Schedule 19 — Alternatively secured pensions and transfer lump sum death benefit etc

Deferred Divisions – in the House of Commons at 10:15 pm on 26 June 2007.

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Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury) 10:15, 26 June 2007

I beg to move amendment No. 44, page 226, line 8, leave out from 'least' to end of line 9 and insert

'equivalent to minimum retirement income (see sub-section 8 below)'.

Photo of Michael Martin Michael Martin Chair, Speaker's Committee on the Electoral Commission, Speaker of the House of Commons, Chair, Speaker's Committee on the Electoral Commission

With this it will be convenient to discuss the following amendments: No. 47, page 226, line 9, at end insert—

'(1A) The total amount of a spouse's, or civil partner's alternatively secured pension paid to a spouse or civil partner of a member of a registered pension scheme in each alternatively secured pension year in respect of a money purchase arrangement under the pension scheme must be at least equivalent to the Minimum Retirement Income for the alternatively secured pension year (but subject to sub-section 5 below).'.

No. 45, page 226, line 10, after 'dependants'', insert '(other than spouses' or civil partners')'.

No. 46, page 226, line 11, after 'dependant', insert

'(other than the spouse or civil partner of a member)'.

No. 49, page 226, line 31, after '(1)', insert '(1A)'.

No. 48, page 227, line 7, at end insert—

'(8) In relation to minimum retirement income as mentioned in subsection (1) above, the following provisions shall apply—

(a) the amount of the minimum retirement income in respect of each tax year shall be set by the Treasury by order at the level of the standard minimum guarantee prescribed under section 2 of the State Pension Credit Act 2002 (c.16);

(b) before making an order under this subsection, the Treasury shall consult such persons as it considers appropriate;

(c) an order under this subsection (other than the order that applies to the first tax year during which this section is in force) must be made on or before the 31st January of the tax year before the tax year to which the order applies.'.

Government amendment No. 33

Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

The amendments would amend schedule 19, which introduces a minimum draw-down from alternatively secured pensions. Those pensions have been a feature of Finance Bill debates in three of the past four years. It may help hon. Members if they understand some of the background.

In response to concerns expressed by the Christian Brethren, the Government legislated in 2004 for alternatively secured pensions, which in effect ended compulsory annuitisation at age 75. In 2006, they introduced new rules to determine the tax on the annuitised pot of ASP members on death. However, the Economic Secretary decided that even the new complex rules on inheritance tax and ASPs were not enough to discourage people from buying them and therefore introduced even more draconian rules, increasing the tax rate on death to a maximum of 82 per cent. and introducing a new minimum draw-down from the funds, which is the focus of the amendments.

The amendments are relatively modest compared with those tabled in previous years. The Pensions Bill was amended in the other place to reflect proposals made by my right hon. and learned Friend Sir Malcolm Rifkind in his private Member's Bill to set up a retirement income fund as an alternative to compulsory annuitisation. We will have a longer and fuller debate on the issues when the Pensions Bill returns from the Lords shortly, but my amendments are narrowly drafted to reflect one particular aspect: the draw-down.

Schedule 19 as drafted stipulates that an ASP member must withdraw a minimum of 55 per cent. of the basis amount for the ASP year. That amount is determined on an annual basis by the Government Actuary based on the life expectancy of a 75-year-old. My approach is to substitute 55 per cent. with the minimum amount of income required to ensure that someone does not need to rely on state benefits—a concept that underpins the Bill of my right hon. and learned Friend and the amendments passed in the Lords.

I accept that setting any minimum level of draw-down is difficult, but by setting the minimum threshold in that way, it would give members of ASPs more freedom over the use of their retirement assets. My concern about the Government's approach is that it compels members to draw down income that could be surplus to their immediate needs if they have income from other sources. Based on the way in which the schedule is drafted, if members do not draw down 55 per cent. of the basis amount, they will be penalised. My measure could be criticised for being as crude as the Government's approach, in that it does not take into account other sources of income, but it would give members of the ASP scheme more flexibility. That would increase the flexibility and attractiveness of ASPs and would make the product much more suited to the needs of pensioners.

As the debate in the Lords demonstrated, there is a growing consensus on creating more flexibility in pension arrangements. In the debate on that point in the other place, Lord Turner of Ecchinswell, who is the architect of the pensions reforms going through Parliament at the moment, said that

"there are two arguments, but two arguments only, for compulsory annuitisation. One is that people should not fall back on the means-tested benefits of the state; the other...is that tax relief is given to pension contributions as they go into the scheme, and it is therefore reasonable that as money comes out of the scheme, those are taxed moneys out."

