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Ed Balls: I am sure that the hon. Gentleman will remember the debates in the House over the issue of self-invested personal pensions, where it was regularly put to the Government by Opposition Members that SIPPs needed to be addressed—and subsequently they were. We debated that during the passage of last year's Finance Bill. Does he agree that, prior to the pre-Budget report announcement of action, no points were put in the House by any Opposition Members to the Government
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about the need to address term assurance at any stage? We have all agreed that action is necessary to protect the revenue base.

Mr. Gauke: The hon. Gentleman may be right that those points were not made during the passage of the 2004 Finance Bill. One would have thought that the Treasury would be looking to spot those pratfalls. The Opposition do point out failures. I referred earlier to the zero per cent. band for corporation tax for small businesses, which was highlighted as a possible concern by Opposition MPs. There are times when things are not spotted by Opposition parties, but the hon. Gentleman will know—he was heavily involved in opposition—that our resources, compared with what is available to the Government and Treasury, are somewhat limited. He had access to a hotel room off Park lane, but those were perhaps the best facilities that any Opposition party has had. Often, one is talking about small numbers of people, but the Treasury is a mighty machine. It has the crème de la crème of the civil service working on these matters, yet constantly it seems to fail to spot some of them.

I would have thought that Ministers are concerned about that. There is certainly an example here of the Treasury not spotting the way in which a tax change would affect behaviour. That is not necessarily a party point, but it is a concern. I would have thought that Ministers ought to acknowledge that and be worried about it.

Rob Marris: May I gently suggest to the hon. Gentleman that he is over-egging the pudding? Labour Members might take on board his point—although we might not agree with every particular of it—in respect of SIPPs or the incorporation issue when some individuals and organisations said at the time, “Do you realise that such-and-such a change could lead to such-and-such a consequence?” My somewhat hazy recollection from having served on the Finance Bill Standing Committee in 2004 is the same as that of the hon. Member for Fareham (Mr. Hoban): no one was making that point. The hon. Member for South-West Hertfordshire (Mr. Gauke) talks about resources in opposition, and I understand that point. However, any Member who has served on the Finance Bill Standing Committee, as he has, knows that members of that Committee get bombarded—quite properly in a democracy—with submissions from outside organisations, such as the Chartered Institute of Taxation, setting out their views on the proposed legislation. I stand to be corrected, but I do not think that there were any such submissions about this change in 2004, so it differs from the other two issues to which the hon. Gentleman has referred, which is why I suggest that he is over-egging the pudding.

Mr. Gauke: I am grateful for that intervention. The hon. Gentleman and I have served on Finance Bill Committees before—he more often than me—and I think that it is fair to say that businesses that lose out as a consequence of tax changes tend to be the most vociferous in their lobbying of Committee members. The area under discussion was simplified by the Finance Act 2004, and it is unsurprising that there were relatively few contributions from industry as—I understand, because I was not a Member at the time—it generally welcomed the contents of the 2004
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Act. That might explain why fewer submissions were made, but circumstances in which tax change measures favour industry are perhaps those where the Treasury ought to be most alert and most alive to the potential impact.

Mr. Hoban: My hon. Friend makes an important point about the extent to which people advise us that specific changes will have adverse consequences. It is my understanding that the Treasury should have been aware of the take-up prior to A-day. Certainly the industry believes that that was discussed with the Treasury prior to A-day. Therefore, although it might not have been able to make any changes to the Finance Act 2004, it certainly could have done so in the Finance Act 2006 on which I served, along with the Economic Secretary and the hon. Member for Wolverhampton, South-West (Rob Marris). That might have been the forum in which to make such changes, because I understand that the Treasury was aware then of the issues we are discussing.

Mr. Gauke: I am grateful to my hon. Friend for his comments, although I must say that, recalling the Finance Act 2006, I am not sure whether I can support the idea that an additional measure should have been included in it. On the contrary, perhaps we should be grateful that that did not happen. However, my hon. Friend makes an important point on the substance of the case.

John Bercow (Buckingham) (Con): I entirely understand my hon. Friend’s lamentation that on the whole one certainly does not look for additional items to be included in Government legislation; on the whole one searches for measures that can be deleted from it. However, I hope that my hon. Friend agrees that, whatever the complexity of Government proposals, that is no excuse for unintelligibility. As a parliamentary point, let me say that when the Government decide that a change is needed, it is important that wherever possible that should be stated in clear terms in the Bill in question. Is my hon. Friend concerned that the order-making power in schedule 18 allows for regulations, the content and detail of which we in this House might not see until some time after we have voted for the legislation? That will not do, it is not satisfactory, it happens under Governments of both colours and it ought to be changed.

Mr. Gauke: My hon. Friend is a doughty defender of Parliament, for which we should be grateful, and he raises an important constitutional point about supervision. However, this Finance Bill, in contrast to last year’s, could do with more substance.

