Schedule 19
Finance Bill
10:30 am
Mark Hoban (Shadow Minister, Treasury; Fareham, Conservative)
May I, too, welcome you back to the Chair, Mr. Gale? It is a remarkable testament to the lure of the Committee that my hon. Friend the Member for Rayleigh, now the shadow Minister for Europe, has come back to enjoy the proceedings for one last time. We look forward to the debut of my hon. Friend the Member for South-West Hertfordshire later this week, who has joined our Front-Bench team.
It seems like only a year ago that we last discussed the taxation of ASPs. I then debated with the Economic Secretary, and I had rather hoped for a re-run, but I understand that he is currently in Luxemburg at the ECOFIN meeting, so the Chief Secretary will be dealing with this issue. It is quite remarkable that it is only a year since we last debated these changes, and at that time the House and the Government had settled views on what was the appropriate rate of taxation for ASPs, yet here we are, a year later, with yet another U-turn on pensions policy, discussing a different way of taxing ASPs.
Given the nature of the Chief Secretary’s introduction, we are effectively having a stand part debate here. I will ask him to respond to some particular issues in detail later, but it is worth noting, by way of introduction, that the issue of compulsory annuitisation and the role that ASPs play in tackling it continues to create interest in this House and in the other place. Indeed, on Second Reading of the Pensions Bill just before the recess, Baroness Hollis, a former Minister at the Department for Work and Pensions, stated:
“As others have already said, given the growth of DC schemes we need a fresh look at the annuities-at-75 rule, which is increasingly absurd. After all, a man on median earnings, contracted in, after 40 years on 4 per cent. plus 4 per cent. contribution—a very modest scheme—will have a DC pot of £240,000, £100,000 more than necessary to float him off income-related benefits if he annuitised to that degree... So this is not—I repeat, not—a matter only for the rich any more, but for those on average earnings and a standard rate tax.”—[Official Report, House of Lords, 14 May 2007; Vol. 692, c. 39-40.]
I think that the noble Lady was right. In the past, the Government have criticised moves to end compulsory annuitisation on the back of the argument that it is there only to help the wealthy, but as she rightly said, the growth of defined contribution schemes and the move away from defined benefit schemes means that more and more people have an interest in compulsory annuitisation at 75, and it will be a growing issue. The Chief Secretary explained how the Government’s thinking on this issue has evolved over the last few months and rightly highlighted the fact that the genesis of this measure came from the theological concerns of the Plymouth Brethren, who objected to the pooling of mortality.
Interestingly, the Treasury considered, in the regulatory impact assessment, ending the scheme or restricting discrimination on the grounds of religion, but thankfully that idea was dismissed. In looking at how this product should be sold, at one stage, the Financial Services Authority considered, and issued guidance, that financial advisers should inquire about the religious beliefs of potential purchasers of ASPs. That indicates that the debate that took place last summer and in the autumn became rather overheated and rather too focused on the origin of the idea of why we should have ASPs, rather than on thinking about how best to put the policy into practice.
I could talk about those arguments at some length, but I suspect that this is probably not the occasion to do so. There may be an opportunity to rehearse those arguments at a later stage. I want to concentrate instead on the particular changes that are being made by schedule 19. I understand the reasons for the Chief Secretary tabling the amendments and I have no particular quibbles with them, but I want to focus on a number of issues.
The first issue is how the schedule introduces new rules on the minimum income that can be drawn down from a fund, as well as increasing the maximum draw-down. It introduces a minimum of 55 per cent. and raises the maximum from 70 to 90 per cent. Those are the Government Actuary’s Department rates, as set at the age of 75, but people who have ASPs get older, and there is a serious argument to be made for reviewing the rates that can be used so that the draw-down is based not on GAD rates at 75, but on the ASP member’s actual age. As someone gets older, the opportunity to withdraw funds from their ASP will increase and my concern is that, by not allowing that flexibility to change or for people to draw down more later in life, the unutilised pot that is left on death will grow.
If the Government increased the rates used for the ages of 75, 85 or 95, that would give the ASP holder the opportunity to withdraw more of their income from the plan and to ensure that there was very little of it left at the time of death. The Government’s objective of using tax-relief savings to meet income in retirement would be achieved more fully than under their current proposals.
The other comment that has been made about the draw-down rules is that for unsecured pensions—the situation that arises before the age of 75—the maximum draw-down is not 90 but 120 per cent. of the GAD rate. There does appear to be a mismatch, or a discontinuity, between the rules that apply for unsecured pensions and those for ASPs. It would be helpful if the Chief Secretary addressed the reason for that inconsistency between the draw-down rules for ASPs and USPs, and also explained why there is not an uprating or revision of the maximum draw-down based on someone’s actual age, rather than the rates set at the age of 75.
The second point is about the exit charge on death. Effectively, the Bill introduces an 82 per cent. tax charge on death when the member dies and there are no financial dependants, or where the balance of the pot does not go to a charity. The 82 per cent. charge arises because there is both an inheritance tax charge of 40 per cent. and a charge of 55 per cent. on the unutilised costs. The 55 per cent. charge normally applies where the value of a pension fund exceeds the lifetime allowance. That appears to be quite a high charge and has certainly caused some comment among financial advisers as to why a 55 per cent. charge is applied in addition to the 40 per cent. charge.
