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Session 2006 - 07 Publications on the internet General Committee Debates Finance |
Finance Bill |
The Committee consisted of the following Members:David
Doig, Hannah Weston, Committee
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attended the Committee
Public Bill CommitteeTuesday 5 June 2007(Morning)[Mr. Roger Gale in the Chair]Finance Bill(Except clauses 1, 3, 7, 8, 12, 20, 21, 25, 67 and 81 to 84, schedules 1, 18, 22 and 23, and new clauses relating to microgeneration)Clause 65Charge
on benefits received by former owner of property: late
elections
10.30
am
We
are about to dispatch clause 65, as the hon. Member for Chipping Barnet
has indicated to me that she does not wish to have a formal vote on
amendment No. 212.
Clause 65 ordered to stand
part of the
Bill.
Clauses
66 and 68 ordered to stand part of the
Bill.
Schedule 19Alternatively
secured pensions and transfer lump sum death benefit
etc
The
Chief Secretary to the Treasury (Mr. Stephen
Timms):
I beg to move amendment No. 134, in
schedule 19, page 228, line 9, leave
out from ‘arrangement’ to end of line
11.
Mr.
Timms:
I welcome you back to the Chair, Mr.
Gale, refreshed after the break and raring to go, as I am sure we all
are.
I
am pleased to have the opportunity to speak to the two Government
amendments and I shall say a few words about what we are doing with
schedule 19. The amendments will make minor drafting changes. Amendment
No. 134 clarifies the fact that there will be no further charge to
inheritance tax on the death of a dependant where the left-over funds
in an alternatively secured pension—ASP—were chargeable
to inheritance tax on the death of a scheme member.
AmendmentNo. 135 ensures that the changes to remove an option
to transfer funds on death from an ASP fund will not affect any members
with ASPs who died before 6 April
2007.
I
shall briefly remind the Committee of the principles that we have set
out in relation to pensions tax relief. The key point is that generous
tax relief is provided to encourage and support pension saving that
will produce
an income in retirement. Pensions tax relief is intended neither to
support pre-retirement incomes, nor to support open-ended asset
accumulation or bequests. Pension savings are necessarily less flexible
than other savings—they are locked away until
retirement—which is why it is right to provide favourable tax
treatment for pensions
savings.
In 2005-06,
the tax incentives to encourage people to save for retirement totalled
about £14 billion. The best way to secure an income in
retirement is via a scheme pension or an annuity. At the time of the
2006 pre-Budget report, we published a paper on the annuities market
that explained the underlying policy and the academic evidence base for
that policy, and responded in detail to the views of the Pensions
Commission on that
area.
As we developed
our proposals for the new pensions tax regime, the A-day regime, we
received a number of representations from groups with principled,
religious objections to the pooling of mortality risk in annuities.
Therefore, in the December 2003 consultation document
“Simplifying the taxation of pensions”, the Government
set out our proposals for the ASP. That option and the rules that apply
to the sums remaining on the death of member of an ASP were enacted in
the Finance Act 2004. Our intentions in doing that were very clear, but
it was apparent that some people wanted to use ASPs for uses other than
providing a
pension.
Some changes
were therefore announced in the pre-Budget report in 2006. I will
remind the Committee of what it
said:
“In line
with the principle that pensions tax relief is provided to produce an
income in retirement, the Government will bring forward legislation to
make changes to the rules governing Alternatively Secured Pensions
(ASPs). This will introduce a new requirement to withdraw a minimum
level of income each year from an ASP fund. The facility to transfer
funds on death as a lump sum to pension funds of other members of the
scheme will be removed from the authorised payments rules, with these
payments attracting an unauthorised payments
charge.”
Clause 68 and
schedule 19 change the ASP rules in line with the announcements that we
have made. I would be very happy to go through the detail of the
proposals, but for now I simply commend the amendments and the schedule
to the
Committee.
Mr.
