I am grateful to the Minister for spending some time discussing the amendments, although on several occasions he has referred to the debate in Committee on schedule 10 and structural assets. I asked lots of questions in that debate, and did not get many answers. I am therefore grateful for the letter that he sent to me explaining the Governments views on structural assets, and the issues that the life
assurance industry raised about the way in which assets held in funds were treated when sold, and what the appropriate capital gains tax treatment would be. It is important to acknowledge that the Treasury and the industry, by working together, have reached a satisfactory solution, and have made progress towards simplifying the tax regime for life assurance companies.
In the Economic Secretarys letter to my hon. Friend the Member for Chipping Barnet (Mrs. Villiers) on 21 June, he referred to regulations needing to be made for more complex areas. I would be grateful if he could outline when those will be introduced and what discussion there will be with the industry to ensure that consensus is reached on the right way of treating those more complex issues. Will they be decided on a case-by-case basis, or will general rules be introduced to cover all those complicated matters?
Ed Balls: We will continue to consult the industry and will introduce the regulations at the earliest opportunity for consultation. We will ensure that we set out in writing the position case by case so that all the details are available. We will produce them when the consultation is completed. It is important to get the detail right. That is what we have done. We will consult fully to ensure that they are operational as soon as possible, but that will happen only once the consultation has been completed in a satisfactory manner.
Mr. Soames: I rise only to ask the hon. Gentleman if he will note with care the very powerful strictures to the Chancellor of the Exchequerthe future Prime Ministerfrom the hon. Member for Grantham and Stamford (Mr. Davies), who was most critical of the pensions policy
Mr. Speaker: Order. I have a great deal of affection for the hon. Gentleman, but he is going too far. We are discussing a set of amendments that are very tightly drafted. I know that he will have every respect for the Chair and will not proceed in that manner. I ask him not to do so, and I notice that he has been very kind in agreeing to my suggestion.
for as a business transfer out substitute by being netted off against incomings in lines 11 to 15 of a revenue account.
(a) in a case where assets become structural assets held in any of the companys non-profit funds by virtue of the commencement of this section, the end of the last period of account of the company beginning before 1st January 2007, and
(11) Regulations made by the Treasury may make provision for computing for the purposes of the Taxation of Chargeable Gains Act 1992 any gain or loss arising on a disposal by an insurance company of a structural asset held in a non-profit fund in any case where the condition in subsection (11A) is met.
(a) income arising from the asset was (or, had there been any, would have been) referable to any category of long-term business the profits of which fell for that period of account to be computed in accordance with the provisions applicable to Case I of Schedule D, or
equivalent to minimum retirement income (see sub-section 8 below).
(1A) The total amount of a spouses, or civil partners alternatively secured pension paid to a spouse or civil partner of a member of a registered pension scheme in each alternatively secured pension year in respect of a money purchase arrangement under the pension scheme must be at least equivalent to the Minimum Retirement Income for the alternatively secured pension year (but subject to sub-section 5 below)..
(other than the spouse or civil partner of a member).
(a) the amount of the minimum retirement income in respect of each tax year shall be set by the Treasury by order at the level of the standard minimum guarantee prescribed under section 2 of the State Pension Credit Act 2002 (c.16);
(c) an order under this subsection (other than the order that applies to the first tax year during which this section is in force) must be made on or before the 31st January of the tax year before the tax year to which the order applies..
Mr. Hoban: The amendments would amend schedule 19, which introduces a minimum draw-down from alternatively secured pensions. Those pensions have been a feature of Finance Bill debates in three of the past four years. It may help hon. Members if they understand some of the background.
In response to concerns expressed by the Christian Brethren, the Government legislated in 2004 for alternatively secured pensions, which in effect ended compulsory annuitisation at age 75. In 2006, they introduced new rules to determine the tax on the annuitised pot of ASP members on death. However, the Economic Secretary decided that even the new complex rules on inheritance tax and ASPs were not enough to discourage people from buying them and therefore introduced even more draconian rules, increasing the tax rate on death to a maximum of 82 per cent. and introducing a new minimum draw-down from the funds, which is the focus of the amendments.
The amendments are relatively modest compared with those tabled in previous years. The Pensions Bill was amended in the other place to reflect proposals made by my right hon. and learned Friend the Member for Kensington and Chelsea (Sir Malcolm Rifkind) in his private Members Bill to set up a retirement income fund as an alternative to compulsory annuitisation. We will have a longer and fuller debate on the issues when the Pensions Bill returns from the Lords shortly, but my amendments are narrowly drafted to reflect one particular aspect: the draw-down.
Schedule 19 as drafted stipulates that an ASP member must withdraw a minimum of 55 per cent. of the basis amount for the ASP year. That amount is determined on an annual basis by the Government Actuary based on the life expectancy of a 75-year-old. My approach is to substitute 55 per cent. with the minimum amount of income required to ensure that someone does not need to rely on state benefitsa concept that underpins the Bill of my right hon. and learned Friend and the amendments passed in the Lords.
I accept that setting any minimum level of draw-down is difficult, but by setting the minimum threshold in that way, it would give members of ASPs more freedom over the use of their retirement assets. My concern about the Governments approach is that it compels members to draw down income that could be surplus to their immediate needs if they have income from other sources. Based on the way in which the schedule is drafted, if members do not draw down 55 per cent. of the basis amount, they will be penalised. My measure could be criticised for being as crude as the Governments approach, in that it does not take into account other sources of income, but it would give members of the ASP scheme more flexibility. That
would increase the flexibility and attractiveness of ASPs and would make the product much more suited to the needs of pensioners.
