Finance Bill

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Mr. Flight: I beg to move amendment No. 396, in

    schedule 34, page 481, line 20, leave out '30' and insert '20 to'.

Paragraph 32 widens the definition of a relevant pension scheme provided in paragraphs 30 and 31 to include a scheme to which a block transfer has been made and deems reference to an existing pension scheme to include schemes where there has been such a transfer. We think that the references should be extended and not limited to paragraphs 30 and 31. They should also cover paragraph 20, which protects the right to take a pension at an age below 55.

Ruth Kelly: Part 3 of schedule 34 deals with transitional arrangements for pensions that have not come into payment by 6 April 2006. Given the complexity of the rules and regulations, it is not surprising that, as the industry begins to focus on the details of the move to the new regime, new issues arise.

The amendment concerns one of those new issues. It would extend the scope of block transfers, so that a protected right to a low normal retirement age is not lost on such a transfer. For example, if there were a block transfer of money dealers from one bank's scheme to that of another bank, the transfer brokers would keep their protected right to a low normal retirement age.

I have good news and bad news for the hon. Gentleman. I sympathise with the underlying aim of the amendment. It is in the spirit of the transitional rights that we have identified to protect pre-A-day rights and we see merit in it. However, unfortunately, the amendment is technically defective. We want to examine the issue in greater detail before proposing an appropriate Government amendment. On the understanding that we will consider the issue sympathetically, I urge him to withdraw his amendment.

Mr. Flight: I am glad that the Financial Secretary accepts that there is an issue. I am not clear whether she is saying that the Government will produce their own amendment and I would be grateful for clarification on that. I cannot see how the issue could be addressed other than by an amendment. Subject to that, I will not put it to a vote.

Ruth Kelly: Yes, we will produce an amendment.

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Mr. Flight: I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Ruth Kelly: I beg to move amendment No. 480, in

    schedule 34, page 482, line 4, leave out from first 'scheme' to second 'the' in line 27 and insert

    'is within any of paragraphs (a) to (e) of paragraph 1(1),

    (b) the member has an actual (rather than a prospective) right to a pension under an arrangement under the pension scheme, and

    (c) under the arrangement a lump sum death benefit is payable if the member dies within the guarantee period.

    (2) The guarantee period is the period of five years beginning with the day on which the member became entitled to the pension or, if later, the day on which the pension was first paid.

    (3) If the member dies after having reached the age of 75 and before the end of the guarantee period—

    (a) paragraph 14 of Schedule 29 (pension protection lump sum death benefit),

    (b) paragraph 16 of that Schedule (annuity protection lump sum death benefit), and

    (c) paragraph 17 of that Schedule (unsecured pension fund lump sum death benefit),

    apply in relation to the member and the arrangement with the following modifications.

    (4) Each of those paragraphs applies as if sub-paragraph (1)(a) were omitted.

    (5) Paragraph 14(1) applies as if paragraph (d) were omitted.

    (6) Paragraph 14(2) applies as if the reference to the pension protection limit were to the transitional protection limit.

    (7) Paragraph 16(2) applies as if the reference to the annuity protection limit were to the transitional protection limit.

    (8) Paragraph 17(3) applies in relation to a lump sum falling within paragraph 17(1) as if the reference to the permitted maximum were to the transitional protection limit.

    (9) Section 195(1) (special lump sum death benefits charge) does not apply to any pension protection lump sum death benefit, annuity protection lump sum death benefit or unsecured pension fund lump sum death benefit paid by virtue of sub-paragraphs (3) to (8).

    (10) If the member dies before having reached the age of 75 and before the end of the guarantee period—

    (a) section 195(1) does not apply to so much of any pension protection lump sum death benefit, annuity protection lump sum death benefit or unsecured pension fund lump sum death benefit paid under the arrangement as does not exceed the transitional protection limit, and

    (b) if the arrangement is a defined benefits arrangement, paragraph 14(1)(d) of Schedule 29 is to be treated as satisfied in relation to so much of the lump sum death benefit paid under the arrangement as does not exceed the transitional protection limit.

    (11) The transitional protection limit is—

    where—

    P is the amount of pension to which (had the member lived) the member would have been entitled under the arrangement in respect of the period beginning with the day of the member's death and ending with the last day of the guarantee period, and

    TPLS is the amount of any pension protection lump sum death benefit, annuity protection lump sum death benefit or unsecured pension fund lump sum death benefit previously paid in respect of'.

