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Session 2003 - 04
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Standing Committee Debates
Finance Bill

Finance Bill

Column Number: 589

Standing Committee A

Thursday 17 June 2004


[Sir John Butterfill 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)

Clause 206

Persons liable to charge

9.30 am

Amendment made: No. 435, in

    clause 206, page 173, line 19, leave out subsection (5).—[Ruth Kelly.]

Clause 206, as amended, ordered to stand part of the Bill.

Clause 207

Individual's lifetime allowance and standard lifetime allowance

Mr. George Osborne (Tatton) (Con): I beg to move amendment No. 415, in

    clause 207, page 173, leave out line 29 and insert—

    '(2) The standard lifetime allowance is, for the tax year—

    (a) 2006–07, £1,500,000

    (b) 2007–08, £1,600,000

    (c) 2008–09, £1,650,000

    (d) 2009–10, £1,750,000

    (e) 2010–11, £1,800,000

    together in each case with an amount equal to relevant valuation factor (see section 263) multiplied by the additional pension (if any) that the member would have been entitled to receive at pensionable age (calculated in accordance with Part 1 of Schedule 4 to the Pensions Act 1995) if he or she had not been in contracted-out employment (as defined in section 8 of the Pension Schemes Act 1993) at any time.'.

The Chairman: With this it will be convenient to discuss the following amendments:

No. 373, in

    schedule 34, page 466, line 28, leave out '£1,500,000 ('.

No. 374, in

    schedule 34, page 466, line 29, leave out ')' and insert '(see section 207)'.

No. 375, in

    schedule 34, page 466, line 39, leave out '£1,500,000 ('.

No. 376, in

    schedule 34, page 466, line 40, leave out ')' and insert '(see section 207)'.

No. 387, in

    schedule 34, page 473, line 12, leave out '£1,500,000 ('.

No. 388, in

    schedule 34, page 473, line 13, leave out ')' and insert '(see section 207)'.

Mr. Osborne: Good morning to you, Sir John, and to the Committee. This clause, one of the most important and contentious in the Bill, sets an individual's lifetime allowance for tax-free pension

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funding. Because of the way in which we conduct business in Committee, one is always in a bit of a dilemma over whether to wait for a clause stand part debate on the principle of a clause—in this case, the principle of a lifetime allowance—or to have the debate at the beginning, on the amendments, bearing in mind the Chairman's guidance. If it is all right with you, Sir John, I would prefer to have the debate now, because it would seem rather strange to discuss the amendments before the bulk of the clause.

As stated in subsection (2), the clause sets the lifetime allowance for the year 2006–07—the first year in which the Bill will apply—at £1.5 million. However, the clause does not say much else. It does not, for example, say what the figure will be in subsequent years. The figures are set out only in the explanatory notes, and one of the amendments to which I shall speak seeks to incorporate them in the Bill.

The clause does not say how the Inland Revenue will increase the lifetime allowance or whether it will rise in line with prices, earnings or anything else. It merely states that the Treasury will announce the sum every year and that it will not be less than that for the previous year.

To return to a familiar debate from our previous sitting, the clause makes no distinction between those with defined benefit schemes and those with defined contribution schemes, even though, as I explained, a lifetime allowance of £1.5 million means that someone with a defined benefit scheme can have a pension of £75,000, while the pension of someone with a defined contribution scheme is likely to be £20,000 lower. The clause also makes no distinction between those who have contracted out of the state second pension and those who have not. In effect, contracting out erodes one's lifetime allowance, and I shall come to an amendment on that issue.

