Draft Finance Act 2004 (Registered Pension Schemes and Annual Allowance Charge) (Amendment) Order 2015
The Committee consisted of the following Members:
† Barwell, Gavin (Lord Commissioner of Her Majesty's Treasury)
† Bebb, Guto (Aberconwy) (Con)
† Dakin, Nic (Scunthorpe) (Lab)
† Evans, Chris (Islwyn) (Lab/Co-op)
† Freer, Mike (Finchley and Golders Green) (Con)
† Gauke, Mr David (Financial Secretary to the Treasury)
† Healey, John (Wentworth and Dearne) (Lab)
† Jamieson, Cathy (Kilmarnock and Loudoun) (Lab/Co-op)
† Johnson, Gareth (Dartford) (Con)
† Kane, Mike (Wythenshawe and Sale East) (Lab)
† Lefroy, Jeremy (Stafford) (Con)
Love, Mr Andrew (Edmonton) (Lab/Co-op)
† Mitchell, Austin (Great Grimsby) (Lab)
† Parish, Neil (Tiverton and Honiton) (Con)
Percy, Andrew (Brigg and Goole) (Con)
† Shannon, Jim (Strangford) (DUP)
† Thornton, Mike (Eastleigh) (LD)
Clementine Brown, Committee Clerk
† attended the Committee
Tenth Delegated Legislation Committee
Wednesday 21 January 2015
[Albert Owen in the Chair]
Draft Finance Act 2004 (Registered Pension Schemes and Annual Allowance Charge) (Amendment) Order 2015
8.55 am
The Financial Secretary to the Treasury (Mr David Gauke): I beg to move,
That the Committee has considered the draft Finance Act 2004 (Registered Pension Schemes and Annual Allowance Charge) (Amendment) Order 2015.
It is a great pleasure to serve under your chairmanship, Mr Owen. The order makes changes in the annual allowance rules, which provide a limit on the amount of tax-advantaged savings that can be made for individuals each year in registered pension schemes. The changes primarily impact on defined-benefit pension schemes and are being introduced to deal with several areas where the legislation does not work as intended, and to reduce some administrative burdens. Some of the changes may increase income tax in respect of pension scheme members, albeit with prospective effect only, which means that the order must be made under the affirmative procedure.
I hope the Committee will forgive me if I do not discuss the detail of all the changes made by the order, but it will perhaps be helpful if I provide background and explanation for some of the changes. I can of course provide an explanation for all the changes if hon. Members so wish.
The annual allowance limit was reduced from £255,000 to £50,000 from 2011-12 and to £40,000 from 2014-15. The Government recognised that the lower annual allowance limit would naturally affect more people and so introduced a number of other changes together with the reduction in 2011-12 in order to ease the impact of the reduction. Those other changes included an exemption for inflation-based increases to deferred members’ benefits under defined-benefit schemes; scope to carry forward unused annual allowances from earlier years; and the introduction of the “scheme pays” facility, which allows individuals to meet AA tax liabilities from their pension scheme, followed by a proportionate reduction in the value of their pension benefits.
However, even though the changes had been the subject of consultation, subsequent engagement with sector representatives identified a number of areas where the technical detail of the legislation did not work as originally intended, nor as it had been understood by the sector.
John Healey (Wentworth and Dearne) (Lab): Before the Minister moves on to the technicalities, tax relief on pensions is obviously designed to encourage people to take more responsibility for their own retirement planning. I am quite surprised to see no impact assessment. What
has the impact on the level of pension savings and investment been of the first step in lowering the annual allowance, and what is his estimate of the impact of this step?Mr Gauke: We have to remember that the order makes a number of technical changes consequential on the reductions in the annual allowance in 2011-12 and 2014-15. If my memory serves me correctly, an impact assessment of those policy changes was made and published at the time. For example, at the time of the reduction to £50,000, it was estimated that 100,000 individuals were affected. That was set out in the tax information and impact note produced at the time. The regulatory impact assessment—in tax change terms, a tax information and impact note—to which the right hon. Gentleman refers was issued at the time of the change in the rules. As I said, about 100,000 individuals were affected.
It is difficult to be clear about the impact of reducing the annual allowance and how many individuals were affected. Many of those affected were expected to have reduced their contributions so that they did not exceed the annual amount limit, so it is difficult for Her Majesty’s Revenue and Customs to give a precise assessment of the total number affected. I hope that makes it clear why there was no impact assessment with this order, but there was at the time of the more substantive changes.
