Draft Social Security (Contributions) (Re-rating) Order 2009


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Mr. Gauke: The hon. Gentleman is making mischief—I merely wish to inquire about the Government’s thinking behind the proposals.
Steve Webb: I am grateful for the hon. Gentleman’s clarification. His question “If not, why not?” seemed like a demand—but never mind.
I shall identify two groups of losers from the statutory instruments, but before I do so, I have a factual question; as I am asking it now, it will give the Minister a chance to recall the answer. The class 2 rates, contained in the first order, will rise from £2.30 to £2.40. Presumably, millions of self-employed people pay a couple of quid a week, so I assume that there is already a great army of infrastructure to collect that £2-odd a week. The rate used to be quite a bit higher, and the Government took the view that they would cut class 2 contributions. Will the Minister tell us how much it costs to collect £2.40 a week a person? If it is a small amount, we could live with it, but I wonder whether it is a significant proportion of the amount collected and whether there is a better way to raise the money.
It is usually inefficient to collect small amounts of money from large numbers of people, and what tends to happen with such laws is that we merely continue to do what we did last year and add a bit. Nobody ever stops to say, “Hang on, why are we doing it?” I am asking whether there is a better way. I appreciate that the money has to be raised from somewhere, and that there is an implied national insurance pension entitlement as a result of the payments, so I understand why it is done, but is the order the best way of getting the money from people at minimum cost, in terms of compliance costs for the individual and the taxpayer? I should be grateful for the Minister’s reflections.
Under the No. 2 regulations on employee contributions there will be significant losers. The Minister presented the statutory instruments as minor, tidying-up exercises, but they are more than that. The upper earnings limit is rising, on my maths, by £74 a week, and if we took an employee contribution rate at 11 per cent., that would come out as an extra £8.14 a week, or £423 a year. Everyone—every member of the Committee—and you too, Mr. Streeter, will lose £423 a year as a result.
Mr. Lindsay Hoyle (Chorley) (Lab): Some people in the room will pay more than others. When I look at some of those who are on extra salaries I am certainly at the bottom of the pile.
Steve Webb: We can see the politics of envy at work. In fact, the hon. Gentleman is mistaken, because the upper earnings limit is moving from a figure well below his salary and mine to one that is still below our salaries, so we will all lose equal amounts. However, given time, there may be other factors at work.
How many people will lose £400-odd a year as a result of the order? The back of my fag packet says at least 2 million, but I am interested in a more precise Treasury figure. The measure will presumably affect every higher rate taxpayer who is either an employed earner or a self-employed earner. If a couple of million people lose £400-odd a year, we are talking about the best part of a £1 billion tax rise, which we shall nod through in a desultory half-hour in a quiet Committee Room. It feels slightly under-scrutinised, which is partly the point made by the hon. Member for South-West Hertfordshire.
What is on the flip side? As I suggested in my intervention to the Minister, normally when we put people’s national insurance up, we get something back. I hope that he will clarify the matter, because I have been trying to wrestle with it almost all through the night, trying to work out what the implications will be. If I describe to the Minister what I think is happening, perhaps he would tell me whether I am right.
First, the answer to my question is yes, in the short term people pay more national insurance on a higher and wider band of earnings, so if they are contracted in—frankly, not many of them will be—they will accrue more state second pension, which will not be at a generous rate, because it is the top band of earnings, but they will accrue something. That is until the earnings link is restored, when the upper earnings limit and a new upper accrual point are created. That limit will continue to be indexed, but the point is frozen, so there is a band of earnings up to that frozen point that accrues state second pension. However, only in decades to come will the lower earnings limit—possibly the primary threshold—reach the upper accrual point, when all the extra national insurance that people have been paying stops earning them any extra. Is that how it works? Is that the kind of deregulated, simplified tax and benefits system that the Minister had in mind in his speech?
Given that the Government want to simplify pension provision, and are saying that one accrues so much state second pension per week regardless of earnings, is not the 20-year—possibly now 25 or 30-year—transition just another complication? If we are to have a flat-rate state second pension, should we not think about moving, perhaps in a revenue-neutral way, to such a system more quickly? People would know that a year in the state second pension got them a certain amount and that was it, and it would not depend on which year, the tapering out, the freezing of this or the scaling up of that. I know that life is simpler in opposition than in government, but the regulations will create greater complexity over a more prolonged period. Are the knock-on effects of what looks like a straightforward lining-up—described as simplification by the Minister—creating a different set of complexities elsewhere in the system? Will the Government look at that?
