Amendment proposed [this day]: No. 187, in page 60, line 35, at end insert—
'(1A) Section 539 (introductory) is amended as follows.
(1B) In subsection (1) (scope of Chapter II of Part XIII of the Taxes Act 1988) after ''policies of life insurance, contracts for life annuities and capital redemption policies'', insert ''but any gain falling to be treated as taxable income by virtue of this Chapter shall be disregarded from total income in applying section 257(5) (reduction in personal allowance for elderly taxpayers by reference to total income).''.'.—[Mr. Flight.]
Question again proposed, That the amendment be made.
As our erstwhile football-supporting colleagues return to their places having seen Italy qualify by the skin of their teeth, much to our joint chagrin, I can return to the matter in hand. I had risen to support the amendment tabled by the hon. Member for Arundel and South Downs (Mr. Flight) because it is important. It would deal with a real unfairness that hits many pensioners on modest incomes when they cash in a life assurance policy, life annuity or capital redemption policy, because the value they realise is added to their income for that year, which often takes them above the age allowances, so they sometimes pay a significant amount of income tax when, in normal years, they have a very modest income. The amendment would tackle that genuine unfairness so that pensioner savers would not suffer that tax hit.
My guess is that the Government will not accept the amendment, but I hope that the Financial Secretary, when she responds to this useful debate, will not dismiss it out of hand. The Government would be wise to realise that the hon. Gentleman has flagged up a serious matter for many pensioners and I hope that the Financial Secretary will assure the Committee that she will discuss the amendment with her Treasury colleagues and consider whether they might take such action in future, either by accepting the amendment or by introducing top-slicing relief so that pensioners will no longer be hit by that tax.
I welcome you, Mr. Benton, back to the Chair.
It is incumbent on those Opposition Members who support the amendment to explain why life assurance policies should be treated differently from other forms of savings policy. They seem to misunderstand the purpose of the age-related allowance, which is to give extra help to those aged 65 and over who must rely on
relatively modest incomes. That is why it is given in full only to those whose income does not exceed a certain limit. A life assurance policy is income and it is right to take that into account. A pensioner pays no more income tax than a younger person with the same income and the same family circumstances. Most life assurance is taken out as a form of saving and there is no good reason to treat it differently from income from other savings products. The amendment would give a unique tax privilege to income from life assurance.
Life assurance is a very flexible savings vehicle and it is possible to take income of up to 5 per cent. with no tax until the end of the policy. Life assurance products can also be structured to produce a regular stream of income through arrangements grouping together a number of different policies. Age-related allowances exist to help people on relatively modest means. If the amendment were accepted, it would allow all such income to be received without its affecting age-related personal allowances. For example, it would allow someone over the age of 65 with a pension income of less than £20,870—a significant amount of money—to receive investment income from insurance without losing any of the allowances they would lose if their money had been directly invested in a bank account. For that reason it would give a tax advantage to part of the population aged over 65 who are relatively well off compared with their peers.
I shall not detain the Committee with a long discussion of our record on pensioner poverty, which speaks for itself. We are determined to tackle pensioner poverty. The amendment before us would privilege one section of the elderly without helping us target pensioner poverty.
Does the Financial Secretary agree that many forms of income from savings have tax exemptions, in addition to the age-related allowances? For example, there are individual savings accounts, which do not suffer tax. We are talking about one particular form of saving, which compared to savings that can be put easily into an ISA, does not gain those benefits. The logic of the current tax position is against her.
Certain savings vehicles are taxed in very different ways. As the hon. Gentleman knows from our earlier debate, there is a difference between qualifying and non-qualifying life policies. If we compared the annual income paid from a life assurance product to an individual with income from savings invested in a bank or building society account, we would not choose to tax privilege the life assurance product versus savings in other forms. That would not be a very effective use of resources, nor would it add significantly to the pursuit of reducing pensioner poverty.
Perhaps the Minister could remind us of something. My understanding is that until 1984 there was 15 per cent. tax relief on premiums for life assurance policies. Policies that are more than 18 years old would have had tax relief when the premiums were paid.
My hon. Friend speaks from a position of great knowledge, and for the sake of the Committee he has made an extremely valuable point. I thank him for it.
