I am delighted to see you in the Chair, Sir John. Not only do I look forward to your expert guidance, but I know how much of an interest you take in this set of clauses. I am sure that, in your wisdom, you will keep us on a safe course.
I will start by introducing the pension simplification provisions. At present, there are eight different sets of rules for pension schemes. The system is complex, expensive to administer and confusing for members, employers and providers. We are sweeping away the existing rules and regulations and replacing them with a single regime for all tax-privileged pension saving. That represents a hugely positive step for those saving or looking to save towards their retirement.
Simplification will introduce greater individual choice and flexibility. For the first time, everyone will have the same opportunity to make tax-relieved pension savings over a lifetime. Our proposals will create a transparent, consistent and flexible system that is readily understood. That will 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.
Simplification will reduce the administrative burdens and regulatory cost for pension schemes, their members, operators and sponsors, and will create opportunities for people to save more towards a pension and a retirement lump sum. The new rules will allow everyone to pay what they can afford when they can afford it.
The pension simplification provisions represent the outcome of two formal consultations and extensive informal consultation. At every stage, we have had regard to the views of those who will be affected, whether individuals, employers or pension providers.
The new regime will consist of two key controls: a lifetime allowance and an annual allowance for the amount of tax-relieved savings that can be made. It is important to recognise that the allowances will not prevent people from saving more in registered schemes
if they wish to. The lifetime allowance will initially be set at £1.5 million and will rise to £1.8 million by 2010. The annual allowance will initially be set at £215,000 and will increase to £255,000 by 2010. Those allowances represent very generous levels of tax-relieved savings. They are far in excess of what 99 per cent. of the population currently save or are ever likely to. However, they limit the amount of tax relief that very high earners can obtain, which is fair.
When someone saves more than the lifetime or annual allowance, they will have to pay a charge. There will be a lifetime allowance charge of 25 per cent. on pension funds in excess of the lifetime allowance. The charge will be 55 per cent. if the benefits are taken as a lump sum. There will be an annual allowance charge of 40 per cent. on funds in excess of the annual allowance. Neither of those charges is intended to be punitive. They are simply intended to remove the benefits of the tax advantage given to savings in registered pension schemes.
The two allowances replace a multitude of controls and restrictions in the existing regime. Currently, there are controls on contributions by members, the rate of funding, the level of benefits that can be paid and the amounts of transfers. Different regimes apply depending on the type of pension and when the member joins the scheme. All those restrictions will go, as will the retained benefits rules and all the other rules that arise from the discretionary approval of schemes by the Board of Inland Revenue.
We are replacing regimes that restrict benefits and contributions quite tightly with a regime that restricts tax relief and nothing else. That is a fundamental change and gives schemes much greater freedom when it comes to how they design pensions.
There is a range of other positive measures, including protection of pre-A-day rights from the lifetime allowance charge, the opportunity for schemes to offer all their members a tax-free lump sum of up to 25 per cent.—in most cases, that is far more generous than the current rules—and new flexible retirement rules, which will mean that, for the first time, members of occupational pension schemes will be able to draw retirement benefits while continuing to work for the same employer.
We are also simplifying the administration associated with securing tax privileges for pension funds. There will be new, simpler processes for scheme registration and reporting. The new rules will reduce the regulatory burden on pension administrators and encourage innovation in pension design. The provision for flexible retirement will help to promote active ageing, which will allow the economy to benefit from the skills and experience of older workers, while encouraging them to save more to boost their retirement.
The provisions represent a radical and fundamental simplification of the tax regime on pensions. The responses that we have received to the proposals have been generally positive. I trust the Committee will welcome them with similar enthusiasm.
May I say what a pleasure it is to take part in the proceedings? Although I have been a member of the Committee, I have not been a particularly visible member in recent weeks. I have a very good excuse: I have been serving on the Committee considering the Pensions Bill. It is a particular pleasure to be serving under your chairmanship, Sir John, because I know that you are a great expert on pensions. I am delighted that you are in the Chair rather than behind me, because you would intervene on me to point out where I had got things wrong and correct my mistakes.
