Finance Bill

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Mr. Osborne: First, 10,000 is quite a lot of people and, secondly, we regularly deal with clauses that target far fewer people.

Mr. Laws: I am grateful for that point. I did not suggest that we should never debate clauses that affect only 10,000 people. However, in the light of both the overall tax advantages in the system and the Government's compromise, the proposal on the lifetime allowance seems reasonable. We must reflect on the fact that the overall increase in the lifetime allowance—or the movement to a lifetime allowance—has increased the amount of tax-free savings that people with a particular type of pension can enter into. Even before the Government decided to increase the previously proposed lifetime limit of £1.4 million, the Institute for Fiscal Studies said in its analysis of the proposals that the limits

    ''are set at such high levels that anybody who is constrained by them would be unlikely to be considered to be underproviding for their retirement.''

That is something of an understatement.

I welcome the fact that the Government have listened to the debate. As we said earlier, whether or not the number of people involved is small, it is right that we should consider whether the tax system deals with them fairly. The Government have made a sensible concession. I am not sure that I would want them to go any further, given my earlier criticisms of the fact that tax reliefs are already generously skewed in favour of people on upper incomes. The challenge is not to make tax reliefs for that group more generous, but to consider how to distribute those advantages further down the income scale.

I should like to touch on the more profound question of whether the lifetime limit is the right approach at all. Setting the limit in such a way prompts the question of whether people's liability to pay the additional rate of tax or clawback will increase dramatically as a consequence of the performance of

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their funds and the assets therein. The Institute for Fiscal Studies paper on the Government's tax proposals says that

    ''for individuals with pension funds that are approaching the proposed lifetime fund limit, this limit and the associated recovery charge would distort investment decisions towards lower-risk, lower-expected-return assets. A simple cap on the size of the tax-free lump sum would remove this distortion. Again, the government should consider whether this change would have any undesirable consequences not considered here.''

The institute points out that, although its proposal would be more costly than the existing Government proposals, which I would not want, it would be possible to deal with the problem by adjusting the proposed level of the tax-free lump sum. The Government should consider that, whether or not it is difficult to do. They should consider it particularly in the context of tax proposals providing more generous tax relief for most people contributing to pension funds than at present.

The amendment is sensible. We welcome the concession on the lifetime limit, but we question whether the lifetime limit approach will prove to be popular, or enduring in the long term.

Rob Marris: I found the hon. Member for Tatton's remarks interesting, particularly when he referred to schemes in the state—I think that they are called 401 schemes, but he can correct me if I am wrong—with certain tax advantages if everyone in the company is on the same scheme.

I pay tribute to Britain's largest independent brewer, Wolverhampton and Dudley Breweries, which is located in my constituency. It has such a scheme, albeit closed to new members. It is a final salary scheme, where the equivalent of payroll put in is 25 per cent., in addition to which the employer pays 7 per cent and it has been able to maintain a fine final salary scheme on that basis.

The hon. Member for Tatton's remarks are based on two fallacies. The first is that tax relief encourages saving for retirement. I asked the Department for Work and Pensions what evidence there was that tax relief encourages saving for retirement, but there is precious little such evidence. It may affect the vehicle in which those who have money save—they will use a pension vehicle because of the tax relief—but it does not affect their savings. The main determinant of whether people save for retirement is whether they can afford to do so. Crudely speaking, the poor do not save for their retirement because they cannot afford to do so.

Mr. Michael Jack (Fylde) (Con): Just for the record, can the hon. Gentleman remind us of the legal definition of pension?

Rob Marris: The definition is scattered throughout this Bill and previous Finance Bills. It involves savings vehicles—whether they are money purchase or final salary schemes—that have certain tax reliefs attached to the contributions made to the savings vehicles and the accumulation of assets within those vehicles. They are tightly regulated, and their hallmark is those tax reliefs.

Mr. Jack: I am surprised that the hon. Gentleman, with his keen legal mind, did not refer to the Barber

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judgment, which defined pensions in European terms as pay postponed. It is important that the money is not taxed twice, going in and coming out.

Rob Marris: I will be guided by you, Sir John. I could go into the Coloroll judgment and all such things as well, but I think that you would say that we were straying too far from the amendments and too far even from a clause stand part debate. I will gladly discuss it with the right hon. Gentleman outside if he wishes. I would do it now, if you would give me the latitude, Sir John, but from the shaking of your head I take it that you would not allow it.

Secondly, the hon. Member for Tatton's said words to the effect—he will forgive me and correct me if I paraphrase him wrongly—that the super-wealthy would find alternative ways to save for their retirement if the cap were maintained, but that others would not do so. I think that that is a fallacy. Those who have the kind of assets to which he referred would find vehicles, if there are such vehicles, to get around such restrictions.

