Mr. Flight: As I understand it, the Minister has given the key answer to the problem that we spotted: the DWP is empowered to address the problem, so the amendment is unnecessary. I therefore beg to ask leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Amendment made: No. 478, in
Column Number: 660
Mr. Flight: I beg to move amendment No. 378, in
The Chairman: With this it will be convenient to discuss the following:
Amendment No. 379, in
'(5) Subject to paragraph 9, for the purposes of this paragraph the value of the individual's uncrystallised rights on 5th April 2006 under an arrangement is to be calculated in accordance with section 201 (valuation of uncrystallised rights for the purposes of section 199) as if—
(a) at the end of subsection (4) of section 201 the words ''and no reduction were applied under the arrangement to take account of early availability'' were inserted and
(b) at the end of subsection (7) of section 201 the words ''(c) that no reduction had been applied under the arrangement to take account of early payment'' were inserted.'.
Government amendment No. 503.
Amendment No. 380, in
'as if it was not subject to this paragraph 9'.
Government amendment No. 504.
Amendment No. 382, in
Amendment No. 383, in
'and where PCPF is the pre-commencement pensions factor (see paragraph 19)'.
Government amendment No. 505.
Amendment No. 389, in
Amendment No. 390, in
'and where PCPF is the pre-commencement pension factor as set out in sub-paragraph (6)'.
Amendment No. 391, in
'(6) The pre-commencement pensions factor is the appropriate factor certified from time to time by the Government Actuary having regard to the individual's age on 6th April 2006 and the extent to which the individual before that date received a tax free lump sum in lieu of pension'.
Mr. Flight: Several of our amendments are grouped together, although they are in fact somewhat different. Schedule 34 says that if an individual opts to defer taking an annuity, he will be treated as entitled to payment of the benefits. Why has that interpretation been made? Surely, benefits should be treated as uncrystallised if they are not being paid. Amendment No. 378 seeks an explanation of why that is not the case.
Amendment No. 379 is about valuing uncrystallised rights for the purpose of primary protection, which provides for the A-day value of the benefits to be indexed until retirement. There may be a technical problem, in that clause 201 deals with the calculation in the normal course of events, but in this case a problem could arise because of the assumption that on A-day the member becomes entitled to benefits even if they are under 50 and in good health. In such
Column Number: 661circumstances, the scheme may apply reduction for early repayment—that is discussed in paragraph 18—thereby massively reducing the value of the protection, as even if the pension is deferred, it would be increased in deferment by limited indexation and paid unreduced. If the value of the primary protection is actuarially reduced, by the time the benefit is paid it is almost certain to exceed the level of primary protection anyway. The amendment is therefore designed to ensure that no actuarial reduction is applied when valuing such benefits for this purpose. It appears that one of the Government amendments may address that point in a slightly different way.
Amendment No. 380 is purely a drafting amendment. Paragraph 8 is subject to paragraph 9, but paragraph 9 merely envisages a value calculated in accordance with paragraph 8 being higher. That seems logically incoherent. Presumably, paragraph 9 is intended to say something along the lines of, ''as if the effects of this paragraph were ignored.''
Amendments Nos. 382 and 383 are designed to achieve fairness in protection arrangements if lump sums have already been taken. They are about the valuation of payments and benefits on A day for the purpose of primary protection.
The suggested 25 to 1 factor is different from the normal 20 to 1 factor because it addresses problems related to age that we have already discussed. The 25 to 1 factor goes beyond that by assuming that everyone with a pension in payment took exactly the same proportion of the pension previously as a tax-free lump sum. Clearly, some people may not have taken a lump sum and some may have taken more, some may have taken less, so the amendment to paragraph 19, which is also about how benefits in payment are valued irrespective of the form of protection sought, introduces the new pre-commencement pension factor—PCPF—that we touched on last week.
Essentially, there is no allowance for the unfairness that could occur depending on how much or how little tax-free lump sum has been taken. That is an issue that must be addressed. Amendments Nos. 389 to 391 relate to the same factors.