It is a delight to shadow the Financial Secretary. Under the Leader of the Opposition's new arrangements for shadowing, I seem to have ended up shadowing about five Ministers, but the Financial Secretary is undoubtedly my favourite. We had a very good time on the Child Trust Funds Bill with the hon. Member for Yeovil (Mr. Laws) earlier this year. I thought that she conducted herself with great moderation, was very sensible and listened to my arguments. She even accepted one or two of my amendments, which is all one can hope for in opposition. I am sure that I speak for everyone when I say that there is nowhere we would rather be today than in this Committee.
As the Financial Secretary said, we are dealing with the largest single item in the Bill, the pension simplification process. I shall explain why I call it not a simplification process, but a new tax regime for pensions. We generally support what the Government are doing, and we do not object in principle to the overall package. By and large, we think that they have put together something that the industry welcomes. They have consulted. In a number of key areas, they have changed their mind and listened to the industry. Therefore, we shall be giving the provisions, in their broadest sense, our support.
I do not refer to the process as one of simplification for a couple of reasons. First, it is difficult to describe 151 pages of primary legislation, 100 pages of secondary legislation and 350 pages of guidance notes as simplification. Some people in the industry have been quite critical of that. The National Association of Pension Funds has said:
''The quality of drafting of the Bill is also disappointing. It is not transparent, lacks clarity and is not always consistent, which makes for difficult reading. Considering the scope of the new provisions . . . and the amount of effort schemes would need to go through to implement the new regime, one would have expected that, as a minimum, the rules would be clear, consistent and easy to read.''
Secondly, it is not a question of sweeping away eight different pensions tax regimes and replacing them with just one. The new process will create about six regimes. That is certainly the view of PricewaterhouseCoopers, which says:
''Today's Finance Bill clearly illustrates the complexity of delivering pensions tax simplification. The Bill reveals that the Government's original intention to reduce eight tax regimes to one, has actually resulted in the creation of six separate regimes.''
I know that Committee members will be interested to learn that PricewaterhouseCoopers identifies those regimes as the registered schemes regime, the employer finance retirement benefit schemes, overseas
recognised schemes, overseas unrecognised schemes, section 615 schemes and corresponding accepted schemes. That is the view of one of the largest accountants in the world.
Although the process will make pension planning easier for many, it will make it massively more complex for those with the largest pensions, which we shall touch on later—quite a lot of the Bill concerns those with very large pension pots. It is not a simplification, but it is new and it is welcome. We welcome the fact that the Government have made several significant changes since the consultation. They have reduced the recovery charge from 33 1/3 per cent. to 25 per cent. There has been a climbdown on the issue of the lifetime allowance. The Chancellor of the Exchequer dug his heels in and said that he would not shift from the figure of £1.4 million for the lifetime allowance. When the National Audit Office showed that he was 100 per cent. wrong in his estimates of how many people would be affected, he climbed down. We welcome the change to a simple valuation of defined benefits—the 20:1 formula—and the more generous transitional arrangements that we will debate later.
We welcome any measure that supports saving. As we begin the sittings on these provisions, it is important to remember that the measures are being introduced—rather like with the Pensions Bill—against a background of a savings crisis. The savings ratio has halved and confidence in pensions has collapsed for a range of reasons. It is interesting to hear what the chairman of Aviva, which operates Norwich Union, the largest life insurer in the country, said last month:
''We will have a generation of elderly people coming soon who will have a hard time to live above the poverty line. No one should be proud or pleased with that scenario.''
He also said that Aviva is seeing faster rates of savings growth in many continental European markets than in the UK because of people's reluctance to save in this country.
Last month, JP Morgan Fleming published a survey that found that 61 per cent. of the top 350 pension funds have closed or restricted availability to defined benefit schemes. We will talk about the balance between defined benefit and defined contribution schemes. The survey found that 60 per cent. of the top 350 funds have a defined contribution scheme. There has been a shift away from occupational pension schemes.