Mark Hoban (Fareham) (Con):
May I, too,
welcome you back to the Chair, Mr. Gale? It is a remarkable
testament to the lure of the Committee that my hon. Friend the Member
for Rayleigh, now the shadow Minister for Europe, has come back to
enjoy the proceedings for one last time. We look forward to the debut
of my hon. Friend the Member for South-West Hertfordshire later this
week, who has joined our Front-Bench
team.
It
seems like only a year ago that we last discussed the taxation of ASPs.
I then debated with the Economic Secretary, and I had rather hoped for
a re-run, but I understand that he is currently in Luxemburg at the
ECOFIN meeting, so the Chief Secretary will be dealing with this issue.
It is quite remarkable that it is only a year since we last debated
these changes, and at that time the House and the Government had
settled views on what was the appropriate rate of taxation for ASPs,
yet here we are, a year later, with yet another U-turn on pensions
policy, discussing a different way of taxing ASPs.
Given the nature of the Chief
Secretary’s introduction, we are effectively having a stand part
debate here. I will ask him to respond to some particular issues in
detail later, but it is worth noting, by way of introduction, that the
issue of compulsory annuitisation and the role that ASPs play in
tackling it continues to create interest in this House and in the other
place. Indeed, on Second Reading of the Pensions Bill just before the
recess, Baroness Hollis, a former Minister at the Department for Work
and Pensions,
stated:
“As
others have already said, given the growth of DC schemes we need a
fresh look at the annuities-at-75 rule, which is increasingly absurd.
After all, a man on median earnings, contracted in, after 40 years on 4
per cent. plus 4 per cent. contribution—a very modest
scheme—will have a DC pot of £240,000, £100,000
more than necessary to float him off income-related benefits if he
annuitised to that degree... So this is not—I repeat,
not—a matter only for the rich any more, but for those on
average earnings and a standard rate tax.”—[Official
Report, House of Lords, 14 May 2007; Vol. 692, c.
39-40.]
I think
that the noble Lady was right. In the past, the Government have
criticised moves to end compulsory annuitisation on the back of the
argument that it is there only to help the wealthy, but as she rightly
said, the growth of defined contribution schemes and the move away from
defined benefit schemes means that more and more people have an
interest in compulsory annuitisation at 75, and it will be a growing
issue. The Chief Secretary explained how the Government’s
thinking on this issue has evolved over the last few months and rightly
highlighted the fact that the genesis of this measure came from the
theological concerns of the Plymouth Brethren, who objected to the
pooling of mortality.
Interestingly, the Treasury
considered, in the regulatory impact assessment, ending the scheme or
restricting discrimination on the grounds of religion, but thankfully
that idea was dismissed. In looking at how this product should be sold,
at one stage, the Financial Services Authority considered, and issued
guidance, that financial advisers should inquire about the religious
beliefs of potential purchasers of ASPs. That indicates that the debate
that took place last summer and in the autumn became rather overheated
and rather too focused on the origin of the idea of why we should have
ASPs, rather than on thinking about how best to put the policy into
practice.
I could talk
about those arguments at some length, but I suspect that this is
probably not the occasion to do so. There may be an opportunity to
rehearse those arguments at a later stage. I want to concentrate
instead on the particular changes that are being made by schedule 19. I
understand the reasons for the Chief Secretary tabling the amendments
and I have no particular quibbles with them, but I want to focus on a
number of issues.
The
first issue is how the schedule introduces new rules on the minimum
income that can be drawn down from a fund, as well as increasing the
maximum draw-down. It introduces a minimum of 55 per cent. and raises
the maximum from 70 to 90 per cent. Those are the Government
Actuary’s Department rates, as set at the age of 75, but people
who have ASPs get older, and there is a serious argument to be made for
reviewing the rates that can be used so that the draw-down is based not
on GAD rates at 75, but on the
ASP member’s actual age. As someone gets older, the opportunity
to withdraw funds from their ASP will increase and my concern is that,
by not allowing that flexibility to change or for people to draw down
more later in life, the unutilised pot that is left on death will
grow.
