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'(1) The Finance Act 2004 is amended as follows.
(2) In section 164 at end add "and
(g) payments into a Retirement Income Fund.".
(3) In section 165 there is inserted in Pension rule 6 "or
(d) a withdrawal from a Retirement Income Fund.".
(4) In section 165 after Pension rule 7 there is inserted—
"Pension Rule 8
Before a member makes a withdrawal from a Retirement Income Fund, he must buy a relevant linked annuity which is linked to the retail prices index, which pays an income equivalent to the Minimum Income Requirement.".
(5) In Schedule 28 after paragraph 16C there is inserted—
"Retirement Income Fund
16D (1) Subject to subsections (2) and (3) of this section, a Retirement Income Fund is a vehicle for the reinvestment of savings in retirement, which—
(a) has been established by a person designated by subsection (1) of section 154; and
(b) is a vehicle by whose investments are—
(i) investments of a kind described in the Insurance Companies Regulations 1994, Schedule X, Part 1; or
(ii) approved by HM Revenue and Customs.
(2) Funds held in the Retirement Income Fund as referred to in subsection (1) may be withdrawn from the Retirement Income Fund by the member as and when he elects.
(3) A member may not invest in a Retirement Income Fund unless the requirements of Rule 8 of section 165 have been met.
(4) A Retirement Income Fund, and any income derived from it, must not be capable of assignment or surrender by the member.
(5) Any withdrawal from the Fund by the member under subsection (2) shall be assessable to tax under Schedule E (and section 203 shall apply accordingly) and shall be treated as earned income of the member.
Minimum Retirement Income
16E (1) The amount of Minimum Retirement Income shall be set for each financial year following consultation by the Chancellor of the Exchequer by order.
(2) An order under this section shall, in respect of each financial year after that in which this section comes into force, be made on or before 31st January preceding the year in question.
(3) An order under this section shall be made by statutory instrument and shall be subject to annulment in pursuance of a resolution of either House of Parliament.".'.— [Mr. Hoban.]
Brought up, and read the First time.
With this it will be convenient to discuss the following:
New clause 7— Dependant's Retirement Income Fund—
'(1) The Finance Act 2004 is amended as follows:
(2) In Schedule 28 after paragraph 22 insert—
"22A Dependant's retirement income fund
(1) Subject to subsections (2) and (3) of this section, a department's retirement income fund is a vehicle for the reinvestment of savings in reitrement, which—
(a) has been established by a person designated by subsection (1) of section 154; and
(i) investments of a kind described in the Insurance Companies Regulations 1994, Schedule X, Part 1; or
(ii) approved by HM Revenue and Customs.
(2) Funds held in the retirement income fund as referred to in subsection (1) may be withdrawn from the retirement income fund by the members as and when he elects.
(3) A dependant may not invest in a dependant's retirement income fund unless the requirements of Rule 8 of section 165 have been met.
(4) A retirement income fund, and any income derived from it, must not be capable of assignment or surrender by the member.
(5) Any withdrawal from the fund by the member under subsection (2) shall be assessable to tax under Schedule E (and section 203 shall apply accordingly) and shall be treated as earned income of the member.".'.
Amendment No. 62, in clause 159, page 135, line 7 , leave out 'and (4)' and insert ', (4) and (7)'.
Amendment No. 14, page 135, line 34, at end insert—
'(7) The Treasury may make regulations about the application of subparagraph (2) of this section which will be deemed to take effect from 6th April 2006.'.
Amendment No. 107, schedule 22, in page 451, line 26, after 'fund', insert 'and retirement income fund'.
Amendment No. 108, page 451, line 28, after 'fund', insert 'and retirement income fund'.
Amendment No. 109, page 451, line 38, after 'fund', insert 'and retirement income fund'.
Amendment No. 110, page 452, line 6, after 'pension', insert 'and retirement income fund'.
Amendment No. 111, page 452, line 29, after 'fund', insert 'and retirement income fund'.
Amendment No. 112, page 452, line 35, after 'fund', insert 'and retirement income fund'.
Amendment No. 113, page 452, line 40, after 'fund', insert 'and retirement income fund'.
Amendment No. 114, page 453, line 4, after 'fund', insert 'and retirement income fund'.
Amendment No. 115, page 453, line 10, after 'fund', insert 'and retirement income fund'.
Amendment No. 116, page 453, line 29, at end insert—
"dependent's retirement income fund" has the meaning given by paragraph 22A of that Schedule'.
Amendment No. 117, page 453, line 40, at end insert—
"'retirement income fund" has the same meaning as in paragraph 16D of that Schedule.'.
Amendment No. 118, page 453, line 44, after 'fund', insert 'and retirement income fund'.
Amendment No. 119, page 454, line 6, after 'fund', insert 'and retirement income fund'.
Amendment No. 120, page 454, line 20, at end insert—
"'dependant's retirement income fund" has the meaning given by paragraph 22A of that Schedule'.
Government amendments Nos. 31 and 97.
I should like to break down my remarks into two sections. The first deals with new clauses 3 and 7 and amendments Nos. 107 to 120 and the second covers amendments Nos. 62 and 14.
Hon. Members will remember debates about scrapping the rules that require the compulsory purchase of annuities at 75. We are holding our first debate on the topic since the Government modified the requirement in the Finance Act 2004. The argument that underpins new clauses 3 and 7 and amendments Nos. 107 to 120 is that the Government have created a framework through the 2004 Act and the Bill that could give people much wider choice for retirement income planning through the introduction of the alternatively secured pension and the creation of an inheritance tax regime for left-over funds. Having accepted that, I contend that the Government should create more choice for people in retirement and more certainty for the state by introducing a further alternative to annuitisation and the alternatively secured pension—the retirement income fund, which is the subject of the new clause.
