Clause 156 - Lump sum rule

Finance Bill – in a Public Bill Committee at 5:00 pm on 8th June 2004.

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Question proposed, That the clause stand part of the Bill.

Photo of David Laws David Laws Shadow Chief Secretary to the Treasury

The clause and its associated schedule introduce a simplification, codification and extension of the principle of the tax-free lump sum. As we debated this morning, not only are the Government consolidating it, but, as the Minister indicated, the measures are appreciably more generous than the previous ones. The Government have decided not only to simplify and to codify the manner in which the tax-free lump sum operates but to extend it. We have the opportunity to probe their intentions in that area before we get into the greater detail.

I wonder whether the Minister will put on record the answer to a number of questions about the tax-free lump sum, so that we can understand how the Government's policy is developing. First, will she clarify the purpose of, and justification for, the tax-free lump sum? As we discussed this morning, the previous Chancellor described the tax-free lump sum as an ''anomaly'' within the taxation of pensions. However, the Government have chosen not only to consolidate that anomaly but to extend it. Presumably, they have considered whether there are other ways that savings, both for pensions and for other items, could be tax-advantaged. They have chosen to extend the tax-free

lump sum. So that we have it on the record, can we be told the Government's thinking about the purpose and justification of the tax-free lump sum?

Secondly, there was speculation a few years ago about whether the Government would get rid of the tax-free lump sum altogether. The Minister pooh-poohed that this morning. Notwithstanding the tendency of Treasury Ministers to be careful about the things that they say and put on the record, can we take that as confirmation that the Government are committed permanently to keeping the tax-free lump sum?

Thirdly, will the Government clarify why they have made the tax-free lump sum arrangements more generous in the Bill? How much additional saving for pensions do the Government anticipate will result from that? Fourthly, will the Minister clarify the current cost estimates in respect of the tax-free lump sum and how much that will increase over time as a consequence of the Bill?

Photo of Ruth Kelly Ruth Kelly Financial Secretary, HM Treasury 5:15 pm, 8th June 2004

I am delighted that the hon. Gentleman has taken such an interest in the tax-free lump sum. We have decided to merge upwards for several reasons. The first is for pure simplification. We are increasing the permitted lump sum as part of a wider objective under tax-simplification proposals to merge occupational and personal pension regimes and to remove the distortions that are caused by having two different regimes. We did not want some people who currently benefit from a particular privilege to have it reduced under the simplified proposals. We decided in each case to level upwards, so that there would be practically no losers under the new regime compared with the number of winners. We are prepared to commit the Exchequer to financing that levelling-up of the legislation.

The second point, which is highly relevant, is that the tax-free lump sum is very popular. That is not a silly point. People save in pensions partly because they know that when they retire they will have access to a tax-free lump sum, perhaps to fund a more active early retirement before they use the rest of their income as an annuity. It is an attractive element of the overall pensions regime and encourages people to use the pensions vehicle rather than a different savings vehicle.

Photo of David Laws David Laws Shadow Chief Secretary to the Treasury

I understand the Financial Secretary's argument, but does she accept that any double relief of taxation is going to be popular? She may be coming to that point and perhaps I am pre-empting her argument, but so far she has not produced a justification for that particular form of double-tax relief.

Photo of Ruth Kelly Ruth Kelly Financial Secretary, HM Treasury

I thought that I did. I talked about committing, for every £100 saved in a pension fund, £30 in direct tax relief from the Exchequer, plus the permitted tax-free growth. As part of the bargain, we require people to buy a secured income for life at the end of that period. In order to ensure that sufficient money is saved, an additional, attractive element of pensions saving is that people are permitted to use up

to 25 per cent. of that in a liquid form immediately on retirement. That is one of the elements that increases pension saving.

It is virtually impossible to assess exactly what impact that has on pension saving, or how significant the boost to pension saving is. However, I am sure that if we were to abolish the tax-free lump sum, it would be severely detrimental to the overall savings environment. We do not that think that is an anomaly. We think that it is an important and attractive feature of the pensions regime. The hon. Gentleman is a braver politician than I if he is prepared to argue that that feature of the pensions regime should be abolished.

I said that it is impossible to separate out the costs. We have not published figures detailing how much of the additional cost of pension simplification arises from the more generous access to tax-free lump sums, but those in occupational schemes, who have not yet been able to benefit from the full 25 per cent. tax-free lump sums, will tend to benefit from our reforms. Many pensioners who do not have such a large pension pot will be able to avail themselves of the increased generosity of the Exchequer. I hope that the hon. Gentleman will welcome our proposals.

Question put and agreed to.

Clause 156 ordered to stand part of the Bill.

Clause 158 ordered to stand part of the Bill.

Photo of Mr John McWilliam Mr John McWilliam Labour, Blaydon

We now come to a large group of Government amendments. If we are going to have any problems with the schedule, I will break for half an hour, because I have had enough.

Photo of Jim Fitzpatrick Jim Fitzpatrick Vice-Chamberlain (HM Household)

On a point of order, Mr. McWilliam. My apologies if you were not advised of this, but it is our understanding that the Committee has informally agreed to conclude its business today at 5.30 pm. I hope that we will deal with the first group of Government amendments in the next schedule and then conclude for the day.

Photo of Mr John McWilliam Mr John McWilliam Labour, Blaydon

That is fine, but I am just about at the end of my tether.Schedule 29 Registered pension schemes: authorised lump sums—supplementary