If the
Government increased the rates used for the ages of 75, 85 or 95, that
would give the ASP holder the opportunity to withdraw more of their
income from the plan and to ensure that there was very little of it
left at the time of death. The Government’s objective of using
tax-relief savings to meet income in retirement would be achieved more
fully than under their current
proposals.
The other
comment that has been made about the draw-down rules is that for
unsecured pensions—the situation that arises before the
age of 75—the maximum draw-down is not 90 but 120 per cent. of
the GAD rate. There does appear to be a mismatch, or a discontinuity,
between the rules that apply for unsecured pensions and those for ASPs.
It would be helpful if the Chief Secretary addressed the reason for
that inconsistency between the draw-down rules for ASPs and USPs, and
also explained why there is not an uprating or revision of the maximum
draw-down based on someone’s actual age, rather than the rates
set at the age of
75.
The second point
is about the exit charge on death. Effectively, the Bill introduces an
82 per cent. tax charge on death when the member dies and there are no
financial dependants, or where the balance of the pot does not go to a
charity. The 82 per cent. charge arises because there is both an
inheritance tax charge of 40 per cent. and a charge of 55 per cent. on
the unutilised costs. The 55 per cent. charge normally applies where
the value of a pension fund exceeds the lifetime allowance. That
appears to be quite a high charge and has certainly caused some comment
among financial advisers as to why a 55 per cent. charge is applied in
addition to the 40 per cent.
charge.
10.45
am
I would
understand it if the Chief Secretary said that, based on the
Government’s principle that tax relief savings should not be
used to fund benefits or to enable a pension pot to be passed from a
person to members of their family, particularly where there are no
financial dependants, it is important to recover all the tax relief
gained or obtained by any pension fund member. I could accept
that—it would be appropriate to try to claw back that tax
relief. I understand that that tax relief is clawed back at a rate of
about 55 per cent. That goes back to the situation in which the pension
fund value exceeds the lifetime
allowance.
I would be
grateful if the Chief Secretary advised the Committee at what rate the
Government will recover the tax relief given on pension fund savings.
That is important when assessing what the right level of the tax charge
on death should be. There is, however, another inconsistency. I
referred earlier to USPs. In those, different rules apply on the death
of a member. If a USP member dies without drawing any pension benefits,
his pension pot is transferred to his nominated beneficiaries free of
inheritance tax. If he had started to draw benefits, a 35 per cent.
charge would be levied on that pot.
Legislation intended to simplify
pensions back in 2004 is now creating different tax charges depending
on when someone dies. Somebody who died aged 74 years 364 days without
having drawn their pension could pass their pension pot on free of tax.
If, however, they died a couple of days later, or even some minutes or
hours later, an 82 per cent. charge could be levied on their pension
pot. That does not strike me as a consistent set of regulations to
cover what is a difficult area.
I would also like to ask what
the Government believe the impact of the 82 per cent. charge will be.
The regulatory impact assessment is silent about the additional revenue
that the measure will produce, or what impact it will have in saving or
protecting tax revenues. Given the wide interest in ASPs, it is
important that the Government are more transparent about what they
consider to be the revenue implications of introducing the 82 per cent.
charge, and what those implications would be if that charge were not
introduced and the rate agreed in last year’s Finance Act
continued to hold. It would be useful if the Chief Secretary said what
modelling the Treasury has done to assess what would have happened if
those changes, particularly on the exit charge, had not taken
place.
Finally, I
would like to touch on three other matters of concern that have been
raised with me. The first is in paragraph 2 of the schedule. The
Finance Act 2004 introduced ASPs and led to simplification of the
pension tax system. It also allowed for annuity payment scheme pension
payments and payments from ASPs to be guaranteed for up to 10 years.
Therefore, if a member died within 10 years, the payments would
continue. Paragraph 2 withdraws that guarantee for ASPs, although it
remains in place for annuities and scheme pensions. I would be grateful
if the Chief Secretary explained why that change was made only for
ASPs.