The Government made great play of the Pensions Bill providing security for people with pensions and dealing with the problem of people who lose their pensions. It is worth noting in passing that the Association of Consulting Actuaries survey on that Bill stated:
''Fewer than 1 in 10 firms felt that the measures will improve pensions coverage . . . 9 out of 10 firms say the Bill's measures will either add to costs . . . or make no difference'' to their position. That is the background against which we are examining this change to pensions law.
I will flag up areas of concern, where we will seek to push the Government. The largest area of concern and the greatest disappointment that we and the industry have is that the Government have not used the
opportunity to scrap once and for all the requirement to buy an annuity at the age of 75—that issue is dear to your heart, Sir John, as you introduced a private Member's Bill on it some years ago. The Government have opened the door a bit with the alternatively secured pension—we shall see how much they have opened it when we debate the measure.
The Treasury has presented the measure as a response to the genuine concerns of religious groups such as the Christian Brethren about the pooling of mortality risk. However, many people to whom I have spoken in the industry think that the measure will drive a coach and horses through the requirement to buy an annuity. They think that a huge number of people will take up the opportunity that the measure presents, as death benefits can be exploited to allow people to pass their pension pot on to future generations.
We welcomed the Government's retreat from the figure of £1.4 million for the lifetime allowance. They could hardly have stuck to it once the National Audit Office showed that they were 100 per cent. wrong in their estimates of the number of people affected. When we commented on the consultation, we questioned the need for an allowance at all, provided that schemes were required to offer the same sort of pension with the same sort of benefits to people at every level of the company—from the boardroom to the shop floor. That might have been a way of encouraging the creation of whole company schemes. However, we will not die in a ditch fighting for that proposal in Committee.
I suppose that I will make the point again when we discuss the lifetime allowance but, if we are going to have a lifetime allowance, surely the Bill should include a mechanism for reviewing that allowance, regularly increasing it and linking it to earnings or, perhaps, to prices. At the moment, there is no mechanism for increasing it. Although the explanatory notes tell us what it will be for the first five years post A-day, that information is not in the Bill. We will seek to have it included.
We have some smaller concerns in other areas: for example, the impact of the legislation on occupational schemes with fewer than 50 members and the impact on the future of with-profit annuities. I look forward to explaining those during the next couple of weeks. It is our intention to turn a not bad set of reforms into an excellent set. We look forward to the co-operation of the Financial Secretary in achieving that.
We join the hon. Gentleman in welcoming the broad thrust of this part of the Finance Bill, and in particular its attempts to simplify the existing pension tax regimes. The measures are an attempt to simplify and to codify existing Inland Revenue rules.
It is notable that the measures in their existing form have been welcomed by most of the professional bodies that have commented. They see the proposals as a simplification of existing rules and feel that the
Government have gone out of their way to listen to some of the concerns that were expressed at an earlier stage.
We still have a fairly generous regime on tax relief and pensions in this country, particularly by international standards. As the Financial Secretary suggested, the measures make the existing regime slightly more generous, starting with a cost of £25 million in 2006-07, rising to £165 million by 2008-09.
The first issue that I want to raise at this stage is the £1.5 million lifetime limit. We think that that reflects a sensible balance between the constraints on the Chancellor of the Exchequer in relation to public expenditure and tax reliefs on the one hand, and the need to ensure incentives for people right up the income scale on the other.
Now that the Government have made the adjustments that the Chancellor announced in the Budget, we do not have a problem about the overall magnitude of the £1.5 million limit. We do, perhaps, have a more fundamental concern about the fact that the £1.5 million relates to the total pot of money in pension investments rather than to the amount going in. We are concerned, and perhaps the Government should be as well, about whether, at a time when there is significant asset price inflation, a large number of people moving up into what would be seen as quite penal tax bands in relation to their pensions will cause a problem. There remains an issue about whether we are giving tax relief in relation to pensions in the right way and whether, if there is another surge in the stock market, the Government's chosen mechanism will not create a few problems.
We are frequently teased by Treasury Ministers and by the Prime Minister for having a policy of a 50 per cent. top rate of tax on earnings of more than £100,000 a year. However, as many people have noticed—including noble Lords in another place—the Government are implementing a tax charge of around 55 per cent. in relation to pension fund assets above the £1.5 million cut-off. That is something that we will remind them of in the future.
Our second concern is wider. It relates to the point that the hon. Member for Tatton (Mr. Osborne) made when he said that the Bill is largely about people with the largest pension pots. Much of the discussion that we have had and that we will no doubt continue to have about the measures in the Bill—the £1.5 million cap, the ceiling of £215,000 on annual contributions and so on—will seem completely irrelevant and bizarre to most people in most parts of the country, for whom the idea of having a pension pot of £1.5 million or being able to contribute £215,000 in any one year would be cloud cuckoo land.
I have a great deal of affection for the hon. Member for Arundel and South Downs (Mr. Flight), but in some of his contributions on the Bill so far he has spoken rather in Press Gallery terms, as if the average person in this country was on an income of £100,000 or £200,000 per year. He spoke passionately about country estates and public access to them. In the real
world, which most of our constituents inhabit, average income and earnings are far lower than we in this place and certainly most of the press assume.
I read with some amusement recently an article that appeared in The Daily Telegraph, which I must confess is not my normal read. I could not get my usual paper that day, so I read The Daily Telegraph. As it was a quiet day, I turned to the ''City Comment'' section. Imagine my surprise when I read an article entitled, ''The Chancellor's munificence seems too good to be true''. It began:
''We read it in the Budget Red Book but we didn't quite believe it. Now it's in the Finance Bill, it really does seem that our dear Chancellor has opened up a quite splendid tax loophole for the affluent middle-aged, a group of people for whom he's had little good news for much of the past seven years.''
The article went on to describe how this Chancellor has not only maintained the tax-free lump sum, which a previous Chancellor referred to as a ''much-loved anomaly'', but has extended its influence so that more people can take advantage of it. The article discusses the risk that, in their last year before retirement, people will transfer to their pension funds huge sums that they then will be able to draw down as a tax-exempt sum. Presumably, such people are not average members of the population but those who are on particularly high earnings or who have a large number of assets. Hon. Members may wish to read the article, which also gives details about the prospects for investing pension fund money in second homes and retirement homes.
My concern, which may not be the same as that of the hon. Member for Tatton—we shall explore that in the course of the debate—is that in our debates about pensions and pension tax relief we talk much too much about a tiny proportion of the population. Of course, it is important that the system should be fair for everyone, regardless of how much money they earn. Everyone is entitled to expect the Government to consider their financial interests in a fair and reasonable way, but we spend a great deal of time thinking about the financial interests of and tax relief on pensions for 1 per cent. or 0.5 per cent. of the population. The problem for the vast majority of people is that they do not have incomes that allow them to save easily, and they probably do not understand the existing pension system or tax reliefs because of their complexity, which has got far worse.
I share the hon. Gentleman's concern about those who do not have anything like the sums talked about in some parts of the Bill. Just so we know where we stand, could he explain his party's policy on the basic state pension? Is it still the position of Liberal Democrats to link it to earnings, or have they changed their mind on that?
I have exciting news for the hon. Gentleman. I shall be going to a meeting later this morning to discuss the final touches to a paper, to be unveiled at our conference, on that very issue. I shall send him a copy—perhaps even an early copy, before the conference—which he will be able to read in great detail. He will be interested to know that the proposals
will all be carefully costed and worked through, in contrast with the shadow Chancellor's proposals, the pages of which seem to have been glued together for a couple of years. You may be getting slightly impatient with the detour on which the hon. Member for Tatton has taken us, Sir John. I promise not to go any further down it.
My point is simply that we must give more attention to tax reliefs for the majority of people who have pensions and for those who should be incentivised to contribute to pensions. Perhaps it is unreasonable of us to expect the Government to do that in this exercise, which is largely about simplification and codification of the existing rules. However, I hope that they will return to pensions tax reliefs in future Finance Bills and make proposals that have more relevance to the majority of our constituents, rather than a very small group.
May I add my welcome to you this morning, Sir John?
I want to make a few points in addition to the main points raised by my hon. Friend the Member for Tatton. First, I am pleased that the retained benefits rule has gone. I had endless stick from my constituents about the rule, which affected people who had been in the armed services or whose career finished at, say, the age of 50, and then took another job and received another pension. They were constrained in what they could enjoy from that pension, and in a world in which more and more people will have two, if not more, careers, that could cause unfairness. It is not explicit in the Bill that the rule will go, so I was pleased to hear the Financial Secretary confirm that it will.
My second point concerns the £1.5 million cap, which is rising to £1.8 million. The sums for those with final salary schemes and those with money purchase schemes are very different, and the Committee will need to look at that in detail because there is scope for unfairness in treatment between the two, depending on annuity rates.
In previous debates on the Bill, I have tried to achieve legislation that is not retrospective and is fair rather than unfair. That principle is right, whatever anyone's means, but when we come to the transitional arrangements, I am mindful that when the Conservative Government introduced the principle of the pension cap in 1989, it grandfathered the situation for those with pension arrangements prior to that and the new cap was not retrospective. As we come to that part of the Bill dealing with transitional arrangements, it is an important principle that that should remain so until people retire if they stay in their pension schemes. It would be an extremely retrospective step if the legislation ended up damaging people's rights.
My hon. Friend the Member for Tatton has already commented on annuities and I look forward to making a contribution when we come to that. One of my primary objectives since arriving in this place has been to get rid of an out-of-date, patronising requirement that has become an increasing cause of concern to people as they approach the age at which that will have an impact on them. We have a lot to deal with, but,
echoing my hon. Friend, there are some improvements in the new structure and the industry broadly welcomes that.
I welcome the hon. Member for Tatton, and I am sorry that I forgot to welcome him on his first outing on the Bill. I look forward to working with him during this debate. He was right to say that we had a very constructive debate on the Child Trust Funds Bill.
I am pleased to hear the welcome that Opposition Members have given to our proposals and the recognition that we have listened to representations on the Bill. I am also pleased at the recognition of the hon. Member for Yeovil that this is a much more generous system for the vast majority of pensioners than the one that it replaces, particularly in respect of the tax-free lump sum. Many more people will be able to benefit from a 25 per cent. tax-free lump sum. I remember many debates in the House and many Treasury questions suggesting that we had a secret plan to remove the tax-free lump sum. I feel vindicated, to say the least, that we have provided a much more generous element for the vast majority of pensioners.
Can the Financial Secretary tell us broadly how much of the additional expenditure on these measures will be a consequence of the greater generosity of the tax-free lump sum and how much will relate to some of the other small changes in the Bill?
We have not provided a breakdown of the costs. As the hon. Gentleman is well aware, the published figures speak for themselves. A fair proportion of the costs is related to the increase in the tax-free lump sum, but there are elements related to the opportunity to take flexible retirement for the first time as well. The measure will provide a huge relaxation of the rules for the vast majority of pensioners.
Geoff Pearson, head of Sainsbury's pension scheme, said that the Treasury's proposals are much more radical than anyone on his side of the industry could ever have hoped for. He said that sometimes the industry must congratulate politicians and civil servants and that now is that time. Given the response by the industry to the proposals, I was slightly disappointed to hear the suggestion that the measures are not a true simplification of the schemes. In no sense are we replacing the current eight or nine regimes with six new regimes; the simplified regime introduces one set of rules for tax-privileged pension savings.
Pension schemes that wish to benefit from the new regime must be registered. Non-registered schemes will be allowed to continue, but they will not benefit from the tax relief and tax-free investment afforded to registered pension schemes, hence the need for various definitions in the legislation. It is a radical simplification that will benefit millions of pensioners. I am delighted that the Opposition parties have welcomed the clause and I look forward to a constructive debate.
Question put and agreed to.
Clause 139 ordered to stand part of the Bill.