Although the clause does none of those things, it nevertheless represents a huge climbdown by the Treasury. When the concept of the lifetime allowance was set out in the original consultation document, the amount was set at £1.4 million. The Government said that that was broadly the capital equivalent of the sum required to provide a maximum capped pension under the current tax regime for a man aged 60 who was drawing an indexed pension and providing a spouse's pension. They said, of course, that no more than 5,000 people would be adversely affected and that the number would increase by about 1,000 people a year. Of all the things that have been mentioned in connection with pensions legislation, the £1.4 million limit has been the most contentious. It was the thing that the industry was most upset about. The National Association of Pension Funds said that

    ''we have urged the Inland Revenue to remove the proposed £1.4 million lifetime limit, which threatens to alienate company executives from occupational pension schemes for which they are responsible. The numbers potentially affected are likely to be far higher than the 5,000 suggested by the Government and compliance monitoring could prevent the benefits of simplification from being fully realised. Capping tax free cash and annual payments into pensions are all that is needed.''

The Chancellor of the Exchequer does not like to be told that he has got things wrong and does not often apologise; in fact, I do not think that he has ever

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apologised. Instead, he dug in his heels in the second consultation document, which was published in December 2003, despite receiving all those complaints and evidence from the industry that he, or the people working for him, had got the sums wrong. However, he slipped out a significant concession in that document which would reduce the number of people affected. I am talking about the 20 to 1 valuation factor. I imagine that the concession was partly an attempt to take the steam out of the argument about the £1.4 million limit.

The Chancellor then asked the National Audit Office to confirm that he had been right all along and hinted rather darkly that the whole package could be abandoned if the industry did not agree on this issue. The problem with asking the NAO a question—I say this as someone who served on the Public Accounts Committee, along with the Financial Secretary, who is still a member, although she does not attend particularly regularly—is that we cannot be sure that we will get the answer that we like. The Chancellor found that out to his cost, because the NAO discovered that the Treasury was not just wrong in its forecast, but 100 per cent. wrong. The NAO came to the conclusion that 10,000 people were likely to be affected when the lifetime allowance came in, which is double the Treasury's estimate of 5,000.

I am sure that most of the excited Labour members of the Committee read the NAO report as basic preparation and will need no reminder of what it said. However, some of them look as though they have not done their homework, so I had better remind them. The report stated that

    ''the Inland Revenue undertook some credibility checks against alternative sources of evidence, but they did not undertake sensitivity analysis and so did not have a range of possible values.

    Using alternative assumptions that seem more likely to be tailored to the attributes of high earners drove the estimate of the number affected upwards, compared to the average assumptions made in the original estimates.''

The NAO pointed to other evidence that was consistent with an estimate of 10,000 people being affected.

The NAO was even more critical, in its rather dry way, of the estimate that only 1,000 additional people would be affected in each future year. It stated:

    ''Even greater uncertainty attaches to the projections into the future which makes it even harder to provide a reliable estimate of the number likely to be affected . . .

    The evidential base for the estimate of 1,000 additional people a year with funds exceeding the allowance is thin and based on a number of assumptions and roundings which significantly affect the outcome.''

That was its verdict on the way that the Inland Revenue did its sums.

The £1.4 million limit would have a particular impact on those in certain professions, such as members of the judiciary and airline pilots. Manchester airport's second runway is in my constituency, and I represent quite a number of airline pilots who live in the constituency. One of them, a Captain Roberto De Martino—[Laughter.]

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I am surprised that the hon. Member for Rhondda (Chris Bryant), who I thought was such a good European, sniggers at a non-English name. Anyway, Captain De Martino wrote to me, not because I have this job in the Committee considering the Finance Bill, but because I am his constituency MP. He stated:

    ''The Government suggests that only 5,000 will be affected on 'A' Day (6th April 2005) and about 1,000 per year thereafter. This would suggest that the measure only affects a small number of the very rich and therefore is of no concern to most pension savers . . .

    I am an airline pilot, as are many of your constituents . . . I have been saving for my pension since the age of 21, and will be retiring in another 13 years. I have been saving prudently and with foresight for my own and my family's future yet I will now be affected by this legislation.''