In paragraph 12,
there is a further change that has raised some concerns. When a member
of a small self-administered scheme, or SSAS, dies, the funds that he
has built up are distributed to other members as an increase in their
rights. That reduces the cost of the benefits to the remaining members
and to the employer, in the same way that in a large defined-benefit
scheme the cost to members is reduced by any savings coming from
deceased members. The SSASs are important for many small businesses,
and there is a concern that the changes set out in paragraph 12 of
schedule 19 will increase the cost to small and medium-sized
enterprises by levying a 55 per cent. charge on reallocations within
SSASs. Will the Chief Secretary confirm whether SSASs are caught by the
changes outlined in paragraph
12?
On paragraph 20,
in cases where there is an unutilised pot at the time of death, that
ASP pot is top-sliced in the IHT calculation. In the pre-Budget report,
however, the nil rate band was to be apportioned between the ASP and
the rest of the estate. I would be grateful to the Chief Secretary if
he could explain why that change has taken place. Will he also confirm
that, where the rest of the estate does not exhaust the nil rate band,
the unutilised amount will be offset against ASPs, thus reducing the
IHT bill?
The changes in schedule 19 are
quite difficult and they will start to have two effects. As the
Government intend, they make life difficult for those who want to
exercise greater control over their pensions by increasing the exit
charge on death and restricting the draw-down of funds so that there
will always be a significant pot left on which the 82 per cent.
effective rate can be charged. The changes also create a degree of
administrative complexity, for example—I have already touched on
this—there are particular rules about the circumstances in which
pension pots are passed on to dependants, what happens when that
dependant dies and what rate of inheritance tax is applied to those
funds. We need to go back to the inheritance tax calculation of the
original ASP member. Changes such as those are quite complicated and
hard for people to understand. There is a niggling doubt at the back of
my mind that they are meant to discourage, and make life difficult for,
those who want to exercise control over the use of their pension funds
in retirement.
The
reforms were not properly thought through in the first place. This is
the third significant U-turn on the pensions simplification announced
in 2001, and the Secretary of State for Communities and Local
Government must be wondering why on earth her reforms are being
unpicked, almost on an annualbasis. There appears to be a
continual retrenchment away from the spirit of simplification in the
Finance Act 2004 towards a more complicated and difficult system. It is
remarkable for a Government who have embraced choice on schools, health
care and hospitals not to embrace choice on the release of pension
funds in retirement. Something is not quite right in the way in which
the Government are approaching the issue.
To conclude, I go back to the
comments made by Baroness Hollis in the pensions debate in the other
place. I suspect that she was right, considering how the rules have
evolved and become more complicated and the Government’s
dogmatic opposition to an end to compulsory annuitisation, when she
said that
“given the
growth of DC schemes we need a fresh look at the annuities-at-75 rule,
which is increasingly absurd.”—[Official Report, House
of Lords, 14 May 2007; Vol. 692, c.
40.]
The complexity that the
Bill introduces indicatesthat the Government’s
opposition to compulsory annuitisation is introducing increasingly
absurd rules.
The
Chairman:
It will not have escaped the Committee’s
notice that those on the two Front Benches have determined that this
shall be a debate upon the schedule being agreed to, as well as the
amendment. I am perfectly content with that, as long as hon. Members
understand that they cannot have the same debate
twice.
My hon. Friend
the Member for Fareham has conducted his usual forensic analysis and
posed a number of searching questions. I have just three points to add.
First, I believe that the Government are in danger of losing touch with
the principle behind the rationalisation of the pension system that
came into effect last year. The guiding principle of the pension tax
simplification reforms was supposedly that, where
there was a conflict between simplicity and unfairness, simplicity would
prevail. I am not sure that that is a desirable maxim for legislation
because the law tends to think that fairness should prevail over
rigidity, but having advanced it, the Government ought to have tried to
adhere to it for longer than simply one year.
The complicated new provisions
for taxing residual ASP funds after a death are neither simple nor
clear. However, I am sure that the increased flexibility offered to
pensioners by allowing them to make use of the alternative secured
pensions regime is desirable. My concern is that the system was
developed in response to a specific inequity caused by religious
belief, and that Ministers have clung to that rationale despite the
problems that have resulted from it. It is strange peg on which to hang
wide-scale pension reform.
