The hon. Member for Northavon also made a point about tax. We pay substantial amounts of tax relief on the way in and, if we were to have an equivalent tax take on the way out, to make sure that people saving for a pension were not advantaged by knowing that they could pass it on with inheritance tax paid at the end, inheritance tax would need to be substantially higher than the current rate. I accept that Members have tabled supporting amendments to apply inheritance tax charges, but the reason the cost will be £100 million is that charging inheritance tax would not come anywhere near to clawing back the kind of tax benefit that a person would receive from going in with tax reliefs but then not buying an annuity. The fear is that there would be a substantial amount of tax planning for pensions that avoided the need to buy an annuity. The number of beneficiaries might rise slightly above the 4 per cent. of the population who would benefit from new clauses 3 and 7, but it would still be a minority pursuit, which would be expensive for the taxpayer and would require tax rises elsewhere, to no benefit.
Ed Balls: If the hon. Gentleman has been following the debate, he will know that we are talking about the amount of pot a person would need to buy an annuity that delivered the minimum retirement income to which we have referred. The overall amount in the pot would need to be substantially higher than the median to provide the necessary income.
Over and above the already generous tax incentives for saving for pensions on the way in, we have introduced flexibility in a number of ways over the last few years, through the Finance Act 2004 and also through the new tax regime that we introduced on 6 April, which gives much greater flexibility and simplicity for pensions saving. We have added flexibility to saving for retirement provision in several ways.
First, as the hon. Member for Fareham (Mr. Hoban) mentioned earlier, we are continuing in the new regime the facility to defer taking an annuity and instead to take income withdrawal. Annuities often represent the most efficient way of turning a capital sum into income, but there could be circumstancesperhaps when the scheme member was relatively young and there was a reasonable expectation that the underlying investments of the pension scheme would perform wellwhen some people might benefit from not being tied into the then prevailing annuity and gilt rates paid later in life. As Members know, the income draw-down rules introduced by the Government allow people to take an income and defer taking an annuity until a more opportune occasion.
The hon. Gentleman gave the impression, perhaps inadvertently, that there are no limits on the degree of draw-down. That is not correct; there are clear rules that allow, in the new regime, a maximum amount to be drawn down for income withdrawal, while allowing resource to remain for the purchase of the annuitythe income guarantee, which is the prime motivation for the existence of the tax reliefs. By contrast, the facilities offered under new clauses 3 and 7 would actually allow the whole amountway beyond the maximum level we have set in the draw-down legislationto be taken in draw-down without the need to buy an annuity.
Only a small minority of people have sufficient wealth to benefit from those opportunities in a way that sensibly assesses risk. Only those individuals could take the risk of not making provision through an annuity. Our view is that providing a substantial tax advantage to allow that, as the new clauses would do, for one in 20 of the population with a pension pot at age 75 would not be the right way to spend taxpayers money.
A second way in which we have added flexibility is that tax rules now allow a new product, a limited period annuity, which enables someone vesting their pension fund to use part of the fund to provide an annuity for a maximum period of up to five years. We have also made a change to allow value-protected annuities to be offered, to allow a return of capital on an annuity where a member dies before reaching age 75.
As the hon. Member for Fareham reminded us, we have also introduced an alternatively secured pensionASPfor pension scheme members who have not secured their pension benefits by age 75, where the member has a principled religious objection to the pooling of insurance and mortality risk. As the hon. Gentleman knows, and as the quotation from my right hon. Friend the Member for Bolton, West (Ruth Kelly) to which he referred makes clear, it was always our intention that the rules would apply in the specific and narrow case of individuals with such principled religious objections as the Christian Brethren. It has
always been our intention to replicate the secure lifelong income obtainable from an annuity through those measures, but not to allow that to become a way in which a small and wealthy minority could benefit substantially from tax advantages to the cost of taxpayers overall. We have always made it clear that we shall not allow those concessions to be taken up more broadly to get round the annuity rules. This is not a mainstream product and it must not become a tax avoidance measure. We shall not be going down that road.
Finally, we have taken steps to ensure that more people with small retirement funds can avoid the need to purchase an annuity which, although secure and guaranteed, is neither cost-effective to pay or to receive, because the amount in the pension pot is so small.
