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delegated legislation

Mr. Deputy Speaker (Sir Alan Haselhurst): With the leave of the House, we shall take motions 3 to 6 together.

Motion made, and Question put forthwith (Standing Order No. 118(6)),


Legal Services Commission

Criminal Law

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Children and Young Persons

Question agreed to.

Select Committee on Reform of the House of Commons

Motion made,

Hon. Members: Object.

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Taxation of Pensions

Motion made, and Question proposed, That this House do now adjourn. —(Mark Tami.)

7.12 pm

Barry Gardiner (Brent, North) (Lab): The debate has come about because of an unexpected reduction in the available pension commencement lump sum suffered by one of my constituents, whom I shall refer to simply as Dr. Robert, after he retired. I have corresponded with the Treasury about the matter, and I would not normally seek to detain the House by debating an issue that might otherwise be handled by means of an exchange of letters with the Minister. I do so on this occasion for the following reasons.

First, Dr. Robert’s case has exposed what I believe to be an anomaly in schedule 29 of the Finance Act 2004 as it relates to tax-free pension lump sum allowances. His case cannot, therefore, be remedied at an individual level; it can only be remedied by the will of the House in future legislation. Secondly, although the majority of pensioners will not have been affected by the injustice that I believe Dr. Robert has suffered, his case is far from unique. While I suspect that very few who have been affected by the anomaly in the regulations will have been able to articulate the fact with the same mathematical clarity as my constituent, they will have felt no less bewildered and cheated than he has.

My third reason for raising the matter in the House is that in his letter to me of 19 November last year, my hon. Friend the Economic Secretary to the Treasury acknowledged the real problems that had been created by the lump sum rule. He even acknowledged that my constituent had proposed

Unfortunately, the letter proceeded to justify not adopting those solutions on the grounds that they would add administrative complexity. That cannot be right; injustice cannot be excused on the basis of administrative convenience.

Having set out my reasons for bringing the matter before the House, I must now present the detailed arguments relating to the tax rules. I apologise in advance that they are necessarily technical and complicated, but I will try to reconcile simplicity with accuracy as best I can.

Since what the Government chose to call A-day, 6 April 2006, there has been a lifetime allowance, known as an LTA, of £1.5 million. That is the limit imposed not on an individual’s pension fund itself, but on that element of the cumulative pension fund from which an individual can withdraw or crystallise a lump sum without incurring a lifetime allowance charge. The figures are indexed each year, but if we talk in 2006 money, an individual is entitled to take a tax-free lump sum called a pension commencement lump sum, or PCLS, of up to £375,000, which is 25 per cent. of the standard LTA of £1.5 million.

My constituent had a pension in progress at A-day that had a capital value of £250,000, with 25 per cent. crystallised lump sum rights of £62,500. He also had an NHS pension with a capital value of £1.2 million,
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where, under the NHS scheme, the lump sum entitlement was limited to 13.04 per cent. rather than the Government figure of 25 per cent. He also had four other uncrystallised pension funds totalling £580,000 in capital value, and a scheme lump sum entitlement of 20 per cent. amounting to £145,000. Finally, he had a post-1987 freestanding additional voluntary contribution scheme worth £60,000. That scheme, although allowing him to take a lump sum of £25,000, would under Treasury rules not be allowed to count as part of his VULSR, which is Treasury-speak for valuation of uncrystallised lump sum rights, and could therefore not be calculated towards the total lump sum rights minimum figure of £375,000, at which point he could register for primary or enhanced lump sum protection in accordance with RPSM03105070.

Dr. Robert registered for enhanced—dormant primary—transitional protection of his LTA. His declared LTA if needed later for primary protection was 139.33 per cent., which equates to £2.09 million rather than the £1.5 million. The reason he could not apply for enhanced lump sum protection was that his total lump sum rights on A-day did not quite reach £375,000. We should remember at this point that he had crystallised £62,500 already and had a further £156,480, which represented the 13.04 per cent. of his NHS pension, as well as a further £145,000 which represented 25 per cent. of his four pensions with a capital value of £580,000, and zero from his post-1987 freestanding AVC.

