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Standing Committee Debates
Finance Bill

Finance Bill

Column Number: 653

Standing Committee A

Tuesday 22 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 269

Transitionals and savings

Question proposed, That the clause stand part of the Bill.

9.30 am

Mr. Howard Flight (Arundel and South Downs) (Con): I welcome you to our deliberations this morning, Sir John.

As we all know, the clause introduces the transitional arrangements. I am glad to note that it contains powers for the Revenue to make by order any other transitional provisions that may appear appropriate, as, despite all the Government amendments to schedule 34, it strikes me forcefully that the transitional arrangements are ludicrously complex and impenetrable and that other changes may need to be made.

There seem to me to be two different types of person. One is a member of a pre-1989 uncapped scheme grandfathered 15 years ago in 1989. I have encountered a great deal of upset about the fact that what was grandfathered 15 years ago has been retrospectively changed. Indeed, a lawyer friend who has been a lifelong member of the Labour party commented to me that he was disgusted with the lack of principle with which his colleagues had disregarded the fact that he had an arrangement to save his pension: he has not changed his employment, he is still a member of the same pension scheme and he now finds himself, towards the end of his career, with a load of different rules. He pointed to the fact that the Conservative party had established the principle of grandfathering, which has been thrown to the wind. The second category is self-evidently members of schemes—whether defined benefit or defined contribution—currently subject to capping.

I ask the Minister to put on the record the underlying principles that the Government followed in producing the transitional arrangements applicable to those two different categories of people.

The Government will be aware that various outside parties have said that the arrangements that have emerged are not quite what the Green Paper envisaged and in some cases are less attractive. It has been said that the Bill should provide a more precise definition of the valuation method for DB used to register for primary protection, which will be significantly more restrictive than expected; that protection applies to 20 times the pension available on early retirement at A-day rather than the full accrued pension; and that, for those too young to retire, retirement at the earliest permissible age is assumed. If early retirement

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reductions are brought into the equation, primary protection will be much less attractive and less available.

The point has been made that the valuation basis is more prohibitive than was originally suggested. Point C5 of the consultation document says:

    ''For DB benefits, pre A-day pension rights may be based on earnings when the benefits or part of the benefits are first taken, rather than on historic earnings. So, the taking of the first benefits under a DB scheme sets the maximum final pensionable salary''.

I shall not go into excessive illustrations, but the point is readily made that some people lose out because the calculation may put them under the ceiling for protection, but as time goes by, and even with the £1.8 million, they may be over, particularly if they are younger when they come to take their pension on retirement.

Some of the amendments that we tabled to schedule 34 have been echoed by the Government, but I repeat that, having read through the explanatory notes, I found the schedule to be probably the least clear part of the Bill. It is an area of complexity and one in which the people who most want to know where they stand are those caught in the transitional process, so I think it pertinent that the Minister lay down the broad principles for those two categories, from which individuals can subsequently explore with their advisers precisely where they stand.

The Financial Secretary to the Treasury (Ruth Kelly): It is a pleasure to be here under your chairmanship yet again, Sir John.

As I said in opening the debate, we want to ensure that the move from the old pension regime to the new, simplified regime is as smooth as possible. I reject the charge that the hon. Member for Arundel and South Downs (Mr. Flight) made that we are somehow introducing retrospective taxation. He—or perhaps he and a few of his colleagues—seem to be the only people suggesting that that is how the new regime operates. We want to ensure that the transitional arrangements provide appropriate protection for existing pension rights, while being as straightforward as possible to understand and administer, and that they carry forward as little complexity as possible from the existing regimes.

I do not want to anticipate the debate that we are likely to have on the sixth group of amendments to the schedule, which suggest that we should carry forward all the previous regimes into the new, simplified regime.

I believe that the schedule, as amended, meets our objectives fully. It is in four parts. The first part will allow approved schemes to move into the new regime without the need to register doing so with the Inland Revenue. Schemes not intending to become registered schemes may give the Inland Revenue notice of that intention before 6 April 2006. There will be a tax charge that applies to such schemes that is equivalent to the existing withdrawal of approval charge on occupational pension schemes.

The second part of the schedule provides protection for those rights accrued before 6 April 2006 that, when

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brought into payment, are likely to be worth more than the lifetime allowance.

Part 3 of the schedule covers individuals who have registered for enhanced or primary protection who also have lump sum rights of more than £375,000 that they can protect. In addition, there will be protection for lump sum rights accrued before 6 April 2006 that, although not in excess of £375,000, breach the limit of 25 per cent. of the total fund. Schemes will be able to make tax-free lump sums that exceed the new limit of 25 per cent. of the total fund if those rights were accrued before 6 April 2006.

Simplification also seeks to introduce a single minimum pension age of 55 for all by 2010. We debated that in the previous sitting. Without some extra protection, that could create some hard cases. In the current regime, a number of occupations have their own minimum pension age, ranging from 35 to 50. It is not possible to get from here to there in a single step. Members of schemes who already have rights to early pensions will, subject to meeting some conditions, receive transitional protection.

In general, members with the right to take pension at an age younger than 50 will continue to be able to do so, but in recognition of that early retirement, the value of the pension will be assessed against a reduced lifetime allowance. The lifetime allowance will be reduced by 2.5 per cent. for each year in advance of age 55 that the pension is taken.

Part 4 of the schedule covers a range of miscellaneous transitional issues, for example those schemes approved before 1970. I believe that those are sometimes referred to as old code schemes. They will be able to wind up before the end of 2006–07 and pay out all the benefits as a lump sum. Of the total benefits, 25 per cent. will be tax-free and the remainder paid as a lump sum taxed at the member's marginal rate of tax. That will ease the transition to the new regime for those insurance companies with old code schemes on their books, most of which have only small pension funds.

We are also protecting the rights of occupational schemes to pay the balance of five years' pension payments on the death of a member, even if that death occurs after the age of 75.

The clause allows the Treasury to make regulations on transitional issues. As the industry focuses on the detail of moving to the new regime, other difficult issues may arise. That is not surprising, given the complexity of the current rules and regulations. There will be further discussions between the Government and the industry about the exact workings of the transition. I do not accept, however, that the transitional rules are overly complex; they merely reflect the rules of the current pension regime. Those powers will enable us to respond flexibly.

We will discuss the other points raised by the hon. Gentleman when we debate the amendments that he has tabled to the schedule. I commend the clause to the Committee.

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Mr. Flight: The Financial Secretary says that she does not think that the rules are unduly complex, but she has not responded to my request to set out in understandable language the basic principles behind the transition arrangements for the two different types of people—those who belong to an uncapped pre-1989 scheme and those who belong to a capped scheme. Neither the arrangements in schedule 34 nor the notes set out any coherent pattern of broad principles. It is no good having a load of random rules; the Government must have come up with a basic principle to determine the transitional arrangements. It would be helpful to those affected if she bothered to set out those principles.

The capping arrangement introduced by the Conservative Government in 1989 quite clearly and correctly stated that those who were already members of pension schemes, because they were embarked on pensions saving, would be exempt so long as they stayed members of the scheme and in employment with its provider. They were grandfathered from the new arrangements. By definition, most of those people are probably in their 50s and moving towards retirement. The Financial Secretary is ignorant of many people's resentment at finding in their last decade of employment a grandfathered arrangement changed and new arrangements penalising them. Instead of being able to continue until retirement with whatever their contributions to that scheme were, they are grandfathered only if they have no further contributions to make to it. That is a major breach of the established grandfathering arrangements.

I would like the Financial Secretary to put on record the broad principles underlying the transitional arrangements, because they are not clear from the notes or the Bill.


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