Let me turn to a couple of additional points, which I would like the Economic Secretary to address. What analysis has the Treasury conducted on who will lose as a consequence of this tax change? It seems that there are certain beneficiaries of the Finance Act 2004—the self-employed, contract workers and so on, who would not normally be able to participate in occupational pension schemes that provide some kind of life assurance lump sum. The purpose of the 2004 changes might have been to simplify the system and to make
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better provision for these people, but it seems that they have suffered as a consequence. I might be wrong, however, and I should be grateful for enlightenment from the Economic Secretary.

I should also be grateful if the Economic Secretary clarified the impact of the following development, which my hon. Friend the Member for Fareham addressed. My understanding is that before A-day—6 April 2006—tax relief was available for those individuals wanting to buy term assurance, if they were part of a pension plan that also provided pension benefits. As I understand it, that will no longer be the case, and I should be grateful—

Ed Balls indicated assent.

Mr. Gauke: From a sedentary position, the Economic Secretary gives a conclusive, authoritative nod. Term assurance is therefore more limited than it was before A-day, so this is almost more than a U-turn. We are not just going back to the position before A-day.

I turn to my final point.

John Bercow: Surely not.

Mr. Gauke: I am afraid so. I have a final question for the Economic Secretary, on stability in the pension system, which my hon. Friend the Member for Fareham discussed in his conclusion. There have been a number of tax changes to the pension system. Has the Treasury analysed the impact of these frequent changes? Is the Economic Secretary concerned that such frequent changes increase instability? If there is an unstable environment—if people do not know where they will stand and what the tax system will be next year, or in two or three years’ time—it does not encourage them to save. We surely need to look at that issue. I appreciate that there are difficulties and that we need to get the system right, but such constant tinkering—the constant attempt to encourage a particular approach, only to discourage it on seeing its perhaps being overused—is characteristic, I am afraid, of the way the Treasury has been run in the past 10 years. Such tinkering is not necessarily good for stability, or to the long-term benefit of this country.

John Bercow: I am very grateful to my hon. Friend for giving way. The immediate impact on consumers of change after change should rightly preoccupy us, but there is another respect in which constant changes and growing levels of complexity are unhelpful: they tend to discourage market entry by smaller-scale providers. One can end up, even without having intended this consequence, with a lack of competitiveness and a concentration of power in the hands of a relatively small number of highly powerful operators, who tend to enjoy better access to Ministers. That does not necessarily conduce to the public interest.

Mr. Gauke: My hon. Friend again makes a very important point. As is generally the case with financial services—and, indeed, in other areas—if we want to provide good products and services, competition is very important. Encouraging new entrants into the market and encouraging innovation is a very important part of
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any policy, but the level of complexity is making matters difficult for new entrants. It is not just a question of having the ear of the Government, but of the ability to pay legal and accountancy fees. As is often the case, I fear, too much complexity is causing us great difficulty.

However, I am straying from the clause under consideration, Sir Michael, and before I get into trouble I should like to conclude by reiterating that there are a number of questions that the clause raises, and I hope that the Economic Secretary will be able to answer them in his forthcoming speech.

5.45 pm

Mr. Dunne: I have three brief points to make. My hon. Friend the Member for Fareham (Mr. Hoban) was right to take this opportunity to chide the Government for their conduct of the issue of pension term assurance. He did so with considerable skill and took us back through the historical development—or lack of development—of Government policy on this matter.

When the then Financial Secretary—now the Secretary of State for Communities and Local Government—introduced the proposals for pension simplification and A-day in Committee on the Finance Act 2004, she also described her intentions. She said:

I am sure that we would all agree that had that happened, it would have been a sensible ambition. However, from what we have heard today, the then Financial Secretary, her advisers and the Treasury did not understand what they were introducing. Now, three years later, we have to use up four pages of the tax code in schedule 18 to undo the damage that was done in 2004. It is right, therefore, that we take this opportunity to remind Ministers, and the industry outside, of the way in which the Government have conducted affairs and the consequences of some of their policy implementation, which were not clearly understood at the time.

The then Financial Secretary also said that the proposals would

However, the provision is now being scrapped as a perceived anomaly that favours a particular type of life assurance cover over another, and it was introduced by this Government.

The Association of British Insurers has not hesitated to point that out. It is perplexed that tax relief has been withdrawn from pension term assurance products, a market that the Government helped to create. It did not exist three years ago: it was the Government’s measures in 2004 that brought it about. As my hon. Friend said earlier, the industry was in discussion with Government officials about the product. In the run-up to A-day, the Government were well aware that the product was being developed, but they did nothing to discourage that.


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My second point relates to the impact on policyholders. Research by Scottish Widows indicates that the households most at risk from this measure are not the wealthy, as suggested earlier, but those with an income above £20,000—so not the poorest, either—but with less than £30,000 in savings. They are middle Britain, and the people whom the Government should be encouraging to make provision for their retirement and unforeseen occurrences in their lives. Emma Walker from moneysupermarket.com has said that its research shows that some one in 10 life insurance customers have already made the switch from a conventional life insurance product to a pension term assurance product, so the change will affect a significant proportion of people.

Mr. Robert Goodwill (Scarborough and Whitby) (Con): My hon. Friend is making a valid point about whom the proposals will affect. However, does he agree that farming, where self-employment is rife, and the construction industry are among those sectors already hard hit by other economic factors that will be hit again by the proposed withdrawal of the measure?

