Schedule
28Inheritance
of tax-relieved pension
savings Question
proposed, That this schedule be the Twenty-eighth schedule to the
Bill. 9.15
am Mr.
Mark Hoban (Fareham) (Con): Welcome to the Chair,
Mr.
Cook. I
will say a few brief words about the schedule and raise a question
about parity. The schedule should be regarded as being in honour of the
right hon. Member for Normanton (Ed Balls), now the Secretary of State
for Children, Schools and Families, who had a particular obsession with
the ways in which people could inherit
tax-relieved forms of savings. Comparatively simple sections of the
Finance Act 2004 on alternatively secured pensions were amended in 2006
and 2007. Here we are in 2008 amending those same sections and
extending to other types of pension schemes the measures used to
discourage people from using alternatively secured
pensions. It
is not entirely clear what mischief, if any, the schedule is supposed
to tackle. I do not have any evidence that there has been widespread
abuse of the pension schemes that are identified. I would be grateful
if the Economic Secretary would provide clarification, because one of
the consequences of the measure is the application of a tax charge of
up to 82 per cent. to payments made from scheme pensions when there is
an increase in the pension rights of one member following the death of
another member who is part of the family or a partner. This is quite a
complex
measure. I
want to raise several issues with the Economic Secretary. As I
understand it, a number of these small pension schemes have at their
heart an asset that is relevant to the business. The pension scheme
might own a factory, an office or a shop that is used in the business.
When these measures were first discussed, I spoke to a number of
pension advisers who were concerned that these changes could lead to
the forced realisation for sale of those assets to fund pension
charges. The responses to the consultation from organisations such as
the Association of British Insurers suggest that those concerns have
been
allayed. There
are still areas where there is a lack of clarity for taxpayers in
interpreting these rules. I refer the Committee to the concluding words
of paragraph 7(3)(a), which
state, “but
otherwise having regard to the circumstances of the
member”. Paragraph
9(2)(a) contains the
words, “otherwise
having regard to the circumstances of the
dependant”. The
explanatory notes are commendably brief on the topic, but they do not
provide clarity for tax advisers or pensioners about what might be
deemed to be the circumstances of the dependant. I do not know whether
the intention is to produce guidance to supplement that paragraph and
the explanatory notes, but it would be useful for people to have
greater clarity on the purpose and the meaning
of “having
regard to the circumstances of the
member” so
that they can understand how these particularly complex rules should be
applied.
The
Economic Secretary to the Treasury (Kitty Ussher): It is a
pleasure, as always, to serve under your chairmanship, Mr.
Cook. The
hon. Member for Fareham correctly summarised what the schedule is
attempting to achieve. It will change current legislation to ensure
that scheme pensions and lifetime annuities are used to provide a
retirement income for life, and not as a means of diverting
tax-relieved pensions savings into inheritance. It will make the
treatment of scheme pensions and lifetime annuities consistent with
that of alternatively secured pensions, which the hon. Gentleman
rightly says have been considered by previous Finance Acts, and so
create a level playing
field for the different ways in which individuals aged 75 or over can
use their pension funds to secure an income for the rest of their
lives. The hon.
Gentleman asked why we are doing that, and it is really a point of
principle. The purpose of giving generous tax relief on pension savings
is to support savings that provide a secure income in retirement, so
provisions allowing tax relief to be redirected and passed on to
inheritance are contrary to that fundamental principle. In addition,
mass-market providers of pensions told the Government that a level
playing field between alternatively secured pensions and other types of
pensions was required, and we agree. While the measure was not being
particularly abused, according to our evidence, the failure to act
would have left in place a perverse tax incentive for members of
pension schemes to select pension options that provide the best
opportunity to increase inheritances for their children and grand
children, rather than maximising the income in retirement available to
them and their dependants. There are other ways of saving for
one’s children and grandchildren, rather than doing so through
pension
schemes. The
hon. Gentleman made a point about assets belonging to a scheme—a
factory, for example—having to be realised as a result of this
measure, but that is not our view. The measures apply only after the
pension scheme has begun to pay a secure pension, and therefore will
not affect the type of assets that the scheme must realise to provide
that pension, so I hope that I can allay the hon. Gentleman’s
concerns and those of the wider audience in that regard.
The hon.