I do not doubt the seriousness
of the problem experienced by the Christian Brethren’s
repudiation of pooled mortality risk. However, the Christian Brethren
should perhaps have been mere beneficiaries of the introduction of
alternative secured pensions, not the cause of them. An article from
December last year in Pensions World—I am sure that the
Chief Secretary subscribes to it—states quite
rightly:
“Religion
should not be a tax avoidance
issue.”
However,
it should not be a cause for unnecessary complication either. The same
article cites a census estimate that there are 738 members of the
Christian Brethren. This seems to be a significant understatement,
because when the issue was debated in 2004—I see the Chief
Secretary looking at me quizzically—the figure cited was close
to 14,000. Even so, for perspective, some 942 of my constituents
described their religion as “Jedi” in the last
census.
I am not
suggesting that the Christian Brethren should lose the benefit of
alternatively secured pensions, but rather that ASPs should, from their
institution, have been seen as possessing wider relevance than to the
Christian Brethren. At least by acknowledging that there was a wider
ideological issue in play here, the Government could have avoided the
introduction of a new scheme and the subsequent familiar
clampdown.
My hon.
Friend the Member for Tatton (Mr. Osborne) tried valiantly
in 2004 to engage the then Financial Secretary, the right hon. Member
for Bolton, West (Ruth Kelly) in such an ideological debate by
suggesting that ASPs should be seen in the wider context of the
trickle-down of wealth from one generation to another. In a colourful
debate, he quoted from both Corinthians and Timothy, but sadly the Book
of Ruth was a little less forthcoming in the response.
My hon. Friend eventually
dredged up an actuarial relic in the form of a tontine, to try to get
to grips with some of the consequences of ASPs and how trickle-down of
residual lump sums might work in practice. Tontines, as I have found,
allow funds contributed by participating scheme members to devolve to
the last man or woman standing. They certainly captured the imagination
of the hon. Member for Wolverhampton, South-West, who correctly
observed their crucial importance to Victorian and Edwardian murder
mysteries, due to the unfortunate habit of participants bumping each
other off in order to claim the funds. If
the ministerial pension scheme were run on that basis, there would
perhaps be fewer candidates for the Labour deputy
leadership.
My point is that the Government
tried hard in 2004 to avoid engaging with the issue of the inevitable
trickle-down of wealth from ASPs. About as close as we got was the then
Financial Secretary’s admission
that
“if we find that
people intend to use the alternatively secured pensions to bequeath any
unused funds to their dependants, we will of course review the
provisions, and we could consider ways to tighten up the proposals to
make that a very unattractive option.”—[Official
Report, 7 July 2004; Vol. 423, c. 919.]
But the failure to deal with the issue
head-on in 2004 is the reason for the draconian measures in this
year’s
Bill.
There have been
more reverse gears used in the Chancellor’s treatment of
pensions than are commonly associated with second world war Italian
tanks. [Interruption.] Not Italian; second world war. I love the
Italians. This heavy-handed crack-down on ASP lump sum transfers on
death is just the latest example of what I have just
described.
11
am
I
would be heartened if the Government gave up on the justification of
“principled religious objection” and looked again at the
wider issue of allowing pension funds to be preserved and transferred.
If the provision of tax relief on pension contributions is to encourage
healthy provision in old age, it should follow that lump sum transfers
should be preserved for that purpose, rather than being wiped out by
punitive taxation. For example, allowing lump sum transfers to
non-dependent children, which would then count towards their own
pension’s lifetime allowance, would encourage independence from
means-tested support and would still achieve value in return for the
income tax that the Government have
forgone.
