and the administrative burden on schemes, I suggest that the hon. Gentleman withdraw his amendment.

Mr. George Osborne (Tatton) (Con): What a joy it is, on this sunny day, to be in the Committee Room serving under your chairmanship, Mr. McWilliam. As I said before, there is nowhere we would rather be.

Amendment No. 220 was a technical, or typographical amendment. The Financial Secretary said that the Inland Revenue has considered the issue and thinks that it is absolutely clear. The pensions lawyers who have talked to me say that it is not. One is right and one is wrong. I think that the lawyers will have their day in court arguing the toss on the issue and will pick up a big fee for doing so. If the Inland Revenue wants to let that happen, so be it. I was just trying to help.

Amendment No. 225 is about short service refunds. To be fair—I am in a generous spirit, because my son woke me up at about 5 this morning by jumping on my bed dressed as Buzz Lightyear—


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