Dr. Robert chose to crystallise his NHS pension shortly after A-day and received a PCLS of £156,480. When added to his pre-commencement pension, this meant he had used up 96.66 per cent. of a standard LTA. However, because he had registered for enhanced—dormant primary—protection, he knew he had, in fact, got 42.67 per cent. of LTA still remaining. On deciding shortly thereafter to crystallise his four private pension plans, he was told that although he had crystallised only 58.4 per cent. of his available lump sum rights, he could now crystallise only £12,500 tax-free—or 3.34 per cent. of £375,000—before he would exceed his PCLS allowance. The Treasury deemed him to have used up 96.66 per cent. of his tax-free lump sum allowance when, in reality, he has used only 58.4 per cent. of it. The reason for that is because the way in which the lump sum rule operates does not recognise that the amount he could take as a lump sum from his national health service pension was limited to 13.04 per cent. of its capital value.

The lump sum rule, as defined in schedule 29(2) of the Finance Act 2004, tracks the decrementing “available portion” of PCLS remaining, after “benefit crystallisation events”, from an individual’s PCLS lump sum entitlement, called the “applicable amount”. The “applicable amount” is not the problem here; the problem is in the way the decrementing “available portion” is calculated after each progressive lump sum crystallisation event. The available portion is initially defined in schedule 29(2) and RPSM09104510 by the formula: “available portion” equals the current standard lifetime allowance indexed to the year in question minus the aggregate of amount crystallised—AAC—for each proceeding benefit crystallisation event, all divided by four.

The rationale behind the formula is that it progressively tracks the decrementing available portion to zero, thus ensuring that no excess PCLS is paid out by pension administrators. However, it makes the extremely unfair assumption that each individual crystallisation that goes
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to make up the AAC actually represents 25 per cent. of the PCLS. That assumption, represented by the use of four as the divisor in the formula, is simply unfounded, as is shown in the case of Dr. Robert, whose scheme did not allow him to crystallise more than 13.04 per cent.

Thus far, I am confident that the Exchequer Secretary to the Treasury accepts that what I have said is accurate, both factually and with regard to the calculations. I say that because her officials have acknowledged as much to me in correspondence. A letter from the Economic Secretary to the Treasury expressed it by saying that


With respect, that is to acknowledge the injustice, but not to remedy it.

The letter goes on to give an excuse of, “Not my fault, guv,” when it says that

That claim might have had a brighter ring to it were it not for the fact that the Government’s own civil service pension scheme did not enable full commutation to 25 per cent. until 1 October 2007. Furthermore, the NHS pension authority delayed until 6 April 2008, some two years after A-day.

Those two pension schemes represent the majority of the UK’s public sector employers. In the light of that, I consider the idea that the Government can absolve themselves of a duty to get the lump sum rule right by blaming the pension fund’s sponsors as wide of the mark. The Government have a duty to legislate for the world as it is, and as they know it to be, not to put pensioners on some Procrustean bed and chop them to the same size, regardless of the actual rules of their pension fund, especially when the Government operate two such non-compliant funds themselves, employing millions of public sector workers.

In his letter, my hon. Friend the Economic Secretary declined to resolve the anomaly in the lump sum rule on the grounds that to do so would add administrative complexity. He says:

I point out that given that HMRC has already had to develop efficient “application for protection” and “event report” schemes, the additional work involved in tracking the actual rather than the assumed PCLS crystallisations of those individuals eligible for an enhanced LTA over their lifetime should not be greater than that already required for those who register lump sum rights greater than £375,000 in respect of primary or enhanced protection.

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My hon. Friend also failed to indicate that pension schemes are also required to maintain precise records of pensions paid, including PCLS, for six years after A-day. Indeed, since A-day, they have been obliged to complete detailed annual electronic returns online to HMRC, using APSS300, which covers 20 wide-ranging event reports pertaining to transfers and payments made from the scheme to individual scheme members. Those events are detailed in RPSM12301010-12301220 and S.I.2006/257. Within APSS300, only event reports 6, 7 and 8 require consideration for the PCLS in relation to the anomaly in the lump sum rule. There is no specific event report at present for a PCLS paid to an individual with enhanced LTA who does not have additional PCLS rights greater than £375,000. A small amendment to the APSS300 reporting requirements of event 6 would go a long way to remedying the anomaly.

