New Clause 31
Pensions Bill
2:45 pm
David Laws (Shadow Secretary of State for Work and Pensions, Work & Pensions; Yeovil, Liberal Democrat)
Yes, it said it was very complex but also that it would not recommend changing it in the short term—in other words, in the next few years. It did not say that it was so complex that people of the Minister’s brilliance and all those in the civil service, the Treasury and the Department for Work and Pensions could not start doing some work on this in order to produce a better system.
Therefore, I hope that the Minister will not use that as an excuse not to take this issue full-on, although I fear that he might. I anticipate a speech in which he will say that this is a matter for Treasury Ministers, not for his Department. He will say that this is extremely complex and difficult to deal with, that other changes to the regime of pension tax relief are taking place and that it would be imprudent to introduce other measures at the same time, as it might destabilise them. I have seen this speech outside; I have read it.
Despite all that, I will not be knocked off course. Not only did the Pensions Commission come up with this devastating criticism, but the right hon. Member for Birkenhead (Mr. Field), in his evidence to the Work and Pensions Committee, said he very much hoped that this issue would be pursued. The Select Committee itself asked the Government to look into that.
What I want to find out from the Government today is not the bit about the complexity—because I know that bit, have already read it and am probably going to hear it again—but whether the Minister agrees with the conclusion of the Pensions Commission report that this tax relief is costly, poorly focused and not well understood. The main issue will not be whether it is costly or well understood, because we already have information on that, but how focused, fair or unfair it is. We have Government figures on the cost of pension tax relief and they are pretty significant, which is another reason why we could not leave this whole debate without airing the issue.
In 2005-06, the net cost of pension tax relief, after clawing back the money on tax from pensions in payment, will be approximately £14.3 billion. That must be something north of 1 per cent. of GDP, which is quite a lot of money. That figure has increased by almost £2 billion since 2004-05. It is up by something like £5 billion from 2001-02, which is a pretty significant increase.
If some of this week’s newspaper reports are correct that the demand for pension products is increasing as a consequence of the recent simplification of pension tax relief, we may find that the net cost of pension tax relief continues to rise quite rapidly in the future. Therefore, it is quite a large element of total tax relief and very large in relation to this whole debate.
We also know from the Pensions Commission’s excellent second report that pension tax relief is not well understood. Page 317 of the report provides two very useful charts, which show basic rate and higher rate taxpayers’ understanding of how pension tax relief works. Almost half of basic-rate taxpayers had no idea about their entitlement to tax relief on their pension contributions, 26 per cent. thought it would be better than the basic rate and only 17 per cent. got it right at the basic rate. Higher rate taxpayers, as one might expect, were a little better informed about the enormous benefits of tax relief to them, but even there only 28 per cent. got it right that they would get a 40 per cent. rate of relief. Almost the same figure as for basic rate taxpayers, 27 per cent., could come up with no idea at all about what the tax relief was worth.
I hope that we can establish that tax relief is costly and that it is not very well understood. The issue is whether it is well focused and fair. Before I get an intervention, I should point out that it is a reasonable presumption within our tax system and, as I understand it, most other tax systems of developed economies that there should not be a double taxation of pensions. One should not be taxed on the income used to put into a pension and again on money as it is drawn out. That principle, in one way or another, is embedded in our whole savings regime. However, the Pensions Commission’s point was that we do not seem to have that kind of tax neutrality in relation to our existing system in the UK but, rather, an unbalanced system that seems to give greater relief to one proportion of the population. In crude terms, something like 50 per cent. of the tax relief goes to the top 10 per cent. of income earners and 25 per cent. to 2.5 per cent. of the income earners. That would not necessarily matter, if that simply reflected the amount of participation in pension savings by those two groups and the need therefore to neutralise the effects on taxation. However, it seems to be not simply neutralising, but actually skewing the tax system in a way that benefits people on very high incomes.
We already know that in this country we have an extraordinarily unequal distribution of income, wealth and opportunity. There are question marks about whether social mobility has been declining over recent years. So, it is very striking and also bizarre and extraordinary that we should have a tax system that the Pensions Commission considers to be skewed in favour of those people with the higher incomes. The second report of the Pensions Commission points out this extraordinary situation, which we have been discussing throughout the Bill, where those people on very low incomes potentially suffer enormous withdrawal of benefits in retirement and therefore may have their incentives to save cut away from them. In the earlier debate the hon. Member for Eastbourne talked about the effect of means-testing essentially operating as a tax on saving.
At the same time, to those people who already have a lot of money, more is given. There is an extraordinary graph on page 313 of the Pensions Commission’s second report, which shows the impact of the tax advantages on returns from savings. Looking at it, one will see an extraordinary rise in the tax advantage of saving for those people as they go over the threshold for upper-rate tax. The Pensions Commission made the issue very clear on page 312 of the report:
“The benefits of this significant cost to the Exchequer are...extremely unequally distributed”.
It continued:
“But the overall message is clear: the beneficial impact of tax relief on the rates of return of savings is much higher for higher-rate taxpayers than for basic rate or lower-rate taxpayers. And this is not simply because tax relief undoes the higher detrimental effect on rates of return which higher tax rates would impose on non-tax privileged saving: higher tax rate payers can achieve through pension savings higher post-tax rates of return than those enjoyed by basic-rate taxpayers”—
which includes those at the bottom end of the income distribution.
We have a bizarre, eccentric system. It not only uses tax relief on pensions to give a special bonus to those who already have a lot, rather than just neutralising the tax consequences, but it disincentivises saving among people with very little money, because there is so much means-testing. Enormous incentives to save are being given to people at the upper end of the income distribution. It seems bizarre that we should be giving massively generous incentives to affluent people while creating disincentives for people at the bottom end of the income distribution