Ruth Kelly: We now come to a group of amendments covering the valuation of rights for primary protection. We received representations from the Faculty of Actuaries and the Institute of Actuaries that cover the same ground as changes to valuation that we discussed and agreed when debating clause 171.
I will not detain the Committee with a detailed description of what is achieved by our amendments, merely to say that the mechanism is the same for transitional protection as for the unauthorised payment surcharge and the valuing of direct benefit rights for the purposes of the annual allowance that we discussed alongside the amendments to clause 177.
Taken with the previous amendments and new clause 17, our amendments clarify the valuation rules in all areas and provide a simple and consistent approach to valuation across the piece. Government
Column Number: 662amendment No. 503 clarifies beyond doubt the test of the maximum benefits to be valued, in words with which the industry is familiar.
We received several representations about paragraph 9 of schedule 34 and how in some cases it could bring about a perverse result if someone's earnings had dropped and there had been a transfer of large pension rights from a previous employment. Through our amendments we have therefore taken a fresh approach to paragraph 9. All the actual rights under the employment will be valued on the basis of the member having reached his expected retirement date on 5 April 2006.
In order to stop manipulation of retirement ages, which was something recognised by the actuaries in their letter to the Revenue, the member's normal retirement date will be that which was his under the scheme on 10 December 2003, or 60 if he joined after that date. The value will be tested against the maximum pension that the scheme could pay the member on 5 April 2006 without losing tax approval. That approach is fair, the actuaries support it and I commend our amendments to the Committee.
Our amendments achieve pretty much the same results as those tabled by the hon. Gentleman, therefore I ask him not to press amendments Nos. 379 and 380. There are further Opposition amendments to paragraphs dealing with valuing benefits for transitional protection. We have already debated using single factors for simplicity, and that is what amendments Nos. 382, 383 and 389 to 391 seek to do. They replace a factor for valuing pensions already in payment of 25 with a factor set by the Government Actuary.
The Association of Consulting Actuaries recommended the 25 to 1 factor for valuing pensions already in payment. That is higher than the pensions factor, because it assumes that a lump sum has already been taken. I agree with the hon. Gentleman that it will not have been in all cases. He suggests that the matter needs to be addressed because of the unfairness that arises, but it is not clear how that would be done. The alternative of requiring members to acquire, and schemes to provide, proof of lump sums would be an administrative burden of some complexity, and it would all be for nothing.
We must value pensions already in payment, so that someone with a large pension has an opportunity to contribute another £1.5 million with tax relief. Valuing pensions in payment at 25 to 1 allows people to top up existing pension savings to the lifetime allowance, but we also take the already crystallised pension into account for the purpose of providing transitional protection. Therefore, as the provision relates to both sides of the equation, it will have no adverse effect overall. I therefore ask the hon. Gentleman to seek to withdraw the amendment.
The hon. Gentleman outlined the purpose behind amendment No. 378. Sub-paragraph 8(4), which it seeks to delete, provides clarity. It states clearly that funds in draw-down are crystallised funds and are therefore to be valued as such under paragraph 10 using a factor of 25 to 1. One effect of the amendment
Column Number: 663would be that funds in draw-down would be treated as uncrystallised pension rights and valued at 20 to 1. However, that would introduce an additional distortion between pensions in payment and pensions moving into draw-down. It would be unfair and unreasonable to value funds in draw-down using a factor of 20, the factor for uncrystallised pensions, rather than 25, the factor for crystallised pensions. It would create an anomaly in the valuation rules for draw-down pensions and other pensions in payment. As the higher factor has already been set at 25 to take account of tax-free lump sums already paid, that factor should be used to value funds in draw-down. If the lower factor of 20 is used to value funds in draw-down, the absolute value of an individual's total pension rights would be smaller than if the higher factor were used. It follows that the amendment would cause a reduction in the value of an individual's pension rights for the purposes of primary protection.
Government amendment No. 503 deals with a point raised by several respondents to the Revenue. There is an issue about whether a pension that a person receives as a result of the death of a spouse or someone on whom they were dependent is counted as a pension for the purposes of transitional protection and the ongoing operation of the new system. It was not our intention that it should be, and the amendment puts the matter beyond doubt. I therefore commend it to the Committee.
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