The Chairman: I thought that that was what children were for.
Mr. Osborne: You seem to have more experience than I do, Mr. McWilliam. I am still learning.
The Financial Secretary addressed my concern on the short service refund by saying that a scheme administrator member payment would allow schemes to pay interest. There may be some related tax complications because people would end up having to compute their tax liability on what could be small sums of money; the bulk of the tax will be paid by the scheme itself. If I understood the Financial Secretary correctly, the member will be responsible for paying tax on what could be fairly small sums of money, which is the interest earned on the short service pension. I was trying to establish that there would still be an opportunity to receive interest on short service refunds, and she assured me of that.
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On the more substantive amendment relating to trivial commutation, I was not entirely satisfied with what the Financial Secretary said. She explained the history of it briefly. The idea in the consultation document aroused a lot of criticism from the industry. The Inland Revenue probably spotted that there was a potential tax loophole that people might exploit by setting up a large number of small pensions then commuting them all to avoid tax. However, I am not sure that the new system is better. The Financial Secretary said that the first proposal in the consultation document was not warmly welcomed by the industry. As I am sure she already knows, the new system is not warmly welcomed by the industry either.
I have received a large number of representations from the different representative organisations, all of which make one point. The new system is likely to lead to schemes having to administer large numbers of very small pensions. It will not be their fault that someone has used up their 1 per cent. The schemes may end up administering a small pension of 50p a month simply because someone has gone over the 1 per cent. level. I agree that there will not be many such examples.
The other, more serious point is that it is the decision of the member to commute, not the decision of the scheme. In some cases, schemes with large numbers of members may have lost track of some, and the members will not be in a position to volunteer to have their pension commuted. One pensions adviser told me that the electricity board apparently has many such pensions from many years ago. The new system will be a big administrative burden for it.
Last week, I raised the question of the PPF levy with the Financial Secretary. She made the point that the number of scheme members is only one factor in the calculation of the PPF levy. Nevertheless, it remains a factor in that calculation. It is possible to envisage a scheme that is paying out a pension of 50p a month also paying a £10-a-year levy for administering that pension. Under the current arrangement, someone would be unable to commute what is clearly a trivial sum.
Rob Marris (Wolverhampton, South-West) (Lab): I am not as familiar with the Bill as the hon. Gentleman. Perhaps he could point out where it specifies that the trivial commutation is the option of the member rather than the scheme. Where in the schedule does it say that?
Mr. Osborne: I am not sure that I can do that as quickly as the hon. Gentleman would like. It may say so in sub-paragraph (3) of paragraph 7. I think that there is also reference to that in line 31 of page 134.
Mr. David Laws (Yeovil) (LD): Write to him.
Mr. Osborne: I shall write to the hon. Member for Wolverhampton, South-West (Rob Marris), or get someone else to write to him, which, after all, is no more than what the Financial Secretary does. The hon. Gentleman seems satisfied—another satisfied customer.
Rob Marris: I am not satisfied or dissatisfied with the hon. Gentleman. I await with bated breath the letter that he will be writing to me or arranging for someone to write to me.
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Mr. Osborne: I will be happy to confirm that point, but I think that I am right.
The Financial Secretary deployed two arguments: first, that there would be an increase in tax liability, which she accepted would be very small; secondly, and dubiously, that many people could languish on benefits if we agreed to the amendment. That is not a serious argument. I do not believe that the state would expose itself to a huge risk simply by changing the rules on trivial commutation. These are responsible people who probably have a main pension and several smaller pensions. The hon. Lady says that it would significantly increase the cost of benefits, but I would be very interested to see the evidence of that. I suspect that her argument does not stand up to the facts.
The Financial Secretary stated that people would need to commute within a year and she made some reasonable arguments for that, but why do people have to wait until they reach the new age barrier of 60 before commuting trivial sums? The Government are raising the minimum retirement age from 50 to 55 in 2010, so why cannot people commute trivial pensions at 55? What is so magical about 60?
Ruth Kelly: I hope that I can reassure the hon. Gentleman about the number of trivial pensions that may be left after a sum has been commuted from a particular scheme. I accept that, in our original consultation document, we put forward a proposal that might have led to the situation that he describes. However, in response to concerns expressed by the industry, we slightly revised the proposal and made the facility for pension scheme members to commute trivial pensions available only to those with pensions with an aggregate capital value of less than 1 per cent. of the lifetime allowance. That, I think, overcomes the point that he raised. People in that position will be able to choose a year falling between their 60th and 75th birthdays in which to commute their trivial pensions.
The hon. Gentleman raised an interesting point about the pension protection fund levy. As he knows, that is the responsibility of the Department for Work and Pensions, which will work very closely with the pension protection fund. Of course, we will work with them and we will discuss with the industry how the issue should be addressed. It is not a simple issue, as the hon. Gentleman well understands, but we are aware of it and we will work to address it.
The hon. Gentleman also asked about the problem of commutation at age 55, which I think I addressed in my opening response. Commutation at that age could significantly increase the value of the pensions commuted and, although there is little tax cost associated with such a move, it could have a major effect on state benefits, particularly on the cost of the pension credit. It is not possible to assess that cost, but I am advised that there could be a significant cost to the Exchequer.