The issue of compulsory purchase of annuities has been rumbling on for some time and was a topic of debate through private Members' Bills. My hon. and learned Friend Mr. Garnier, my right hon. Friend Mr. Curry and the former Member for Taunton all sought to address the matter through private Members' Bills. My hon. Friend Mr. Waterson also raised it in discussions on the Pensions Bill and my hon. Friend Mr. Osborne did so in the Committee and Report stages of the Finance Act 2004.
It is remarkable that, having doggedly defended compulsory annuitisation throughout the debates on the private Members' Bills and the passage of the Finance Act 2004, the Government in a sense modified the principle of compulsory annuitisation in that Act. The Act and the Bill that we are considering create an architecture for an alternative to compulsory annuitisation.
The 2004 Act introduced the concept of the alternatively secured pension, a mechanism that enabled the Plymouth Brethren to draw pensions that were not linked to annuities. They have well-known objections to annuities and required an alternative mechanism to establish a means of funding their retirement after the age of 75—the age at which an annuity has to be purchased. The Act enabled them to draw down a proportion of their pension fund after the age of 75, in line with specific rules, which I shall not go through in detail.
I shall not do that, despite the hon. Gentleman's tempting me to do so. However, the rules have an important bearing on some points that I want to make.
It is fundamental to appreciate that, in the 2004 Act, the Government accepted that there is no requirement for the annuitisation of the pension fund of a group of people at 75. Anyone who wants to go down that route can do so. The Government have, therefore, through the 2004 Act, removed an argument for compulsory annuitisation.
The new clause creates an alternative to the alternatively secured pension, which sets a maximum draw-down that ensures that people do not run out of funds during their retirement. It would minimise the chances of those with alternatively secured pensions becoming reliant on the state. It would not entirely prevent that, but it would minimise the chances by ensuring that there was always something left in the alternatively secured pension on which people could draw later in life.
The new clause would also minimise the chances of people becoming reliant on the state by requiring them to buy an annuity that delivered a minimum income. The Chancellor of the Exchequer would set the amount and, once it was purchased, it would enable people to draw down the rest of the funds as they saw fit, as they can do now before the age of 75. The new clause therefore sets out the minimum income requirement, the amount of which would be set by the Chancellor annually, to ensure that people do not become reliant on the state in their retirement, but that they have the flexibility to determine how the remainder of their pension fund should be used.
The hon. Gentleman has given a clear exposition. He suggests that the Chancellor of the Exchequer would set the same minimum income figure for everybody. However, if I have a pension pot and some other source of income, which already gets me clear of means-tested benefits, there is no reason why the minimum income for me should not be zero, because I will not need means-tested benefits even if I blow the entire pot. Should not the figure be specific to individuals?
The hon. Gentleman makes an important point. It is difficult to legislate on such matters. The minimum retirement income is aimed to achieve, in time, the right amount of income to be purchased for the rest of people's lives. In circumstances in which a person's income might fluctuate, the minimum will fluctuate over the course of that person's retirement. We are considering a floor for use in later life. The subject is complex, and I am the first to acknowledge that. The process is not entirely straightforward but we should explore it to ensure some flexibility in the way in which people can use their retirement funds.
It is worth considering the views of the Turner commission on annuitisation. Its report highlighted the strains that the move to defined contribution schemes would place on the annuity market. It asks whether there are any limits to the capacity of the annuity market to play a greatly expanded role in post-retirement longevity risk absorption, as the state exits from pay-as-you-go earnings-related pension provision, and as private pension provision shifts from defined benefit to defined contribution. It therefore asked whether there would be a sufficient supply of annuities for people to acquire to enable them to achieve certainty about their income throughout their retirement.
Two points emerge from that analysis. First, the shorter the period of the annuity, the lower the inherent risk, the lower the risk premium priced in the product and, therefore, the higher the income that people can secure for their retirement. That is an argument for later annuitisation. The commission contends that policies need to be in place to encourage later annuitisation. One policy option is the proposal that the requirement for annuitisation at any age should be limited. That is similar to the proposal in the new clause. The report states:
"The Pension Commission is not convinced by the arguments that annuitisation requirements should be waived entirely. Since the whole objective of either compelling or encouraging people to save, and of providing tax relief as an incentive, is to ensure that people make adequate provision, it is reasonable to require that pension savings are turned into regular pension income at some time. But this objective could be pursued via requiring annuitisation up to some defined level of income. And tax relief given on contributions can be reclaimed via the tax treatment of pension funds at point of inheritance or drawdown. While only a minority of people would use this freedom, anything which removes demand from the annuity market will at the margin improve ease of supply and pricing for others."
The Turner commission highlighted two matters that are vital to our debate. First, it supports the idea of minimum annuitisation, reflecting the provision for the minimum income requirement in the new clause. Secondly, it tackles head-on one of the arguments that the Government have used persistently—the fact that the measures will directly benefit only a minority. Yes, that may well be the case, but that relieves the pressure on the annuity market and, indirectly, helps the remaining population, who wish to buy annuities.
It is therefore short-sighted of the Government to reject the Turner report's approach.
I shall not go down that route. As was debated during consideration of the private Members' Bills—the issue has been debated in depth— several factors should be borne in mind. I am trying to emphasise that an alternative to the current arrangement could give people a wider choice in retirement. The minimum retirement income should be enough to ensure that people are not a burden on the state.
The outstanding issue from the Finance Act 2004 is the tax treatment of left-over funds. It is an inevitable consequence of the structure of alternatively secured pensions that there will be left-over funds, because the rules set a ceiling on the amount that can be withdrawn from the pension. It is therefore inevitable that, on death, the member will leave some left-over funds. That likelihood was mentioned in our deliberations on the Finance Bill in 2004, when the then Financial Secretary to the Treasury, Ruth Kelly, said:
"We have made this concession because people hold significant, principled, religious objections to the pooling of mortality risk. We will keep the matter under review and check to see whether abuse is occurring. We stand ready to make any changes needed to preserve the integrity of the tax system."—[ Official Report, Standing Committee A,
Since that debate in 2004, a tax treatment has been introduced for the left-over funds in alternatively secured pensions that prevents them from being passed between generations tax-free and therefore achieves the goal set out in 2004 of preserving the integrity of the tax system. In new clause 7 and amendments Nos. 107 to 120, we are seeking to mirror that provision for the left-over funds in retirement income funds, so that they can be taxed in the same way as the left-over funds in an alternatively secured pension, and so that, when the funds pass to the spouse and dependents, inheritance tax would be paid.