My
second point also concerns inevitability. It was inevitable that there
would be plenty of takers using ASPs for non-religious reasons and it
was impracticable that any test of faith should be applied to them,
which the Government have at least admitted. There was a chorus of
warnings in 2004 and, rightly, a chorus of “I told you
so” now. However, it does not take too much Sibylline talent to
have predicted the use of ASPs to pass on wealth, so I would like to
ask the Chief Secretary to provide the Treasury’s original
prediction of ASP uptake and what the uptake has in fact been? I am
sure that those figures are available in the old regulatory impact
assessment, but if he has them to hand, I would be grateful if he could
share them.
My final
point concerns the change to the maximum draw-down from an ASP under
paragraph 2 of schedule 19. I believe that my hon. Friend the Member
for Fareham has already asked why the figure should now be set at 90
per cent. as opposed to a higher figure and, throughout our debate, he
has spoken persuasively about the need for consistency. However, I
would like to probe
the Chief Secretary further as to why the magic number for draw-down was
70 per cent. in 2004, but can be raised to 90 per cent. and no higher
in 2007.
I presume
that the 70 per cent. figure was arrived at on the basis of an analysis
of the risk that some ASP holders would run out of capital. Indeed,
that appears to be the case. In 2004, the then Financial Secretary said
that, with maximum draw-down set at 70 per cent., only one in 20 people
could expect their income from an ASP to fall to a third of its initial
value; on the contrary, she said, if people were allowed a draw-down
equivalent to 100 per cent. of the maximum annuity, 30 per cent. of
people would be placed in a similar situation. I would therefore first
like to ask the Chief Secretary whether he believes that these relative
risks are still accurate, and secondly what has changed to justify the
increased draw-down and the consequently increased risk? Were the
Government wrong then and if so, why is the 90 per cent. limit correct
now?
Mr.
Timms:
Perhaps I should begin by expressing
congratulations—I am sure I do so on behalf of the whole
Committee—to the hon. Member for Rayleigh on his promotion to
shadow Minister for Europe. I think that he has already got a little
bit of business from the debate that we have just had. Nevertheless, we
are delighted that he is with us and we look forward to hearing from
him during the course of the morning.
To respond to the hon. Member
for Fareham, let me give a little more detail about what the schedule
does. We indicated in the pre-Budget report that we would require a
member of an ASP to be paid a pension of at least 65 per cent. of a
comparable annuity for a 75-year-old. We subsequently received a number
of representations about the level of minimum income, and that led to
the announcement in the Budget that we would reduce that figure to 55
per cent. This is not an exact science—it is a matter of finding
a balance—but we concluded that that was the right level in
order to reduce the danger of exhausting funds prematurely.
Where the minimum income is not
paid, there will be a charge on the scheme administrator on the
difference between the minimum income requirement and the amount of
pension paid out in the year. The maximum withdrawal permitted from an
ASP fund will be increased to 90 per cent. of a comparable annuity of a
75-year-old. That figure was also mentioned by the hon. Member for
Fareham. The maximum withdrawal ensures that the ASP fund is not
depleted too quickly and will continue to provide a pension for the
remainder of the member’s life. That is an important
consideration, and raising it to 90 per cent. provides a range within
which the member can choose to draw an income to suit his
circumstances.
Mr.
Hoban:
Perhaps I am pre-empting remarks that the Chief
Secretary is about to make, but could he explain why 90 per cent. is
appropriate for ASPs but 120 per cent. is appropriate for
USPs?
Mr.
Timms:
I think that the hon. Gentleman is asking about the
arrangements for draw-down prior to the age of 75, when there is, as he
knows—he has already commented on it—a compulsory
annuitisation requirement. The arrangements set out here are those
that apply in that post-compulsory annuitisation period, in which an
alternative route is now available. The considerations there are
different from those that apply prior to the age of compulsory
annuitisation. That is the reason for the difference in those
numbers.
To deter
people from using pension funds as a tax-privileged way of accumulating
capital for bequests, an unauthorised payments charge will be imposed
on any ASP fund that is transferred to the pension pots of other
members when an individual dies. That will not prevent members from
providing pensions for their survivors. To pick up a point that was
made by the hon. Member for Braintree, remaining funds may be used for
a dependant’s pension or paid to charity without attracting an
unauthorised payments charge.