The hon. Member for Kingston and Surbiton (Mr. Davey) suggested another potential way of tackling the problem, which is to apply top-slicing relief to the calculation of age-related allowances. The purpose of top-slicing relief is to reduce the possibility of taxpayers who would normally pay tax only at the basic rate paying tax at a higher rate solely because of a one-off gain from a policy that has accrued over many years.
Of course, we have received representations on this issue in the past, not least from the hon. Gentleman, but they do not match the amendment before us. I would like to clarify that. It is not clear to me that applying top-slicing relief to the calculation of age-related allowances would in every respect alleviate pensioner poverty as the hon. Gentleman maintains. It would be incredibly complicated to calculate. One would have to average the gain over the period of the policy, and work out the impact of any age-related allowances in previous years. In many cases, there would be no difference to the amount of tax paid, but it is perfectly possible that individuals would end up paying more tax because they would lose more than one year's age-related allowance during the life of the policy. I do not think that that is a simple solution to the matter, and for those reasons I urge the Committee to reject the amendment.
The Minister asked why, and my reply is as follows. As she knows, the data show that, typically, the more sophisticated and better-off do not save with such life policies. They have learned to save through personal equity plans, ISAs and other ways, and they would not qualify for the age allowance because their incomes are often too high. The typical case study of people with policies that are caught in this case concerns people of quite modest means who may have been oversold a policy in the past. Some of them have a non-qualifying policy, which is different, but the same point obtains. They have worked in a fairly modest way in other parts of the world and have saved a bit in a non-qualifying policy as an alternative to a pension, because they are not eligible for a pension. Their basic income in retirement is very modest, which is why they would otherwise qualify for the age allowance. They have saved in a life policy, which may have gone up by X or Y, depending on the fortunes of the stock markets. For better or worse, they view whatever gain they have been fortunate enough to make not as income but as capital gain.
I am surprised that the Financial Secretary has not received letters from constituents who have discovered that, because of their little nest egg, which, with a bit of luck, has made a bit—unfortunately, it appears that the reverse will be the case for the next few years—they have lost their age allowance. Their incomes are typically only £10,000 or £11,000, and they feel huge resentment. They believe that they are being unfairly
screwed and, from their perspective, I can understand that.
That is an unjust comment, because those people may have saved through life assurance for perfectly good reasons. The wealthier members of society who are not eligible for age allowances have probably saved in more sophisticated ways that may have been more tax efficient. It is a different form of saving.
Just as an observation, the people who have the sort of life policies to which I refer will have been modest savers. If they were in the expatriate category, life policies were probably a good way to save. They did not want to risk direct exposure to equities that might go up or down and wanted to pay only a modest amount each month. Similarly, those in the UK who saved that way in the past were often saving amounts each month that were so small that putting them into unit trusts, given front-end charges, would not have made sense.
I am saying not that the policies were mis-sold but that this is a historic, old-fashioned way of saving that probably suited the person's cash flow. The crucial point is that we are talking not about the better-off members of society but about people whose regular, basic incomes in retirement in old age are very modest. From their perspective—Governments should consider tax from the perspective of citizens, particularly those who are less sophisticated—it is extremely unjust that they should lose their age allowance in the year that their insurance policy delivers a gain.
I do not want to labour the point, but is the hon. Gentleman suggesting that people—for example, those who live overseas—who use these saving instruments could have chosen pensions policies instead? As I understand it, life policies mature when the person is of pensionable age; we would not be discussing them otherwise. Therefore, those people who took financial advice appear to have been mis-advised, and they should seek redress elsewhere.
I am grateful that the hon. Gentleman now accepts that Governments should look after pensioners with modest incomes, because the previous Conservative Government never did that. That is what the pension credit is about.
First, the hon. Gentleman will be aware that I fought for many years for groups who work overseas, but the Treasury, under the present Government and the previous Conservative Government, resisted. There is absolutely no tax logic in not allowing people who work overseas to belong to a UK pension scheme. The answer to his first question is that they cannot save though a pension scheme because there are no schemes that are appropriate for expatriates. Typically, they saved for their old age through life policies. Again, such savings
may be out of date, but if one went back a hundred years they would find that the situation was the same then. I am trying to remember the hon. Gentleman's second point.