We had a discussion in Committee about the interaction between income tax and inheritance tax. For the purposes of this debate, although we accept the position that the Government outlined in Committee, we would point out that tax rules are now in place to tackle the transfer of wealth from generation to generation, and that those same rules could be applied to retirement income funds.
The Government have now created the architecture to enable more people to opt out of compulsory annuitisation, through the introduction of alternatively secured pensions in the Finance Act 2004 and the inheritance tax regime in the Finance Bill. I do not wish to rehearse the arguments about why it is appropriate to end compulsory annuitisation, nor do I think that the Government will rush to accept the new clauses and amendments, but the fact that they have given way on the principle of compulsory annuitisation through the introduction of alternatively secured pensions creates a window of opportunity for them to think again.
I know that, in the pensions White Paper, the Government rejected some of the ideas from the Turner commission on changes to the annuities market, but they will have to monitor the appetite of the market for alternatively secured pensions, following A-day and the introduction of the new inheritance tax regime. They will need to respond to the pressures from the market for an alternative to the annuitisation of pensions at the age of 75.
For the benefit of those Members who did not participate in the Standing Committee, amendments Nos. 62 and 14 relate to the rules on the recycling of lump sums in clause 159. In Committee, I expressed concern that the clause could be applied broadly, as it seeks to capture circumstances in which people pay significantly higher pension premiums in the knowledge that they will receive a higher lump sum. That opportunity has been available for some time, but it is only since the simplification of pensions after A-day that this has become an issue, because of the relaxation of the contribution cap and the facility for pension scheme members to withdraw a lump sum without drawing a full pension.
The Government's principal concern was what the Economic Secretary referred to as "turbo-charging". The example that he used in Committee was of someone who withdrew a cash lump sum from their pension, reinvested it in another scheme, obtained 40 per cent. tax relief on that reinvestment, withdrew 25 per cent. of the amount invested as a lump sum, reinvested that 25 per cent. in another scheme, obtained a further batch of tax relief at 40 per cent., withdrew 25 per cent. of that amount—and so the cycle would continue as the contributions were recycled.
Clause 159 would stop the abuse of that mechanism, but it could also capture a series of legitimate pre-retirement tax planning arrangements. However, to limit the scope of this rather brief clause, Her Majesty's Revenue and Customs has produced a significant quantity of guidance notes—28 pages containing 21 different examples of how the rules apply—to clarify its remit. The rules are complex, and some industry experts have expressed their concern about that. The Institute of Chartered Accountants of England and Wales has said that
"the rule will apply only if 'the member envisaged at the relevant time that that would be so'. This is a highly unusual and unclear phrase and is not used in the guidance, which refers to 'pre-planned'. We think it should be redrafted to make it clear that at the time the lump sum was paid, it was the intention of the taxpayer to use all or part of the lump sum to fund additional contributions."
I will come back to the use of the word "envisaged" later, so as to recapture the spirit of our debate in Committee.
Rachel Vahey of Scottish Widows has said:
"Advisers and providers may both have a role to play. Advisers will need to make sure through factfinds that the contribution does not come from a tax-free cash sum. Providers cannot be expected to know where contributions come from. In practical terms, picking out exactly which income stream is the source for a pension contribution could be problematic for affluent clients phasing in their retirement. There is a real danger that the anti-avoidance rule to be inserted into Finance Bill 2006 to stop this practice will be overly onerous and, in the end, create more problems than it solves."
She has also said that the rules are worrying as they seem to be very complicated—which is what had been feared—particularly as all the examples show how difficult it is to calculate whether contributions have increased significantly. She points out that, as it is up to the scheme administrator to apply the charge to the member if they own up to recycling tax-free cash, any charge that the administrator incurs may also be passed on to the individual, which could leave the member with a charge equivalent to about 70 per cent. of the tax-free lump sum.
Rachel Vahey added:
"After putting all these rules in place, it will be very difficult to police. Providers will probably have to change application forms to ask about pre-planning as a part of recycling, and if someone does recycle after denying it on a form, can providers go back to HMRC and say it's not our fault because we asked for a declaration, in order to avoid an administrator's charge?"
Her conclusion about the Government was:
"The approach they've taken is using a sledgehammer to crack a nut."
Iain Oliver, the head of pensions at Norwich Union, has said:
"HMRC's approach is inconsistent with the aims of simplification. We urge them to fundamentally rethink their approach to prevent unnecessary complication to the retirement and financial advice approach".
He also said that recycling pension contributions—by taking a tax-free lump sum and reinvesting it to obtain tax relief and a further lump sum—could perhaps be prevented by changes to the self-assessment form or by ruling out its promotion in the Financial Services Authority's code of business rules. He went on to say that HMRC's latest guidance would mean additional paperwork for clients to read and a penalty charge of 55 per cent. on lump sums paid.
John Lawson, the head of pensions policy at Standard Life, has said that the proposals will be unworkable because the reporting requirements will fall on the individual taxpayer, creating the strong possibility that they will make mistakes or overlook parts of the guidance. He said:
"It's just incredible, and mind-numbingly complex. I don't think people will be able to get to grips with it. I don't think they can be serious. They've come up with probably their best fist of it, but there's no way it's workable."
Lawson also asks how the Revenue will prove that people are pre-planning the recycling of tax-free cash, saying:
"In order for the rule to apply, it has to be pre-meditated, but how do you prove it—how are the Revenue going to read your mind? The only way is to assume guilt in every case, which is a bit harsh".
That is an understatement.
I am afraid that anyone seeking clarity on the interaction of those elements from the proceedings in the Committee will end up confused. The Economic Secretary waxed philosophical in Committee. In a Committee stage that had previously been characterised by arguments based on law and accountancy, that was the first debate that drew on the works of the American philosopher Donald Davidson, whose work "Actions, Reasons and Causes" was on the Economic Secretary's reading list and clearly influenced the debate on the word "envisaged". During an exchange on what is now sub-paragraph (2)(b) of new schedule 3A, the Economic Secretary said
"Envisaging is a broader term; it might be an intention on behalf of someone else, rather than a personal intention. 'Envisaging' may mean opening up the possibility that someone else may use the provision—in this case, to recycle the lump sum on that date. If 'envisaging' were used, that case would be caught. The difference between 'envisaged' and 'intended' is subtle but essential. 'Envisage' will cover the concept of intention, as sought by the amendment, and will go a little wider, so as to ensure that we catch all necessary cases."—[ Official Report, Standing Committee A,
The Institute of Chartered Accountants has said of the word "envisaged":
"This is... highly unusual and unclear".
My goodness! That exchange, and those surrounding it, certainly demonstrated that.
Before the debate, I took the opportunity to find out a bit more about Professor Davidson. He wrote copiously about natural semantics, something with which I suspect the Economic Secretary is familiar. Perhaps he has used natural semantics himself at various times in his professional career, both inside and outside the House.
Was it "neo-classical post-endogenous growth cycle", or a combination of those words in no particular order?
I consulted Professor Davidson's biography to see whether he had written anything about economics, but he had refrained from doing so, dealing entirely with semantics, causes and actions.
Will my hon. Friend again explain to the Minister that once tax law is complicated to the extent that it is beyond the ken of ordinary people, they cease to believe in its fairness? There is a fundamental problem with the kind of complication with which he has delighted us today. It is not reasonable to make people expect their affairs to be so complicated that they require the kind of advice that is available only to the very richest.
I am grateful to my right hon. Friend for putting me back on track—as, indeed, did you, Madam Deputy Speaker. He has made an important point. We are asking taxpayers to examine the rules carefully, and to draw their own conclusions about whether they may be recycling lump sums. The amounts involved are relatively small: they may be as little as 1 per cent. of a person's lifetime allowance, which is £15,000.
The hon. Gentleman must realise that a number of people will build up £60,000 in their pension funds, and £15,000 is 25 per cent. of that. People with pension funds of that size will not be in a financial position to seek the expertise of members of the Institute of Chartered Accountants, such as myself, or lawyers or pension advisers. There is a real issue here: to what extent will people be able to interpret the Bill and the fairly detailed explanatory notes, and reach their own conclusions?
What will ultimately dissuade those people is the threat of having to pay 55 per cent. of the lump sum as a penalty. People who might otherwise wish to embark on sensible pre-retirement planning may find it difficult. We should also bear in mind that the pension contribution that is required to trigger the charges is only 30 per cent. of £15,000—£4,500. Relatively small sums could have an impact on someone's overall pension. I believe that the law should be clear and straightforward so that people can understand, and that there should be some certainty.
I shall resist the temptation to return to past debates. I merely wanted to give some reassurance to the hon. Gentleman and Mr. Gummer. The hon. Gentleman quoted a number of advisers who may or may not have been involved in the marketing of these schemes. May I give him a quotation from the Chartered Institute of Taxation, which may provide some reassurance?
"The PBR announced changes in the pension rules to prevent recycling of pension funds. CIOT was worried lest the ordinary taxpayer, with no tax avoidance motive, would be inadvertently caught, and wrote to HMRC setting out these concerns. HMRC were receptive to these comments and took them into account when drafting the proposed legislation and guidance. We believe the resulting provisions are workable and should prevent marketed avoidance without catching the innocent."
I hope that that does provide some reassurance. This is well-made policy, which means that the innocent will not be caught, but those who are paying large amounts for tax avoidance purposes will.
I am grateful to the hon. Gentleman for his generosity. Perhaps I am not understanding him correctly: I cannot see what is so complicated about knowing whether one has reinvested a lump sum from a pension scheme, returning it to the pension scheme.
If it is so clear, why are 21 examples and 28 pages of guidance necessary? However, let me take up something that the Economic Secretary said. Clause 159 is quite short and has a broad application, but its impact is mitigated by the 28 pages of guidance, which are very clear.
Let me give the hon. Gentleman some further reassurance. We have debated the issue before, and I shall return to it shortly, but let me give him a second quotation from the Chartered Institute of Taxation:
"HMRC have consulted effectively on these changes; the resulting rules seek to separate structured tax avoidance from accidental or insignificant increases to pension fund payments, while the guidance includes a lot of excellent worked examples".
In fact, there are almost 28 pages of them. It is the volume of those worked examples that means that the guidance is fit for purpose. The hon. Gentleman ought to praise us for being so open and transparent in our efforts to help people, rather than criticising us.
What the Economic Secretary has said demonstrates why the position is not as clear as the hon. Member for Wolverhampton, South-West suggested.
Let me now deal with an issue that relates to amendments Nos. 62 and 14. The Chartered Institute of Taxation said that it was happy with both the clause and the guidance notes. The clause will remain on the statute book if the Bill is given its Third Reading tomorrow, but the guidance notes will not be on the statute book. HMRC can alter them.
My point is that there should be more certainty and more clarity about the tax regime. That is why the amending provisions propose that the Treasury be given regulation-making powers to set out the application of sub-paragraph (2) in order to create that certainty. The issues covered in the guidance notes would then be on the statute book through secondary legislation, so they could not suddenly disappear or be changed overnight without proper parliamentary scrutiny. Revenue and Customs and the Treasury would then be forced to produce clear, watertight wording rather than use 21 examples to clear up the scope and application of clause 159. It provides a way of moving from abstract philosophical treatises to the concrete reality of law and regulation. We would also be able to revisit the guidance when it changes as the statutory instruments would need to be amended.
I was grateful to the Economic Secretary in Committee when he made a kind offer, namely, that if significant material changes were made in the guidance, he would ensure that they were circulated to the Opposition so that we would have a chance to comment upon them. He said that he would take advice to ensure that the Government continued to take a consultative approach to guidance issues. I am flattered, as would be my successor, to be given the opportunity to comment at some point when the guidance changes, but rather than leaving it to a single Member to comment, it would be preferable if the Committee had the opportunity to question the regulations. My proposals are an attempt to achieve some clarity, consistency and parliamentary scrutiny to ensure that the guidance notes, which are such an integral part of the application of clause 159, achieve a degree of security and certainty. It is an important matter and I conclude my remarks on that point.
I shall make a couple of brief observations in support of new clause 3, proposed by my hon. Friend Mr. Hoban. His concluding comments about the need for consistency and clarity were well made. We are entering a new era for pensions in this country. Following the introduction of A-day, individuals now have the opportunity to accumulate substantial pensions— [Interruption.] Before Rob Marris invites me to declare an interest, I will maintain my consistent and clear conduct before the House by declaring that I will be the beneficiary in due course of a personal pension and I am also a member, like everyone else in the House, of the parliamentary pension scheme. I declare that fully for the record.
The introduction of the new regime under A-day means that, at the upper end of the pension market, a decision needs to be taken by individuals who are considering whether to add to their pension funds over the coming years. The decision means setting aside potentially significant amounts of money—up to £200,000 in the current year. On my parliamentary salary, it is unlikely for me, but it applies to those who have sufficient income. They have to decide whether or not it is an appropriate repository for their funds.
The Government need to deal with the logical inconsistency of having established the alternative secured pension structure, but allowing some individuals not to have to take out an annuity at the age of 75, while others do. If the Government are paying attention, they need to reflect on whether to relax the compulsory annuitisation regime and allow individuals, on reaching 75, to withdraw income and thereby suffer income tax and, if these people were to die with large residual amounts in their pension fund, whether those amounts should form part of the estate and be taxed under the inheritance tax regime. That would an entirely logical and consistent approach to these larger individual pension amounts and would in no way conflict with the objectives of the Turner commission and subsequent White Paper.
I remind Ministers that the White Paper addresses the part of the population that has little prospect of paying inheritance tax and encourages saving among those earning up to £32,000 a year. Such individuals are unlikely to be able to accumulate sufficient assets over their lifetimes to get into the inheritance tax net, which is an objective of the rules on annuitisation. The Government need to look into that as a means of refining the White Paper, which I would greatly welcome. Like my hon. Friend the Member for Fareham, I do not anticipate that the Government will accept the new clauses, but they need to reflect on these issues as the White Paper becomes an Act over the next year. By next year, I expect the Government to have reflected on these provisions and to introduce them into the Budget.
I am not a statistician or an actuary, so I cannot foresee the right amount, but I suspect that it should be close to the level that would take people out of means-testing. That would be the principle to apply, but I cannot tell the hon. Gentleman exactly how many pounds the amount should be. The hon. Member for Wolverhampton, South-West managed to intervene, just as I concluded my remarks.
The Conservative new clause 3 provides an alternative to the current position, whereby people are forced to buy an annuity with their pension funds when they reach 75. The Conservatives have made that proposal before, most notably through the private Member's Bill of Mr. Garnier in 2002. As Mr. Hoban said, the issue was raised more recently in connection with the Finance Act 2004 and the Pensions Act 2004.
I draw the House's attention to the ping-pong with the other place at the later stages of the Pensions Bill. This very matter was one of the most significant issues debated and it was the collapse of the Conservative vote in the House of Lords that prevented the opportunity of the provision being written on to the statute books. If the Conservative peers had been able to vote, perhaps we would not be debating the matter now.
The new clause is designed to limit the requirement to purchase an annuity to the amount that would give the annuitant a minimum retirement income, and it would provide greater flexibility over the remaining residual fund. That contrasts with the current situation in which 75 per cent. of the funds from a money purchase pension must be used to purchase an annuity by the age of 75. Since the scheme was set up, life expectancy has increased considerably, which alone might provide the Government with a reason to look into the matter again. The new clause would amend the Finance Act 2004, set up a retirement income fund and create a rule whereby withdrawals cannot be made unless the individual has purchased a relevant annuity that is linked to the retail prices index.
The hon. Member for Fareham will know that the Liberal Democrats have supported the approach in principle in the past and we do not intend to change our minds today—we will still be on the side of the angels. However, I have one query about the drafting of the new clause in respect of an issue that my hon. Friend Steve Webb has mentioned.
The principle behind the minimum retirement income is that it exists to prevent individuals from withdrawing all their money from their pension and falling on to state benefits. The annuity that would need to be purchased under new clause 3 would prevent that from happening, but in terms of qualifying for state benefits, all income is taken into account, not just the income from the annuity. The hon. Member for Fareham assumed that my hon. Friend the Member for Northavon was talking about fluctuating income, but it could affect someone with a steady income close to the minimum income. If they were below it, they would fall on to state benefits. However, under the provision, all the money in the pension pot would need to go into the annuity to provide a minimum income that, together with their other income, might take them significantly above the minimum income requirement in the new clause. I hope that the hon. Member for Fareham will clarify the operation of the new clause in that respect.
Finally, I have a question for the Economic Secretary. The Secretary of State for Work and Pensions promised a review of the pensions situation following the Turner report. When might we see that?
I want to make a brief contribution. These days, I follow health matters, but when I saw that annuities were to be debated today I could not resist one last bash.
I am sure that our new Economic Secretary, who studied philosophy, politics and economics at Oxford, will be familiar with the concept of a Pareto improvement—that it is possible to act in such a way that no one is worse off, but someone is better off. In economics, of course, that is highly desirable. The reform of annuity law is a Pareto improvement—what these days we would call a win-win situation. No one loses if we can reform annuities in a way that gives people choices, at no cost to the taxpayer. As has been noted, the implications for means-tested benefit expenditure and the possible loss of tax revenue are the two areas of worry in terms of cost to the taxpayer.
New clause 3 is rather excessive in its attempts to deal with the risk falling on means-tested benefits. It is too prescriptive because, as I said in an earlier intervention, some people might be able to draw down their entire pension pot and still not run any risk of falling within the realm of means-tested benefits. However, new clause 3 would oblige them to buy an index-linked annuity of a certain value. The official Opposition do not know how much that would be, even though they want us to support the new clause, but that proposal is unnecessary and unduly restrictive.
We understand that there has to be a fail-safe—and I believe that it should be individual-specific—to ensure that a person's pension pot is not raided to such an extent that he or she falls at the mercy of means-tested benefits. However, I have always believed that the Treasury always gets its tax money anyway. For example, tax is paid when a pension pot is drawn down, and also when people leave money when they die.
The Treasury's ideological line is to convince us that tax relief is some sort of incentive. By and large, with the exception of what happens with the lump sum, tax relief is about taxing things once rather than twice. Our tax regime gives tax exemption on the way in and levies tax on the way out, but that is no reason to say that any change would undermine the incentive purpose of tax relief. Pension tax relief is about avoiding double taxation, not about incentives.
As long as the tax is paid at the end in some way, why should the Treasury care how it is paid? It could be paid as a charge on the un-annuitised fund at death, or on the pension that is eventually drawn at the end. It could be also be paid on the money drawn out while a person remains alive, but the Treasury will always get its tax, so who loses?
New clause 3 is unduly cautious, although Mr. Hoban noted that the Government have given ground in response to the concerns expressed by the Plymouth Brethren. However, society always benefits when people in their old age are given new choices about their income. It is true that we are talking here about those who are better off, but that is no problem for the new Liberal Democrat party. Giving people choices is all part of our new approach. We approve of new freedoms for people on higher incomes to make choices.
The new clause would give a limited number of people new choices, at no cost to the Exchequer. I cannot see why a reasonable man such as the Economic Secretary would not be persuaded by that argument.
I am pleased to respond to the debate, and to have an opportunity to restate the Government's policy on annuities. However, I shall first answer the point made by Steve Webb. I shall resist all temptation to stray on to the philosophy of Mr. Davidson or the economics of Mr. Pareto. The hon. Gentleman defined a Pareto improvement as something that left no one worse off and a number of people better off, which sounds to me like the definition of a Labour Government.
We estimate that the cost of the new clause would be around £100 million. It is certainly not cost free. To implement and pay for it, the Liberal Democrats would have to raise from capital gains tax increases not £12 billion but £12.1 billion. Moreover, we discussed the Conservative idea of abolishing inheritance tax—at a cost of £1 billion—when we considered the previous group of amendments. Adopting new clause 3 would cause that total to rise to £1.1 billion. I therefore counsel hon. Members of both Opposition parties to be cautious about adopting policies that would cost £100 million, given that some of the other commitments that they have made would require substantial tax increases elsewhere.
I said that I wanted to restate the Government's approach to annuities, and to reiterate the response to the recommendations of the Pensions Commission made by my right hon. Friend the Secretary of State for Work and Pensions in his recently published White Paper. In that document, we reiterated our policy of securing an income in retirement, and we rejected the principle underlying this new clause—that people aged 75 should not have to buy an annuity. At the same time, in response to some of the points made by the commission, we undertook to publish later in the year a detailed paper setting out the evidence base for our policy.
The Government's policy on annuities is very clear. Very generous tax reliefs are provided to encourage people to save for their retirement. Contributions may be paid with the benefit of tax relief and investment income and growth may accumulate in a pension fund tax free. In addition, when people come to take their pension benefits, they can take up to 25 per cent. of their total pension pot as a tax-free lump sum. In return for those generous tax incentives on the way in, there are long-standing rules that require a person, by the age of 75 at the latest, to convert the remainder of the pension pot into a secure retirement income for life, or to provide for dependants' benefits. Over 90 per cent. of people aged 70 have already bought an annuity, so only a very small number of people have to make such decisions when they reach 75.
I shall deal later with the Pensions Commission's recommendations on annuities, but its report endorsed the fundamental principle that a retirement income should be secured by an annuity, in return for tax relief on the way in. 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 pension saving is turned into regular pension income at some time."
For the vast majority of people who do not get a pension paid directly from their scheme, an annuity will be the best way to secure an income for their retirement. The most recent evidence suggests that annuities are fairly priced and value for money. People do not know how long they will live after they retire, and tend to underestimate their longevity. Without a requirement to secure an income, there is a danger that they will run down their retirement savings either too fast or too slowly.
Insurance companies know, broadly and on average, how long people will live, and offer products that pool the risk. Welfare is therefore improved at the aggregate level.
Is that not a rather paternalistic approach? Why should not people who receive an occupational pension sufficient to keep them above means-tested benefits be able to choose to take a risk about whether they draw their pot down too fast or too slowly? As long as the tax is paid and the state does not lose, why should they not be free to do what they like?
I shall give a more detailed explanation of the £100 million cost of the new clause in a moment, but I can tell the hon. Gentleman that the median pension pot is about £25,000 a year, although many people get much less than that. To achieve an annuity of that size, a person would have to have a pension pot very substantially above the median amount. The pension pots of 19 people out of 20 would be too small to give an annuity of that size. We are talking about a policy that would benefit only the wealthiest 4 or 5 per cent. of the population in pension pot terms.