He went on:

    ''I am writing to alert you to this unfair measure, which penalises the prudent saver, whilst still protecting the pension funds of the super wealthy (the supposed real targets of Gordon Brown's proposals) . . . The tax avoidance industry is already advising the super wealthy on loopholes and their silence is deafening as they look forward to more fee income from those about to be swept up by these proposals. Whereas professional employees who are above average income earnings, such as myself my fellow pilots, doctors, senior managers, head teachers and directors, to name a few; who already pay full PAYE and are currently shouldering a large part of this Government's increased tax burden, will find themselves most affected in their retirement.''

It is important that members of the Committee understand that we are talking not just about the super-wealthy, who, in any case, will find alternative ways of saving for their retirement if they are caught by the lifetime allowance.

Why did the Inland Revenue get its sums so wrong? It is partly because the methodology was wrong. The NAO picked up on that. It was critical of several things; for example, the Government used the family resources survey as evidence in calculating the allowance, but the survey sample included only 100 people who earn more than £100,000, so it was not of great use in calculating the effect of such measures on high earners.

Another reason is the secretive way in which the Government drew up the proposals. It goes without saying that they did not consult the Department for Work and Pensions. We have long been used to the fact that the Treasury does not tell the DWP anything. However, it did not even consult the Government Actuary's Department. I have with me two extraordinary letters: one is to my hon. Friend the Member for Havant (Mr. Willetts), and the other is to you, Sir John. I know that you were aware that I was to mention the letter, as I sought your permission to do so. The letters are in the public domain, and GAD—which, by the way, is a Government Department—has confirmed that it is happy for the letters to be used.

The letter from the chief Government Actuary, Chris Daykin, to my hon. Friend the Member for Havant, the shadow Secretary of State for Work and Pensions, states:

    ''I would like to be absolutely clear that GAD was not involved in any way in advising on the figure of £1.4 million. Indeed I think it is safe to say that GAD was not asked to advise at all on the original Inland Revenue proposals, although we have offered our views to the Revenue during the consultation period.

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    I should be obliged therefore if you could ensure that GAD is not blamed for having calculated (or miscalculated) the figure of £1.4 million!''

That is a letter from a Government Department.

The letter from Grant Ballantine of GAD to you, Sir John, with which you of course are familiar but members of the Committee may not be, states that

    ''the Inland Revenue did not consult the Government Actuary's Department about the lifetime limit (either on its substance or on the detailed calculations which may have been made to determine the actual quantum of the limit) . . .

    We in GAD have a number of concerns about the proposals, particularly in terms of equity between different types of pension provision and fairness between different members of the population (e.g. according to their age at retirement). On the basis of the slightly revised December 2003 Inland Revenue simplification paper which was published yesterday,''—

this was in December 2003—

    ''it would appear that the Inland Revenue have given no weight to any of the points we made. (Indeed, they appear to have given very little weight to any comments from consultees, since the proposals do not appear to be changed in any matter of substance)''.

Mr. Ballantine goes on to say:

    ''My own personal views on the proposed lifetime limit of £1.4 million are very much in tune with your views. I believe the imposition of the lifetime limit, particularly at the proposed 'low' level of £1.4 million, will be counterproductive—encouraging a reduction in the level of pension provision (contrary to the Government's stated aim of more private provision) and resulting in more complexity, particularly at the implementation stage (contrary to the Government's stated aim of simplification)''.

9.45 am

In the years I have been involved in politics, both in this place and as a special adviser in the previous Conservative Government, I have not come across a case of a public letter from a Government Department being so critical of what the Government are proposing. They are both extraordinary letters, and I am grateful for your indulgence, Sir John, in allowing me to read them out.

Faced with the evidence from the NAO, the Chancellor of the Exchequer had no real choice but to back down. In the Budget, he announced that he would not dig his heels in any more and the lifetime allowance would be increased from £1.4 million to £1.5 million; indeed, he set out some pretty generous increases for the years up to 2011.


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Prepared 17 June 2004