Yes, the pension credit. The hon. Gentleman's logic seems extraordinary: he says that those who have made an effort to save, which is what the Government want because they want to shift the balance from 40:60 to 60:40, should be punished, and that those who have not saved should be given taxpayers' money through a generous pension. He raises the basic issue related to pensions and the minimum income guarantee, which is that if there is a much more generous state earnings-related pension at the expense of other taxpayers, it makes little sense for people to save for their old age at all.
We are talking about people who have, in one way or another, saved for their old age. Typically, the lump of saved capital is small—perhaps £20,000—but when that is finally cashed in to spend in retirement, people will find that, oops, they have lost their old-age allowance. I suggest that the cost of the amendment would not be great and that, from a social justice point of view, the academic approach of saying that savings will be regarded as income for the purposes of general taxation and that they relate directly to someone's personal allowance in old age is an example of bureaucratic, middle-class establishment thinking. Ordinary people do not see it that way, but in the way in which I have described.
There is an academic argument for the Government's case, which is why it has remained for so long. However, where it bites the category of people to which it applies, morally there is a case for people paying tax on what gain there is but not allowing that to affect tax allowances in old age.
I am sure that Committee members are as anxious as I not to open up the debate to discuss the Government's pensions policy—I am sure that you would not allow it, Mr. Benton. However, the purpose of the amendment is to add to the tax advantages already enjoyed by those on modest incomes who will gain considerably under the pension credit. The Government are already assisting those people, and rightly so.
I thank my hon. Friend for that helpful contribution.
The hon. Member for Arundel and South Downs suggests that his proposal would be of no significant cost to the Exchequer, and that the Government are being prejudiced against holders of life insurance policies by not accepting his amendment. I hotly dispute that. His amendment would cost about £5 million every year. If his intention is to target pensioner poverty, there are more appropriate and focused methods of achieving it.
I accept in good faith, however, the hon. Gentleman's comment that we should make the navigation of the tax system as simple and easy as possible for people so that they understand what tax
rates and systems apply to them, and that we should make it easy for them to save and protect themselves for the future. That is precisely what we are doing by commissioning the reviews—of savings policies by Sandler in the Treasury, and of taxation policies by the Inland Revenue.
I ask the Committee not to accept the hon. Gentleman's amendment, which would not make a substantial difference to the real issues to be addressed.
I thank the Financial Secretary for her comments. I remain of the view—as, I believe, does the hon. Member for Kingston and Surbiton—that the Government continue to consider the perspective of the individuals involved through rosy spectacles. The cost of £5 million is not considerable, and I am grateful to the hon. Lady for quoting it.
Does the hon. Gentleman understand that the Government's response must not only consider the £5 million that his amendment would cost, but all the other spending commitments that he has suggested during the Bill's consideration? The other day, he referred to £1 billion in extra subsidy for the oil industry. He cannot announce £5 million here and £2 million there on different occasions; when all his spending commitments are totted up, the Tories will have promised to spend a considerable amount.
The hon. Gentleman is indulging in age-old political games. On oil revenues, he missed our point that the net revenue gained from the tax would be exceedingly modest as a result of losing £10 billion of investment and 50,000 jobs. If he thinks that the Government will get £1 billion a year out of the tax, he has got another thought coming. As I have gone through the Bill, I have been fairly careful in keeping a little tot-up of what hon. Members might come back and say, and the total is not that significant. It is perfectly valid to say that if the cost were £100 million it would be a significant amount, but £5 million is not significant.
On the minimum income guarantee and pension credit, it is strange to argue that it is better for the Government to pay out with one hand with MIG while taking back with the other hand. With respect, that sounds like buying votes, which is of course what lies behind much of the thinking on tax credits. The issue concerns what people who are not well off perceive to be fair. They have accumulated modest sums for their old age by saving through insurance, which they know will be taxed through income tax. They do not know, however, that they will experience the knock-on effect of losing their age allowance, which is extremely unjust. Given that the cost of correcting that would be modest, the Government should get on and do it. We therefore want to put the amendment to a vote.
Question put, That the amendment be made:—