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pension contributions are not a way of getting tax relief on various insurances that would not otherwise qualify for relief.
Many respondents argued that it should be possible to include an element of life assurance cover within a pension. But they did not support the use of a flat rate limit... The Government has decided that life insurance can be included so long as it does not exceed 10 per cent. of the contributions paid.
History shows that what had been a very small market before that decision became a negligible one, and that 10 per cent. of overall contributions was not sufficient to incentivise people to go into the pension-related term assurance market, given the nature of the business.
to encourage people to save in a pension.
the Government wishes to ensure that pensions remain a vehicle for providing income in retirement...Pensions saving is to provide an income in retirement...It is not a route for conserving and passing on capital.
That was the background to the debate on the 2004 Finance Bill, when the then Financial Secretary undertook the pensions simplification process. However, there was no reference in the legislation to pension term assurancethe expression did not exist at the time. The market for pensions-related term assurance was negligible at the time, and there was no intention to encourage a term-assurance market link to pensions, nor any discussion of such an intention during proceedings on the Finance Bill. There was a simplification of the pensions and tax regime to provide income in retirement.
There was some discussion between the industry and the Government as to whether the simplification would lead to the growth of a pension term assurance market and whether the changes in tax relief for pensions might lead to migration or churning in the term assurance market. However, there was no consensus for the view that the changes posed a material risk. Following discussions with industry players, the then Financial Secretary concluded that there was not a material risk that the changes we were making to tax relief for pensions retirement income would be likely to lead to a rapid growth in a pensions-related term assurance market.
Ed Balls: We had an interesting debate on those matters earlier, when my hon. Friend the Member for Wolverhampton, South-West (Rob Marris) referred to debates on past Finance Bills. In an intervention, I mentioned SIPPs. At the time, public debate and Members made it clear that there was concern that the SIPPs changes could have undesirable effects and the concerns were dealt with then. However, there was no discussion of the term assurance issue during the Finance Bill; it was never raised by Opposition Members and nor was it a subject of public debate. Technical discussions as to whether the changes posed a material risk concluded that they were not, and that the benefits of simplification outweighed the risk. It was not a mistake; it was a judgment that simplification benefits were more important than a risk that, at the time, was judged not to be material.
That was the position for the next two years and during the run-up to A-day. However, by September 2006 it became clear that although the products were completely within the lawthey were not the means of tax avoidancea substantial re-badging of the term assurance market was taking place. Many life companies did not sell the products as pension term assurance, which would have been a confusing label as they had nothing to do with pensions; they were about death benefit. The policies were often marketed as term assurance with tax reliefterm assurance with the benefit of pension tax relief. In many cases, they were not marketed as pension tax relief.
I was asked for some figures. Before A-day the number of contracts sold that could be described as pension tax reliefterm assurance linked to pensionswas in the low thousands; the number was
negligible. In the fourth quarter of 2005, the number of mortgage-related term assurance contracts sold was 238,154. From the beginning of 2006, when almost no policies were being sold, the number rose to 58,046 productsfrom almost nothing to 20 per cent. of the term assurance marketwhereas the number of mortgage-related term assurance products fell from about 238,000 to 190,161. What happened was perfectly understandable and, in retrospect, predictable: a substantial, tax-driven switch from mortgage-related term assurance to a term assurance that qualified for pension tax relief, but was often not marketed as such because it had no pension income. To my mind, and that of several Members, including perhaps the hon. Member for Fareham, that was not what we intended; our intention was not that pension tax relief should be used to sell what was, in essence, a non-pension product.
Last autumn, it was put to me that costs anticipated as negligible to the Exchequer were set to rise from about £25 million last year to about £160 million a year in five years timeas the hon. Member for Fareham pointed out. Over a five-year period there would be a cost to the Exchequer of slightly more than £500 million. That is £500 million of taxpayers money being spent on tax relief actions that people had previously taken without tax relief for, in essence, the same producta non-pensions-related death benefit that some years before we, as a country, had decided not to tax-advantage. All our consultation documents made it clear that was not our intention and that was why we decided to act in the pre-Budget report.
The report made a clear statement that there was a substantial risk to the taxpayer, that the practice was outside our intentions and that the right thing was to address it with immediate effect. That is what we did. However, we did not say that there was necessarily an end to any link between pensions and term assurance. With the pensions industry, we wanted to find out whether we could establish an ongoing, meaningful link between term assurance policies and saving for a pension, which would not have disproportionate costs and would not mean that a large proportion of the tax relief was going to a death benefit rather than to pension saving.