As the debate in the Lords demonstrated, there is a growing consensus on creating more flexibility in pension arrangements. In the debate on that point in the other place, Lord Turner of Ecchinswell, who is the architect of the pensions reforms going through Parliament at the moment, said that
there are two arguments, but two arguments only, for compulsory annuitisation. One is that people should not fall back on the means-tested benefits of the state; the other...is that tax relief is given to pension contributions as they go into the scheme, and it is therefore reasonable that as money comes out of the scheme, those are taxed moneys out.
if we took those two principles, we might well end up with a rule establishing a minimum level of annuity that people had to buy, plus an appropriate set of rules as to the tax treatment...I have found it difficult over the years to understand what the arguments against that approach are.
Lord Turner hits the nail on the head. Increasingly, it is the Government who are out of step with the views of pensioners and the industry, and it is the Government who need to understand more about the pressures that are arising in the pensions debate.
My amendments do not tackle the exit charge on death, which is also addressed in Lord Turners comments, but they do tackle the amount to be drawn down from the fund. Increasingly, people will look for alternatives to annuitisation as the growth in defined contributions schemes increases, and my amendments would make an ASP more attractive to those approaching retirement. It is worth reflecting on the pressures in the system. The Office for National Statistics shows that between 1997 and 2005 employee membership of defined benefit pension schemes, such as the scheme that hon. Members benefit from, fell from 46 per cent. to 35 per cent., while membership of defined contribution schemes increased from 10 per cent. to 15 per cent. Those are the people who will end up on retirement with a pot of money to be invested in annuity or some alternative way to provide a retirement incomeperhaps something that is more flexible than the arrangements on offer at the moment.
The switch from defined benefit to defined contribution schemes has been especially evident for smaller employers. That is an indicator of the potential increase in demand for annuities, but as Lord Turner indicated in the same debate:
The bigger the imbalance is between demand for and supply of that capacity, the lower the annuity rates will be.
There is an interest for everyone who buys an annuity in ensuring that those who do not need to buy one do not push their demand into the market and therefore decrease yields.[ Official Report, House of Lords, 6 June 2007; Vol. 692, c. 1142-1148.]
If, through amendments such as these we can make alternatives to annuities more attractive, that will benefit those who wish to buy annuities instead of making their own arrangements in retirement. That reflects the growing consensus in the House of Lords debate. Lord Turner supported that principle, as did Baroness Hollis, a former Minister at the Department for Work and Pensions. Lord Howarth of Newport, having seen the damage that the Chancellor had caused to pension funds, also supported the proposals.
Mr. Hoban: Compulsion to take out annuities is increasingly regarded as a barrier to saving for retirement, so we need a wider range of options. The amendments would give greater flexibility as to the minimum income to be drawn down from an ASP, thus creating a more attractive alternative to an annuity. There is cross-party support in the Lords for the principle, and it is time for the Government to decide whether they want to be part of the consensus, or to continue in their dogged determination to oppose giving people choice over how they manage their retirement funds.
Ed Balls: I listened carefully to the hon. Member for Fareham (Mr. Hoban), and will try to deal with the points that he made. Ministers faced some distraction from those on the Opposition Front Bench, but we managed to focus on the issue at hand.
Ed Balls: Before I turn to alternatively secured pensions, I shall speak briefly about Government amendment No. 33, which makes a minor change to the pension commencement lump sum rules included in schedule 20. One of the technical improvements in schedule 20 will allow more time for the tax-free pension commencement lump sum to be paid, and to allow it to be paid after a member has reached age 75, if the entitlement to that lump sum arose before that age. However, the published Bill omitted a consequential amendment to a regulation-making power in the Finance Act 2004, with unintended and potentially adverse results. Government amendment No. 33 will be welcomed by the industry, because it allows the regulations to continue to operate as originally intended. I am sure that the proposal will be uncontroversial for most hon. Members.
I turn now to ASPs, the subject of amendments Nos. 44 to 49 and one I spoke about at length in our debate on pension term assurance during the Committee of the whole House. Unfortunately, I was not able to attend the Committee stage, as I had to attend the ECOFIN meeting in Brussels
As my right hon. Friend the Chief Secretary to the Treasury made clear in the debate in the whole House, it is important to set out the principle behind the generous tax relief that we provide for pension savings. First, we believe that generous tax relief is provided to support pension saving, where that produces an income in retirement. Pension tax relief is not there to support pre-retirement income, nor to support accumulation or inheritance.
Secondly, we believe that pensions should get more favourable tax treatment compared to other forms of savings, in recognition of the fact that they are less flexible than other savings and are locked away until retirement. Thirdly, we believe that incentives for employer contributions should be provided and, finally, we consider the pensions tax incentives must be affordable and fall within the current fiscal projections. Given that we are talking at the moment, in 2006-07, about a total of £16 billion of tax incentives to encourage people to save for retirement, as a sensible and proper Government we need to make sure that we use that £16 billion wisely. That is why it is right to take these issues seriously.
Ed Balls: I cannot give the hon. Gentleman a detailed answer. I would say that, in Finance Bill terms, it would count as negnegligible. Without wanting to return to the earlier debates about the philosophical difference between zero and close to zero, my guess is that it would be pretty close to zero.
The Government believe that the best way for the majority of people to save is to secure an income in retirement by saving through a pension and then purchasing an annuity. An annuity provides an income for life, regardless of how long life turns out to be. As one of our steps towards a progressive consensus, I should point out that the Pensions Commission endorsed that basic principle in its report when it said: