It may be for the convenience of the Committee if I say that it will be in order to refer to schedule 18 in the course of the debate. I would then expect the amendments to the schedule to be taken in short order, and similarly the formal question on schedule 18 being the schedule to the Bill.
Clause 67 relates to changes to the relief available to individuals for their pension contributions that are used to fund personal term assurance policies, and it also introduces schedule 18 of the Bill. In summary, clause 67 and schedule 18 are a response to a process of consultation with industry, announced at the time of the pre-Budget report, on the application of tax relief to personal term assurance. Throughout that process, and indeed throughout the whole consultation period when developing the new pensions tax regime in the period up to A-day on
Indeed, the Government stated in the 2002 consultation document issued before A-day that
"to encourage people to save in a pension, the Government awards favourable tax treatment...which people must use to provide a secure income in retirement. Most of the savings built up in this way must be used to generate a taxable income in retirement."
The tax reforms that came into effect last April removed the complexity that had led over many years to different tax rules applying across numerous types of pension scheme. The long-term benefit is a streamlined regime that is easier to understand and cheaper to administer and which was at the time, as it is now, broadly welcomed by the pensions and savings industry.
As we announced at the time of the pre-Budget report, we became aware in the summer and autumn of last year that the rapid growth of pension term assurance—a life insurance death benefit that in most cases was providing no income in retirement—was leading to rising costs and was clearly at odds with the principles we had set out. To deal with the problem, we announced in the pre-Budget report that we would work with the pensions industry to explore, in time for the Budget, how our principle that pensions should be tax-advantaged to provide an income in retirement could be applied to pension term assurance contracts. We announced that any changes we decided to make would not affect either personal arrangements entered into before
Following detailed discussions with industry representative bodies, such as the Association of British Insurers, it became clear that a meaningful link could not be provided between those policies and pension saving without making the products commercially unviable or leading to high compliance and tax costs to Her Majesty's Revenue and Customs and the Treasury. That is why the Budget announced the changes before us today.
In making the changes, we have worked with the industry to protect the position of consumers who had taken out policies before the pre-Budget report announcement in 2006 and, as I will set out in more detail later—either in the debate on the amendments or in the wind-up—we have tabled amendments to the transitional arrangements in schedule 18 to ensure that they work in the best interests of the consumer. On that basis, given the amendments we shall propose to the schedule, I commend the clause to the Committee.
As the Economic Secretary indicated, clause 67 abolishes pension term assurance, which was introduced in its current form in the Finance Act 2004 and was part of last year's A-day reforms to introduce pensions simplification. This is the third major pensions U-turn since the 2004 Act; it follows hard on the heels of taking residential property out of self-invested personal pensions and the changes to alternatively secured pensions foreshadowed last summer.
I am concerned about the implications of the abolition of pension term insurance and I have four key questions. First, should not the attractions of pension term assurance have been apparent to the Treasury at the outset? Secondly, how has the Government's thinking evolved over the past few years? The Economic Secretary gave us a flavour of that, to show that it had remained constant, but I contend that the Treasury's thinking has changed since the 2004 Act. Thirdly, how did the industry respond to the Government's concerns? Finally, what are the consequences both for the pensions life insurance industry and for consumers?
First, however, I shall consider why pension term assurance was introduced in the Finance Act 2004. Members on both sides of the House are lucky. As part of our pension scheme we receive a death in service benefit. When we die our widow or widower will receive a lump sum, on top of their pension. Our contribution to that benefit is tax-free. If I die as a Member of the House—
It is not something I am anticipating but if, unfortunately, I died while I was a Member my wife would receive a lump sum, which she could use to pay off our mortgage, thus freeing up income. Alternatively, she could invest the lump sum to provide an income.
A substitution effect arises from the death-in-service benefit. The lump sum can be invested either to generate an income or to pay off a mortgage to increase disposable income. The importance of that point will be apparent when I discuss the evolution of the Government's thought process a little later in my remarks.
I am very fortunate as a Member to have that benefit, but others are not so fortunate. People who are self-employed, for example, will not have the same benefit and will have to pay for it themselves. Prior to A-day, this type of cover could have been subject to tax relief as part of a pension policy. Now, however, as we shall see later, even that is not available to the self-employed. Anyone not covered by an employer's scheme will have to bear the full cost of cover—something that we do not have to do. In fact, we are doubly lucky because in a sense the cost of the benefit is split between us and our employer. Someone who is self-employed will not only have to pay the full cost of a stand-alone policy, but will not receive any tax relief either. That raises real questions about the affordability of protection cover for many people on low or moderate incomes.
The change that the Government have introduced creates some ironies. We will recollect that yesterday we discussed the incentives for incorporation in respect of small traders. As Taxation recently noted, if the policy is paid for by the employer, it is acceptable. That leads to the ridiculous situation whereby someone operating through a personal service company can get tax relief, but a sole trader or partner cannot. Yesterday, the Government tried to reduce the incentive for incorporation, but this afternoon we are discussing changes that have encouraged it.
When pension term insurance was introduced, the perspective from the industry was that it would lead to the closure of the protection gap. People out there on low and moderate incomes feel, as I said earlier, that they cannot afford life cover to provide for their dependants in the event of their death. It is worth reflecting on a recent article in Money Marketing by Vanessa Owen of Liverpool Victoria. I am afraid that I am going to refer back to it regularly throughout my remarks, because it provides an insightful view of the development of opinion in the industry about the introduction and development of this product and its subsequent abolition. She said:
"Everyone, including consumer bodies and the Government, understands that most people do not have enough life protection to cover sudden death of the main breadwinner or family carer. It is in all our interests to encourage more people to provide for their dependants and reduce dependency on the state. Despite all the talk about the size of protection gaps, since Swiss Re published its data, the problem has got bigger, with everyone scratching our heads over how to solve it. Then came pension term assurance."
I want to understand the principles guiding the hon. Gentleman's approach. In 1984, tax relief on life assurance products was abolished by the Government of the day. Is the hon. Gentleman suggesting that we should revisit that principle and that tax relief on life assurance and term assurance products should be reintroduced? Should we reverse the 1984 decision?
It is interesting that the Minister raises that point, because the Government effectively reintroduced the relief in their A-day reforms for pension term assurance and they are now seeking to abolish it. What I aim to achieve this afternoon is to understand rather more about the Government's thinking on that matter, particularly why they felt it appropriate to introduce this tax relief in 2004, when they want to remove it 2007. That is the purpose of my remarks today.
What the introduction of pension term assurance enabled in the 2004 Finance Bill was the creation of a level playing field, so that the indirect tax relief that we receive through our contributions to pension schemes, which gives us death-in-service benefits, is also available to others who are in a less fortunate position than us. It is worth reflecting on the debate that took place on the 2004 Finance Bill. Ruth Kelly, who was then Financial Secretary to the Treasury, said in the Standing Committee debate:
"Simplification will introduce greater individual choice and flexibility."
She continued—this is the key quote—by saying:
"For the first time, everyone will have the same opportunity to make tax-relieved pension savings over a lifetime."—[ Official Report, Standing Committee A,
She referred to the creation of a level playing field.
I am obliged to the hon. Gentleman for giving way—I think. Does he not accept that, by and large, as I understand it, the financial press did not really bat an eyelid about this measure? The only point that the financial press seemed to make was about the timings and implementation. That is why the Government have tabled the various amendments to schedule 18. Given that there was not really the clamour that he appears to be trying to make out that there was and given that the Government have tabled amendments Nos. 6, 7, 8 and 9 to schedule 18, does he not agree that those amendments are the best way forward and will he support them?
I will not discuss the amendments at this point. I think that you indicated in your opening remarks, Sir Alan, that we may have a brief debate. We will support the amendments, because they help the Government to get out of a bit of a hole that they have created of their own volition. The Government dealt poorly with the transitional arrangements and there was a lack of clarity about the original statement that was made at the time of the pre-Budget report. That led to some concern and confusion about whether there would be relief for pension term assurance that was included within a pension policy and whether that tax relief would still continue. We have clarity now, whereas we did not have it in December. So, we will support the amendments.
I am a little perplexed by the hon. Gentleman's remarks about the lack of concern in the financial press, because my reading of that press—particularly at the time of the pre-Budget report—was that there was a significant degree of concern among members of the industry. Certainly in conversations that I had in the aftermath of the pre-Budget report, there was quite significant concern, particularly given that so many industry members—I will come on to this later—had invested a significant sum in preparation for the launch of the policy. They are now left trying to administer a relatively small number of policyholders.
To go back to the question of principle—it is important that we establish the principles that are guiding us in these debates—the hon. Gentleman quoted one of my predecessors, a former Financial Secretary, talking about tax relief for pensions. But term assurance is about not pension income but death benefit. It is a life insurance product. Does he accept that it was never our intention to tax-relieve non-pension savings in the manner that has transpired, or is he saying that introducing a tax relief for term assurance is his proposal to close the contributions gap—as he referred to it?
That is slightly curious. If it was not the Government's intention to introduce tax relief for pension term assurance, why on earth did they include it in the Finance Act 2004? The Government put the measure forward three years ago, in that Finance Act, but are now seeking to reverse it. If it was not their intention to have that provision, why did they include it in the first place? That is the problem that the Economic Secretary has to think about. The reality is that the measure was well understood by the industry. Perhaps the Economic Secretary will tell us why the Government included the provision in the Finance Act 2004, because the Committee would be interested to hear that. I would happily give way to enable him to give that explanation. [ Interruption. ] The Economic Secretary says that he will give an explanation in his speech. Well, we have heard that before.
If we go back to the Committee Hansard for the 2004 Finance Bill, it is interesting to note that there was no discussion whatsoever on the introduction of pension term assurance. According to my reading of Hansard, that clause seemed to pass through without comment. The then Financial Secretary to the Treasury did not give the merest warning that abuse could lead to the scheme being closed down; that is in stark contrast to the warning that she gave about alternatively secured pensions.
The Government introduced the tax relief back in 2004, and when one talks to people involved in the industry, one finds that their view is that the Government should have been aware of the impact of the relief on the life assurance market. As the Association of British Insurers said:
"Even before this change was made, the insurance industry told the government of the positive effect this could have on the term assurance market."
It was an opportunity for that market to rejuvenate itself. That should have come as no surprise to the Treasury. Indeed, some people were so concerned that the change would lead to a large-scale re-broking of business that they started to lobby the Treasury. I once again point out what Vanessa Owen of Liverpool Victoria said:
"When I first read the proposed death benefit rules back in 2004, I wondered if boards of directors across the country would be turning pale at the risk of churning to in-force books. But after much lobbying, it became clear the rules were not going to change before A-day".
There appears to have been plenty of discussion and debate before A-day, and what happened should have come as no surprise. Indeed, when I spoke to a group of industry experts in January this year, I specifically asked them whether the take-up of pension term assurance should have come as a surprise to the Treasury, and they emphatically said no; the Treasury should have been aware of the scale of interest.
The effect of the A-day change was to encourage people to think again about life assurance, as they could pay their premiums net of the basic rate of tax, if they were basic rate taxpayers, or net of the higher rate of tax, if they were higher rate taxpayers. When consumers went to see their financial adviser or someone at the bank, the person giving them financial advice would have been remiss if they had failed to point out that they could take out pension term assurance at a lower cost than normal life assurance, because of the generous tax relief introduced by the Government in their Finance Act 2004. It is worth considering one insurer and the rates that it was offering. According to an article in The Times, a male non-smoker buying £300,000 of level-term cover from Legal & General would pay £27.25 a month in cover. If he chose pension term assurance, he would pay £25.25 a month in cover if he was a basic rate taxpayer, but if he was a higher rate taxpayer, he would pay only £19.39. I suspect that Rob Marris is thinking about the difference between £27.25 and £25.25 and saying to himself, "That does not sound like the basic rate reduction," and indeed it is not. There is recognition in the industry that the cost of pension term assurance cover was higher than the cost of basic cover, if we exclude tax relief.
There were significant caveats about pension term assurance cover. As Richard Eagling, the editor of Investment, Life & Pensions Moneyfacts says:
"Although price is not the only differentiating factor to be considered when choosing between the two, the cost savings cannot be ignored, and for those clients who have no existing cover in place, the case for PTA is compelling."
Consumers were warned that the policy might not be for them, as an article in The Sunday Telegraph said:
"For a start, only basic life insurance is available with these PTA packages. The tax-breaks do not apply to extras that are often added on to conventional term assurance products, such as critical illness cover which pays out if you suffer a serious illness that leaves you unable to work. Family income benefit is not covered either—this product pays out an annual income on death rather than a lump sum."
So there were caveats in respect of the sale of such policies; it was not a straightforward slam dunk, as it were, to sell the policy to clients. There was a proper process that had to be gone through. Certainly, the increased affordability of term assurance would enable people who had previously found life cover prohibitive to take greater personal responsibility for their family, but as I said earlier, it also gave those with existing life cover the chance to see whether their cover could be re-broked.
Again, Vanessa Owen made some perceptive comments about what happened in the industry at the time. She said:
"What we did find was that, although not a storm, life protection volumes started to pick up from all channels. Consumers were interested in the tax relief message which was clearly stimulating demand although, judging by our average premium levels, it was not wealthier clients who were buying but people on more modest means.
In other words, it was not just the wealthy who were taking advantage of another opportunity to claw back higher-rate tax relief but also regular policyholders looking to take out life cover at a competitive rate."
What about churning—the re-broking of in-force life protection? Vanessa Owen said of the in-force life protection book:
"It has remained largely intact, with rebroking activity at a minimal level", so it appears from her evidence that people on low and moderate incomes were taking the opportunity to put in place cover that they may have considered too expensive before.
The interest in pension term assurance should have been apparent at the time. It certainly seemed to attract new customers. Has the Minister asked his officials to conduct any research into who purchased the products, and did the research that the Government conducted reflect Miss Owen's perception of the change of business in the market?
If so many businesses were thinking of taking advantage of the introduction of pension term assurance—clearly, the Liverpool Victoria thought about it—why was that not obvious to the Treasury? Plenty of people seem to have told the Treasury. Why did not the Treasury realise sooner what the take-up rate would be, or was it so naive that it did not think it would happen after all, or so incompetent that it did not think of taking action prior to A-day?
It is worth noting the cost of the Government's failure to take action. According to the regulatory impact assessment, the estimate of lost tax revenues if the clause is not reversed would be £160 million, out of a total estimated cost of £250 million for A-day reforms. What was the Government's original estimate of the amount of tax relief that would be claimed as a consequence of introducing pension term assurance? Presumably, in their calculation of the £250 million, they would have produced an estimate back in 2003-04. It would be interesting to understand the difference, from the Minister's perspective, between the original estimate and the current revised estimate, as set out in the regulatory impact assessment. If the Minister knows, I should be grateful if he enlightened me and the Committee about the difference between the estimate at the time that the A-day reforms were consulted on and the £160 million cost referred to in the regulatory impact assessment.
I fear that the hon. Gentleman is in danger of misleading the Committee. The regulatory impact assessment refers to the cost that would arise to the Exchequer, had we not taken action at the time of the pre-Budget report. As I said, it was never the Government's intention to incentivise through pensions tax relief what became a rapid switch to pension term assurance. It was to prevent that cost from arising that we acted. I am still trying to work out whether the hon. Gentleman is supporting our action to protect the revenue base, or advocating a reversal of the 1984 decision not to tax advantage life assurance. On that question of principle, he still has not given us any clue.
I am only up to page 6, so there is plenty of time before we discuss that.
I hope I did not inadvertently mislead the Committee. I am clear that £160 million is the Government's estimate of what the costs would have been in the future. It would be interesting to know what they think the cost is now and what they thought the cost might have been. [Interruption.] The Economic Secretary says from a sedentary position that the cost at present is none, but we have had nine months of sales of the products. In a parliamentary answer, he told me the number of sales in the quarter to June and the quarter to September, so there would be some indication of the cost to the Exchequer. I am keen to understand what the Government's estimate of cost was at the time that they conducted their pre-A day consultation. The Minister still has not responded to that question. I happily give way to him.
The estimate would have been that it was a negligible cost, because it was not the Government's intention to tax-advantage term assurance. The hon. Gentleman is not answering the question whether, as a matter of principle, he supports the extension of tax relief to life insurance and term assurance products to close what he has called "the coverage gap". Until he answers that question, it is hard for the Committee to understand whether he supports or opposes our proposals. At the moment, he is just drifting in the middle.
My hon. Friend is ploughing a steadfast course through the middle of the Economic Secretary's argument, and he is right to press the Economic Secretary. I struggled through the Red Book in an attempt to find an estimate of the current cost of relief to the Treasury, but I could not find anything. The Economic Secretary tells us that the amount was negligible in the past, which suggests that the Treasury had no idea not only what the relief would amount to, but that it was allowing it in the first place—he has just told us that it was unintentional relief. My hon. Friend is doing a noble thing in getting to the bottom of the matter.
It is remarkable that the Government introduced a change that happened to slip unintentionally through the legislative process and past the eagle eyes of the Treasury and Her Majesty's Revenue and Customs and that it will cost nothing. That does not stack up. I cannot understand whether the Treasury was naive or incompetent when it introduced the measure and failed to understand the ramifications. My hon. Friends are encouraging me to believe that it was both naive and incompetent—I am a generous man, and one or the other is enough for me.
The Economic Secretary has raised the question of the future cost of the policy. I assume that the £160 million figure is an annual cost, and I am intrigued to know what assumption he made on how that cost would build up. Does he expect growth to continue at the rate of the increase in sales that took place towards the end of last year prior to the closure of the schemes? Does he expect the rate of growth to plateau? Or was there simply pent-up demand out there, because people who could not previously afford to take out such cover suddenly rushed to do so?
The regulatory impact assessment does not make it clear how the Government reached the £160 million figure—I presume that the logic is more robust than the estimate of negligible cost, which the Government made when they introduced the pre A-day consultation. It will be interesting if the Economic Secretary elaborates in his answer on how officials calculated the cost of £160 million.
The Economic Secretary has nodded, and I am delighted that we will be furnished with that information.
I want to refer to a broader point in that context. At one level, this Government, more than any other Government, understand the behavioural impact of changes to the tax regime; otherwise, the Chancellor would not meddle in the tax regime quite as frequently as he does. At the same time, there has been a fundamental failure properly to think through the behavioural impacts of those changes and the extent to which increasing reliefs, cutting rates or increasing allowances would change people's behaviour. The Association of British Insurers indicated prior to A-day that those products would have a positive impact on the term assurance market, with new policyholders taking advantage of the increased affordability of products.
The Treasury does not seem to have responded. It does not seem to have thought through whether the situation would encourage new participants to enter the market and offer new policies to try to close the protection gap. One of the problems is that the Government have not properly thought through their A-day reforms; that is why this is the third U-turn on those reforms since they were enacted in the Finance Act 2004. Slowly but surely, the Economic Secretary is unpicking the work that one of his predecessors, the right hon. Member for Bolton, West, did when, as Financial Secretary, she was responsible for the same areas. I feel sorry for her at times. She must be wondering why on earth she spent so much time working on these reforms only for the Economic Secretary, who was at the Treasury at the time advising the Chancellor in some capacity, to conduct a series of U-turns once they were on the statute book.
We can see how, and how quickly, the Treasury's approach to pensions has unravelled over the course of the past couple of years in moving on from the intention that was set out in the then Financial Secretary's speech in Standing Committee only three years ago. In the context of the Pensions Commission report, the 2006 Budget said that one of the five tests that the Chancellor set to see whether these reforms were acceptable to him was whether they would promote personal responsibility. Yet here we are with a product that would appear to promote personal responsibility and reduce dependency on the state but that the Government are seeking, through this clause, to abolish.
In last year's pre-Budget report there is a section headed "Fairness for tomorrow's pensioners", where, at paragraph 5.77, the Government casually say that they have
"become aware that, at a result of the flexibilities that the new pensions tax regime has brought in, life insurance policies that provide lump sum death benefits alone are being offered as personal pension arrangements eligible for pensions tax relief."
If the industry knew about it prior to 2004 and A-day, why did the Treasury just happen to become aware of it? Surely it should have played a much more active role in understanding what was happening in the market and what would be the impact of the legislative changes that suddenly crept into the Finance Act 2004.
In this year's Red Book, we have greater amplification of the Government's approach to pensions tax relief so that no one can be in any doubt about what might happen in future. It sets out some key principles that have guided and continued to underpin the Government's approach to pensions tax relief, one of which the Economic Secretary repeated in his brief opening remarks. It says that
"generous tax relief is provided for pension saving to produce an income in retirement. Pension saving is not, however, provided to support pre-retirement income, asset accumulation or inheritance".
Let us ponder for a moment the meaning of that principle. The death in service benefit that our widows and widowers receive on our death as Members can be used to be invested in an income in the same way as a widow's pension. It can be used as an alternative to pay off the mortgage so that their existing income is protected. Yes, we are talking about a lump sum that is gained on death, but the purpose to which it is put can enhance the widow's or widower's pension by supplementing it through direct investment or by repaying the mortgage debt with which so many people are burdened.
If one is a member of an occupational scheme, the contributions are subject to tax relief, and many such schemes clearly include death in service benefits. The Government are trying to remove the opportunity for those who are self-employed or not part of such a scheme to receive the tax relief on a stand-alone, pension term assurance policy. Another key principle that underpins the Government's approach to pensions tax relief emphasises that point. The Red Book states that
"incentives for employer contributions are provided as it is more efficient for pensions to be provided on a collective basis through the employer".
What happens to those who are not in employment—the self-employed and temporary workers? They will not benefit from tax relief on a stand-alone policy. Indeed, other changes make it more difficult for them to get that tax relief. They will have to bite the bullet and not only pay the costs that we pay in our pension contributions and the sort of costs that the Exchequer pays into the parliamentary pension scheme, but get no tax relief. They are therefore hit by a triple whammy and in a far worse position than us as employees in the context of death in service benefit and how to fund it.
This is the last time that I shall try. The hon. Gentleman has clearly outlined the principles that guide the Government's approach, which I set out in a speech a month or two ago and has appeared in repeated documents. His speech makes it clear that he disagrees with those principles because he advocates the use of pension tax relief to pay for term assurance, life assurance and products for individuals. As I said, that is a reversal of the 1984 position. I shall give him one last chance to confirm that he is taking that principled position. He was concerned when I suggested that it was unprincipled. Have I outlined his principled position? This is his moment.
I acknowledge the Economic Secretary's persistence. He is trying hard and, at some point, I might satisfy him. However, he ought to tell the Committee why the Government sought in the Finance Act 2004 to reverse the position that was adopted in the early 1980s. I am intrigued to hear his arguments.
My point in opposing the measure is more about the Treasury's chaotic approach to policy making and the impact of the change on consumers and the industry. It is clear from speaking to people in the sector that there is a problem with the protection gap. The Economic Secretary and I support the concept of financial inclusion and want to spread to more people the benefits that those of us who are lucky enough to be in employment enjoy. We should consider carefully the way in which we spread those benefits, but that is not a commitment to tax relief because, as I said yesterday, we are not in a position today to write the first Budget of the next Conservative Government.
That was a simplistic question. People oppose measures for many and varied reasons. If the hon. Gentleman survives into opposition, perhaps he will understand the way in which such decisions are made. I am not sure whether I hope that he experiences that, but he might.
My final quote from the Red Book demonstrates the hubris of a Government who are 10 years into their life. It states:
"The Government recognises the importance of a stable environment that allows the pensions industry to plan ahead and minimise disruption to the regimes already in place that are working well."
That comes from a Government who have already made three main U-turns on their post A-day reforms. How many more are consistent with maintaining
"a stable environment that allows the pensions industry to plan ahead"?
When the Economic Secretary read that bit and let it go through, he must have smiled at the irony of those remarks, and at how many people in the industry would not recognise the Government's principle in relation to the reforms of the pensions system. Another principle is that the cost of pensions tax incentives must be affordable and fall within current fiscal projections. I am sorry that I forgot to mention that earlier, because it is relevant here.
This raises a doubt in my mind, and in the minds of those in the industry, about what other changes might be planned if the cost of these reforms continues to mount. Will the Economic Secretary unpick other measures in next year's Finance Bill? Will the Government take fright at the levels of the lump sum contributions that many people are putting into their pension schemes this year? I recognise the importance of the argument about affordability, but this leaves the door open to further U-turns in the future.
Where does this leave the consumer and the industry? Let us consider the industry first. It estimates that it has invested some £35 million in new systems and processes to introduce the type of policy that the Government have created, and that sum will have to be written off. This sudden withdrawal without consultation has left an estimated 50,000 policy holders in the pipeline. Insurers could not deal with inquiries promptly because there was so little information available from the Treasury when the announcement was made.
The final details of the transitional arrangements were announced only on
The Minister and I agree on the importance of maintaining London as a global financial services centre, and we recognise that insurance, along with other financial services, covers a global market. Companies seeking to expand their businesses need to think carefully about how and where they use their capital. It will not help the UK market if there is a perception that we have an unstable, unpredictable pensions tax regime.
It is also worth pointing out that the industry has sought to reach a compromise with the Treasury on this issue. It has come forward with a series of proposals to facilitate the continuation of this type of business, as it recognises the importance of the protection market. It is also thinking of ways of avoiding writing off such a large investment in the new systems. It has proposed that all pension term assurance offers would contain clear information about the pension to which they were linked, including details of the provider and a policy number, reinforcing the link that the Government think is so important between the term assurance and the pension. That would produce an integrated policy that provided a pension and a lump sum death benefit. The industry made that proposal so that contributions could continue, but the Treasury rejected it. In effect, it rejected that position before A-day.
The lack of clarity in the Government's position on integrated products is such that in one of today's amendments to schedule 18 we see explicit recognition of that type of policy and of the new transitional arrangements involved. The industry also suggested, as an alternative, that it would cap the amount of the lifetime allowance that could be utilised by taking out term assurance. A third of the allowance, about £500,000, was suggested, but again the Treasury rejected this attempt by the industry to reach a workable compromise.
Many consumers have therefore been left with a protection gap. Those who are outside an occupational pension scheme will have to pay more for the coverage that all Members of the House take for granted. There is an uneven playing field, which favours those who are lucky enough to be in jobs that have a death in service benefit as part of the package, and disadvantages those who are self-employed or contractors. Perhaps more sole traders will be encouraged to incorporate, despite the Government's best efforts yesterday, to access the tax relief that comes from being an employee.
Another important issue is that consumers and industry cannot assume that just because something is a Government policy one month, it will be a policy next month, next year or the year after. That undermines consumer confidence in saving for the long term. In a subtle but important way, it undermines the Government's long-term goal for more people to take responsibility for their financial affairs. That has a destructive effect on the industry and on consumers' willingness to plan for the long term. Every Member of the House recognises the importance of that, and we have had many debates about the Pensions Bill, which is an attempt to encourage more people to save for the long term. One message seems to be coming out from the Department for Work and Pensions, and a different one from the Treasury and the Economic Secretary.
Two quotes highlight the combined impact of the change in policy. First, Vanessa Owen of Liverpool Victoria—perhaps I should start to pay her royalties, given the number of times that I have quoted her—said:
"Our members and customers who do not have access to life assurance through their employer are now at a greater disadvantage because the option of tax relieved life protection has been removed."
Secondly, according to AEGON,
"Not to mention a complete waste of millions of pounds in making pension term assurance available in the first place, following extensive consultation with the Treasury."
Finance Bill by Finance Bill, the Economic Secretary unpicks the work of the former Financial Secretary, the right hon. Member for Bolton, West. Instead of the clear, simple scheme that she advocated, we have an increasingly complex and restrictive scheme. It is surprising that the pitfalls were not seen, and warnings not given, when the legislation was introduced in 2004. The Bill is destructive—it undermines the confidence of consumers in the stability of the Government's pensions policy, inhibits both innovation and the sector's willingness to respond to Government initiatives, and is destructive of the Treasury's ability to make policy in an area in which long-term stability is fundamental if we are to promote long-term savings.
Mr. Hoban spent three quarters of an hour teasing out the issues, as he put it. I shall be very much briefer.
The hon. Gentleman started well in explaining the origins of pension term assurance, and making the point that it was an entirely innocent and reasonable way in which the industry should evolve. All individuals are faced with the question of how to hedge the risks when they look forward to their old age. There is the risk of death, and in that regard we provide for our dependants either in the form of a widow's pension or a lump sum. We must also hedge against the risk of living, and therefore provide an income for ourselves. It is entirely sensible and natural that the two sets of risks should be considered together, as many pensions providers do, and many of us are beneficiaries of such an arrangement. It was therefore natural that the industry should evolve a product that sought to provide those two activities together: pension term assurance. As the hon. Member for Fareham pointed out, in 2004, the Government saw no problem with that, and extended tax relief.
With regard to the Government's answer, about which the Economic Secretary has intervened several times, there are two issues. He has laboured the point about the need to maintain the integrity of the distinction—which he calls the principle, although it is probably more an established practice than a principle—between tax relief for pensions and tax relief for life insurance. Clearly, that is established practice, and must be maintained. The practical issue, however, is not so much the restatement of that principle as tax avoidance. There are clearly individuals who have seen, and would see in this new product, an opportunity to maximise tax relief on life insurance products, particularly if they have high incomes and are able to take advantage of higher rates of relief.
What I would like to know—and the Economic Secretary might strengthen his case if he told us—is how much of the £150 million or so that the Government hope to retrieve originates in the higher tax relief. If it is true that, as the hon. Member for Fareham suggested, this product was designed principally for people on low incomes, we can see that it may have evolved in a fairly innocent way; but if it is designed for high earners—we are talking about 40 per cent. tax relief—I am more sympathetic to the Government's view that there is a potential for avoidance. It would be helpful if the Economic Secretary could give us an idea of the relative proportions.
The Liberal Democrats approach the matter differently from the Conservatives: from the opposite direction, in a sense. We are not trying to maximise the scope for tax relief. Generally, we have gone rather further than the Government in arguing that there is no justification for giving people on high incomes not just more tax relief, but higher rates of tax relief, on pensions, let alone life insurance. However, we agree with the Conservatives that the distinction between what happened in 2004 and what happens now has created confusion, and has not been terribly well handled.
I should like to hear from the Economic Secretary how the Government responded to proposals from the industry. The hon. Member for Fareham summarised ways of meeting the Government's requirements that had been suggested by the Association of British Insurers and others, some of which seemed perfectly sensible at first sight.
If the Government's primary concern was to maintain the link between life insurance and pensions, organisations in the industry were willing to propose ways of checking that it was being maintained. They suggested, for instance, that if someone died and life insurance was claimed, it should be checked that there was a parallel pension product to maintain the integrity of the connection. Perhaps the Economic Secretary will tell us whether that proposal was explored, and whether it was deemed feasible. Organisations also suggested a limit on the tax relief that could be available, and a mechanism for fraud checking.
I have a sense that the industry has gone out of its way to try to meet the Government halfway, addressing their central concern that there must be a link between the life insurance and pension elements. As for how far the Government have gone to meet the industry's concerns, I have an open mind. Our stance on whether the clause should stand part will be determined partly by how they respond.
I want to reiterate some of the points made by my hon. Friend Mr. Hoban in his comprehensive and thorough speech. I shall cover some of the same ground, however, because it would be difficult not to: my hon. Friend really did cover the waterfront. It is worth my repeating one or two of his points in the hope of provoking an answer from the Economic Secretary.
It is not entirely clear what was the rationale for the simplification of the rules governing pension term assurance in the Finance Act 2004, which came into force on
So what, if it was not simplification, was the justification for extending the relief to pension term assurance?
What happened after
One has to put that in the context of a number of cases. Yesterday, we debated the rate of corporation tax for small businesses. We have seen change after change: the introduction of a 10 per cent. band, then a zero per cent. band, which was abolished last year, and now the small business rate is increasing. That is an example of the Government introducing a policy and businesses altering their behaviour accordingly.
We have seen something similar with pension term assurance. Does it not worry Ministers that there often seems to be an almost systemic failure within the Treasury to anticipate the consequences of tax changes? Every year, a Finance Bill is presented and contains detailed provisions. The Treasury is keen to encourage certain types of behaviour and discourage others, yet it does not have a good record of judging what the consequences of the changes will be. This appears to be a very good example of that. Surely it could have been anticipated that pension term assurance would be used in the manner in which it has been. Within only a few months, the Treasury has been forced to change policy.
I am sure that the hon. Gentleman will remember the debates in the House over the issue of self-invested personal pensions, where it was regularly put to the Government by Opposition Members that SIPPs needed to be addressed—and subsequently they were. We debated that during the passage of last year's Finance Bill. Does he agree that, prior to the pre-Budget report announcement of action, no points were put in the House by any Opposition Members to the Government about the need to address term assurance at any stage? We have all agreed that action is necessary to protect the revenue base.
The hon. Gentleman may be right that those points were not made during the passage of the 2004 Finance Bill. One would have thought that the Treasury would be looking to spot those pratfalls. The Opposition do point out failures. I referred earlier to the zero per cent. band for corporation tax for small businesses, which was highlighted as a possible concern by Opposition MPs. There are times when things are not spotted by Opposition parties, but the hon. Gentleman will know—he was heavily involved in opposition—that our resources, compared with what is available to the Government and Treasury, are somewhat limited. He had access to a hotel room off Park lane, but those were perhaps the best facilities that any Opposition party has had. Often, one is talking about small numbers of people, but the Treasury is a mighty machine. It has the crème de la crème of the civil service working on these matters, yet constantly it seems to fail to spot some of them.
I would have thought that Ministers are concerned about that. There is certainly an example here of the Treasury not spotting the way in which a tax change would affect behaviour. That is not necessarily a party point, but it is a concern. I would have thought that Ministers ought to acknowledge that and be worried about it.
May I gently suggest to the hon. Gentleman that he is over-egging the pudding? Labour Members might take on board his point—although we might not agree with every particular of it—in respect of SIPPs or the incorporation issue when some individuals and organisations said at the time, "Do you realise that such-and-such a change could lead to such-and-such a consequence?" My somewhat hazy recollection from having served on the Finance Bill Standing Committee in 2004 is the same as that of Mr. Hoban: no one was making that point. Mr. Gauke talks about resources in opposition, and I understand that point. However, any Member who has served on the Finance Bill Standing Committee, as he has, knows that members of that Committee get bombarded—quite properly in a democracy—with submissions from outside organisations, such as the Chartered Institute of Taxation, setting out their views on the proposed legislation. I stand to be corrected, but I do not think that there were any such submissions about this change in 2004, so it differs from the other two issues to which the hon. Gentleman has referred, which is why I suggest that he is over-egging the pudding.
I am grateful for that intervention. The hon. Gentleman and I have served on Finance Bill Committees before—he more often than me—and I think that it is fair to say that businesses that lose out as a consequence of tax changes tend to be the most vociferous in their lobbying of Committee members. The area under discussion was simplified by the Finance Act 2004, and it is unsurprising that there were relatively few contributions from industry as—I understand, because I was not a Member at the time—it generally welcomed the contents of the 2004 Act. That might explain why fewer submissions were made, but circumstances in which tax change measures favour industry are perhaps those where the Treasury ought to be most alert and most alive to the potential impact.
My hon. Friend makes an important point about the extent to which people advise us that specific changes will have adverse consequences. It is my understanding that the Treasury should have been aware of the take-up prior to A-day. Certainly the industry believes that that was discussed with the Treasury prior to A-day. Therefore, although it might not have been able to make any changes to the Finance Act 2004, it certainly could have done so in the Finance Act 2006 on which I served, along with the Economic Secretary and Rob Marris. That might have been the forum in which to make such changes, because I understand that the Treasury was aware then of the issues we are discussing.
I am grateful to my hon. Friend for his comments, although I must say that, recalling the Finance Act 2006, I am not sure whether I can support the idea that an additional measure should have been included in it. On the contrary, perhaps we should be grateful that that did not happen. However, my hon. Friend makes an important point on the substance of the case.
I entirely understand my hon. Friend's lamentation that on the whole one certainly does not look for additional items to be included in Government legislation; on the whole one searches for measures that can be deleted from it. However, I hope that my hon. Friend agrees that, whatever the complexity of Government proposals, that is no excuse for unintelligibility. As a parliamentary point, let me say that when the Government decide that a change is needed, it is important that wherever possible that should be stated in clear terms in the Bill in question. Is my hon. Friend concerned that the order-making power in schedule 18 allows for regulations, the content and detail of which we in this House might not see until some time after we have voted for the legislation? That will not do, it is not satisfactory, it happens under Governments of both colours and it ought to be changed.
My hon. Friend is a doughty defender of Parliament, for which we should be grateful, and he raises an important constitutional point about supervision. However, this Finance Bill, in contrast to last year's, could do with more substance.
Let me turn to a couple of additional points, which I would like the Economic Secretary to address. What analysis has the Treasury conducted on who will lose as a consequence of this tax change? It seems that there are certain beneficiaries of the Finance Act 2004—the self-employed, contract workers and so on, who would not normally be able to participate in occupational pension schemes that provide some kind of life assurance lump sum. The purpose of the 2004 changes might have been to simplify the system and to make better provision for these people, but it seems that they have suffered as a consequence. I might be wrong, however, and I should be grateful for enlightenment from the Economic Secretary.
I should also be grateful if the Economic Secretary clarified the impact of the following development, which my hon. Friend the Member for Fareham addressed. My understanding is that before A-day—
From a sedentary position, the Economic Secretary gives a conclusive, authoritative nod. Term assurance is therefore more limited than it was before A-day, so this is almost more than a U-turn. We are not just going back to the position before A-day.
I turn to my final point.
I am afraid so. I have a final question for the Economic Secretary, on stability in the pension system, which my hon. Friend the Member for Fareham discussed in his conclusion. There have been a number of tax changes to the pension system. Has the Treasury analysed the impact of these frequent changes? Is the Economic Secretary concerned that such frequent changes increase instability? If there is an unstable environment—if people do not know where they will stand and what the tax system will be next year, or in two or three years' time—it does not encourage them to save. We surely need to look at that issue. I appreciate that there are difficulties and that we need to get the system right, but such constant tinkering—the constant attempt to encourage a particular approach, only to discourage it on seeing its perhaps being overused—is characteristic, I am afraid, of the way the Treasury has been run in the past 10 years. Such tinkering is not necessarily good for stability, or to the long-term benefit of this country.
I am very grateful to my hon. Friend for giving way. The immediate impact on consumers of change after change should rightly preoccupy us, but there is another respect in which constant changes and growing levels of complexity are unhelpful: they tend to discourage market entry by smaller-scale providers. One can end up, even without having intended this consequence, with a lack of competitiveness and a concentration of power in the hands of a relatively small number of highly powerful operators, who tend to enjoy better access to Ministers. That does not necessarily conduce to the public interest.
My hon. Friend again makes a very important point. As is generally the case with financial services—and, indeed, in other areas—if we want to provide good products and services, competition is very important. Encouraging new entrants into the market and encouraging innovation is a very important part of any policy, but the level of complexity is making matters difficult for new entrants. It is not just a question of having the ear of the Government, but of the ability to pay legal and accountancy fees. As is often the case, I fear, too much complexity is causing us great difficulty.
However, I am straying from the clause under consideration, Sir Michael, and before I get into trouble I should like to conclude by reiterating that there are a number of questions that the clause raises, and I hope that the Economic Secretary will be able to answer them in his forthcoming speech.
I have three brief points to make. My hon. Friend Mr. Hoban was right to take this opportunity to chide the Government for their conduct of the issue of pension term assurance. He did so with considerable skill and took us back through the historical development—or lack of development—of Government policy on this matter.
When the then Financial Secretary—now the Secretary of State for Communities and Local Government—introduced the proposals for pension simplification and A-day in Committee on the Finance Act 2004, she also described her intentions. She said:
"Our proposals will create a transparent, consistent and flexible system that is readily understood."
I am sure that we would all agree that had that happened, it would have been a sensible ambition. However, from what we have heard today, the then Financial Secretary, her advisers and the Treasury did not understand what they were introducing. Now, three years later, we have to use up four pages of the tax code in schedule 18 to undo the damage that was done in 2004. It is right, therefore, that we take this opportunity to remind Ministers, and the industry outside, of the way in which the Government have conducted affairs and the consequences of some of their policy implementation, which were not clearly understood at the time.
The then Financial Secretary also said that the proposals would
"make it easier for people to concentrate on things that matter, such as when and how much to save for their retirement, rather than on trying to understand anomalies between the different tax regimes." ——[Official Report, Finance Public Bill Committee,
However, the provision is now being scrapped as a perceived anomaly that favours a particular type of life assurance cover over another, and it was introduced by this Government.
The Association of British Insurers has not hesitated to point that out. It is perplexed that tax relief has been withdrawn from pension term assurance products, a market that the Government helped to create. It did not exist three years ago: it was the Government's measures in 2004 that brought it about. As my hon. Friend said earlier, the industry was in discussion with Government officials about the product. In the run-up to A-day, the Government were well aware that the product was being developed, but they did nothing to discourage that.
My second point relates to the impact on policyholders. Research by Scottish Widows indicates that the households most at risk from this measure are not the wealthy, as suggested earlier, but those with an income above £20,000—so not the poorest, either—but with less than £30,000 in savings. They are middle Britain, and the people whom the Government should be encouraging to make provision for their retirement and unforeseen occurrences in their lives. Emma Walker from moneysupermarket.com has said that its research shows that some one in 10 life insurance customers have already made the switch from a conventional life insurance product to a pension term assurance product, so the change will affect a significant proportion of people.
My hon. Friend is making a valid point about whom the proposals will affect. However, does he agree that farming, where self-employment is rife, and the construction industry are among those sectors already hard hit by other economic factors that will be hit again by the proposed withdrawal of the measure?
My hon. Friend makes an excellent point. Clearly, some sectors will be affected more than others, in that they will have been the focus for the marketing undertaken by the insurance companies providing the products that we are debating. The people affected may well include farmers, in both his constituency and mine.
My final point has to do with the impact that the measure will have on the industry. The Government led the industry to develop these products: last September's pre-Budget report gave a clue that adjustments were likely, but not even the Budget itself made it clear that the policy would be scrapped. My hon. Friend the Member for Fareham was right to say that the details were hidden in the small print of the Finance Bill published in April. If the proposal comes into law, it will deal a hammer blow to the products under discussion. They will be killed stone dead.
The industry has invested £35 million in developing the products, but we are led to believe that that money will be written off, as there will be no return on it at all if the proposals in the Bill are accepted. In addition, over the next 25 years the industry will have to manage the run-off of the 50,000 or so policies that have been taken out, as they cannot be cancelled or exchanged. Companies that had anticipated building up large portfolios of such business over a number of years are now looking at having to manage a small portfolio of less than critical mass over 25 years.
That will add a cost burden to the industry for many years to come, even though the Government just now are seeking co-operation and assistance from everyone in the life assurance and pensions industries who is involved in the promotion of lifetime savings. The Government want to work with the industry, as much more substantial pension plans will come through in other legislation, but they have dealt it a difficult blow.
I would not describe it as a body blow to the industry, as I do not want to exaggerate, but the industry has come to see that the Government who led it down a certain path three years ago have now moved to block that path. That has happened at a very unfortunate time in the Government's relationship with the industry.
In my opening remarks, I set out the background to the Government's decision taken at the time of the PBR and then the Budget. We have had an interesting debate, and I want to respond to a number of points that have arisen. I shall begin by putting the proposals in context, in terms of both principle and history. Much of the discussion has been about the process through which we reached the A-day reforms, and about their consequences, so some contextualisation is appropriate.
Mr. Hoban talked about the Government's principles, and almost got to the point of agreeing with them. I fear that the speeches of some other Opposition Members contradicted that approach, but that is by the by.
In a speech to the National Association of Pension Funds in March, I set out the principles that have guided, and continue to guide, the Government's approach to pensions tax relief. I shall set them out again for the Committee. First, we believe that generous tax relief is provided to support pension saving where that produces an income in retirement. Pensions tax relief is not there to support pre-retirement income, nor to support accumulation or inheritance. Secondly, we believe that pensions should be provided with more favourable tax treatment compared to other forms of saving, in recognition of the fact that they are less flexible than other savings and that they are locked away until retirement. Thirdly, we believe that incentives for employer contributions should be provided, as it is more efficient for pensions to be provided on a collective basis through the employer, Finally, we consider that pensions tax incentives must be affordable and fall within current fiscal projections.
It is important to set out those principles again, as they have guided the Government's decisions over recent months and years. They have also guided our approach to term assurance and pension term assurance, and I shall refer back to them during the course of my speech.
I also want to set out some history. In an intervention on the hon. Member for Fareham, I said that the Conservative Government of the day withdrew tax relief on life assurance premiums in the 1984 Finance Bill. The policy issues debated at the time were slightly different from those that pertain today, but I have read the debates and remain struck by the similarities and echoes between then and now.
In particular, it is clear that the Government of the day were concerned that the relief was being used for circumstances that were not intended. That meant that most of the relief was of no real benefit to the general body of taxpayers, and that any attempt to target the life assurance premium relief more precisely would be both potentially expensive and difficult. That was why the then Government decided that the only solution was to withdraw the tax relief altogether—a pragmatic solution that took account all the different factors.
The system left in place following the 1984 changes allowed relief, restricted to 5 per cent. of earnings, for contributions to a personal pension scheme for life insurance products. However, the term assurance market that was linked to pensions accounted for only a very small percentage of the overall term assurance market.
Does my hon. Friend recall that the 1984 abolition had an unintended consequence? I want to be generous to the Conservative Government of the time, but the consequence was that people getting mortgages stopped taking out the life assurance policies on which hitherto they had been able to get 15 per cent. tax relief, and piled into low-cost endowments that were widely mis-sold. This Government are still trying to sort out the mis-selling that was provoked as an unintended consequence of the Conservative Government's change of tax rule on life insurance premiums.
I hear what my hon. Friend is saying. He is almost certainly correct, albeit somewhat partisan. I shall learn lessons from what he has said, but I am attempting to forge a consensus with the Opposition and so shall move on.
As I was saying, there was an earnings relief of 5 per cent., but the market remained very undeveloped. Essentially, term assurance is a pretty low-cost, high-volume sort of market, and the amount of tax relief available was not sufficient.
This Government reviewed the position at the end of the previous decade, as part of establishing an integrated tax regime for personal and stakeholder pensions. Consultations were held in September 1999 and February 2000, and the Government consistently made it clear that
"pension contributions are not a way of getting tax relief on various insurances that would not otherwise qualify for relief."
The Government held that the primary aim of pension tax relief was to encourage saving in a pension. After the consultation of February 2000, the Government stated:
"Many respondents argued that it should be possible to include an element of life assurance cover within a pension. But they did not support the use of a flat rate limit... The Government has decided that life insurance can be included so long as it does not exceed 10 per cent. of the contributions paid."
History shows that what had been a very small market before that decision became a negligible one, and that 10 per cent. of overall contributions was not sufficient to incentivise people to go into the pension-related term assurance market, given the nature of the business.
The Government embarked on a process of simplification, at each point making it clear that the goal was
"to encourage people to save in a pension".
That was what drove our thinking. In the second pension simplification document of December 2003, we said that
"the Government wishes to ensure that pensions remain a vehicle for providing income in retirement...Pensions saving is to provide an income in retirement...It is not a route for conserving and passing on capital".
That was the background to the debate on the 2004 Finance Bill, when the then Financial Secretary undertook the pensions simplification process. However, there was no reference in the legislation to pension term assurance—the expression did not exist at the time. The market for pensions-related term assurance was negligible at the time, and there was no intention to encourage a term-assurance market link to pensions, nor any discussion of such an intention during proceedings on the Finance Bill. There was a simplification of the pensions and tax regime to provide income in retirement.
There was some discussion between the industry and the Government as to whether the simplification would lead to the growth of a pension term assurance market and whether the changes in tax relief for pensions might lead to migration or churning in the term assurance market. However, there was no consensus for the view that the changes posed a material risk. Following discussions with industry players, the then Financial Secretary concluded that there was not a material risk that the changes we were making to tax relief for pensions retirement income would be likely to lead to a rapid growth in a pensions-related term assurance market.