The hon. Member for Northavon also made a point about tax. We pay substantial amounts of tax relief on the way in and, if we were to have an equivalent tax take on the way out, to make sure that people saving for a pension were not advantaged by knowing that they could pass it on with inheritance tax paid at the end, inheritance tax would need to be substantially higher than the current rate. I accept that Members have tabled supporting amendments to apply inheritance tax charges, but the reason the cost will be £100 million is that charging inheritance tax would not come anywhere near to clawing back the kind of tax benefit that a person would receive from going in with tax reliefs but then not buying an annuity. The fear is that there would be a substantial amount of tax planning for pensions that avoided the need to buy an annuity. The number of beneficiaries might rise slightly above the 4 per cent. of the population who would benefit from new clauses 3 and 7, but it would still be a minority pursuit, which would be expensive for the taxpayer and would require tax rises elsewhere, to no benefit.
If the hon. Gentleman has been following the debate, he will know that we are talking about the amount of pot a person would need to buy an annuity that delivered the minimum retirement income to which we have referred. The overall amount in the pot would need to be substantially higher than the median to provide the necessary income.
No, the pot, because a person would transfer their pot into purchase of the annuity.
Over and above the already generous tax incentives for saving for pensions on the way in, we have introduced flexibility in a number of ways over the last few years, through the Finance Act 2004 and also through the new tax regime that we introduced on
First, as Mr. Hoban mentioned earlier, we are continuing in the new regime the facility to defer taking an annuity and instead to take income withdrawal. Annuities often represent the most efficient way of turning a capital sum into income, but there could be circumstances—perhaps when the scheme member was relatively young and there was a reasonable expectation that the underlying investments of the pension scheme would perform well—when some people might benefit from not being tied into the then prevailing annuity and gilt rates paid later in life. As Members know, the income draw-down rules introduced by the Government allow people to take an income and defer taking an annuity until a more opportune occasion.
The hon. Gentleman gave the impression, perhaps inadvertently, that there are no limits on the degree of draw-down. That is not correct; there are clear rules that allow, in the new regime, a maximum amount to be drawn down for income withdrawal, while allowing resource to remain for the purchase of the annuity—the income guarantee, which is the prime motivation for the existence of the tax reliefs. By contrast, the facilities offered under new clauses 3 and 7 would actually allow the whole amount—way beyond the maximum level we have set in the draw-down legislation—to be taken in draw-down without the need to buy an annuity.
Only a small minority of people have sufficient wealth to benefit from those opportunities in a way that sensibly assesses risk. Only those individuals could take the risk of not making provision through an annuity. Our view is that providing a substantial tax advantage to allow that, as the new clauses would do, for one in 20 of the population with a pension pot at age 75 would not be the right way to spend taxpayers' money.
A second way in which we have added flexibility is that tax rules now allow a new product, a limited period annuity, which enables someone vesting their pension fund to use part of the fund to provide an annuity for a maximum period of up to five years. We have also made a change to allow value-protected annuities to be offered, to allow a return of capital on an annuity where a member dies before reaching age 75.
As the hon. Member for Fareham reminded us, we have also introduced an alternatively secured pension—ASP—for pension scheme members who have not secured their pension benefits by age 75, where the member has a principled religious objection to the pooling of insurance and mortality risk. As the hon. Gentleman knows, and as the quotation from my right hon. Friend Ruth Kelly to which he referred makes clear, it was always our intention that the rules would apply in the specific and narrow case of individuals with such principled religious objections as the Christian Brethren. It has always been our intention to replicate the secure lifelong income obtainable from an annuity through those measures, but not to allow that to become a way in which a small and wealthy minority could benefit substantially from tax advantages to the cost of taxpayers overall. We have always made it clear that we shall not allow those concessions to be taken up more broadly to get round the annuity rules. This is not a mainstream product and it must not become a tax avoidance measure. We shall not be going down that road.
Finally, we have taken steps to ensure that more people with small retirement funds can avoid the need to purchase an annuity which, although secure and guaranteed, is neither cost-effective to pay or to receive, because the amount in the pension pot is so small.
The hon. Member for Fareham mentioned the Turner commission report and we shall be setting out a detailed paper in response later in the year. The Turner report looked at pensions policy 20 or 30 years ahead and the commission advises us to look at all the issues in the round over time, including limits and ages. We shall certainly do that. Following publication of the first Turner report, we took up the suggestion that we should examine the case for not requiring the full purchase of an annuity at 75. Our view is that our policy is right for the present and that to follow that suggestion would be complex and bureaucratic and benefit only a small minority at wider expense to the taxpayer, all as a result of substantial increases in tax rates. That would be the wrong road for us to take.
I shall be happy to do so. If the hon. Gentleman were to ask me a written question, I should be happy to provide him with the figure, but I think that he will find that it is £100 million. The Revenue has much experience in such matters. We understand exactly the motivation behind the proposals. To be more precise, my estimate is that the figure would be upwards of £100 million, which may mean that the size of capital gains tax rise that the Liberal Democrats would need will creep up from £12.1 billion to £12.1 billion-plus. We are looking forward to hearing the details of the Liberal Democrats' tax policies and how they intend to reconcile their commitment to supporting wealth, prosperity—
I am sure that you are right, Madam Deputy Speaker. There will be other times when we can debate those tax policies and we are looking forward to learning the details in due course. I will provide the hon. Member for Northavon with details of our costings and look forward to his providing us with details of his.
Turning to the specific proposals under discussion, as outlined by the hon. Member for Fareham, we have before us a proposal to allow people to set up a retirement income fund from which they may make withdrawals on reaching the age of 75, provided that they first purchase an annuity to secure a minimum income requirement. New clause 7 provides for the equivalent facility for dependants. I have explained already in answer to Opposition interventions why that would be inconsistent with both the principles that have guided our approach to annuity policy over the past few years and the cautious and careful flexibility that we have introduced over the past couple of years and why it would represent a substantial cost to the Exchequer.
