Lump Sum to Member

Finance Bill – in the House of Commons at 7:45 pm on 14 July 1987.

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Photo of Sir Brandon Rhys Williams Sir Brandon Rhys Williams , Kensington 7:45, 14 July 1987

I beg to move amendment No. 40, in page 13, line 15, leave out subsection (4).

Photo of Miss Janet Fookes Miss Janet Fookes , Plymouth Drake

With this, I propose to group amendment No. 39, in page 13, line 15, leave out '£150,000', and insert '£156,000'.

Photo of Sir Brandon Rhys Williams Sir Brandon Rhys Williams , Kensington

I am grateful for the generosity shown by the Chair in allowing me to move so many amendments. I hope that I can deal with amendment No. 40 as quickly as possible and that I shall not weary the Committee too much. This matter concerns lump sums emanating from the new personal pension schemes. A similar matter arises in schedule 3 in respect of existing schemes which may in future give lump sums of more than

I am not happy with this provision. Although there are not many people who are able to reach a salary of £100,000 a year, and therfore qualify for a lump sum of £150,000, I do not like introducing discrimination against any particular group in the way clause 23 undoubtedly does, for no evident moral purpose. I tabled amendment No. 39, which proposes that the sum be £156,000 rather than £150,000. I think that my right hon. Friend the Financial Secretary would be hard put to explain why £150,000 is the chosen figure and why £156,000 would not be almost equally good.

I did not pluck the figure of £156,000 out of the air. I suggested it because it corresponds to £2,000 a week, a round figure. The Treasury has to explain why it decided that this is the point after which people become second-rate citizens. Not withstanding the conditions of their scheme, they will not be allowed the benefit of a tax-free lump sum such as that given to someone who has arranged his affairs in such a way that the tax-free sum is £149,000.

I do not like discrimination against the better-off. It is not a particularly Conservative principle. I am horrified to find this arbitrary and sudden recommendation appear in a Conservative Budget. That does not mean to say that I am happy with the tax-free lump sum. I spent a great deal of time in Standing Committee on the previous Finance Bill explaining how I thought it should be phased out. I do not think that a tax-free lump sum should have a place, because it attracts all kinds of consequences. It encourages people to commute their annuity for a lump sum, which they may not spend wisely. If they do spend it, it may simply force up house prices, because people have the benefit of a tax-free bonus which they can use in conjuncion with house purchase finance schemes of various kinds. They may do other things with this enormous tax-free lump sum which are not in the public interest.

The Inland Revenue is approaching this difficult matter in the wrong way in trying to victimise the top echelon of salary earners. I happen to be the Member of Parliament for Kensington and I dare say that there may be people in my constituency who will be affected by this clause. If so, they have not been in touch with me. In my opinion, this recommendation should not have appeared in the Budget. I should be very much happier if it did not appear in the part of the Finance Bill that refers to these new personal pension schemes. It is a pity that it is there. I hope that the Treasury agrees to think in other terms about the tax treatment of lump sums.

Photo of Mr William Clark Mr William Clark , Croydon South

I support my hon. Friend the Member for Kensington (Sir B. Rhys Williams), although I do not necessarily congratulate the powers-that-be on selecting his amendments but not mine. I do not understand why amendment No. 3 was not selected because, as far as I know, it was not out of order. As I have some short experience of Finance Bills, I should have thought that that amendment could easily have been taken with my hon. Friend's amendments. I congratulate him on getting so many amendments covered. I must talk to him later to find out how he exercises the influence to effect that.

I agree with my hon. Friend the Member for Kensington that £150,000 is an arbitrary figure. I do not know why the Revenue has thought of £150,000. Why not make it £200,000? Since the average national wage is £10,000 a year, I should have thought that a salary last year of £100,000 was an extremely low amount to be considered in respect of lump sums. I disagree with my hon. Friend the Member for Kensington about the amount of the pension that should be commuted. Spending the lump sum does not necessarily put up house prices. Normally, when a pension is commuted, the individual's mortage liabilities are immediately paid off and the balance of the money is then put into some sort of annuity or investment, so the commuted sum carries on after the individual dies.

I deplore the idea of reducing the commuted ceiling to £150,000. I accept the question of my hon Friend the Member for Kensington as to why the sum was not £156,000. I should have thought that, if the Government are to be logical—although they have plucked this figure out of the air with no logic—they could adopt the same logic as they do with personal allowances. The Rooker-Wise amendment—or, as I remind the Committee, the Rooker-Wise-Lawson amendment—gave us indexation at the beginning. My amendment, which as you realise, Miss Fookes, was not selected, called for the indexing of the £150,000 lump sum each year so that it does not decrease in value. My hon. Friend the Member for Kensington has suggested that the figure should be £156,000. I appreciate his logic in saying that it corresponds to £2,000 a week. I think that most Committee members would have worked that out. Actually, it is £3,000, not £2,000, a week.

Photo of Sir Brandon Rhys Williams Sir Brandon Rhys Williams , Kensington

By my reckoning, £2,000 a week comes to £104,000 a year. As the lump sum is one and a half times the final salary, that brings it to £156,000.

Photo of Mr William Clark Mr William Clark , Croydon South

That is right. I think that we have unaminity. Taking a basic sum of £2,000 a week, one and a half times that must make £3,000 a week, so the £156,000 lump sum equals £3,000 a week. I do not think that we should become involved in any more arguments about that. I assumed that my hon. Friend intended having some form of indexation in respect of the £150,000.