Alongside those changes, the
clause and the schedule also introduce necessary consequential changes
to the inheritance tax rules, mainly to address the interaction between
inheritance tax and the unauthorised payments charge where both arise
on the same funds. In all cases, the inheritance tax nil rate band will
be set in priority against the deceased person’s estate
excluding the ASP funds. That will be advantageous for the
beneficiaries of the estate in that it will speed up the process for
tax-paying estates and it will allow the inheritance tax position to be
settled on the ASP funds independently of the remainder of the
estate.
Should both
unauthorised payment and inheritance tax charges arise on the same
funds, the chronological order in which the charges arise will dictate
how each is determined. For example, where inheritance tax is due
first, the inheritance tax liability will be calculated by reference to
the gross value of the ASP fund. In recognition of the fact that the
ASP funds will be subject to an unauthorised payment charge in due
course, any inheritance tax nil rate band that remains available to be
set against them when inheritance tax is due will be grossed up by a
formula to prevent double taxation. The subsequent unauthorised payment
charge will then be calculated by reference to the value of the funds
net of inheritance tax. In all cases, Her Majesty’s Revenue and
Customs will calculate the inheritance tax due, if any, on the
left-over ASP funds and send the bill to the scheme
administrator.
We
have consistently made it clear that we do not wish to allow pensions
tax relief to be used for purposes other than to secure an income in
retirement. Some commentators have expressed the concern that if ASP
funds are paid in a manner not authorised bythe pension tax
rules, the combined inheritance tax on unauthorised payments charges
can in some circumstances reach as much as 82 per cent., the figure
named by the hon. Member for Fareham.
The two charges exist for
different purposes. The unauthorised payments charge recoups those
generous tax reliefs if pension savings have not been used as intended
to secure a retirement income, and inheritance tax is a separate charge
on wealth being passed on upon death, regardless of the form of that
wealth. Together, those measures reinforce the message that the purpose
of pensions tax relief is to support saving for an income in retirement
and not to help accumulate capital for bequests.
However, those who have
principled religious objections to annuitisation maintain the
opportunity to benefit from tax relief. I am disappointed that the hon.
Member for Braintree should take so lightly the religious concerns that
gave rise to the change. We are not talking about something on a par
with “Star Wars”, despite his rather discourteous
reference. I reassure the Committee about the views of those who have
religious concerns about the risk of pooled annuitisation. We have
discussed the matter with them, and they wrote to my hon. Friend the
Economic Secretary, after the announcements in the pre-Budget report,
saying:
“We
are totally satisfied with the revised provisions made by the
Government and are sure they will secure the desired result.”
In other words, the changes
should not undermine our intentions when we introduced the
alternatively secured pension. The hon. Gentleman cited my right hon.
Friend, the then the Financial Secretary, who made it clear at the time
that if we found that the arrangements were being used in ways that we
did not intend, we would introduce further changes. That is precisely
what we have done.
The hon. Member for Fareham
queried the need for compulsory annuitisation at the age of 75, and he
referred to debates in the other place. I say again that we have been
consistently clear about the fact that the generous tax relief given
for pension savings is to provide for an income in retirement. If one
attempted to set a threshold beyond which people could use the money as
they wished, and if the threshold used to obtain an annuity was set
high enough for one to be sure that it would provide an income in
retirement above the means-tested level throughout the remainder of the
person’s life, however long they lived, only a very small
proportion of annuity pots would be large enough. At most, only the
biggest 5 per cent. of pension funds would be eligible to withdraw the
remainder of their fund as a lump sum if that approach were taken. In
reality, that is not viable.
We set the maximum ASP rate by
reference to annuity rate for a 75-year-old. Insurance companies know
pretty well how long on average a typical pool of people will live and,
by pooling that risk at the aggregate rate, they can pay a secure
income to individuals for the remainder of their lives, no matter how
long that may be. However, alternatively secured pensions do not have
the benefit of such mortality pooling, so limits need to be imposed in
order to ensure that the fund continues to provide a level of income
for members, even if they live much longer than expected. To ensure
that, as I have said, the limit imposed by the rules is a maximum
withdrawal rate of 90 per cent.