Gentleman questioned the precise meaning of the phrase
“having regard
to the circumstances of the member”.
It is intended to
ensure that account is taken of the fact that an individual may have a
higher nil-rate band if a claim has been made to transfer the nil-rate
band on the death of a spouse. However, we will shortly provide further
guidance on that point, which I hope will allay any
concerns.
Mr.
Hoban: Why can we not either have that guidance now, or
have those circumstances set out more clearly in the Bill? Having that
guidance, or preferably having the amendments on Report to clarify what
“other circumstances” actually means, would provide
better parliamentary
scrutiny.
Kitty
Ussher: We are not convinced that it will require
amendments on Report, but the hon. Gentleman has made his point. I hope
that I have indicated in the debate broadly what the purpose of that
phrase is, and I give him my undertaking that we will publish further
guidance as soon as
possible. Question
put and agreed
to. Schedule
28 agreed
to. Clause
89 ordered to stand part of the
Bill.
Schedule
29Further
provision about pension
schemes Question
proposed, That this schedule be the Twenty-ninth schedule to the
Bill.
Mr.
Hoban: I want to ask some detailed questions that cover a
number of different issues relating to the schedule. Paragraph 7(3)
states that
“the individual
is one of a class of at least 20 pensioner
members”, but
that term is not defined. That is quite important, because there is an
anti-avoidance provision in paragraph 7(4), which will insert new
sub-paragraph (4) into the original legislation so that any increase
within 12 months of a previous increase is not acceptable if the class
of pensioner members is different between the two increases and
if “the
purpose, or one of the main purposes, of the individual’s being
included in the new class
is” to
avoid being caught through an excessive
increase. Will
the Minister confirm that the class will be defined by reference to
criteria, and that it does not matter that the individuals within a
class are different at two different dates? A class of pensioners is
likely to change over time, because pensioners may die, but new
pensioners will join that class. Hence, any second increase within a
12-month period may involve what is technically a different class, even
if 90 per cent. of the individuals have remained the same. Is class
defined by the individuals who are part of that group or by specific
criteria? Paragraph
8 discusses threshold annual rates and circumstances in which
exemptions may be taken for relatively small increases. There is
concern that, at times, Department for Work and Pensions legislation
requires changes and there has been a suggestion that those increases
may exceed the retail prices index. Therefore, it would be appropriate
for an exemption from testing to apply to any increase required by
legislation. Has the Minister given any thought to
that? Paragraph
18 deals with the inheritance tax treatment of non-UK pension schemes.
In principle, the paragraph is widely welcomed by pension advisers. It
corrects a situation that has arisen since A-day, when changes were
made to the pension regime. Prior to A-day, a sponsored superannuation
scheme was outside the scope of inheritance tax legislation , including
overseas pension schemes. However, post A-day, only registered schemes
and something called “section 615 schemes” have been
outside the scope of IHT. All non-registered schemes, both UK and
overseas, were within the scope to IHT and subject to the ensuing
complexity. Recognising
that there are overseas schemes that should fall outside the scope of
IHT is welcome to the industry. However, there is concern about the
definition of the scheme as set out in the draft statutory instrument,
which the Minister kindly circulated to members of the Committee.
Because it reflects the way in which Her Majesty’s Revenue and
Customs looks at UK tax schemes, it creates a slight problem. If a
scheme does not qualify it imposes burdens. Pension schemes could be
treated as a settlement and subject to significant IHT consequences,
such as 10th anniversary charges. There are pension schemes designed to
deal with expatriate employees or people who work overseas that could
become liable to those charges, because they do not fall within the
definition of qualifying schemes as set out in the draft statutory
instrument. I shall give some examples.
First, some
countries, such as the US, have limits on benefits in approved pension
schemes, and management often has unapproved schemes on top of the
approved schemes. While it may be reasonable for those schemes
not to enjoy full UK income tax approval, because they will not qualify
for the exemption, long-term inheritance tax burdens may be imposed on
them. Secondly, some skilled mobile executives often end up in
international pension schemes in cases in which individuals move from
country to country a number of times and no particular country’s
pension scheme can cover them. Those people often form part of a key
group of senior management but, because of the mobile nature of their
employment, their pension scheme is not often open to ordinary local
employees, as it is geared to benefit mobile expatriates. According to
the draft statutory instrument, such schemes would not qualify, so IHT
burdens could be imposed on them with compliance and reporting
obligations. Such complexity is not normally found in other countries.