The hon. Member for Fareham mentioned the Turner commission report and we shall be setting out a detailed paper in response later in the year. The Turner report looked at pensions policy 20 or 30 years ahead and the commission advises us to look at all the issues in the round over time, including limits and ages. We shall certainly do that. Following publication of the first Turner report, we took up the suggestion that we should examine the case for not requiring the full purchase of an annuity at 75. Our view is that our policy is right for the present and that to follow that suggestion would be complex and bureaucratic and benefit only a small minority at wider expense to the taxpayer, all as a result of substantial increases in tax rates. That would be the wrong road for us to take.
Steve Webb: The Minister gave us what sounded like a precise estimate of the costs, although I believe them to be closer to zero. Is he willing to put in the Library a detailed note setting out where his figure of £100 million comes from?
Ed Balls: I shall be happy to do so. If the hon. Gentleman were to ask me a written question, I should be happy to provide him with the figure, but I think that he will find that it is £100 million. The Revenue has much experience in such matters. We understand exactly the motivation behind the proposals. To be more precise, my estimate is that the figure would be upwards of £100 million, which may mean that the size of capital gains tax rise that the Liberal Democrats would need will creep up from £12.1 billion to £12.1 billion-plus. We are looking forward to hearing the details of the Liberal Democrats tax policies and how they intend to reconcile their commitment to supporting wealth, prosperity
Ed Balls: I am sure that you are right, Madam Deputy Speaker. There will be other times when we can debate those tax policies and we are looking forward to learning the details in due course. I will provide the hon. Member for Northavon with details of our costings and look forward to his providing us with details of his.
Turning to the specific proposals under discussion, as outlined by the hon. Member for Fareham, we have before us a proposal to allow people to set up a retirement income fund from which they may make withdrawals on reaching the age of 75, provided that they first purchase an annuity to secure a minimum income requirement. New clause 7 provides for the equivalent facility for dependants. I have explained already in answer to Opposition interventions why that would be inconsistent with both the principles that have guided our approach to annuity policy over the past few years and the cautious and careful flexibility that we have introduced over the past couple of years and why it would represent a substantial cost to the Exchequer.
I could also explain at length why the proposals are bureaucratic, complex and technically flawed, but I will resist the temptation. Suffice it to say that we urge Opposition Members not to spend £100 million tonight on those measures and, instead, to continue to support us and the wider industry in implementing the Turner commission proposals and the wider A-day pension simplification that we have introduced. A consensus on pensions policy has eluded us for a long timeit is something that we hope to achieveso let us make it a consensus about the importance of using tax relief to benefit the majority, rather than a very small minority.
Turning to amendments Nos. 62 and 14, which cover the recycling of lump sums. As the hon. Member for Fareham says, those amendments were motivated by a concern that the recycling rule might catch certain cases of normal retirement planning. His view is that the guidance notes restrict the scope of the legislation and that, without the guidance notes, clause 159 would have far wider ramifications than is intended.
In Committee, I offered to circulate any significant material changes to the guidance to the hon. Gentleman, to give him a chance to comment if we made any such change. On the basis of his speech this evening, I am happy to offer that opportunity more widely if any other Opposition Member would like to be consulted on the guidance. That offer was in no way intended to be ad hominem. I will endeavour to ensure that there is proper consultation on those matters.
More importantly, following the tabling of amendments Nos. 62 and 14, I took the opportunity to reconsider the legal status of both the legislation and the guidance notes and to hold discussions with relevant legal and technical specialists. Following those meetings, I am pleased to be able to assure the House that the recycling legislation does not have the wider ramifications that the hon. Member for Fareham fears and that the guidance has no concessionary or discretionary effect whatsoever.
The guidance notes contain a number of worked examples because, as the right hon. Member for Suffolk, Coastal (Mr. Gummer) would agree if he were here, the world is a complex place and people can construct many different kinds of turbocharged recycling schemes to try to avoid tax. It is important that people understand the way in which the Revenue will proceed in each kind of case. I have quoted to the hon. Member for Fareham in interventions the views of the Chartered Institute of Taxation on these matters.