Why have the Government plucked this £100,000 out of the air, giving the £150,000 commuted amount? Why is the sum not indexed, as per the Rooker-Wise-Lawson amendment? Clause 23 states that the lump sum must not exceed £150,000 or such other sum as the Treasury may prescribe. Will my right hon. Friend the Financial Secretary confirm that, if the £150,000 is changed, it will only be changed upwards and not downwards?

8 pm

Photo of John Greenway John Greenway , Ryedale

I endorse the remarks made by my hon. Friend the Member for Croydon, South (Sir W. Clark). Will the Minister assure the Committee that the £150,000 will not be reduced by Treasury order? I disagree with my hon. Friend the Member for Kensington (Sir B. Rhys Williams) on people taking all their money in tax-free cash. That is not the purpose of the provision. We see a reduction in the amount that can be commuted. Clause 23 (3) states: The lump sum must not exceed one quarter of the total value". That is somewhat less than the present practice under the existing retirement annuity arrangements, and it is to be regretted.

Photo of Tony Blair Tony Blair , Sedgefield

I wish only briefly to disturb the argument that is going on between the Government Back Bench and Front Bench and to defend the Chancellor against the accusations of Socialism that have been made against him in introducing the £150,000 limitation. On Second Reading of the Finance Bill, the Financial Secretary described the lump sum as a tax-free perk. That seems to sum up the position. The generosity is in having such a high limit at all. In some ways, it is difficult to see how one justifies it.

Hon. Members are perfectly entitled to press the Minister on how the Treasury intends to use the powers that it will be given. The Treasury is given a completely free hand to decide what it wants to do—it could raise it, reduce it, or do whatever it wants. We should at least have some outline of how it intends to exercise that power. I do not promise that the Opposition will support the Treasury if it decides to give that outline, but it is a little unsatisfactory to leave the matter as open and vague as it is at present.

Photo of Mr Norman Lamont Mr Norman Lamont , Kingston upon Thames

On Second Reading, I described our thinking on the lump sum. No doubt Hansard will clarify whether I described it as a tax-free perk, but I made it clear that the Government and I regard pension funds that qualify for extremely generous tax reliefs as being primarily for the provision of pensions. The lump sum has been debated many times before; it has its critics and supporters, particularly in the industry. I recall that, on one occasion, my right hon. Friend the Chancellor used the phrase the much loved lump sum". My hon. Friend the Member for Kensington (Sir B. Rhys Williams) thinks that we should tackle the anomaly, problem or tax-free perk—however one wants to describe it—in a different way. His view is that it should be taxed. We have left it alone, and various assurances were given in the past by my right hon. Friend about what would or what would not constitute Green Paper territory.

There is no doubt, as my hon. Friend the Member for Kensington said in Committee during pre-election deliberations on the Finance Bill, that people use the lump sum provision in all sorts of ways, particularly when combined with accelerated accrual provisions. Notwithstanding the changes that we are making, it is still possible to use different accelerated accrual provisions in combination with the lump sum. People are getting tax deductions for contributions to pension funds, and they get a tax-free sum at the end. We certainly felt that it was not wrong that there should be a cap on the lump sum.

My hon. Friends have perfectly fairly asked me why £150,000, why not £150,000·02, or something like that.

Photo of Tony Blair Tony Blair , Sedgefield

It is a round number.

Photo of Mr Norman Lamont Mr Norman Lamont , Kingston upon Thames

It is a round number, says the hon. Member for Sedgefield. By any standard, it is a generous figure. My hon. Friend the Member for Croydon, South (Sir W. Clark) suggested that, perhaps, it should be indexed. Notwithstanding what happens to personal allowances, it is our general stance, in a time of low inflation and at a time when we intend that inflation should remain low, to resist general indexation provisions. It is our intention to keep on top of inflation rather than to build indexation into large parts of fiscal legislation.

In response to the point that is worrying my hon. Friends, I repeat the assurance that I gave before the election. I said that, from time to time, we shall examine the limit and that we did not wish to see the limit eroded. I repeat that statement for the benefit of the Committee, and I hope that it will satisfy my hon. Friends, even if my hon. Friend the Member for Kensington is not entirely at one with me on the approach to the problem.

Photo of Sir Brandon Rhys Williams Sir Brandon Rhys Williams , Kensington

I am sure that the House is grateful to my right hon. Friend. I intervene in the debate again because he made one remark about my own position which I cannot allow to stand. He said that I am against the tax-free lump sum—just in so many words. I do not believe in retrospective legislation for pension schemes. When someone has already served 20, 30 or more years in a pension scheme in the confident expectation that, on retirement, he or she will be eligible for a commuted annuity to be taken in the form of a tax-free lump sum, we should not intervene. That was suggested by the Treasury some three or four years ago, when it received an extremely negative response from the public.

I do not think that we should say that, notwithstanding the fact that they have worked all those years in that expectation, that expectation should now be taken away. That is why I made the suggestion, which I elaborated at some length in Committee during consideration of the Finance Bill before the election. It is only in so far as entitlement accrues in future years that the ability to apply the tax provisions when a pension is commuted for a lump sum should apply.

I hope that my right hon. Friend will look again at my suggestion that the amendment is the right solution and that clause 23 is the wrong one. We should give everybody equal treatment. We should not discriminate against people on high salaries. That is an absolutely wrong principle. If the Treasury were to adopt my approach, it would be 40 years before we reached the stage at which the lump sum option became totally taxable. In my estimation, that is a long enough period for people who have relied on the tax-free lump sum to make their adjustments. That is why the Treasury is entirely wrong in proceeding in this way. I do not feel able to withdraw my amendment.

Amendment negatived.

Clause 23 ordered to stand part of the Bill.