Finance Bill

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Rob Marris: It is extremely difficult for the Treasury to come up with that figure because of the long time

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frame between when contributions are put in tax free, and when the money is taken out. The best estimate that the Department for Work and Pensions has been able to provide the Select Committee on which I sit is that the cost of tax relief is £14 billion a year and that the additional tax brought in down the line is about £8 billion. So the net annual cost is £6 billion.

Mr. Jack: I am grateful to the hon. Gentleman. He speaks with authority and knowledge on the matter. He has set a precedent that the Financial Secretary should follow, because she is even better informed about those matters than he is, or at least she should be.

I conclude my remarks by saying that I support the line that my hon. Friend the Member for Tatton took. I look forward to the points of clarification when the Financial Secretary responds.

10.30 am

Mr. Flight: Pension saving is self-evidently a long-term activity. It is important that, when changes are made, substantial notice is given to the generation whom those changes will affect and that changes should not dishonour the basis on which people have been saving. When the Conservative Government last changed the rules—bringing in the cap on earnings—people were, rightly and properly, grandfathered, as long as they stayed in schemes that were previously not capped.

I accept that, in the main, the boundaries set in the reforms disadvantage only a modest number of people. However, I believe that the intention of the original committee brought together by the Inland Revenue was that the principle should be that the boundaries were at least neutral for everyone. I object to the argument, ''It doesn't matter about 10,000. It affects a load of fat cats.'' The issue of principle is that the rules affecting people's saving process should not be changed partway through that saving process to those people's detriment.

Rob Marris: Will the hon. Gentleman remind the Committee whether he supported the previous Conservative Government's gradual abolition of mortgage interest relief at source?

Mr. Flight: First, as the hon. Gentleman is well aware, mortgage interest is an entirely different matter. It is not about saving for old age. Secondly, I accept the point in principle. No Government, whatever their complexity, should change the tax rules in relation to people's long-term commitments lightly or wantonly. There is an underlying point of principle. That is particularly important in the area of saving for old age. Whether or not taxation is an incentive, it can become an extreme disincentive if the rules keep changing for people. They will end up saying, ''Why bother? We don't know where we are.''

The narrow point that I make is that the Government have been close to a regime that does not disadvantage anybody. What was the justification for deciding, while tidying up, to take no notice of what was an established principle?

Ruth Kelly: We have had an absolutely fascinating debate so far. I was delighted that one Opposition

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Member at least professed himself content—even happy—with the basic thrust of the proposals.

Mr. Laws: I do not want the Financial Secretary to misrepresent what I said. I am sure that she will not. I said that I thought that the change to the lifetime limit was appropriate and that I was happy with it. However, I question the fundamental approach of the lifetime limit. That is different from the impression that she is giving.

Ruth Kelly: I shall discuss the principle of the lifetime limit. What I meant to say was that the hon. Gentleman considered it fair that, given that there was going to be a lifetime limit, that limit be set at £1.5 million.

Despite his eloquence, I was extremely disappointed by the contribution made by the hon. Member for Tatton. Indeed, throughout the debate—until relatively recently—we have heard about contributions from several sections of society and several individuals that completely misrepresented the underlying nature of the proposals.

Mr. Osborne: Is one of those people the Government Actuary?

Ruth Kelly: I shall come on to discuss the role of the Government Actuary in due course. Because of the extensive misrepresentation of the arguments, we thought it wise to ask the National Audit Office to confirm that our estimate of the number of people likely to be affected by a lifetime allowance was reasonable. I have the report in front of me. Far from saying that it is unreasonable, it says that 5,000 people is reasonable, if perhaps at the lower end of the reasonable range. Our estimate is vindicated. Compare that with the figure of 600,000 that was quoted in the press. The NAO's best estimate was about 10,000, but ours was reasonable, and if the hon. Member for Tatton disputes that, I encourage him to stand up and to make his point.

The NAO told us that the evidential base for the estimate of 1,000 people a year exceeding the allowance was completely reasonable, subject to a degree of uncertainty, as such estimates always are. In fact, it could not come up with a better estimate.

Mr. Osborne: What the NAO said was that

    ''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.''