The introduction of the new pension regime and the intention to make it apply immediately to all pension schemes from 6 April 2006 requires a series of provisions to ensure that the transition from the old schemes to the new one is fair. The subject of the amendment is the transitional arrangement that

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should apply to the right of occupational pension schemes to pay the balance of five years' pension payments on the death of the member, the five-year guarantee lump sum, even if—this is the substantive point—that death occurs after the age of 75.

Death benefits are a complex area of tax simplification. They have been misunderstood in some quarters. In particular, the issue of whether schemes can continue to offer a five-year guarantee paid as a tax-free lump sum has generated much discussion. In the new pension regime, the facility to repay a tax-free lump sum under the five-year guarantee will be removed, bringing occupational pension schemes in line with personal pensions. In its place, all schemes will be given the flexibility to pay a lump sum death benefit as an additional pension benefit, test it against the lifetime allowance and, provided that it does not exceed the dead member's unused lifetime allowance, pay it to the survivor tax free. That means that, instead of being limited to paying the unused balance of the pension payments to the survivors, employers will be able to pay a larger tax-free amount as a death benefit.

Value protection is another new option available in the new regime. It represents the repayment, on the death of the member before age 75, of an amount representing the initial capital value of the pension, less any instalments paid before the date of death. All value protection repayment lump sums will be taxed at 35 per cent. That is equivalent to the existing tax charge on capital payments from income draw-down.

However, there will be some individuals in receipt of a pension that started before 6 April 2006 who have a five-year guaranteed pension in place as we go into the new regime. Under the old rules, any lump sum consisting of the balance of the pension payments in the guaranteed five-year period would be paid tax free to that person's spouse, even if the death occurred after the age of 75.

In the new regime, no return of capital will be permitted after age 75, and value protection repayment lump sums will be taxed at 35 per cent. Clearly, it is only right that transitional protection be extended to people who have a five-year guarantee arrangement already in place to allow a tax-free lump sum to be paid if death occurs within five years of retirement. The amendment redrafts paragraph 34 to remove any possible doubt about the continued ability of occupational schemes to offer tax-free lump sums on death, and I commend it to the Committee.

Mr. Flight: We are happy with the Government's proposals.

Amendment agreed to.

Amendments made: No. 481, in

    schedule 34, page 483, line 23, after 'election' insert 'on or'.

No. 482, in

    schedule 34, page 483, line 27, leave out 'before 6th' and insert 'on or before 31st'.

No. 483, in

    schedule 34, page 484, line 20, leave out 'continues to apply' and insert 'applies'.

No. 484, in

Column Number: 686

    schedule 34, page 485, line 2, at end insert—

    'Application of PAYE to certain annuities in payment at commencement

    43A (1) Taxable pension income for the tax year 2006–07 or any subsequent tax year determined in accordance with section 612 of ITEPA 2003 for an annuity to which this paragraph applies is to be treated as being PAYE pension income for the tax year by virtue of section 683(3) of that Act (PAYE income).

    (2) This paragraph applies to an annuity in payment on 5th April 2006 which—

    (a) would be within paragraph 1(1) but for paragraph 2, or

    (b) would be within paragraph 1(1)(d) if the annuity did not provide for the immediate payment of benefits.'.—[Ruth Kelly.]

Mr. Flight: I beg to move amendment No. 397, in

    schedule 34, page 485, line 10, leave out

    'an employer of an individual makes a relevant consolidation contribution'

    and insert

    'a relevant consolidation contribution is made'.

The Chairman: With this it will be convenient to discuss amendment No. 398, in

    schedule 34, page 485, line 18, at end insert

    'or a transfer from an arrangement not falling within paragraph 1(1) which was established before 6th April 2006'.

Mr. Flight: Paragraph 45, to which amendment No. 397 relates, is about allowing unfunded, unapproved top-up promises to be merged into registered schemes without triggering a liability under the annual allowance charge. Allowing such consolidation, if people want it, is sensible. The amendment seeks to draw an explanation from the Financial Secretary as to why that flexibility is not extended to funded, unapproved top-up schemes by similarly allowing transfers from them into registered schemes. In essence, amendment No. 398 deals with the same point.

 
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