The second group of losers is from the class 3 change, which is contained in the draft Social Security (Contributions) (Re-rating) Order 2009. As the Minister said, the move from £8 to £12 is because of the changes under the so-called Baroness Hollis amendment. He described the move as cost-neutral, but some cross-subsidy is going on. Women who turn 60 between 2008 and 2015 may buy back under particular terms, but they are not the only ones who will pay the higher class 3 rate—everyone pays the higher rate. The Government have financed the concession, which I support, by saying that anyone who misses a year of national insurance will now have to pay £600 instead of £400 to fill the gap. How many people are we talking about? I genuinely do not know. I am not talking about people who reach 60 or, under various schemes, go past 60 and buy back missing years after they have retired; I am talking about people of working age. To how many people’s costs are we adding £200 a year to fill a gap in the national insurance record? In appraising the regulations we are sometimes in the dark, but we are adding £200 a year to some people’s bills. Is that 100,000, 1 million or 10 million people? How many noughts are there? I have no sense of that. I would be grateful if the Minister could tell me how many people’s bills we are putting up.
Increasing the cost of class 3 for people of working age raises two concerns for me, one of which might be called mis-selling—we will be charging people more for filling a gap in their national insurance record. If someone decided to fill a gap in their national insurance record, they would compare the cost of doing so with the eventual benefit. Someone on a modest income, heading for a modest pension, might only be reducing entitlement to pension credit by filling the gap in their national insurance record. Given that the Department for Work and Pensions is projecting that half of all retired people will be on pension credit by 2050, that is not a peripheral, nit-picking marginal point, but absolutely central. I am of working age. If I miss a year, I now have to pay the extra £200 to fill the gap, but if that costs me the equivalent amount of pension credit, I am not making myself any better off. I describe that as mis-selling, although the Minister would say that the provision is not being sold, but is merely available to people who choose it.
I hope the Minister accepts that such is the complexity of the system that few people would know whether it was worth their while buying back a missing year or not. Is there not a risk that if we put up the cost of buying back a missing year, more people will make the wrong choice? For example, if I could previously get a marginal benefit from one extra year and pay £400 for it, but now I have to pay £600 for it, perhaps I should not do it. Is there any information or advice on such things for people who might otherwise be mis-sold a year of class 3 contributions.
The Government are doing something entirely desirable in 2010 by cutting the number of years needed for a full state pension from 44 or 39 years to 30 years. However, suppose I have 28 years of qualifying contributions. I might miss a year, but later in my working life I could pay another two years of contributions, thereby getting to the magic 30 years. The risk is that if I pay class 3 contributions for my missing year, I will get nothing back for them. That is my second worry about mis-selling.
For example, suppose I have built up my 28 years and I am five years short of pension age, but I miss a year. At the end of that year I get the deficiency notice, and I decide to pay what is now £600 for the missing year as I do not want to miss out on a full pension. I then get a job and do two more years, thereby building up to my 30 years—in fact, I now have 31 years because of the voluntary year that I paid. Will the Minister clarify whether I can claim that money back, or is it lost for ever?
Presumably, someone in the scenario that I have just described who is five years short of pension age should not pay class 3 contributions, especially not at the enhanced rate. They should wait and see what happens. If within six years of the missing year it still looks as though they will be in trouble, they should pay the contributions. Of course, nobody does that because the system is all so complicated and no one understands it. That is not purely because of the change in the rates, but it is more of a worry because of that. People could lose not £400 but £600 by buying a year that it later turns out they did not need. The Minister could find post-2010 that aggrieved people come to him who only needed 30 years for a pension but who bought back missing years that it turned out they did not need. Can they get the money back? If not, the loss will clearly be bigger as a result of the provision.
My last point is about the other group of people who pay the higher rate of class 3 contributions, which is women who turn 60 between 2008 and 2015. That is the point of the exercise and I welcome it—it is a good thing—but my worry is about whether those women will make well-informed choices. I have a written answer from the Department for Work and Pensions, and from the Minister’s Department, about the circumstances in which women can buy back up to six missing years. Because of the regulations, the cost of buying back six missing years, which is the cap, has risen from roughly £2,400 to £3,600. That is a big increase. The Minister will tell us that it is still actuarially a good deal, but it is less of a good deal than it was previously.
