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Let us ponder for a moment the meaning of that principle. The death in service benefit that our widows and widowers receive on our death as Members can be used to be invested in an income in the same way as a widows pension. It can be used as an alternative to pay off the mortgage so that their existing income is protected. Yes, we are talking about a lump sum that is gained on death, but the purpose to which it is put can enhance the widows or widowers pension by
supplementing it through direct investment or by repaying the mortgage debt with which so many people are burdened.
Mr. Hoban: If one is a member of an occupational scheme, the contributions are subject to tax relief, and many such schemes clearly include death in service benefits. The Government are trying to remove the opportunity for those who are self-employed or not part of such a scheme to receive the tax relief on a stand-alone, pension term assurance policy. Another key principle that underpins the Governments approach to pensions tax relief emphasises that point. The Red Book states that
incentives for employer contributions are provided as it is more efficient for pensions to be provided on a collective basis through the employer.
What happens to those who are not in employmentthe self-employed and temporary workers? They will not benefit from tax relief on a stand-alone policy. Indeed, other changes make it more difficult for them to get that tax relief. They will have to bite the bullet and not only pay the costs that we pay in our pension contributions and the sort of costs that the Exchequer pays into the parliamentary pension scheme, but get no tax relief. They are therefore hit by a triple whammy and in a far worse position than us as employees in the context of death in service benefit and how to fund it.
Ed Balls: This is the last time that I shall try. The hon. Gentleman has clearly outlined the principles that guide the Governments approach, which I set out in a speech a month or two ago and has appeared in repeated documents. His speech makes it clear that he disagrees with those principles because he advocates the use of pension tax relief to pay for term assurance, life assurance and products for individuals. As I said, that is a reversal of the 1984 position. I shall give him one last chance to confirm that he is taking that principled position. He was concerned when I suggested that it was unprincipled. Have I outlined his principled position? This is his moment.
Mr. Hoban: I acknowledge the Economic Secretarys persistence. He is trying hard and, at some point, I might satisfy him. However, he ought to tell the Committee why the Government sought in the Finance Act 2004 to reverse the position that was adopted in the early 1980s. I am intrigued to hear his arguments.
My point in opposing the measure is more about the Treasurys chaotic approach to policy making and the impact of the change on consumers and the industry. It is clear from speaking to people in the sector that there is a problem with the protection gap. The Economic Secretary and I support the concept of financial inclusion and want to spread to more people the
benefits that those of us who are lucky enough to be in employment enjoy. We should consider carefully the way in which we spread those benefits, but that is not a commitment to tax relief because, as I said yesterday, we are not in a position today to write the first Budget of the next Conservative Government.
Mr. Hoban: That was a simplistic question. People oppose measures for many and varied reasons. If the hon. Gentleman survives into opposition, perhaps he will understand the way in which such decisions are made. I am not sure whether I hope that he experiences that, but he might.
The Government recognises the importance of a stable environment that allows the pensions industry to plan ahead and minimise disruption to the regimes already in place that are working well.
a stable environment that allows the pensions industry to plan ahead?
When the Economic Secretary read that bit and let it go through, he must have smiled at the irony of those remarks, and at how many people in the industry would not recognise the Governments principle in relation to the reforms of the pensions system. Another principle is that the cost of pensions tax incentives must be affordable and fall within current fiscal projections. I am sorry that I forgot to mention that earlier, because it is relevant here.
This raises a doubt in my mind, and in the minds of those in the industry, about what other changes might be planned if the cost of these reforms continues to mount. Will the Economic Secretary unpick other measures in next years Finance Bill? Will the Government take fright at the levels of the lump sum contributions that many people are putting into their pension schemes this year? I recognise the importance of the argument about affordability, but this leaves the door open to further U-turns in the future.
Where does this leave the consumer and the industry? Let us consider the industry first. It estimates that it has invested some £35 million in new systems and processes to introduce the type of policy that the Government have created, and that sum will have to be written off. This sudden withdrawal without consultation has left an estimated 50,000 policy holders in the pipeline. Insurers could not deal with inquiries promptly because there was so little information available from the Treasury when the announcement was made.
The final details of the transitional arrangements were announced only on 13 April, a few days after the previous deadline had expired. That is not an orderly way in which to conduct business. I know that the industry is pleased that those transitional changes have been made, and we should welcome them on that basis,
but this is not the way to make policy. All sorts of changes had to be made by the industry: automated advice systems had to be amended to redirect customers to alternative products, for example, and the industry now has sub-scale portfolios of business to administer for the next 25 years or so.