We had an interesting debate on those matters earlier, when my hon. Friend Rob Marris referred to debates on past Finance Bills. In an intervention, I mentioned SIPPs. At the time, public debate and Members made it clear that there was concern that the SIPPs changes could have undesirable effects and the concerns were dealt with then. However, there was no discussion of the term assurance issue during the Finance Bill; it was never raised by Opposition Members and nor was it a subject of public debate. Technical discussions as to whether the changes posed a material risk concluded that they were not, and that the benefits of simplification outweighed the risk. It was not a mistake; it was a judgment that simplification benefits were more important than a risk that, at the time, was judged not to be material.
That was the position for the next two years and during the run-up to A-day. However, by September 2006 it became clear that although the products were completely within the law—they were not the means of tax avoidance—a substantial re-badging of the term assurance market was taking place. Many life companies did not sell the products as pension term assurance, which would have been a confusing label as they had nothing to do with pensions; they were about death benefit. The policies were often marketed as term assurance with tax relief—term assurance with the benefit of pension tax relief. In many cases, they were not marketed as pension tax relief.
I was asked for some figures. Before A-day the number of contracts sold that could be described as pension tax relief—term assurance linked to pensions—was in the low thousands; the number was negligible. In the fourth quarter of 2005, the number of mortgage-related term assurance contracts sold was 238,154. From the beginning of 2006, when almost no policies were being sold, the number rose to 58,046 products—from almost nothing to 20 per cent. of the term assurance market—whereas the number of mortgage-related term assurance products fell from about 238,000 to 190,161. What happened was perfectly understandable and, in retrospect, predictable: a substantial, tax-driven switch from mortgage-related term assurance to a term assurance that qualified for pension tax relief, but was often not marketed as such because it had no pension income. To my mind, and that of several Members, including perhaps the hon. Member for Fareham, that was not what we intended; our intention was not that pension tax relief should be used to sell what was, in essence, a non-pension product.
Last autumn, it was put to me that costs anticipated as negligible to the Exchequer were set to rise from about £25 million last year to about £160 million a year in five years' time—as the hon. Member for Fareham pointed out. Over a five-year period there would be a cost to the Exchequer of slightly more than £500 million. That is £500 million of taxpayers' money being spent on tax relief actions that people had previously taken without tax relief for, in essence, the same product—a non-pensions-related death benefit that some years before we, as a country, had decided not to tax-advantage. All our consultation documents made it clear that was not our intention and that was why we decided to act in the pre-Budget report.
The report made a clear statement that there was a substantial risk to the taxpayer, that the practice was outside our intentions and that the right thing was to address it with immediate effect. That is what we did. However, we did not say that there was necessarily an end to any link between pensions and term assurance. With the pensions industry, we wanted to find out whether we could establish an ongoing, meaningful link between term assurance policies and saving for a pension, which would not have disproportionate costs and would not mean that a large proportion of the tax relief was going to a death benefit rather than to pension saving.
We consulted the ABI, the Association of Independent Financial Advisers, the Society of Pension Consultants and the Investment and Life Assurance Group. The area is complex and we looked at several options: a test at the point of sale, to confirm that the policyholder was also a member of a relevant pension scheme; a cap on the total sum assured; a test at the point of claim; and ongoing sampling of policies by HMRC to check for fraud. Some in the industry, including the ABI, considered that some of the options might be workable, but after our consultation we found it impossible to set out a way forward that would be both commercially viable and consistent with our intentions and principles.
The problem was that the checks needed to make sure that term assurance, which is a high-volume low-margin product, was genuinely pension-related were disproportionate to the administrative costs that the industry could bear. A cap could work only if it was so high that there would be a death benefit rather than a pension income benefit. We would then have been forced to concede the sum of £500 million over five years. The people selling those products would have been willing for us to make that decision, but we felt that we could not do so because we could not justify expenditure of £500 million on what was largely a deadweight cost.
That is why we decided to bring tax relief back into line with our intentions and to make it clear that we could not see a way forward that was consistent with our principles. Some in the industry agreed with our approach. An expert at AEGON Scottish Equitable said:
"Although we understand the ABI's position, we do not think"— its proposals are—
"a workable solution for providers or for customers. At the very least, it will introduce a need for additional resource from providers, which will be met ultimately in adjusted costs for customers. Ultimately, it could mean providers withdrawing from the market."
It was on that basis that we decided that we could not proceed.
Mr. Gauke asked about losers—an issue also taken up in an intervention by Mr. Dunne. The fact is that before A-day, the market barely existed: it was negligible. The market then grew very rapidly. Everyone who took advantage of it during that period is grandfathered—we are not withdrawing tax relief from anyone who took out products up to the time of the pre-Budget report, or, indeed, for a period afterwards when transitional arrangements applied. Our tax changes take us back to the position ex ante. There are no losers, though people who might have benefited from the more lax regime in future will not do so now because we have gone back to the status quo. As I have explained, I think that the right decision was taken.
I note that point, but has the Treasury done any analysis of the type of people who were taking advantage of the regime in the period after A-day and before the pre-Budget report announcements?
As I said, all the people who were taking advantage will have their benefits protected. It is not true to describe those people as either the very rich or tax avoiders. We are talking about people who previously took out mortgage-related term assurance or life assurance products and then benefited from the tax relief that came from the re-badging of those life assurance policies. It was never our intention—nor, in my view, the intention of the House—to tax advantage those life assurance policies. That is why we are returning to the status quo.
I am seeking clarification about whether a particular type of person benefited from that regime while it existed? For example, was it generally the self-employed or contractors who took out this sort of product in the relevant period?
No, I do not think so. Those who benefited were those who took out assurance policies such as life assurance. I pressed the hon. Member for Fareham to agree with me a number of times about that and eventually, on my fourth attempt, he did. Unless the Conservative party is willing to put up the £500 million to pay for an alternative proposal, I think that the hon. Gentleman and I are agreed that tax-advantaging life assurance products through pension tax relief is not the way forward. If so, we were right to sort out the problem at the earliest opportunity. We did so, despite the fact that in the period before we took our decision, we were not pressured by Opposition Members or anyone else to do so. As I said, we put transitional arrangements in place, which were widely communicated to the industry and, I think, welcomed by it as a way of sorting out the difficult pipeline cases. Indeed, we were praised by the ABI for so doing.
We would have had a considerably longer period between our decisive decision at the time of the pre-Budget report and the eventual enactment of the Finance Bill provisions, though our decision to act would not have been delayed because at that time the revenue risk was too great.
I am not going to say that there are no lessons to be learned from the experience. In retrospect, the Government could have been clearer about their intentions and I believe that both the Government and the insurance industry together could learn some lessons about the process involved in tax policy making. Indeed, I spoke earlier today to the director general of the ABI about how to learn such lessons for future tax policy.
In conclusion, the decision was taken in order to restore the Government's intentions to protect the tax base and to ensure that what we set out to do and what the Finance Bill legislated for—to tax-advantage retirement saving—was, in fact, what happened. It was never our intention to tax-advantage assurance. I do not think that the hon. Member for Fareham is proposing so to do, but if he wants to stump up the £500 million necessary to oppose the clause, I will be very interested to find out how he is going to pay for it.