My hon. Friend the Exchequer Secretary has had a long day, and I am conscious that this is a detailed and difficult issue. I know that she is aware of all the technicalities of it, because of the correspondence that I have had with her officials, but I urge her to look again at how a very small change in the rules can prevent a continuing and wide-ranging injustice.

Mr. Deputy Speaker (Sir Alan Haselhurst): I now have to announce the result of a question deferred from a previous day on a question relating to justice and security. The Ayes were 421 and the Noes were 64, so the Ayes have it.

I shall also announce the result of a Division deferred from a previous day on the question relating to identity cards (provision of information without consent). The Ayes were 272 and the Noes were 219, so the Ayes have it.

I shall also announce the result of a Division deferred from a previous day on the question relating to identity cards (information and code of practice on penalties). The Ayes were 271 and the Noes were 218, so the Ayes have it.

I shall also announce the result of a Division deferred from a previous day on the question relating to identity cards (fees). The Ayes were 270 and the Noes were 218, so the Ayes have it.

I shall also announce the result of a Division deferred from a previous day on the question relating to identity cards (application and issue of ID card and notification of changes). The Ayes were 271 and the Noes were 218, so the Ayes have it.

I shall also announce the result of a Division deferred from a previous day on the question relating to identity cards (prescribed information). The Ayes were 273 and the Noes were 217, so the Ayes have it.

I shall also announce the result of a Division deferred from a previous day on the question relating to the EU preliminary draft budget 2010. The Ayes were 345 and the Noes were 142, so the Ayes have it.

[The Division lis ts are published at the end of today’s debates.]

7.30 pm

The Exchequer Secretary to the Treasury (Sarah McCarthy-Fry): I congratulate my hon. Friend the Member for Brent, North (Barry Gardiner) on securing this debate and on bringing his constituent’s concerns to the
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attention of the House. I know that his constituent has already been the subject of some highly technical correspondence with HMRC, which, I understand, is ongoing. I do not think that this is the place for that detailed technical discussion of the finer workings of the pension legislation, but it would be helpful if I responded to my hon. Friend by considering the issues in broad terms.

As my hon. Friend is aware, under the new pension rules a pension scheme member can receive up to 25 per cent. of their pension fund as an initial tax-free lump sum when their pension starts to be paid. The total amount that individuals can save in a pension tax-free is subject to a lifetime allowance, which currently stands at £1.75 million. That limit is a maximum, within which pension funds may decide how best to provide benefits to their members. However, the Government need to ensure that the system is used fairly and remains affordable for the taxpayer, so there are limits on the amount of tax relief available to an individual.

If there were no limits to the amounts of tax relief available on pension savings, some people might use them as general savings accounts and would put away far more than was necessary simply to provide a retirement income, instead using pensions as a way to avoid income tax. In that case, the cost to the Exchequer in tax relief could be open-ended.

The cap on the size of tax-free lump sums therefore ensures that the tax relief available for pensions is kept to the level intended by Parliament and allows the Government to monitor the cost of tax relief to the taxpayer. As I said, the lifetime allowance is the maximum tax advantaged pension benefits an individual can accumulate, other than under transitional rules. That limit is an optional maximum, within which pension funds may decide how best to provide benefits to their members.

When the individual has more than one pension fund, the maximum tax-free lump sum that an individual can take is based on the lower of 25 per cent. of the money held in a particular pension fund and 25 per cent. of the lifetime allowance available. As each pension scheme comes into payment, the lifetime allowance is reduced by the value of the total benefits taken. Therefore, if one pension scheme pays a lump sum of less than 25 per cent., that will mean that the total lump sum from all schemes will be less than 25 per cent. of the value of all the pension funds as no pension can provide a lump sum bigger than 25 per cent. of the funds held by the individual in that scheme.

A similar issue arises in connection with the enhanced protection rules.

Barry Gardiner: My hon. Friend is absolutely right to make that point. However, does she not consider it wrong that there should be an assumption that runs absolutely counter to the fact of what the actual payment is? Is it not wrong that there should be an assumption that the full 25 per cent. has been paid out when, in many cases, it will not have been?

Sarah McCarthy-Fry: There is not a requirement for schemes to allow 25 per cent—I think that that is where we are getting a bit confused—rather it is the maximum tax-free lump sum permitted in tax rules.

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