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Baroness Noakes moved Amendment No. 96:

Page 9, line 29, leave out paragraph (a).

The noble Baroness said: In moving Amendment No. 96, I shall speak also to Amendment No. 97, which partially overlaps with Amendment No. 98 standing in the names of the noble Baronesses, Lady Castle and Lady Turner.

We are now reaching the end of Clause 15. I believe I hear sighs of relief coming from the Front Bench opposite. Amendment No. 96 seeks to remove paragraph (a) from subsection (6). Paragraph (a) states that,

"a person is treated as possessing capital or income which he does not possess".

The Explanatory Notes refer to repeating other provisions which deem a notional income from capital disposed of solely or mainly to increase extra pension credit. As most members of the Committee will know, I am a newcomer to social security matters, but I do have some background in taxation. I am very clear that if the tax system tried to incorporate this kind of anti-avoidance provision, there would have to be extraordinarily clear rules on the face of a Bill. It would not be allowed to relegate this to prescription after the event with relatively little scrutiny.

It allows the department to rewrite history, to turn it into something that fits its concept of how pension credit should work. If a pensioner gifts his capital, thus depriving himself of income, will the Minister say in what circumstances the department will seek to deem something else? What will happen if a pensioner takes the disincentive effect of the savings credit, and he blows all his capital on a holiday or a fast car? What are the principles involved in using these interventionist powers?

Amendment No. 97 would leave out two further paragraphs in Clause 15(6). Paragraph (c) allows income to be treated as capital and paragraph (d) allows capital to be treated as income. These powers are in the same category as those to which I have just referred. The Explanatory Notes give no idea as to why they are needed. Is their purpose to try to normalise the investment policies of pensioners, to deem them as having capital or receiving income had they conducted their affairs differently? If so, what personal freedoms are pensioners being allowed to have?

I hope that the Minister will tell us what she has in mind for these powers. I beg to move.

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Baroness Turner of Camden: I have an amendment in this group—Amendment No. 98—which seeks to leave out paragraph (c) from Clause 15(6), providing for income to be treated as capital in prescribed circumstances. The power already exists under the income support regulations. Income treated in that way includes tax refunds and occasional charitable payments. It would be logical to include such payments in the types of income to be disregarded. If not spent, they would automatically become part of the recipient's capital in the same way as any other income that is not spent. I await the Minister's response with interest.

Baroness Hollis of Heigham: It is right that we should explore this important issue. The three amendments have been grouped together because they all relate to Clause 15(6). The first of them—Amendment No. 96—seeks to remove subsection (6)(a) which includes important powers for anti-abuse provisions designed to prevent claimants who have deliberately deprived themselves of income and capital from securing or maximising their pension credit entitlement. Under the proposed amendment, the subsection would be removed, and with it the necessary safeguard.

We intend to retain the broad framework for guarding against intentional deprivation of capital or income that exists in the minimum income guarantee. That has been built into social security arrangements for a long time. It is not acceptable for people deliberately to reduce their income levels to maximise their pension credit entitlement. We propose to adapt the rules and guidance to ensure that while protecting the integrity of the pension credit scheme we uphold our commitment to reducing intrusion into people's lives.

In practice, the regulations will have to ensure that pensioners, especially when an assessed income period is in place, will not feel that they are limited in how they choose to spend their savings. They may want to pay off a mortgage or repay previously incurred debts. That would be reasonable financial planning in which one could engage before retirement. Other examples could be installing a new kitchen, going on holiday or buying a new car. None of those examples would be regarded as intentional deprivation of capital.

The rules governing how we consider deprivation and how we apply notional income or income from notional capital will focus primarily on gifts or similar disposal, other than between the couple, such as having one's pension paid to a third party.

Equally, when a pensioner goes into residential care or a nursing home, the value of the home, which we have previously ignored for the purposes of pension credit, becomes a capital asset. It is understandable that pensioners want to pass the value of their home to dependants. It is not uncommon for them to do so just as their health deteriorates and a stay in residential care seems likely. In such cases, however, a pensioner would be judged as having deprived him or herself of the value of the home, which would be taken into account in calculating their pension credit, as it would

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under minimum income guarantee provisions, and as it does in terms of charging assessments for local authority homes now.

I can assure the Committee that these are real issues and that they are at the forefront of our minds as we develop regulations. We want to get the balance right. We do not want to intrude into people's lives but we want to avoid the intentional deprivation of capital in order to maximise pension credit.

Amendment No. 96 suggests that we remove this legal provision from the Bill. But in doing so we would see the pension credit system laid open to the most blatant abuses. Pensioners could deprive themselves of income and capital. Even if we had clear evidence of a pensioner's intention to deprive himself of income or capital in order to gain pension credit, we would be powerless to take that income into account. That would not be fair on other taxpayers.

In Amendment No. 97 the noble Lord, Lord Higgins, seeks to remove subsection (6)(c), which contains the power to prescribe rules, within regulations, dealing with the circumstances in which income is to be treated as capital or capital is to be treated as income—what the noble Earl, Lord Russell, has referred to as the "Humpty-Dumpty clauses". Paragraph (c) contains the power (already contained in the minimum income guarantee) to prescribe in regulations the circumstances in which the one is to be treated as the other. It would be used in circumstances when a payment that is regularly received, or is made in relation to a particular period, should not be treated as income; for example, a pensioner may have loaned a relative some money which he or she is repaying monthly by instalments. Although it would be regular monthly income, it clearly would be in respect of capital and, therefore, we would want it to be treated as such.

Paragraph (d) represents the reverse. It is intended that the regulations made under this power will provide for the treatment as income of a payment that has the nature of an income, although it could, as a result of general law, be regarded as a capital holding—for example, it is paid regularly or in relation to a period, such as regular payments from an annuity. I should like to reassure the Committee that secondary powers to be introduced under paragraphs (c) and (d) would be used only so that a correct amount of pension credit entitlement may be calculated. I hope, therefore, that noble Lords will feel able to withdraw those amendments when we reach that stage.

Finally, I turn to Amendment No. 98, which in part is the same as Amendment No. 97. It seeks also to amend subsection (6). However, it would remove paragraph (c) only of that subsection. As I explained when dealing with the previous amendment, this subsection contains the power to prescribe, within regulations, the circumstances in which income is to be treated as capital—such as in the case of a repayment of a loan. There would seem to be little value in this subsection, but it is there for specific purposes that include benefiting the pensioner. Paragraph (c) will be used in those circumstances when a repayment

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received regularly, or made in relation to a particular period, should not be treated as income. That applies to a loan repayment from a relative, as I explained earlier.

If it were treated as income, depending on the rate of repayment and the pensioner's weekly pension credit entitlement, pension credit entitlement would be reduced or even extinguished. For example, a pensioner may be entitled to £15 week to bring his income up to the appropriate minimum guarantee. If the loan repayment instalments were £10 a week, the pension credit would be reduced to £5 a week. If the instalments were £50, entitlement would be extinguished. If the repayment of the loan were made in one lump sum, entitlement would be extinguished for just that one week. Thus the pensioner would need to reclaim pension credit for the following week. He or she may also need to reclaim housing benefit and council tax benefit. These situations would not, I think, be acceptable for any of us.

However, if the payments were to be treated as capital, as is the Government's intention, there would be no effect on pension credit if the capital holding were equal to or below £6,000 or if an assessed income period had been set. If total capital were above £6,000 or an assessed income period had not been set, the £1 in £500 assumed income from capital provisions would apply. Given all those examples, I hope that the Committee will agree that these provisions are benevolent; that they will ensure accuracy; and that they are indeed necessary to ensure that the Bill's proposals are treated properly.

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