Finance Bill

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The Chairman: Before I call the Financial Secretary to reply to the debate, I want to tell hon. Members that, although I am not sure what catering facilities are available, we have arranged, with the assistance of the Clerks, for the Tea Room to remain open to serve hot meals for the next 45 minutes. Thereafter, it will remain open to serve tea, coffee, cakes and biscuits until we finish. If we finish very late, they will also produce bacon butties, affectionately known as bacon sandwiches.
Hon. Members can see what is happening in the House: the monitors have gone off and the House is coming to a grinding halt, with the exception of the Committee, which will continue to sit. I am inclined to suggest, if the Committee is not unhappy, that we should suspend for 45 minutes. I am prepared to drop a quarter of an hour off what would otherwise have been a more leisurely meal—I had also wanted to see whether I have had any telephone calls in these past hours—and suggest that we return at 8 o’clock, when the Minister will reply to the debate.
7.13 pm
Sitting suspended.
8 pm
On resuming—
The Chairman: I think all of us feel a wee bit better and more refreshed, and I hope that within the hour we will be able to wrap up the Committee, and perhaps at the end, quietly and discreetly, we can say nice things about each other.
Mr. Hammond: Including the Chairman?
The Chairman: Including the Chairman. That is by the by.
The Economic Secretary to the Treasury (Kitty Ussher): Picking up from where we left off, I would like to place on record my thanks to the hon. Gentleman who speaks for the Opposition for the thoughtful way in which he outlined the issues. However, I urge hon. Members to resist the new clause for a simple reason. I do not know whether the hon. Gentleman is aware of this, but today HMRC published two papers and a consultation document that will spawn an official consultation process with the Government—meetings, workshops and so on—to look at a number of issues in that area. That is the right way to make good policy, rather than the independent report that is proposed, and I encourage all hon. Members to resist the new clause.
Mr. Hammond: I know that conspiracy theories abound in the Treasury. There are two possibilities—either people have looked at my new clause and decided to try to trump it, or we have a mole buried deep in the network of HMRC. Which does the Economic Secretary find more credible?
Kitty Ussher: On a point of order, I did not give way to the hon. Gentleman, I sat down because I had finished. I presume that those were his closing remarks.
Mr. Hammond: In that case, I am grateful to the Economic Secretary for her words. I must be honest—I have not seen the publication of those documents today, for reasons that will become apparent. One or two people will be getting a call from me in the morning to find out why I have not seen them. I am intrigued and perhaps it would be helpful if we had been given a little more information. From what she said, I take it that the papers published today cover precisely the area that is the subject of the new clause. If that is the case, I am pleased to see that the Government are thinking along the same lines as us—we know that that happens from time to time in the Treasury. I hope that she is doing it for the reasons that I outlined, and as an attempt to explore the possibility of creating a valuable new policy tool, which could be used in a much more flexible way than the PAYE system currently allows.
Had I known before, perhaps through an intervention, I might have curtailed my remarks. However, in light of what the Economic Secretary has said, I am delighted that she is proceeding in that direction and I beg to ask leave to withdraw the motion.
Motion and clause, by leave, withdrawn.