John Healey: I am grateful to the Minister for sort of getting to a sort of answer to the question. I think he was confirming that there was a drop in the amount that people generally were putting aside for their savings, so as not to fall foul of the lower limit. Does he accept that the Committee is being asked to approve technical changes to make the policy changes work? He said that the first attempt was deficient. Does he not accept that it would be useful if the Committee had available as background to this morning’s debate the impact assessment we have been discussing?
Mr Gauke: The tax information and impact note on the reduction of the annual amount to £50,000 is freely available to hon. Members: it has been published and can be found without too much difficulty. I should have thought that someone of the right hon. Gentleman’s resourcefulness would have no difficulty locating it.
The changes we are discussing are focused on some detailed technical points that do not apply to many of those affected by the reduction in the annual amount. However, for the reasons I set out earlier, even though there was full consultation a number of issues have arisen and it is right that we deal with those after a further round of consultation and the details have been examined. It is worth stating that the vast majority—some 99%—of pension savers were unaffected by the reduction in the annual amount from £255,000 to £50,000 because they did not make contributions above that level. That was a sensible, proportionate way of addressing the costs of pensions tax relief. If I were so inclined, I might raise the wider issue of why the previous Government did not take such steps to ensure better value in respect of pensions tax relief, but that would take me outside the scope of the order.
The Government have worked closely with the pensions sector—including further public consultation—to develop the changes made in the order. Broadly, the changes affect the exemption for deferred members pension
benefits, the “scheme pays” facility, and the treatment of certain transfers of pension pots. The changes to the treatment of deferred members’ benefits reflect the original aim of excluding from any potential annual allowance charge deferred members who only receive inflation-based increases to their pension until they retire. Among several other changes, this exclusion will be extended to cover certain historically agreed increases based on RPI rather than CPI and certain increases required by statute. These changes are meant to reflect the original intention of the 2011-12 provisions and the way they were understood by pension scheme administrators at that time. Bar one unusual situation, they will not increase any individual’s tax liability and will have retrospective effect from 2011-12.The order will also impact on the “scheme pays” rules in several ways. One of the changes will address an unintended anomaly for the year in which individuals retire, ensuring that the amount of any annual allowance tax charge in that year cannot be reduced simply by using the “scheme pays” facility. As this change might increase the tax an individual pays, it will apply with prospective effect only. Other changes will extend the flexibility of the “scheme pays” rules by ensuring that individuals will always have access to the facility before they start to draw their benefits, and by ensuring that an individual’s annual allowance charge under one scheme may be borne by a scheme into which the individual’s pot has been transferred. All these changes will apply with prospective effect.
The last broad area of change affects the rules catering for the transfer of scheme members’ pension pots. The main change will simplify treatment for “block transfers”, which form the majority of transfers between defined-benefit schemes. These transfers tend to arise under complex pension scheme mergers and reorganisations where the value of scheme members’ pension benefits is the same before and after the transfer. The change will ensure that the treatment of such transfers will be the same, regardless of the scheme’s funding status.
Once again, the changes are intended to reflect the original intention of the 2011-12 provisions and the way those have been understood by the pension sector, so they will have retrospective effect from 2011-12. Draft guidance covering the range of changes included in the order was published for comment when the order was laid, and is being finalised.
I hope my explanations have helped the Committee and that I have anticipated some of the questions. I commend the order to the Committee.
9.6 am
Cathy Jamieson (Kilmarnock and Loudoun) (Lab/Co-op): Although the Minister has of course anticipated a number of issues I wished to raise, as always I hope I may find one or two others to mention.
As the Minister said, the statutory instrument is designed to help ensure that the annual allowance legislation introduced by the Finance Act 2011 works as intended and does not result in individuals becoming liable to an annual allowance charge in certain unintended circumstances. It also ensures that the charge is the same whether an individual pays it themselves or asks their pension scheme to pay, through “scheme pays”. In principle, we do not have an issue with that.
The “scheme pays” rules were introduced in the 2011 Act to mitigate the impact on individuals of reducing the annual allowance from £255,000 to £50,000. The rules allow individuals to meet the tax charges from their pension scheme in return for a reduction in their eventual benefits under the scheme. In other words, the scheme pays the annual allowance charge and subtracts the cost from the member’s benefits accrued. That might be considered reasonable, so we do not oppose that.