A number of positive remarks
have been made about the changes that we are making by people in the
pensions industry. Madeline Forrester, the head of UK distribution of
Threadneedle Investments
said:
“We are
delighted the Government has finally brought more clarity to what was
an area of some doubt. We think this makes the ASP a viable alternative
to an
annuity.”
Mr.
Hoban:
Does the Chief Secretary not recognise that the
considerable doubt in the pension industry was caused by the statements
made by the Economic Secretary over the summer? A matter of weeks after
last year’s Finance Act received Royal Assent, his comments
about further changes created uncertainty in the market. He also talked
again about the reasons why ASPs were introduced, saying that they
should only be
taken up by people who had religious objections. The position was clear
when the 2006 Act received Royal Assent, but it became unclear after
the Economic Secretary made his
statements.
11.15
am
“Providers
and advisers are ignoring ministerial warnings that alternatively
secured pensions... are only for those with religious objections
to annuities.”
The
intention was very clear. We have safeguarded that by the changes we
are making.
Mr.
Hoban:
The Chief Secretary needs to reflect on the fact
that nothing in the legislation would prevent people other than
Christians or Plymouth Brethrens from using this. Although the Economic
Secretary said that it was only meant to be for people of a particular
religious view—I respect those views and I understand their
objections—there is nothing in law to prevent other people from
using ASPs. It is another example of where the Government have created
confusion where non existed
before.
Mr.
Timms:
As long as people are using ASPs to draw an income
for their retirement, there will be no difficulty. The schedule
contains safeguards that ensure that the funds will be used in that
way, thereby maintaining the benefits that ASPs introduced. It was made
quite clear when we discussed the issue on Report last year that we
would take steps to ensure that ASP rules could not be used other than
as intended, to provide a pension in retirement. We are maintaining
that with this Finance
Bill.
Let me pick up a
couple of the other points made, particularly by the hon. Gentleman.
The level of the reliefs within a pension fund depend on the particular
circumstances of the individual involved. We give very generous tax
reliefs for pension savings, and the unauthorised payment charge at 70
per cent. ensures that all those reliefs are recovered when
unauthorised payments are made. That is the appropriate
approach.
The hon.
Gentleman expressed concern about the wider impact on small businesses.
Paragraph 12 of the schedule applies to all schemes that provide ASPs,
but we have been clear from the outset that ASPs were not intended to
be a product taken up in the mainstream. The changes to the rules
strike a balance between the needs of those with principled objections
to annuitisation and the needs of the wider public being provided with
tax relief.
I think
that I have answered the point about unsecured pensions. The hon.
Gentleman also asked why the changes to set the inheritance tax
middle-rate band against an estate have been made and whether I can
confirm that the unused nil-rate band could be set against the ASP. The
nil-rate band change to top-slicing the ASP ensured that it is set in
priority against other assets so that non-ASP property inherited will
benefit from the full nil-rate band and bear less inheritance tax. The
inheritance tax will fall instead on the ASP. That change also met
requests made to us by the pensions industry. I can confirm that the
unused nil-rate band will be set against the ASP.
Both the hon. Gentleman and the
hon. Member for Braintree said that we were undermining pension
simplification by making these changes. I do not agree. The pension
simplification changes have proved to be extremely successful and the
initial optimism around them has certainly been maintained. The hon.
Member for Braintree read out what my right hon. Friend the Secretary
of State for Communities and Local Government said when the ASP was
being introduced. As that quotation showed, we have made it clear that
ASPs would be reviewed if used beyond their original intentions. That
commitment is being fulfilled in this schedule.
Amendment agreed
to.
Amendment
made: No. 135, in schedule 19, page 228, line 43, leave out from
‘paid’ to end of line 2 onpage 229 and
insert
‘in
respect of members of schemes whose deaths occur on or after 6th April
2007.’.—[Mr.
Timms.]
Schedule
19, as amended, agreed
to.
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