We consulted the ABI, the Association of Independent Financial Advisers, the Society of Pension Consultants and the Investment and Life Assurance Group. The area is complex and we looked at several options: a test at the point of sale, to confirm that the policyholder was also a member of a relevant pension scheme; a cap on the total sum assured; a test at the point of claim; and ongoing sampling of policies by HMRC to check for fraud. Some in the industry, including the ABI, considered that some of the options might be workable, but after our consultation we found it impossible to set out a way forward that would be both commercially viable and consistent with our intentions and principles.
The problem was that the checks needed to make sure that term assurance, which is a high-volume low-margin product, was genuinely pension-related were disproportionate to the administrative costs that the industry could bear. A cap could work only if it was so high that there would be a death benefit rather than a pension income benefit. We would then have been
forced to concede the sum of £500 million over five years. The people selling those products would have been willing for us to make that decision, but we felt that we could not do so because we could not justify expenditure of £500 million on what was largely a deadweight cost.
That is why we decided to bring tax relief back into line with our intentions and to make it clear that we could not see a way forward that was consistent with our principles. Some in the industry agreed with our approach. An expert at AEGON Scottish Equitable said:
Although we understand the ABIs position, we do not think
a workable solution for providers or for customers. At the very least, it will introduce a need for additional resource from providers, which will be met ultimately in adjusted costs for customers. Ultimately, it could mean providers withdrawing from the market.
The hon. Member for South-West Hertfordshire (Mr. Gauke) asked about losersan issue also taken up in an intervention by the hon. Member for Ludlow (Mr. Dunne). The fact is that before A-day, the market barely existed: it was negligible. The market then grew very rapidly. Everyone who took advantage of it during that period is grandfatheredwe are not withdrawing tax relief from anyone who took out products up to the time of the pre-Budget report, or, indeed, for a period afterwards when transitional arrangements applied. Our tax changes take us back to the position ex ante. There are no losers, though people who might have benefited from the more lax regime in future will not do so now because we have gone back to the status quo. As I have explained, I think that the right decision was taken.
Mr. Gauke: I note that point, but has the Treasury done any analysis of the type of people who were taking advantage of the regime in the period after A-day and before the pre-Budget report announcements?
Ed Balls: As I said, all the people who were taking advantage will have their benefits protected. It is not true to describe those people as either the very rich or tax avoiders. We are talking about people who previously took out mortgage-related term assurance or life assurance products and then benefited from the tax relief that came from the re-badging of those life assurance policies. It was never our intentionnor, in my view, the intention of the Houseto tax advantage those life assurance policies. That is why we are returning to the status quo.
Mr. Gauke: I am seeking clarification about whether a particular type of person benefited from that regime while it existed? For example, was it generally the self-employed or contractors who took out this sort of product in the relevant period?
No, I do not think so. Those who benefited were those who took out assurance policies such as life
assurance. I pressed the hon. Member for Fareham to agree with me a number of times about that and eventually, on my fourth attempt, he did. Unless the Conservative party is willing to put up the £500 million to pay for an alternative proposal, I think that the hon. Gentleman and I are agreed that tax-advantaging life assurance products through pension tax relief is not the way forward. If so, we were right to sort out the problem at the earliest opportunity. We did so, despite the fact that in the period before we took our decision, we were not pressured by Opposition Members or anyone else to do so. As I said, we put transitional arrangements in place, which were widely communicated to the industry and, I think, welcomed by it as a way of sorting out the difficult pipeline cases. Indeed, we were praised by the ABI for so doing.
Rob Marris: Will my hon. Friend tell the House how difficult he believes it would have been to sort out the loophole that was being exploited if we had adopted the Liberal Democrat policy of having a Finance Bill every two years instead of every year?
Ed Balls: We would have had a considerably longer period between our decisive decision at the time of the pre-Budget report and the eventual enactment of the Finance Bill provisions, though our decision to act would not have been delayed because at that time the revenue risk was too great.
I am not going to say that there are no lessons to be learned from the experience. In retrospect, the Government could have been clearer about their intentions and I believe that both the Government and the insurance industry together could learn some lessons about the process involved in tax policy making. Indeed, I spoke earlier today to the director general of the ABI about how to learn such lessons for future tax policy.
In conclusion, the decision was taken in order to restore the Governments intentions to protect the tax base and to ensure that what we set out to do and what the Finance Bill legislated forto tax-advantage retirement savingwas, in fact, what happened. It was never our intention to tax-advantage assurance. I do not think that the hon. Member for Fareham is proposing so to do, but if he wants to stump up the £500 million necessary to oppose the clause, I will be very interested to find out how he is going to pay for it.
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