My right hon. Friend the Member for Wentworth and Dearne made an important point about the impact assessment. The Minister mentioned my right hon. Friend’s having the resources and the ability to find the information, but when I looked for it on the web page for the SI, I found that it states that there is no tax information and impact note. However, the explanatory memorandum does, of course, as the Minister noted, state that the TIIN covering the SI was published first on 9 December 2010 and was then updated on 3 March 2011
“to reflect further decisions relating to the restriction of pensions tax relief”.
Of course, the updated TIIN, as my right hon. Friend rightly said, does not estimate the cost impact of the specific measures we are discussing. None the less, the explanatory memorandum states that
“the impact on business, charities or voluntary bodies is not expected to be significant.”
As always when discussing these changes, it is helpful to have slightly more information on that.
I do not want to take the Minister back over matters that are outside the scope of the order, but issues relating to pensions and annual allowances are important. Will he comment further on the costings provided for the new £10,000 annual allowance, introduced as part of the Taxation of Pensions Act 2014? In his letter to the Taxation of Pensions Bill Committee, published on the day of the autumn statement, he outlined the impact of a series of measures announced since the Budget. The introduction of the new annual allowance was projected to generate increased revenues of £15 million in 2015-16 and thereafter an annual loss. It would be useful to hear the Minister’s comments on that. If the purpose of the reduced annual allowance was to close down an avenue for tax avoidance, why is it going to cost money?
Does the Minister have anything further to say about the figures published at that time on the forecast revisions for salary sacrifice? The Office for Budget Responsibility questioned the general reliability of the pension flexibility costings in the autumn statement, giving them a “very high” uncertainty rating.
On the annual pension allowance for transferred workers, the Minister may recall that my hon. Friend the Member for Chesterfield (Toby Perkins) raised the issue of bridging pensions in an Adjournment debate on 3 December. In that case, the bridging pension paid to workers who transferred employment from Royal Mail to a private IT company led to them incurring an additional and in some cases considerable tax charge, as the payment received was treated as a one-off payment into a separate pension, rather than a continuation of the previous pension. That is one example of what I think was an unintended consequence of the annual allowance rules, resulting in some cases of financial hardship.
In that Adjournment debate, the Economic Secretary to the Treasury said that
“the award of the additional pension may give rise to pension savings in excess of the annual allowance limit. That is because the temporary nature of the increase to an individual’s pension is not recognised in the same way that increases to the pension’s capital value is calculated for annual allowance purposes.
The Government have considered whether special annual allowance provisions should apply for bridging pensions…but we concluded that it would not be desirable to complicate the pensions tax regime”.—[Official Report, 3 December 2014; Vol. 589, c. 402-403.]
I am sure we all agree that we do not want to complicate the pensions tax regime—it is complicated enough—but has the Minister discussed the matter with his colleague? Have any of those cases been looked at and if so, what was the outcome? Is that not an example of an unintended consequence for which the draft order in principle seems to make provision?
During the Westminster Hall debate on the BMI pension scheme, secured by my hon. Friend the Member for Edinburgh North and Leith (Mark Lazarowicz), the Exchequer Secretary to the Treasury said:
“The annual allowance is…designed to strike an appropriate balance between providing financial incentives to encourage and support saving for retirement and the fiscal risk to the Exchequer.”—[Official Report, 17 December 2014; Vol. 589, c. 516WH.]
She said that the projected cost of pension tax relief in the current tax year was £36 billion, and more than £39 billion in 2016-17. Given the high cost of pension tax relief, does the Minister agree that we need to look in particular at the highest earners, in respect of whom there is a considerable burden on the Exchequer? Does he intend to introduce further measures, particularly for those earning more than £150,000 per year?
In principle, we have no issue with the rule changes, but it would be helpful if the Minister answered those questions.
9.12 am
Mr Gauke: I thank the hon. Lady for her questions and for her support for the order.
On the absence of a new impact note, in essence the impact has already been identified, and the tax information and impact note for the 2011-12 changes remains a reasonable reflection of it. The order does not change the impact sufficiently to warrant a new note, which is why a new one has not been published.