We have tried to be consultative and to listen to those in the industry and to ensure not only that their comments are incorporated into the legislation, but
that the guidance provides the fullest explanation of our intent, so that, as I said earlier, we can ensure that expensive tax avoidance is not tolerated and that innocent pension savers are not disadvantaged by those clauses. On the basis of the assurances that I have given the hon. Gentleman this evening, I hope that he will agree that to try further to clutter tax legislation by trying to move guidance notes into legislation is unnecessary. I ask him not to press amendments Nos. 62 and 14 and accept my assurances instead.
Finally, I want to make a short comment on Government amendments Nos. 31 and 97. The new pensions tax regime, which came into force on 6 April, removed a number of outdated and complex rules. The pension tax simplification changes included provisions for the rationalisation of the lump sum payments that pension schemes can make. One of those lump sumsa short-service refund lump summay be paid when someone has less than two years pensionable service and effectively permits a refund of the contribution that the member has paid into the scheme.
One of the requirements of the short service refund lump sum is that the payment extinguishes all the members entitlement to benefits under the scheme. We have recently received representations from the industry that that requirement would cause difficulties for contracted-out money purchase occupational schemes, which, to comply with Department for Work and Pensions protected rights legislation, must retain for the member certain rights within the scheme. That could effectively prevent such schemes from providing short service refund lump sums, where they would otherwise meet all the conditions for their payment.
Amendment No. 31, therefore, provides for an exception to the requirement that all the members entitlement to benefits under the scheme must be extinguished to the extent that the scheme must retain certain rights of the member to comply with other legislative requirements. That amendment will introduce a welcome relaxation in the rules for the pension industry. I urge members to accept it. I know that it will be widely welcomed by the industry, following the consultations that we have had in recent weeks.
Amendment No. 97 will correct a minor technical error in the changes we are making in the Bill to the available transitional protection and ensure that a missed consequential change is incorporated into the legislation.
To summarise, I invite the hon. Member for Fareham to withdraw the motion on new clause 3, not to press new clause 7 or amendments Nos. 107 to 120 and to join us in a consensus on pensions that does not allow tax relief to be diverted to tax avoidance by a small number of people. I ask him not to press amendments Nos. 62 and 14 on the recycling clause and accept my assurances that we will proceed properly in future and consult on any change in the guidance. I ask the House to accept Government amendments Nos. 31 and 97, which will further strengthen the long-term regime for pensioners in this country.
I thank the Economic Secretary for his remarks. He has given a fairly lengthy speech on new
clauses 3 and 7 and the amendments. After listening to it, I am unconvinced about the Governments rationale for opposing new clause 3. The hon. Member for Northavon (Steve Webb) referred to the opportunities that a change to the annuitisation rules would create: an improvement whereby a number of people would gain, whereas others would not lose. Such a change could go further than that. Certainly, the Turner commissions view was that, yes, some people would gain directly, but a great many people would gain indirectly through lessening of the pressure on annuities and markets in the long term. Many people would seek to achieve that gain, particularly as there would be more demand for annuities in the future, with a shift from defined benefit schemes to defined contribution schemes, as I said in my opening remarks.
The Treasury is fighting a rearguard action. The Economic Secretary talked about the alternatively secured pension scheme being available for a small number of people, but more people will take advantage of such schemes. There will be an appetite for that, because people do not want to be tied to the idea of a compulsory annuitisation of the pensions at the age of 75. They want to have the flexibility in retirement to use their funds in a different way. They want to determine their income. They are concerned about the declining annuity rates and the impact of that on their pensions. On that basis, I propose to press new clause 3 to a vote.
I want to make a final remark on recycling. The Economic Secretary sought to persuade us that our fears about the use of such rules are ill-founded, that the guidance is sufficiently robust and applicable, and that we should have no concerns about it. I am afraid that, on that, too, I am not persuaded, and with the leave of the House at the appropriate time, I will seek to move either amendment No. 62 or 14 formally, but I ask my hon. Friends to vote for new clause 3 and I invite the Liberals to be on the side of the angels again, as the hon. Member for Falmouth and Camborne (Julia Goldsworthy) said earlier, in voting with us tonight on new clause 3.