Mr. Dunne: My hon. Friend makes an excellent point. Clearly, some sectors will be affected more than others, in that they will have been the focus for the marketing undertaken by the insurance companies providing the products that we are debating. The people affected may well include farmers, in both his constituency and mine.

My final point has to do with the impact that the measure will have on the industry. The Government led the industry to develop these products: last September’s pre-Budget report gave a clue that adjustments were likely, but not even the Budget itself made it clear that the policy would be scrapped. My hon. Friend the Member for Fareham was right to say that the details were hidden in the small print of the Finance Bill published in April. If the proposal comes into law, it will deal a hammer blow to the products under discussion. They will be killed stone dead.

The industry has invested £35 million in developing the products, but we are led to believe that that money will be written off, as there will be no return on it at all if the proposals in the Bill are accepted. In addition, over the next 25 years the industry will have to manage the run-off of the 50,000 or so policies that have been taken out, as they cannot be cancelled or exchanged. Companies that had anticipated building up large portfolios of such business over a number of years are now looking at having to manage a small portfolio of less than critical mass over 25 years.

That will add a cost burden to the industry for many years to come, even though the Government just now are seeking co-operation and assistance from everyone in the life assurance and pensions industries who is involved in the promotion of lifetime savings. The Government want to work with the industry, as much more substantial pension plans will come through in other legislation, but they have dealt it a difficult blow.

I would not describe it as a body blow to the industry, as I do not want to exaggerate, but the industry has come to see that the Government who led it down a certain path three years ago have now moved
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to block that path. That has happened at a very unfortunate time in the Government’s relationship with the industry.

Ed Balls: In my opening remarks, I set out the background to the Government’s decision taken at the time of the PBR and then the Budget. We have had an interesting debate, and I want to respond to a number of points that have arisen. I shall begin by putting the proposals in context, in terms of both principle and history. Much of the discussion has been about the process through which we reached the A-day reforms, and about their consequences, so some contextualisation is appropriate.

The hon. Member for Fareham (Mr. Hoban) talked about the Government’s principles, and almost got to the point of agreeing with them. I fear that the speeches of some other Opposition Members contradicted that approach, but that is by the by.

In a speech to the National Association of Pension Funds in March, I set out the principles that have guided, and continue to guide, the Government’s approach to pensions tax relief. I shall set them out again for the Committee. First, we believe that generous tax relief is provided to support pension saving where that produces an income in retirement. Pensions tax relief is not there to support pre-retirement income, nor to support accumulation or inheritance. Secondly, we believe that pensions should be provided with more favourable tax treatment compared to other forms of saving, in recognition of the fact that they are less flexible than other savings and that they are locked away until retirement. Thirdly, we believe that incentives for employer contributions should be provided, as it is more efficient for pensions to be provided on a collective basis through the employer, Finally, we consider that pensions tax incentives must be affordable and fall within current fiscal projections.

It is important to set out those principles again, as they have guided the Government’s decisions over recent months and years. They have also guided our approach to term assurance and pension term assurance, and I shall refer back to them during the course of my speech.

I also want to set out some history. In an intervention on the hon. Member for Fareham, I said that the Conservative Government of the day withdrew tax relief on life assurance premiums in the 1984 Finance Bill. The policy issues debated at the time were slightly different from those that pertain today, but I have read the debates and remain struck by the similarities and echoes between then and now.

In particular, it is clear that the Government of the day were concerned that the relief was being used for circumstances that were not intended. That meant that most of the relief was of no real benefit to the general body of taxpayers, and that any attempt to target the life assurance premium relief more precisely would be both potentially expensive and difficult. That was why the then Government decided that the only solution was to withdraw the tax relief altogether—a pragmatic solution that took account all the different factors.


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The system left in place following the 1984 changes allowed relief, restricted to 5 per cent. of earnings, for contributions to a personal pension scheme for life insurance products. However, the term assurance market that was linked to pensions accounted for only a very small percentage of the overall term assurance market.

Rob Marris: Does my hon. Friend recall that the 1984 abolition had an unintended consequence? I want to be generous to the Conservative Government of the time, but the consequence was that people getting mortgages stopped taking out the life assurance policies on which hitherto they had been able to get 15 per cent. tax relief, and piled into low-cost endowments that were widely mis-sold. This Government are still trying to sort out the mis-selling that was provoked as an unintended consequence of the Conservative Government’s change of tax rule on life insurance premiums.

Ed Balls: I hear what my hon. Friend is saying. He is almost certainly correct, albeit somewhat partisan. I shall learn lessons from what he has said, but I am attempting to forge a consensus with the Opposition and so shall move on.

As I was saying, there was an earnings relief of 5 per cent., but the market remained very undeveloped. Essentially, term assurance is a pretty low-cost, high-volume sort of market, and the amount of tax relief available was not sufficient.

This Government reviewed the position at the end of the previous decade, as part of establishing an integrated tax regime for personal and stakeholder pensions. Consultations were held in September 1999 and February 2000, and the Government consistently made it clear that


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