Mr. Jack: Just so that I can understand the hon. Gentleman's remarks with greater clarity, would he be kind enough to tell me what his personal boundaries are between normal, wealthy and super-wealthy?

Rob Marris: The right hon. Gentleman may have noticed that I was quoting the word used by the hon. Member for Tatton. If the right hon. Gentleman can find the opportunity to ask his hon. Friend what he meant by super-wealthy, that will provide him with greater clarity. However, I am putting it forward as a philosophical point, partly to underline the implication of what the right hon. Gentleman said. The category of super-wealthy is a bit vague, but inasmuch as it exists why should those individuals be able to find alternative vehicles, as suggested by the hon. Member for Tatton, but not other wealthy but not super-wealthy individuals?

Mr. Osborne: The phrase ''super-wealthy'' was used by my constituent and by the hon. Gentleman. It was not actually used by me.

Rob Marris: The clear implication of the hon. Gentleman when he read the quote and commented on it was that he, too, was adopting that phrase. If he now resiles from that, perhaps he should tell the Committee.

Mr. Osborne indicated dissent.

Rob Marris: I see the hon. Gentleman shaking his head, but that is the second fallacy.

The third point, which the hon. Gentleman understandably sidestepped because he represents, by purchasing power, the richest constituency in the UK—someone has to represent those individuals, and it is no surprise to some of us that it is the able, but Conservative, hon. Gentleman—is that 10 per cent. of earners get 50 per cent. of the tax relief on those savings and pensions.

The annual figure for tax revenue on pension savings forgone by the Government because of the concessions to which I referred is £14 billion a year.

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That is incredibly regressive when one considers that 10 per cent. of earners are getting, in one sense, a £7 billion a year handout from the Government—I say in one sense because it is forgone tax revenue—but the hon. Member for Tatton seems to want to increase that figure further. On that basis, if nothing else, I urge my hon. Friends to vote against his amendment.

Mr. Quentin Davies (Grantham and Stamford) (Con): My hon. Friend the Member for Tatton made a most able speech and analysed the situation extremely well, but I shall go a little further than he did.

My hon. Friend raised the possibility that, instead of introducing the proposed lifetime limit, the Government should go over to the American ERISA—Employee Retirement Income Security Act—system, under which a condition of having a tax-favoured pension scheme is that all employees should benefit from it. I hoped that he would go a little further than he did and commit the Opposition to adopting that policy when we come back to power—which, I hope, will be quite soon—because nothing would be more effective in restoring defined benefit pension schemes in this country.

Defined benefit occupational schemes have suffered the most terrible devastation since the Government took office in 1997. They used to be the pride of our pension system. Occupational pension schemes gradually expanded over 50 years but, over the past seven years, one after another has suddenly been wound up. Almost all of them are now closed to new members, although a minority are still open. That is a terrible reversal in the space of just a few years, which blights the retirement prospects of millions of our citizens. The younger generation will find it extraordinarily difficult ever to benefit from a defined benefit occupational scheme.

I shall go no further into the damage that the Government have done. There is no question but that reversing it will be difficult, and we need to think long and hard about how we might do so. My suggestion would reverse the damage, because it would create an enormous incentive on management not to close off such schemes to new entrants, as is happening, because they would lose the tax benefits of the scheme for themselves. That would make a substantial difference to the way in which matters are viewed. I hope that my hon. Friend the Member for Tatton will carefully consider that. We have the lesson of the US is in front of us; it is always reassuring when one is legislating to see that one is not jumping into the unknown, but basing one's legislative proposals on experience in comparable circumstances in another country or economy.

The Government's proposals for a lifetime limit will have some perverse effects. The IFS has already been referred to. I have not seen its work on this subject. It may well say the same as I am about to say, as, I think, does everyone who has thought about it carefully. I am not sure that the Government have thought about it carefully—indeed, my hon. Friend made it clear that they have been in complete confusion about the £1.4 million and subsequent £1.5 million limit—but anyone who does will see that considerable perversities

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will flow from the Government's adoption of that mechanism.

10.15 am

One concerns the savings ratio, which is far too low in this country; it is about half what it was in 1997. Naturally, it is traditionally higher the more people earn—the higher their earnings, the more they save. However, it will collapse among people at the top of the income scale, who will no longer have an incentive to save in pensions funds, as no tax benefit from saving will be available to them with the limiting of other tax-sheltered savings schemes by the Government—personal equity plans and tax-exempt special savings accounts and so forth will not apply beyond very low limits. There will almost certainly be a situation in which those—perhaps only a few thousand or hundred thousand people—who might be expected to save a considerable portion of their total income will no longer do so. They will simply spend whatever they earn beyond a minimal point. That could have a considerable effect on aggregate savings ratios, as those people are relatively rather wealthy. I do not complain especially about that effect, but we must take it into account. It will be a natural consequence of the Government's measures.

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