He also argued that

"if we took those two principles, we might well end up with a rule establishing a minimum level of annuity that people had to buy, plus an appropriate set of rules as to the tax treatment...I have found it difficult over the years to understand what the arguments against that approach are."

Lord Turner hits the nail on the head. Increasingly, it is the Government who are out of step with the views of pensioners and the industry, and it is the Government who need to understand more about the pressures that are arising in the pensions debate.

My amendments do not tackle the exit charge on death, which is also addressed in Lord Turner's comments, but they do tackle the amount to be drawn down from the fund. Increasingly, people will look for alternatives to annuitisation as the growth in defined contributions schemes increases, and my amendments would make an ASP more attractive to those approaching retirement. It is worth reflecting on the pressures in the system. The Office for National Statistics shows that between 1997 and 2005 employee membership of defined benefit pension schemes, such as the scheme that hon. Members benefit from, fell from 46 per cent. to 35 per cent., while membership of defined contribution schemes increased from 10 per cent. to 15 per cent. Those are the people who will end up on retirement with a pot of money to be invested in annuity or some alternative way to provide a retirement income—perhaps something that is more flexible than the arrangements on offer at the moment.

The switch from defined benefit to defined contribution schemes has been especially evident for smaller employers. That is an indicator of the potential increase in demand for annuities, but as Lord Turner indicated in the same debate:

"The bigger the imbalance is between demand for and supply of that capacity, the lower the annuity rates will be.

There is an interest for everyone who buys an annuity in ensuring that those who do not need to buy one do not push their demand into the market and therefore decrease yields."—[ Hansard, House of Lords, 6 June 2007; Vol. 692, c. 1142-1148.]

If, through amendments such as these we can make alternatives to annuities more attractive, that will benefit those who wish to buy annuities instead of making their own arrangements in retirement. That reflects the growing consensus in the House of Lords debate. Lord Turner supported that principle, as did Baroness Hollis, a former Minister at the Department for Work and Pensions. Lord Howarth of Newport, having seen the damage that the Chancellor had caused to pension funds, also supported the proposals.

There is a progressive consensus on this issue, but the Government are out of step with it—

Photo of George Osborne George Osborne Shadow Chancellor of the Exchequer 10:30, 26 June 2007

Indeed! Once he gets his peerage, the Economic Secretary will agree with us.

Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

Compulsion to take out annuities is increasingly regarded as a barrier to saving for retirement, so we need a wider range of options. The amendments would give greater flexibility as to the minimum income to be drawn down from an ASP, thus creating a more attractive alternative to an annuity. There is cross-party support in the Lords for the principle, and it is time for the Government to decide whether they want to be part of the consensus, or to continue in their dogged determination to oppose giving people choice over how they manage their retirement funds.

Photo of Edward Balls Edward Balls The Economic Secretary to the Treasury

I listened carefully to Mr. Hoban, and will try to deal with the points that he made. Ministers faced some distraction from those on the Opposition Front Bench, but we managed to focus on the issue at hand.

We are very keen to see a progressive consensus being formed in this House, and I encourage pretty much all hon. Members—not all, but almost all—to consider joining us in that cause in due course.

Photo of Edward Balls Edward Balls The Economic Secretary to the Treasury

Before I turn to alternatively secured pensions, I shall speak briefly about Government amendment No. 33, which makes a minor change to the pension commencement lump sum rules included in schedule 20. One of the technical improvements in schedule 20 will allow more time for the tax-free pension commencement lump sum to be paid, and to allow it to be paid after a member has reached age 75, if the entitlement to that lump sum arose before that age. However, the published Bill omitted a consequential amendment to a regulation-making power in the Finance Act 2004, with unintended and potentially adverse results. Government amendment No. 33 will be welcomed by the industry, because it allows the regulations to continue to operate as originally intended. I am sure that the proposal will be uncontroversial for most hon. Members.

I turn now to ASPs, the subject of amendments Nos. 44 to 49 and one I spoke about at length in our debate on pension term assurance during the Committee of the whole House. Unfortunately, I was not able to attend the Committee stage, as I had to attend the ECOFIN meeting in Brussels—

Photo of Edward Balls Edward Balls The Economic Secretary to the Treasury

I think that he was quite busy at the time, but I cannot remember exactly why. I think that he is quite looking forward to his new job—

Photo of Sylvia Heal Sylvia Heal Deputy Speaker

Order. The Economic Secretary should respond to the debate.

Photo of Edward Balls Edward Balls The Economic Secretary to the Treasury

Thank you, Madam Deputy Speaker.

As my right hon. Friend the Chief Secretary to the Treasury made clear in the debate in the whole House, it is important to set out the principle behind the generous tax relief that we provide for pension savings. First, we believe that generous tax relief is provided to support pension saving, where that produces an income in retirement. Pension tax relief is not there to support pre-retirement income, nor to support accumulation or inheritance.