John Healey: I am grateful for that explanation. I accept the Minister’s assurance that the impact is relatively small scale and therefore does not warrant updating the impact assessment. However, as he knows, it is good practice to do a post-implementation assessment, so perhaps he can tell the Committee whether he plans to make such an assessment of the order, alongside the other technical changes brought into play by this policy.
Mr Gauke: All such matters are of course kept under review, which I am sure is an expression the right hon. Gentleman used on many occasions as a Treasury Minister. In fact, I am sure that I have heard him use it—
John Healey: Not as crudely as that!
Mr Gauke: Almost as crudely as that. We will continue to keep the matter under review. The truth is that the order is a consequence of further consultation, which could be described as actively keeping the matter under review and responding to comments made by the pensions sector and other interested parties. We have listened to the sector to ensure that the rules work in the way originally intended. That is essentially what we are considering today.
The issue was raised of the £10,000 annual amount that applies in circumstances where someone has already drawn down. The hon. Lady and I have debated that subject for many hours on many occasions, and she asked whether I could update the Committee on it. The figures were published at the time of the autumn statement, which was just over a month ago. I do not have any more information for her but I can say that the costings produced then remain in place.
I do not necessarily want to get into a full debate on the £10,000 figure. We believe that it was the most appropriate solution to allow people the flexibility to save into their pensions, while addressing costs in a proportionate way. The autumn statement costings reflect the revised policy. I promised on many, many occasions that we would produce the numbers at the autumn statement, and indeed we did. I hope the hon. Lady remains satisfied with those, even though it is now over a month since they were published.
The hon. Lady also raised the issue of the overall cost of pensions tax relief. The Government have no plans for any further changes to the relief. We believe that the fairest way to restrict it is to ration the amount of tax-privileged pensions saving an individual can make. That is why the annual allowance and lifetime allowance were reduced to £40,000 and £1.25 million respectively on 6 April 2014. The policy preserves incentives for everyone to save. As is the case with all areas of tax policy, pensions tax relief will be kept under review.
On entering office, we inherited plans from the previous Government that were designed to focus on those earning more than £150,000. The Committee will be aware that employers and the pensions sector raised considerable concerns about the workability of those proposals. We have saved a greater amount as a consequence of the changes we made, and in a way that has not created the practical difficulties that the previous Government’s proposals would have caused. The hon. Lady seemed to hint that her party’s policy will be to reintroduce those proposals, but they were unworkable then and I see no reason why they will not be unworkable in the future. I do not want that subject to detain us for too long, but I wished to make that point.
Jeremy Lefroy (Stafford) (Con): The point has been raised in the past—I have raised it myself—that income tax receipts, like all tax receipts, tend to be stated net of any reliefs. Would it not be more transparent and helpful if the gross amount of tax receipts was stated in the Treasury’s annual statements, and allowances such as high-rate pension tax relief were then given as a separate figure, so that we could be clear on the costs of reliefs, whether on income tax or corporation tax?
Mr Gauke: My hon. Friend takes me into wider territory. I know that considerable interest in the issue of tax reliefs more generally has been expressed by the
likes of the National Audit Office and the Public Accounts Committee; indeed, there was an evidence session on that just last week, if I recall correctly. Identifying the numbers can be challenging, but I will take on board the point he has made. HMRC already publishes the costs of most tax reliefs, so it is possible to make such an assessment. Indeed, some costs have been quoted during this debate.I hope I have addressed all the issues raised, many of which take us a little wider than the order before us, but they are none the less relevant to the wider debate. Cathy Jamieson: If the Minister cannot give me concrete answers to the two specific issues I described, can he say whether he has discussed them with the Exchequer Secretary and the Economic Secretary? If not, will he do so?
Mr Gauke: The aim of the order has always been to address specific technical problems with the legislation introduced in 2011-12, not to address wider concerns
some may have about the annual allowance regime and how it may work in relation to a specific pension scheme. We keep such matters under review.The hon. Lady touched on the debate about the BMI scheme, to which there is not much I can add at this point. Lufthansa made payments into a defined-contribution scheme that were measured against the AA limits, even though, in effect, they were compensation for the value lost by members of the BMI defined-contribution scheme that had been put into the Pension Protection Fund. I would rather not attempt to re-run that debate today; as she said, the Treasury Minister responded to the issues raised in it. We look continually to assess how these things work, but I stand by the Minister’s comments during that debate.
I am grateful for the Committee’s support for the order, and I commend it to the Committee.