There will be women who have turned 60 in the last year, or who do so over the next six years, who will have to make that choice. My concern is that they might not know that they have that choice. When a woman turns 60 within that band between 2008 and 2015 and starts to draw her pension, will she be told that she can buy back those class 3 years under this special scheme? Is there a flyer or some information when women get their pension forecast? How will they know that they have that choice? Where will they get advice as to whether they should buy back at the enhanced class 3 rate? Some women clearly should, but some should not. It depends on how much money they have, whether they are on means-tested benefits, whether they are married or divorced and what other income they have. It is a complicated decision.
Traditionally, such things have been the Cinderella of the system. We have independent financial advisers for private pensions advice, but unless someone has a good citizens advice bureau that is up to speed with the fine print, it is difficult to find out whether someone should pay those contributions or not. I have pursued many issues relating to women’s class 3 contributions over the last two years. Almost without fail, when my constituents and others ring the Pension Service on the 0845 number, the front-line staff—I mean no disrespect to them—do not have the faintest idea what people are talking about. When someone says, “There is a deficiency notice reinstatement exercise for the late 1990s. Can I buy years back because I was born between April 1938 and October 1944?”, the front-line staff do not know. They have not been given that training.
Will that happen again in this case? A 60-year-old woman might reach pension age and have the opportunity to buy six years back at the enhanced rate. I appreciate that the Pension Service does not give advice in the technical sense, but when she rings it, will anybody know? Will there be someone on the end of the phone to say, “I cannot give you detailed advice, Madam, but you need to think about whether this will reduce your pension credit? Are you married? Are you divorced?”
Where will those women turn? We are talking about the best part of 1 million women who will turn 60 between 2008 and 2015, who will satisfy the 20 qualifying years rule and who will be able to buy back up to six years. It is not a few peripheral, marginal people, but 1 million constituents who will want to know where they stand. They will worry about paying the extra cash and because we are increasing the rates, they will not just have to find £2,500, but £3,500, which they might struggle to do. The least that we as the state can do is give them accurate, tailored, reliable advice and my worry is that there is no provision in place for doing so.
Although I welcome the provisions for women to buy back missing years to plug a gap—although it would be far better if we just paid a decent pension in the first place—in the real world we at least have a responsibility to make sure that if we ask for more money, we give better advice. I hope the Minister can give us that reassurance before we approve the increases.
3.20 pm
Mr. Timms: I welcome the support expressed for the measures. I am very happy, in answer to the hon. Member for South-West Hertfordshire, to repeat the assurances put on the record on a number of separate occasions by my right hon. Friend the Member for Liverpool, Wavertree. Those reassurances stand.
The hon. Gentleman asked what we were doing, beyond the measures here, about realignment. We have an alignment of the upper earnings limit and the upper profits limit for national insurance with the higher rate threshold. The Chancellor announced, in the pre-Budget report last year, that the annual equivalent of primary threshold will be aligned with the personal allowance for the 2011-12 tax year—that is the next step in achieving further alignment.
The hon. Gentleman raised, quite properly, some points about rounding. My brief helpfully gives me some examples and points out how rounding works for the benefit of those contributing—although it depends on how that works. We keep rounding under review, and he is quite right to make the point that one could imagine, under certain circumstances, that if one kept on rounding year after year there might be a distorted result. So there is nothing absolutely rigid about that. We have applied the usual methodology this year, but we keep that methodology under review.
I cannot anticipate today what the Chancellor might say at the time of the pre-Budget report in a situation where the RPI becomes negative. That would be something for him to say at the time, but I would be surprised if he felt it appropriate to make changes that would reduce people’s benefits, or to do things that would look quite strange to most people.
The hon. Member for Northavon asked about the number of people who would be affected. The important point is to look at the overall effect of the package. Of course, if one takes account of the tax reduction that people will enjoy, as well as the next increase, there is a positive rather than negative impact. He is right to say that some 300,000 employees will pay more NICs because of the change, but they will be paying less tax. That gives an example of the positive impact of the package as a whole, even though, purely in terms of NICs, there will be an increase.
 
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