Secondly, we believe that pensions should get more favourable tax treatment compared to other forms of savings, in recognition of the fact that they are less flexible than other savings and are locked away until retirement. Thirdly, we believe that incentives for employer contributions should be provided and, finally, we consider the pensions tax incentives must be affordable and fall within the current fiscal projections. Given that we are talking at the moment, in 2006-07, about a total of £16 billion of tax incentives to encourage people to save for retirement, as a sensible and proper Government we need to make sure that we use that £16 billion wisely. That is why it is right to take these issues seriously.

Photo of Stewart Hosie Stewart Hosie Shadow Spokesperson (Women), Shadow Spokesperson (Home Affairs), Shadow Spokesperson (Treasury)

How much of that £16 billion goes towards tax incentives for those saving on alternatively secured pensions? I just want to get an idea of the scale of the issue.

Photo of Edward Balls Edward Balls The Economic Secretary to the Treasury

I cannot give the hon. Gentleman a detailed answer. I would say that, in Finance Bill terms, it would count as "neg"—negligible. Without wanting to return to the earlier debates about the philosophical difference between zero and close to zero, my guess is that it would be pretty close to zero.

The Government believe that the best way for the majority of people to save is to secure an income in retirement by saving through a pension and then purchasing an annuity. An annuity provides an income for life, regardless of how long life turns out to be. As one of our steps towards a progressive consensus, I should point out that the Pensions Commission endorsed that basic principle in its report when it said:

"since the whole objective of either compelling or encouraging people to save, and of providing tax relief as an incentive is to ensure people make adequate provision, it is reasonable to require that pensions savings is turned into regular pension income at some time".

On that point, as on many other points, I can agree with the conclusions of the Pensions Commission.

Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

Given the consensus that the Economic Secretary mentioned and the way he warmly commended the conclusions of the Pensions Commission, does he also agree with the views of Lord Turner expressed in the debate on pensions in the House of Lords two weeks ago?

Photo of Edward Balls Edward Balls The Economic Secretary to the Treasury

As I said, we are looking to forge a progressive consensus and I look forward to doing so. It should be possible to have a consensus that is progressive if we can involve most Members of the House—although perhaps not all. I quoted the Pensions Commission in that context as an example of one area where we can reach a consensus. On the particular opinions that Lord Turner set out in the House of Lords, I disagree with him and will set out why during the course of my speech.

Photo of Edward Balls Edward Balls The Economic Secretary to the Treasury

I am sorry to disturb the hon. Gentleman. I see that he has sprung back into life. I am happy to take his intervention.

Photo of Nicholas Soames Nicholas Soames Conservative, Mid Sussex

The hon. Gentleman does not have to apologise at all. He is boring us all sideways as it is. Just for the convenience of the House of Commons, would he have the good manners to define for all of us who sit on this side of the House what exactly a progressive consensus is?

Photo of Sylvia Heal Sylvia Heal Deputy Speaker

Order. I do not see that in any of the amendments. Perhaps the Minister will continue.

Photo of Edward Balls Edward Balls The Economic Secretary to the Treasury

I will therefore hesitate to attempt to give the hon. Gentleman a definition either of progressive consensus or of good manners.

Photo of Philip Dunne Philip Dunne Conservative, Ludlow

Will the Economic Secretary kindly enlighten us on another matter? When talking about the way in which the Government are approaching the issue, he referred to principles. What is his view of principle 6 from the Financial Services Authority, which is entitled "Treating customers fairly"? What about pensioners who die the day before they reach their 75th birthday? Their pension estate is effectively untaxed. Then there are those who, unfortunately for them, die shortly afterwards. The tax rate that applies varies between 0 and 82 per cent. How is that fair?

Photo of Edward Balls Edward Balls The Economic Secretary to the Treasury

If I can make some progress, I will explain why the approach we are taking to ASPs is right and why it would be quite wrong to go down the route of the amendments. I would point out to the hon. Gentleman that the vast majority of pensioners have bought an annuity well before the age of 75 and would never be able to consider the option of an ASP in any case. It is only those with the largest pension pots who would be able to consider doing so. [ Interruption. ] From a sedentary position, Mr. Osborne asked why we introduced ASPs. He knows very well that in the Committee on the Finance Bill in 2004, the then Financial Secretary said:

"We have made this concession because people hold significant, principled, religious objections to the pooling of mortality risk."—[ Official Report, Standing Committee A, 8 June 2004; c. 485.]

We thus introduced a way of allowing people with principled religious objections to save in a pension after the age of 75.