New Clause 19

Retirement Income Fund
‘(1) The Finance Act 2004 is amended as follows.
(2) In section 164 at end add “and
(g) payments into a Retirement Income Fund.”.
(3) In section 165 there is inserted in Pension rule 6 after paragraph (c) “or
(d) a withdrawal from a Retirement Income Fund.”.
“Pension rule 8
Before a member makes a withdrawal from a Retirement Income Fund, he must buy a relevant linked annuity which is linked to the retail prices index, which pays an income equivalent to the Minimum Income Requirement.”.
Brought up, and read the First time.
Mr. Hoban: I beg to move, That the clause be read a Second time.
The Chairman: With this it will be convenient to discuss new clause 20—Dependant’s retirement income fund
‘(1) The Finance Act 2004 is amended as follows.
(2) In Schedule 28 after paragraph 22 insert—
“Dependant’s retirement income fund
22A (1) Subject to sub-paragraphs (2) and (3) of this paragraph, a dependant’s retirement income fund is a vehicle for the reinvestment of savings in retirement which—
(a) has been established by a person designated by subsection (1) of section 154; and
(b) is a vehicle the investments in which are—
(i) investments of a kind described in the Insurance Companies Regulations 1994, Schedule X, Part 1, or
(ii) approved by HM Revenue and Customs.
(2) Funds held in the retirement income fund as referred to in sub-paragraph (1) may be withdrawn from the retirement income fund by the members as and when he elects.
(3) A dependant may not invest in a dependant’s retirement income funds unless the requirements of Rule 8 of section 165 have been met.
(4) A retirement income fund, and any income derived from it, must not be capable of assignment or surrender by the member.
(5) Any withdrawal from the fund by the member under sub-paragraph (2) shall be assessable to tax under Schedule E (and section 203 shall apply accordingly) and shall be treated as earned income of the member.”.’.
Mr. Hoban: Briefly, the new clause inserts into the Finance Act 2004 the possibility for people to set up a retirement income fund. New clause 20 covers the possibility of setting up a dependant’s retirement income fund. My right hon. and learned Friend the Member for Kensington and Chelsea (Sir Malcolm Rifkind) took the opportunity of a private Member’s Bill earlier this Session to float these issues. It is a concept that is available in Canada, where it works very effectively. The issue the two new clauses are trying to address is the ongoing debate about the appropriate use of pension funds on retirement. Someone who retires with a defined contribution scheme can defer buying an annuity until the age of 75 and draw down income from that pension fund to that point.
In the Finance Act 2004 the Government saw fit to introduce the concept of alternatively secured pensions, mainly to address the theological objections of the Christian Brethren to annuities. Although that measure was aimed at their particular needs, it had broad appeal to a large number of people who felt that they wanted the choice as to what to do with their fund at the age of 75. The debate has continued. The issue was addressed on Report during the passage of the Finance Bill last year and the House of Lords also considered it in some detail. My sense is that there is growing consensus around providing more choice for people retiring with a defined contribution scheme.
Baroness Hollis, a former Minister in the Department for Work and Pensions, argued in favour of relaxing the rules around compulsory annuitisation. The only people who seem to be outside this debate are the Treasury. There is a lot of support for the end of compulsory annuitisation, but to get to that point some technical issues need to be addressed. The debate is becoming more pressing. Lord Turner, who has chaired the Government’s Pension Commission and is now the chairman designate of the Financial Services Authority, highlighted the need to reduce some of the pressures on the annuity market in his report on pensions. He suggested that the end to compulsory annuitisation might be a way of reducing that pressure.
As the pension landscape changes, more and more people are retiring with a defined contribution scheme. They then have to make some choices about where they invest that fund. The more funds there are in defined contribution schemes, the more demand there is for annuities. We need to find ways to address the impact that that will have on the price of annuities and the returns that they offer in the market. If we are to allow people to opt out of compulsory annuitisation at 75 we need to ensure that they do not squander their pension pot, spend it and then become dependent on the state for the rest of their income in retirement. There have been various ways of trying to deal with that.
The retirement income fund is one way of tackling that issue. In effect it sets a minimum income that people have to enjoy from a retirement income fund so that the state knows that they are taking responsibility for their own income and to ensure that they do not fall back on means-tested benefits. New clauses 19 and 20 try to address that—[Interruption.] I am sure that this is more gripping than the football result, although I am not entirely convinced given the reaction of Labour Members to that information.
Under the new clause, the minimum retirement income level would be set by the Chancellor of the Exchequer annually, by order. Having a Government-set de minimis limit is the right way to proceed. The concept of annuitisation would not be totally abandoned because people would need to buy annuities that are linked to the retail prices index and that would pay an income equivalent to the minimum income requirement. Annuities would not be dead under the measure; they would still be needed to provide the minimum income level, which would be set by the Chancellor. That would partly relieve the burden on the annuities market.
There has been some debate about whether the returns that could be earned from such a system would be sufficient, and whether people would be sacrificing some return by opting for what is seen as a potentially more volatile set of assets, moving away from annuities to investment in mutual funds, stocks and shares. The Investment Management Association has made a significant contribution to the debate with some research that it published earlier this year, which indicated that the return from investing in securities and mutual funds could generate an income in excess of that provided by a conventional annuity. There is some merit, in terms of providing income for pensioners, in going down that route and enabling them to have choice in retirement about where they invest income and how they buy an income source for retirement. The IMA’s work has helped to give more weight to the argument against compulsory annuitisation.
The Government always use the same argument on the issue. It was used in our earlier debates on the pensions clauses and was used frequently by the previous Economic Secretary, now the Secretary of State for Children, Schools and Families. However, it was not a concern for his predecessor, the current Secretary of State for Transport, who introduced the alternatively secured pension scheme in the Finance Act 2005. The concern is that people will use tax-incentivised savings as a vehicle to provide inheritance for their children.
Emily Thornberry (Islington, South and Finsbury) (Lab): On the subject of children, is the hon. Gentleman aware that my son broke his arm last night and has just had his last GCSE in economics? I would very much like to go home and see him.
Mr. Hoban: I hope that the hon. Lady’s son—
The Chairman: Order. I hope that the Opposition spokesman will express sympathy but not devote too much time to it. We are very sorry and we hope that the hon. Lady’s son recovers, but that is not strictly relevant to the new clause.
Mr. Hoban: Indeed, Sir Nicholas. I join you in expressing sympathy to the hon. Lady’s son. I hope that his economics GCSE will enable him to participate in—
Mr. Hammond: As my hon. Friend has expressed sympathy to the hon. Lady’s son, which I am sure we all share, perhaps he will place on the record the Committee’s good wishes to my hon. Friend the Member for Braintree’s son, who had emergency surgery on Tuesday night. My hon. Friend has none the less been able to attend the Committee today.
Mr. Hoban: I know that all hon. Members will agree, with sympathy, with my hon. Friend. We are all making sacrifices to serve on the Committee this evening.
Perhaps the hon. Lady’s son will be able to participate in future debates about the impact of high and punitive taxation on people’s choices in retirement. I was getting to that point before she intervened.
There is a punitive tax charge on people who opt out of buying annuitisation—it works out at about 82 per cent.—which acts as a disincentive for people to go down the route of alternatives to annuities. Although I understand the Government’s position on the matter, there may be better ways of dealing with people’s opting out of buying annuitisation than simply penalising them. I do not think that the Government’s measure goes with the grain of how people want to run their lives. People want more choice. Indeed, they are being forced to take on board more choice by the move away from defined benefit schemes and defined contribution schemes. It is time that the options for people in retirement reflected the fact that people want control and want to maximise their income in a way that meets their needs and ensures that those things are balanced, at the same time, with the obligations towards the Exchequer and that, in making their own choices about retirement, people do not end up becoming dependent on the state.
8.15 pm
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