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Schedule 28

Inheritance 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 29

Further 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.
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.
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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