As we have discussed many times in Committee, it is impossible in tax law to distinguish between people with different religious convictions. More importantly, in the year or so after we introduced ASPs, it became increasingly clear that people were using ASP vehicles as a way of substantially avoiding tax. We thus acted in last year's Budget to tighten the laws on inheritance tax to prevent people from using ASPs as a vehicle for passing on tax advantage for inheritance. Even after those changes, such practices continued, so we acted in the pre-Budget report to protect properly the principle that pensioners' tax relief was provided to produce income in retirement, rather than to give a tax advantage to inheritance. That is what we are doing through the ASP changes in the Bill.

Our application of the principles has been consistent. Furthermore, we have consistently demonstrated that when people are trying to get round the principles by giving a tax advantage to inheritance, we are willing to act decisively, as we did in the pre-Budget report. We have made it clear that an annuity is the best way for the vast majority of individuals to secure an income in retirement. An ASP allows those with religious objections to the pooled mortality risk in annuities to have a guaranteed lifetime income without an annuity and without a tax advantage to inheritance. While the ASP is not a mainstream product—it is blind to religion—the Bill allows a small minority, if they are well advised, to continue to use ASPs to draw an income in retirement without buying an annuity, but only in a way that is consistent with our principle that pension tax relief should not be used to give a tax favour to inheritance.

The Conservative amendments would replace the proposed minimum income for ASPs of 55 per cent. with an amount that would substantially jeopardise our objectives for ASPs. As I said, the purpose of tax relief is to encourage and support pension saving to produce an income in retirement. The danger of the official Opposition's proposals arises from the specific income from pension savings that they specify must be delivered. Under those proposals, a person with an ASP fund worth £1 million would receive an income that was 10 times lower than that allowed under the Bill. Someone with a large pension pot would have to take a small income and would thus have a large tax advantage pot to pass on to their successors. On the other hand, a person with a much smaller pension fund—£50,000, for example—would draw an income that could well lead the fund to run out much earlier than would be sensible. The proposals would put the most vulnerable in a dangerous and disadvantaged position, while they would give the richest a substantial tax advantage to inheritance.

Let me cite a tax adviser who responded to our announcement in the pre-Budget report. Mr. Tom McPhail, the head of research at financial advisers Hargreaves Lansdown, told the Financial Times on 22 March that the changes in the Bill mean that the

"door has effectively been closed on using pensions for inheritance tax planning purposes".

The problem with the Opposition amendments is that they would reopen that door and allow some of the £16 billion of tax relief to be used to the advantage of inheritance tax planning. There might be some Conservative Members who would think that that would be a step forward, but I think it would represent a substantial step away from the progressive consensus that Labour Members wish to reach. I hope that the hon. Member for Fareham will not attempt to advantage inheritance tax planning, so I urge him to withdraw the amendment, rather than trying to waste taxpayers' money through breaking our principles and encouraging inheritance tax planning.

Photo of Nicholas Soames Nicholas Soames Conservative, Mid Sussex 10:45, 26 June 2007

On a point of order, Madam Deputy Speaker. You refused to allow the Economic Secretary to define a progressive consensus, but the flim-flam argument that he has recently constructed to oppose the amendment is wholly based on a progressive consensus, and no one on this side of the House has the remotest idea what he is talking about.

Photo of Sylvia Heal Sylvia Heal Deputy Speaker

That is not a point of order for me. However, following this debate there will be a debate on Third Reading, and perhaps the hon. Gentleman will wish to catch my eye.

Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

The reality is that in the Finance Act 2004 the Government let the genii out of the bottle. They introduced changes that led people to think that ASPs were an appropriate form of tax planning and of securing an income in their retirement. The Government legislated for that. Only last year, in the Finance Act 2006, the Government introduced changes to tighten up the rules, and this year they have come back and tried to restrict ASPs to make them less flexible and less attractive to people as a means of providing flexibility in retirement.

The problem with the Government's approach is that they are out of step with the desire of most people in this country to have greater control over their pension funds. They are out of step with the people of this country who want choice —[ Interruption. ]

Photo of Sylvia Heal Sylvia Heal Deputy Speaker

Order. The House must come to order.

Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

The Government are out of step with people who want to have choice in their lives, who do not want to be patronised or directed by the Government as to how they use their pension funds in retirement. On that basis, I urge my colleagues to vote in favour of amendment No. 44.

Question put, That the amendment be made:—

The House divided: Ayes 149, Noes 324.

Division number 155 Deferred Divisions — Schedule 19 — Alternatively secured pensions and transfer lump sum death benefit etc

Aye: 150 MPs

No: 324 MPs

Aye: A-Z by last name

Tellers

No: A-Z by last name

Tellers

Question accordingly negatived.