Ruth Kelly: But the NAO has no evidence to say that 1,000 is not a reasonable estimate. It says that the evidential basis is thin. We have to make assumptions about the behavioural impact of changes. However, it is a reasonable estimate of the effect of the proposals.

The hon. Gentleman mentions particular groups—for instance, pilots and the judiciary—that might be disproportionately affected by the proposals. I agree that those groups are singled out by the report. It says:

    ''Two occupations in particular were brought to our attention—the judiciary and airline pilots. Between them they appear to have several hundred people who could be affected due to the specific circumstances of these professions.''

Since the NAO report was published—and before, indeed—we have met representatives of the airline

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pilots' union, BALPA, and explained the proposals to them in depth. It is clear that only a minority will be near to, or over the lifetime allowance. The majority of those are already subject to the earnings cap. A few pilots with high salaries and low retirement ages are affected but, as in other industries, all existing rights will be protected under our regime.

Rob Marris: Did my hon. Friend notice that the hon. Member for Tatton mentioned head teachers? I do not know about the toffs at Eton, but for head teachers to be affected—taking the £75,000 that a 20 to 1 ratio would produce on a £1.5 million fund—a head teacher on a half pension would have to be earning £150,000 a year. I defy the hon. Member for Tatton or anybody else to find more than two head teachers in the state sector in the United Kingdom who earn £150,000 a year.

Ruth Kelly: My hon. Friend chooses his own way to describe the people likely to be affected by the proposals. However, I believe that our estimate has been vindicated by the NAO report. In the run-up to the publication of the report, after we had commissioned the NAO to carry out the research, the vocal resistance to our proposals melted away. People realised that the NAO was likely to come up with a conclusion that was similar to ours, because ours was reasonable and based on common sense, and was more likely to be correct than the 600,000 that had been widely quoted in the press before that.

Mr. Davies: The Financial Secretary mentioned pilots with an early retirement age. Does that not highlight one of the great weaknesses of her proposal? Even if we accept the lifetime limit approach—a case can be made for it—is it not absurd that the same limit should apply irrespective of age? Are we not creating a major disincentive for people to stay longer in employment before taking their pensions? A limit of £1.5 million at 60 is not the same as a £1.5 million limit at 70. One should give people an incentive to stay in work for as long as possible. That will be good for them and the community, and they will benefit from the fact that their pension fund is accumulating in the meantime. If one prevents a person's pension from accumulating, or penalises them for allowing it to accumulate, one destroys an incentive that, in other contexts, the Government are trying to do something about.

Ruth Kelly: I was going to deal slightly later with the hon. Gentleman's points, which follow on from his earlier contribution. Before I do, however, I want to make a number of other points.

First, the 55 per cent. exit charge on those who go over the lifetime limit is not penal. Following consultation, we reduced the rate, and it has been widely welcomed as fair by the industry. Secondly, we are not preventing people from making alternative retirement provisions, but simply saying that such provisions will not be subject to the generous tax reliefs that we provide for income in retirement. Thirdly, people who build up a full lifetime limit will be perfectly able to enter into income draw-down arrangements and to draw down an income from that

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larger lump sum without it yet again being tested against the lifetime limit.

There are very few reasons why someone would be unable to take maximum advantage of such arrangements and why they would be prevented from continuing to work for as long as they liked. In fact, the proposals give far more flexibility to the 14 million or 15 million people who are currently subject to limits that prevent them from taking flexible retirement. Indeed, the proposals open up flexible retirement to the vast majority of people for the first time.

Mr. Davies: With respect to the hon. Lady, she may have missed my point. Let us not have a semantic argument about whether 55 per cent. is penal—it is 15 per cent. higher than the top rate of tax. My point was that, if it is in society's interests for people to stay in work longer—I believe that the Government recognise that in other contexts—people must surely be given an incentive to do so. However, the Bill clearly gives them a disincentive to do so, because 55 per cent. is much higher than 40 per cent., and higher than the effective rate of tax. The Government have therefore made it less rather than more attractive for people to stay in work and to accumulate a larger pension fund. If people work for longer, they should have the reward of a greater income in retirement because they will be enjoying that income for fewer years.

 
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