The original proposals allowing commutations from age 65 were drawn up to bring commutation into line with the state pension age so that members could assess their total income at 65. In response to
Column Number: 517industry views we lowered the age from 65 to 60 because many schemes allow members to begin to draw their pensions at that age. Allowing commutations at age 60 was a direct response to industry representations.
The Chairman: Order. We are all awake this morning, are we not? We have all noticed the misprint on the amendment paper, which would make it appear that we are dealing with schedule 27, not schedule 29: for ''page 420'', read ''page 430''.
Mr. Osborne: I was just testing to see whether anyone would spot that. With your eagle eyes, Mr. McWilliam, you passed the test.
Much more needs to be done on this area with the industry. Most of the representative bodies have raised the matter with me, and the Financial Secretary herself accepts that there is a particular problem with the pension protection levy. To return to a theme that I was developing last week, that suggests that there has not been much joined-up thinking between the DWP and the Inland Revenue in producing these two pensions measures. However, I shall not press the amendment to a vote but beg to ask leave to withdraw it.
Amendment, by leave, withdrawn.
Mr. Osborne: I beg to move amendment No. 348, in
The Chairman: With this it will be convenient to discuss the following amendments: No. 349, in
No. 350, in
No. 351, in
No. 352, in
No. 353, in
No. 354, in
No. 355, in
No. 356, in
No. 357, in
No. 358, in
No. 359, in
No. 360, in
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No. 361, in
Mr. Osborne: The amendments are another attempt to remove an ageist Government policy: the rule that prevents lump sums of various kinds from being paid out if a member dies after age 75. In our discussions about lump sums last week with the hon. Member for Yeovil (Mr. Laws)—I am glad to welcome him to his place and look forward to debating his one amendment, which we will come to some time this afternoon—the Financial Secretary described lump sums as popular and attractive elements of the overall pensions regime and, indeed, as one of the reasons that people save in a pension. Of course, the availability of a lump sum on the death of a member is and equally important reason that people like to save in a pension.
Can the Financial Secretary imagine how much more popular pensions would be if the lump sum could be paid out following the death of the member after the age of 75? My amendments would remove the 75 limit from all kinds of lump sums: ill health, short service, trivial commutation, winding up, lifetime allowance excess and, most importantly, death benefits. I hope that I caught all the 75s when I went through the schedule. However, if I missed a couple, I am sure that, in this spirit of teamwork, the Committee would accept Government amendments that filled in any gaps in my amendments.
The point with lump sums is that most of them attract a 35 per cent. tax charge if the member has not reached the age of 75. One of the biggest obstacles to people taking out a pension is the fact that when it is annuitised the pension pot dies with the member, although in some cases a dependant's pension can be paid. The Government partly recognise that. The Bill is striking in that it recognises that people are discouraged from taking out pensions and annuities because they cannot pass on lump sums when they die. That is why it introduces the concept of value-protected annuities, which, in return for the member's taking a reduced income, will allow any remaining pension pot to be paid to the member's dependant—with the tax charge—provided that the member is not over 75. I concede that that measure is likely to be very popular, and my amendments do not seek to remove it from the Bill.
Last week, the Financial Secretary brandished her report on annuities. I went away and found a different report to brandish, one produced by the Association of British Insurers. Its research found that 47 per cent. of annuitants would be interested in the option of a value-protected annuity and would be willing to give up a reasonable amount of income for one. In fact, one fifth of those whom the ABI surveyed were prepared to give up 20 per cent. of their annuity income in order to be able to pass on something after their death. However, the problem with value-protected annuities—this welcome new product that the Government will allow to be offered—is that they pay out only if the member is under 75. Why is that? What is the Government's argument for such an arbitrary cut-off? If people want to pass on a pension pot after their death, and they are prepared to have a
Column Number: 519reduced income while they are alive to pay for that option, they should be free to choose that and the market should be free to provide products that allow it to happen.
The Government's basic argument—I am trying to anticipate what the Financial Secretary will say—is that a pension is intended to provide an income in retirement as opposed to passing capital between generations. That is the great issue of principle on which the edifice of the Government argument is built, but it is undermined by much of the Bill. Pension capital can pass between generations, provided that the member dies before their 75th birthday. It is not as though that principle were sacred; it is sacred only for those over the age of 75.
People can die before the pension is invested, when the entire tax-free pot is handed over to the next generation or a surviving spouse. If they die after vesting, with an unsecured pension, the entire pension pot is handed over—albeit with a 35 per cent. charge. If they die after vesting with a value-protected annuity, the pot is handed over with a 35 per cent. charge. The principle—to use the Government's word—that capital cannot pass between generations does not apply to those who are unfortunate enough to die before the age of 75. It only becomes a great principle for the Inland Revenue when someone reaches their 75th birthday.
The second way in which that principle has been undermined by the Bill is that the provisions do not apply to anyone with an alternatively secured pension. We discussed that at length last week. An alternatively secured income allows money to pass to other generations. Those who were awake last week and have a memory for boring detail will remember the Osborne pension scheme, and the tontine that I described. [Interruption.] I am glad to see that one hon. Member was awake and paying attention. After last week's sitting I reflected on the warning of the hon. Member for Wolverhampton, South-West that this could lead to a ''Kind Hearts and Coronets'' situation, where a member of my family might kill me and other family members in order to get hold of their pension.
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