Finance Bill

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Rob Marris (Wolverhampton, South-West) (Lab): Does that not suggest to the hon. Gentleman that, contrary to the assertion made in the letter from Grant Ballantine to you, Sir John, the Chancellor had in fact listened to some of the proposals put forward during the consultation?

Mr. Osborne: I am afraid that I do not agree with the hon. Gentleman. During the period of consultation with the industry, the Inland Revenue did not listen or change its proposals between the first and second consultation documents. It did not involve the Government Actuary at any stage, as that Department made clear to members of the Opposition. It then commissioned the NAO report, which contradicted the Chancellor, and faced with that he had little option but to back down.

Mr. Howard Flight (Arundel and South Downs) (Con): I am not certain that this is the case, but I was

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advised by a member of the Inland Revenue committee that the committee proposed a £2 million limit so that the existing cap was comfortably covered, and that it was indeed the Chancellor who cut back that amount to £1.4 million.

Mr. Osborne: My hon. Friend has better information than I, but it would not surprise me to learn that the good officials of the Inland Revenue had got this issue right all along, and that it was the Chancellor of the Exchequer who overruled them and was then forced to back down. Of course, when he backed down in his Budget speech, there was not a word to say that this was anything other than what he had been planning all along, that he had changed his mind, that he had listened to the NAO or anyone else—it was announced as if he had always planned to take this path.

The Chancellor announced that the lifetime allowance would increase for each of the four years after A-day, which is in 2006, to £1.8 million, and that there would be a quinquennial review of the figure. However, neither the increases after A-day nor the review are provided for in the Bill; nor, I think, is the proposal in the December 2003 consultation document that the lifetime allowance should be uprated annually by the retail prices index. We will come back to that in the next group of amendments, but it is worth noting that a proposal in the consultation document is not repeated in the Bill.

My amendment deals with all those points, but before coming to them, I pray your indulgence, Sir John, in commenting on the new £1.5 million figure, and questioning the need for a lifetime allowance at all. The Government concede that, even with the new figure of £1.5 million, up to 1,000 people could still be hit. Will the Financial Secretary confirm that? I do not know what the latest Treasury estimates are. PricewaterhouseCoopers submitted a memorandum to the Treasury Committee's inquiry into this year's Budget, in which it said:

    ''The whole basis of the 'pot limit' remains of concern, however. One can understand why there has to be a limit on tax-assistance for pensions savings but by imposing this on the accumulated fund, it does create uncertainty because of the interaction of future factors such as investment performance, work plans and salary growth. Even if the Treasury's figure of 1,000 people a year affected by this limit is correct, many more will worry about their position.''

Indeed, in a letter to you, Sir John, as trustee of the MPs' pension scheme, GAD suggested that several MPs may also be affected. PricewaterhouseCoopers pointed out that many more than 1,000 people may be affected. Rowena Marsh, a partner at Grant Thornton, the firm of accountants, said that the limit might be all right for the average earner, but it is extremely low for a number of mid-range executives.

PricewaterhouseCoopers makes it clear that the lifetime allowance also penalises good investment decisions, because if a pension pot is invested in shares that do very well, a person can be taken over their lifetime allowance thanks to their own good investment decisions. There is a curious and perverse incentive in the very concept of a lifetime allowance.

The result of all that may be that many highly paid executives are encouraged to make their own

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arrangements for their retirement, and they will no doubt use many of the opportunities afforded to them in, for example, schedule 34, which we will discuss later. They may leave company schemes altogether and will therefore have a less direct incentive to keep an eye on those schemes and ensure that they remain generous.

The Government had alternatives. They could have scrapped the concept of a lifetime allowance and relied on, say, a restriction on capping tax-free cash and on the annual payment allowance, which is what the NAPF suggested. They could have used the United States model of tax relief for occupational pensions based on one simple condition; it does not have a limit, and every member of the company is allowed to join the scheme and enjoy the same benefits. In other words, everyone from the boardroom to the shop floor has access to the same scheme on exactly the same terms.

Interestingly, in a letter to the Financial Times last year, the chairman of the CBI pensions strategy group said:

    ''One solution would be for the Treasury to remove the cap for those companies that can demonstrate that senior executives belong to the same pension scheme as other employees. This, at a stroke, would encourage unity and provide equity.''

Many of us in this place would have welcomed that, because we are concerned about two-tier provision in companies whose pension schemes do not apply throughout and where the people at the top often have more generous schemes than those towards the bottom. However, the Government have chosen not to do that, so, as I said, more and more companies are likely to have different schemes for those in the boardroom and those on the shop floor. This is a missed opportunity.