The Minister and I agree on the importance of maintaining London as a global financial services centre, and we recognise that insurance, along with other financial services, covers a global market. Companies seeking to expand their businesses need to think carefully about how and where they use their capital. It will not help the UK market if there is a perception that we have an unstable, unpredictable pensions tax regime.
It is also worth pointing out that the industry has sought to reach a compromise with the Treasury on this issue. It has come forward with a series of proposals to facilitate the continuation of this type of business, as it recognises the importance of the protection market. It is also thinking of ways of avoiding writing off such a large investment in the new systems. It has proposed that all pension term assurance offers would contain clear information about the pension to which they were linked, including details of the provider and a policy number, reinforcing the link that the Government think is so important between the term assurance and the pension. That would produce an integrated policy that provided a pension and a lump sum death benefit. The industry made that proposal so that contributions could continue, but the Treasury rejected it. In effect, it rejected that position before A-day.
The lack of clarity in the Governments position on integrated products is such that in one of todays amendments to schedule 18 we see explicit recognition of that type of policy and of the new transitional arrangements involved. The industry also suggested, as an alternative, that it would cap the amount of the lifetime allowance that could be utilised by taking out term assurance. A third of the allowance, about £500,000, was suggested, but again the Treasury rejected this attempt by the industry to reach a workable compromise.
Many consumers have therefore been left with a protection gap. Those who are outside an occupational pension scheme will have to pay more for the coverage that all Members of the House take for granted. There is an uneven playing field, which favours those who are lucky enough to be in jobs that have a death in service benefit as part of the package, and disadvantages those who are self-employed or contractors. Perhaps more sole traders will be encouraged to incorporate, despite the Governments best efforts yesterday, to access the tax relief that comes from being an employee.
Another important issue is that consumers and industry cannot assume that just because something is a Government policy one month, it will be a policy next month, next year or the year after. That undermines consumer confidence in saving for the long term. In a subtle but important way, it undermines the Governments long-term goal for more people to take responsibility for their financial affairs. That has a destructive effect on the industry and on consumers willingness to plan for the long term. Every Member of the House recognises the importance of that, and we
have had many debates about the Pensions Bill, which is an attempt to encourage more people to save for the long term. One message seems to be coming out from the Department for Work and Pensions, and a different one from the Treasury and the Economic Secretary.
Two quotes highlight the combined impact of the change in policy. First, Vanessa Owen of Liverpool Victoriaperhaps I should start to pay her royalties, given the number of times that I have quoted hersaid:
Our members and customers who do not have access to life assurance through their employer are now at a greater disadvantage because the option of tax relieved life protection has been removed.
Not to mention a complete waste of millions of pounds in making pension term assurance available in the first place, following extensive consultation with the Treasury.
Finance Bill by Finance Bill, the Economic Secretary unpicks the work of the former Financial Secretary, the right hon. Member for Bolton, West. Instead of the clear, simple scheme that she advocated, we have an increasingly complex and restrictive scheme. It is surprising that the pitfalls were not seen, and warnings not given, when the legislation was introduced in 2004. The Bill is destructiveit undermines the confidence of consumers in the stability of the Governments pensions policy, inhibits both innovation and the sectors willingness to respond to Government initiatives, and is destructive of the Treasurys ability to make policy in an area in which long-term stability is fundamental if we are to promote long-term savings.
The hon. Gentleman started well in explaining the origins of pension term assurance, and making the point that it was an entirely innocent and reasonable way in which the industry should evolve. All individuals are faced with the question of how to hedge the risks when they look forward to their old age. There is the risk of death, and in that regard we provide for our dependants either in the form of a widows pension or a lump sum. We must also hedge against the risk of living, and therefore provide an income for ourselves. It is entirely sensible and natural that the two sets of risks should be considered together, as many pensions providers do, and many of us are beneficiaries of such an arrangement. It was therefore natural that the industry should evolve a product that sought to provide those two activities together: pension term assurance. As the hon. Member for Fareham pointed out, in 2004, the Government saw no problem with that, and extended tax relief.