I could also explain at length why the proposals are bureaucratic, complex and technically flawed, but I will resist the temptation. Suffice it to say that we urge Opposition Members not to spend £100 million tonight on those measures and, instead, to continue to support us and the wider industry in implementing the Turner commission proposals and the wider A-day pension simplification that we have introduced. A consensus on pensions policy has eluded us for a long time—it is something that we hope to achieve—so let us make it a consensus about the importance of using tax relief to benefit the majority, rather than a very small minority.
Turning to amendments Nos. 62 and 14, which cover the recycling of lump sums. As the hon. Member for Fareham says, those amendments were motivated by a concern that the recycling rule might catch certain cases of normal retirement planning. His view is that the guidance notes restrict the scope of the legislation and that, without the guidance notes, clause 159 would have far wider ramifications than is intended.
In Committee, I offered to circulate any significant material changes to the guidance to the hon. Gentleman, to give him a chance to comment if we made any such change. On the basis of his speech this evening, I am happy to offer that opportunity more widely if any other Opposition Member would like to be consulted on the guidance. That offer was in no way intended to be ad hominem. I will endeavour to ensure that there is proper consultation on those matters.
More importantly, following the tabling of amendments Nos. 62 and 14, I took the opportunity to reconsider the legal status of both the legislation and the guidance notes and to hold discussions with relevant legal and technical specialists. Following those meetings, I am pleased to be able to assure the House that the recycling legislation does not have the wider ramifications that the hon. Member for Fareham fears and that the guidance has no concessionary or discretionary effect whatsoever.
The guidance notes contain a number of worked examples because, as Mr. Gummer would agree if he were here, the world is a complex place and people can construct many different kinds of turbocharged recycling schemes to try to avoid tax. It is important that people understand the way in which the Revenue will proceed in each kind of case. I have quoted to the hon. Member for Fareham in interventions the views of the Chartered Institute of Taxation on these matters.
We have tried to be consultative and to listen to those in the industry and to ensure not only that their comments are incorporated into the legislation, but that the guidance provides the fullest explanation of our intent, so that, as I said earlier, we can ensure that expensive tax avoidance is not tolerated and that innocent pension savers are not disadvantaged by those clauses. On the basis of the assurances that I have given the hon. Gentleman this evening, I hope that he will agree that to try further to clutter tax legislation by trying to move guidance notes into legislation is unnecessary. I ask him not to press amendments Nos. 62 and 14 and accept my assurances instead.
Finally, I want to make a short comment on Government amendments Nos. 31 and 97. The new pensions tax regime, which came into force on
One of the requirements of the short service refund lump sum is that the payment extinguishes all the member's entitlement to benefits under the scheme. We have recently received representations from the industry that that requirement would cause difficulties for contracted-out money purchase occupational schemes, which, to comply with Department for Work and Pensions protected rights legislation, must retain for the member certain rights within the scheme. That could effectively prevent such schemes from providing short service refund lump sums, where they would otherwise meet all the conditions for their payment.
Amendment No. 31, therefore, provides for an exception to the requirement that all the member's entitlement to benefits under the scheme must be extinguished to the extent that the scheme must retain certain rights of the member to comply with other legislative requirements. That amendment will introduce a welcome relaxation in the rules for the pension industry. I urge members to accept it. I know that it will be widely welcomed by the industry, following the consultations that we have had in recent weeks.
Amendment No. 97 will correct a minor technical error in the changes we are making in the Bill to the available transitional protection and ensure that a missed consequential change is incorporated into the legislation.
To summarise, I invite the hon. Member for Fareham to withdraw the motion on new clause 3, not to press new clause 7 or amendments Nos. 107 to 120 and to join us in a consensus on pensions that does not allow tax relief to be diverted to tax avoidance by a small number of people. I ask him not to press amendments Nos. 62 and 14 on the recycling clause and accept my assurances that we will proceed properly in future and consult on any change in the guidance. I ask the House to accept Government amendments Nos. 31 and 97, which will further strengthen the long-term regime for pensioners in this country.
I thank the Economic Secretary for his remarks. He has given a fairly lengthy speech on new clauses 3 and 7 and the amendments. After listening to it, I am unconvinced about the Government's rationale for opposing new clause 3. Steve Webb referred to the opportunities that a change to the annuitisation rules would create: an improvement whereby a number of people would gain, whereas others would not lose. Such a change could go further than that. Certainly, the Turner commission's view was that, yes, some people would gain directly, but a great many people would gain indirectly through lessening of the pressure on annuities and markets in the long term. Many people would seek to achieve that gain, particularly as there would be more demand for annuities in the future, with a shift from defined benefit schemes to defined contribution schemes, as I said in my opening remarks.
The Treasury is fighting a rearguard action. The Economic Secretary talked about the alternatively secured pension scheme being available for a small number of people, but more people will take advantage of such schemes. There will be an appetite for that, because people do not want to be tied to the idea of a compulsory annuitisation of the pensions at the age of 75. They want to have the flexibility in retirement to use their funds in a different way. They want to determine their income. They are concerned about the declining annuity rates and the impact of that on their pensions. On that basis, I propose to press new clause 3 to a vote.
I want to make a final remark on recycling. The Economic Secretary sought to persuade us that our fears about the use of such rules are ill-founded, that the guidance is sufficiently robust and applicable, and that we should have no concerns about it. I am afraid that, on that, too, I am not persuaded, and with the leave of the House at the appropriate time, I will seek to move either amendment No. 62 or 14 formally, but I ask my hon. Friends to vote for new clause 3 and I invite the Liberals to be on the side of the angels again, as Julia Goldsworthy said earlier, in voting with us tonight on new clause 3.