Amendment No. 415 is the most important one in the group; the others are consequential. The amendment seeks to achieve two things: first, to write into the Bill the Government's promised increases in the lifetime allowance over four years after A-day. That is £1.6 million for the year 2007–08, rising to £1.65 million, £1.75 million and £1.8 million by 2010–11. As I said, it is set out at the beginning of the explanatory notes, but it is not included in the Bill. The Bill contains no mechanism for increasing the lifetime allowance with any certainty but merely a requirement that the Treasury state each year what the lifetime allowance will be. Will the Financial Secretary explain why it is not in the Bill?

While the hon. Lady is doing that, will she answer a question that struck me last night? Why does the figure increase by £1 million in the first year, £500,000 in the second year, £1 million in the third and then by another £500,000? Why is it not an even increase each year, perhaps of £750,000? The annual allowance increases by the same amount each year—it increases by £10,000 for each of the first four years—but the increase in the lifetime allowance is strangely lumpy. Will the Financial Secretary explain why? That important information will need to be digested by people in the pensions industry. Surely it would be

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better if the necessary information was available in one place rather than people having to turn to the explanatory notes to find out what the increase will be in the four years after A-day.

Important though my previous comments were, amendment No. 415 tries to achieve something more substantive. As currently devised, the lifetime allowance discriminates against those who have contracted out of the second state pension. That is because state pension benefits are not included in the lifetime allowance. However, private pension benefits, including those paid for by contracted-out rebates, are included. In other words, contracting out erodes a person's lifetime allowance.

The paragraph at the end of the amendment would add into the lifetime allowance the additional state pension that the member would have received had he not been contracted out. Subsequent clauses provide, in a number of circumstances, for the Government to allow the lifetime allowance to increase, or, in effect, to disregard things such as overseas income. Why is that not done for people who have contracted out of the second state pension? Why are they being penalised? Is it a deliberate Government policy to encourage people not to contract out of the second state pension, or is it an unintended and unforeseen consequence of the pensions legislation?

Several hon. Members rose—

The Chairman: Order. As correspondence between me and the deputy Government Actuary has been quoted, I wish to clarify the situation. That correspondence arose in the course of my duties as chairman of the trustees of the parliamentary contributory pension fund. It was later used by me in a debate on pensions, but that was some considerable time ago, and only after I had clarified with the Government Actuary that he was happy for it to be in the public domain. The hon. Member for Tatton (Mr. Osborne) consulted me to establish that it was indeed in the public domain before using it in today's debate. That, of course, happened long before I knew that I would be chairing this Committee.

Mr. David Laws (Yeovil) (LD): Thank you and good morning, Sir John. With your permission, I shall make a few comments on the stand-part element of the debate. However, I start by saying that the Liberal Democrats agree with the amendment moved by the hon. Member for Tatton, which seeks to write into the Bill a number of Government undertakings.

The hon. Gentleman highlighted effectively some of the apparent tensions in the Government—and, perhaps, in the Treasury—over the level of the lifetime allowance. We, too, enjoyed seeing the Government's embarrassment over the fact that they had essentially ended up with a marginal rate of 55 per cent., especially as they had criticised our proposal for a marginal rate of 50 per cent. We now think that the overall level that the Government have set for the lifetime limit is a reasonable compromise. We are therefore happy that that is not unfair to the relatively small number of taxpayers involved, particularly as there are already advantages in the tax system that favour people on higher incomes, as we discussed the

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other day. Having elements in the tax system to neutralise those excessive advantages may not be a bad thing.

If there is a criticism to be made of the lifetime allowance, it is the criticism that the hon. Gentleman made. Is the lifetime allowance limit the right approach and will it lead to various anomalies, uncertainty and interesting decisions, based on incentives, about investing in high risk versus low risk assets? It is worth saying that we are talking about only a relatively small number of people. The hon. Gentleman pointed out that the estimated number of people whom the proposals would affect had increased by 100 per cent. However, notwithstanding that, we are still talking about a relatively small number, of about 10,000 in the country, which is perhaps 10 or 15 per constituency. The hon. Gentleman has done well to track down one of those people in his constituency. I have yet to meet any in mine, but his constituency is perhaps more affluent than mine. The point is worth making, because we criticised the Government over the extent to which tax advantages in the system have been consolidated and even extended.

10 am

 
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Prepared 17 June 2004