With regard to the Governments answer, about which the Economic Secretary has intervened several times, there are two issues. He has laboured the point about the need to maintain the integrity of the distinctionwhich he calls the principle, although it is probably more an established practice than a principlebetween tax relief for pensions and tax relief for life insurance. Clearly, that is established practice,
and must be maintained. The practical issue, however, is not so much the restatement of that principle as tax avoidance. There are clearly individuals who have seen, and would see in this new product, an opportunity to maximise tax relief on life insurance products, particularly if they have high incomes and are able to take advantage of higher rates of relief.
What I would like to knowand the Economic Secretary might strengthen his case if he told usis how much of the £150 million or so that the Government hope to retrieve originates in the higher tax relief. If it is true that, as the hon. Member for Fareham suggested, this product was designed principally for people on low incomes, we can see that it may have evolved in a fairly innocent way; but if it is designed for high earnerswe are talking about 40 per cent. tax reliefI am more sympathetic to the Governments view that there is a potential for avoidance. It would be helpful if the Economic Secretary could give us an idea of the relative proportions.
The Liberal Democrats approach the matter differently from the Conservatives: from the opposite direction, in a sense. We are not trying to maximise the scope for tax relief. Generally, we have gone rather further than the Government in arguing that there is no justification for giving people on high incomes not just more tax relief, but higher rates of tax relief, on pensions, let alone life insurance. However, we agree with the Conservatives that the distinction between what happened in 2004 and what happens now has created confusion, and has not been terribly well handled.
I should like to hear from the Economic Secretary how the Government responded to proposals from the industry. The hon. Member for Fareham summarised ways of meeting the Governments requirements that had been suggested by the Association of British Insurers and others, some of which seemed perfectly sensible at first sight.
If the Governments primary concern was to maintain the link between life insurance and pensions, organisations in the industry were willing to propose ways of checking that it was being maintained. They suggested, for instance, that if someone died and life insurance was claimed, it should be checked that there was a parallel pension product to maintain the integrity of the connection. Perhaps the Economic Secretary will tell us whether that proposal was explored, and whether it was deemed feasible. Organisations also suggested a limit on the tax relief that could be available, and a mechanism for fraud checking.
I have a sense that the industry has gone out of its way to try to meet the Government halfway, addressing their central concern that there must be a link between the life insurance and pension elements. As for how far the Government have gone to meet the industrys concerns, I have an open mind. Our stance on whether the clause should stand part will be determined partly by how they respond.
Mr. David Gauke (South-West Hertfordshire) (Con):
I want to reiterate some of the points made by my hon. Friend the Member for Fareham (Mr. Hoban) in his
comprehensive and thorough speech. I shall cover some of the same ground, however, because it would be difficult not to: my hon. Friend really did cover the waterfront. It is worth my repeating one or two of his points in the hope of provoking an answer from the Economic Secretary.
It is not entirely clear what was the rationale for the simplification of the rules governing pension term assurance in the Finance Act 2004, which came into force on 6 April 2006. The Economic Secretary made it clear that it was never the Governments intention to encourage the granting of tax relief on products that were not connected with pensions, but that gives rise to one or two questions. There was no real explanation or debate about the issue during the passage of the 2004 Act. As for the rationale, as my hon. Friend the Member for Fareham pointed out, it was rather slipped through.
What happened after 6 April 2006 to make the reforms in the Finance Act 2004 so unattractive and undesirable? We have had an answer from the Economic Secretary on that: the provision was used for non-pension purposes and for lump sum purposes. However, that begs the most important question, which my hon. Friend the Member for Fareham dwelt on: why was that not anticipated at the time?
One has to put that in the context of a number of cases. Yesterday, we debated the rate of corporation tax for small businesses. We have seen change after change: the introduction of a 10 per cent. band, then a zero per cent. band, which was abolished last year, and now the small business rate is increasing. That is an example of the Government introducing a policy and businesses altering their behaviour accordingly.
We have seen something similar with pension term assurance. Does it not worry Ministers that there often seems to be an almost systemic failure within the Treasury to anticipate the consequences of tax changes? Every year, a Finance Bill is presented and contains detailed provisions. The Treasury is keen to encourage certain types of behaviour and discourage others, yet it does not have a good record of judging what the consequences of the changes will be. This appears to be a very good example of that. Surely it could have been anticipated that pension term assurance would be used in the manner in which it has been. Within only a few months, the Treasury has been forced to change policy.
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