That has an impact on how business friendly the UK tax regime is seen
to be, compared with other countries where businesses might think about
locating skilled, mobile
executives. I
would be grateful if the Minister considered that issue. Could
amendments be made to the wording of the statutory instrument that
would broaden the definition of a qualifying non-UK scheme? They could
take into account situations such as those in which the benefits in one
territory are capped and there are additional schemes, or situations in
which a pension scheme can be set up to cover people working in a range
of different companies. I would be grateful for the Minister’s
comments. 9.30
am
Kitty
Ussher: This is rather a hotch-potch of miscellaneous
provisions, and the questions that the hon. Gentleman asked each refer
to a different provision. I request the patience of the Committee, as I
will describe what the schedule is attempting to achieve, before coming
on to the points made by the hon.
Gentleman. Schedule
29 to clause 89 contains the details of a package of amendments that
simplify the administration of the pension system. The amendments
respond to industry lobbying, pre-announced consultation and
clarification of the rules, following the enormous exercise that led to
the changes at A-day. The amendments, while providing administrative
easements, also preserve the key underlying principle that tax relief
is given for pension savings, in order to encourage and support saving
that will produce income in
retirement. The
changes in the schedule fall into three categories. The first and by
far the largest category simplifies the administration, bringing
practice into line with intention and providing the deregulatory
benefits that we could achieve. We became aware of a number of
circumstances in which pension schemes make payments, often in innocent
error, such as an overpayment of an ongoing pension, that would
currently be treated as an unauthorised payment, and so are subject to
a tax charge of up to 70 per cent. A change to the
regulation-making powers, as we propose, would allow those payments to
be taxed in the same way as authorised payments from pension
schemes. The
second change that our regulations will provide are relaxations to the
rules on trivial commutation, allowing occupational pension schemes to
trivially commute pots of up to £2,000 and to help tackle the
issue of small stranded pension pots. A further administrative
change will ensure that the funds that migrant workers build up in
non-UK pension schemes that have received UK tax relief are
appropriately identified, to ensure that UK tax relief and charges for
overseas pension schemes equate with those for registered pension
schemes. That ensures that the legislation works as intended,
simplifies administration and protects tax revenues by removing a
potential
loophole. Two
further administrative improvements resulted from proposals made by the
pensions industry. The first change simplifies complexities for scheme
administrators in the calculation of lump sum payments. The second
ensures that the members of large occupational schemes are not
unintentionally caught by the rules preventing tax-relieved investment
in residential property. Finally, in the category of administrative
improvements, the schedule includes a change to restore from April 2006
protection from inheritance tax charges to savings in certain overseas
pension schemes, as the hon. Gentleman mentioned, which was
inadvertently removed in changes made to the pension tax rules. The
protection will apply where the overseas scheme is regulated and
tax-recognised in the country in which it is set up. If the country has
no system for regulation and tax-recognition, the pension scheme must
provide for the savings to be used to provide a pension income for
life. The hon. Gentleman queried whether that imposed burdens on
schemes that are liable to IHT charges. The regulations have been
published in draft, and are intended to give the same inheritance tax
protections that apply to schemes broadly equivalent to UK-registered
pension schemes, so we hope that there is not an additional burden.
That is the purpose of the regulations, but we have only published them
in draft, and my colleagues at HMRC are happy to accept and consider
representations. If groups outside the Committee have made points to
the hon. Gentleman, we are happy to take them on board and consider
them to make sure that we get this right.
That is the
first category of issues which the schedule covers. The second category
is the change, following consultation, to rules preventing avoidance of
the lifetime allowance charge. The pensions industry has welcomed those
easements, which make the administration of the rule simpler and less
costly. The third category is the clarification of the rules on
employer contributions. The change confirms that during the period from
April 2004 to April 2006, the only tax relief is the actual
contribution paid in the year, which prevents any doubt about how the
provision operates.
The hon.
Gentleman made two other points. First, he asked about the increase of
the threshold annual rate. It allows exemption from the test if the
increase is below the higher figure of 5 per cent. or RPI, which we
believe will account for all the circumstances that we envisage. It
works in conjunction with the rule allowing exception if more than 20
members have the same increase.
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