I would understand it if the Chief Secretary said that, based on the Government’s principle that tax relief savings should not be used to fund benefits or to enable a pension pot to be passed from a person to members of their family, particularly where there are no financial dependants, it is important to recover all the tax relief gained or obtained by any pension fund member. I could accept that—it would be appropriate to try to claw back that tax relief. I understand that that tax relief is clawed back at a rate of about 55 per cent. That goes back to the situation in which the pension fund value exceeds the lifetime allowance.
I would be grateful if the Chief Secretary advised the Committee at what rate the Government will recover the tax relief given on pension fund savings. That is important when assessing what the right level of the tax charge on death should be. There is, however, another inconsistency. I referred earlier to USPs. In those, different rules apply on the death of a member. If a USP member dies without drawing any pension benefits, his pension pot is transferred to his nominated beneficiaries free of inheritance tax. If he had started to draw benefits, a 35 per cent. charge would be levied on that pot.
Legislation intended to simplify pensions back in 2004 is now creating different tax charges depending on when someone dies. Somebody who died aged 74 years 364 days without having drawn their pension could pass their pension pot on free of tax. If, however, they died a couple of days later, or even some minutes or hours later, an 82 per cent. charge could be levied on their pension pot. That does not strike me as a consistent set of regulations to cover what is a difficult area.
I would also like to ask what the Government believe the impact of the 82 per cent. charge will be. The regulatory impact assessment is silent about the additional revenue that the measure will produce, or what impact it will have in saving or protecting tax revenues. Given the wide interest in ASPs, it is important that the Government are more transparent about what they consider to be the revenue implications of introducing the 82 per cent. charge, and what those implications would be if that charge were not introduced and the rate agreed in last year’s Finance Act continued to hold. It would be useful if the Chief Secretary said what modelling the Treasury has done to assess what would have happened if those changes, particularly on the exit charge, had not taken place.
Finally, I would like to touch on three other matters of concern that have been raised with me. The first is in paragraph 2 of the schedule. The Finance Act 2004 introduced ASPs and led to simplification of the pension tax system. It also allowed for annuity payment scheme pension payments and payments from ASPs to be guaranteed for up to 10 years. Therefore, if a member died within 10 years, the payments would continue. Paragraph 2 withdraws that guarantee for ASPs, although it remains in place for annuities and scheme pensions. I would be grateful if the Chief Secretary explained why that change was made only for ASPs.
In paragraph 12, there is a further change that has raised some concerns. When a member of a small self-administered scheme, or SSAS, dies, the funds that he has built up are distributed to other members as an increase in their rights. That reduces the cost of the benefits to the remaining members and to the employer, in the same way that in a large defined-benefit scheme the cost to members is reduced by any savings coming from deceased members. The SSASs are important for many small businesses, and there is a concern that the changes set out in paragraph 12 of schedule 19 will increase the cost to small and medium-sized enterprises by levying a 55 per cent. charge on reallocations within SSASs. Will the Chief Secretary confirm whether SSASs are caught by the changes outlined in paragraph 12?
On paragraph 20, in cases where there is an unutilised pot at the time of death, that ASP pot is top-sliced in the IHT calculation. In the pre-Budget report, however, the nil rate band was to be apportioned between the ASP and the rest of the estate. I would be grateful to the Chief Secretary if he could explain why that change has taken place. Will he also confirm that, where the rest of the estate does not exhaust the nil rate band, the unutilised amount will be offset against ASPs, thus reducing the IHT bill?
The changes in schedule 19 are quite difficult and they will start to have two effects. As the Government intend, they make life difficult for those who want to exercise greater control over their pensions by increasing the exit charge on death and restricting the draw-down of funds so that there will always be a significant pot left on which the 82 per cent. effective rate can be charged. The changes also create a degree of administrative complexity, for example—I have already touched on this—there are particular rules about the circumstances in which pension pots are passed on to dependants, what happens when that dependant dies and what rate of inheritance tax is applied to those funds. We need to go back to the inheritance tax calculation of the original ASP member. Changes such as those are quite complicated and hard for people to understand. There is a niggling doubt at the back of my mind that they are meant to discourage, and make life difficult for, those who want to exercise control over the use of their pension funds in retirement.
The reforms were not properly thought through in the first place. This is the third significant U-turn on the pensions simplification announced in 2001, and the Secretary of State for Communities and Local Government must be wondering why on earth her reforms are being unpicked, almost on an annualbasis. There appears to be a continual retrenchment away from the spirit of simplification in the Finance Act 2004 towards a more complicated and difficult system. It is remarkable for a Government who have embraced choice on schools, health care and hospitals not to embrace choice on the release of pension funds in retirement. Something is not quite right in the way in which the Government are approaching the issue.
To conclude, I go back to the comments made by Baroness Hollis in the pensions debate in the other place. I suspect that she was right, considering how the rules have evolved and become more complicated and the Government’s dogmatic opposition to an end to compulsory annuitisation, when she said that
“given the growth of DC schemes we need a fresh look at the annuities-at-75 rule, which is increasingly absurd.”—[Official Report, House of Lords, 14 May 2007; Vol. 692, c. 40.]
The complexity that the Bill introduces indicatesthat the Government’s opposition to compulsory annuitisation is introducing increasingly absurd rules.