Schedule 29 - Registered pension schemes: authorised lump sums — supplementary

Finance Bill – in a Public Bill Committee at 5:15 pm on 8th June 2004.

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

I beg to move amendment No. 311, in

schedule 29, page 430, line 37, leave out

'amount which is the individual's lifetime allowance in relation to the member'

and insert 'member's lifetime allowance'.

Photo of Mr John McWilliam Mr John McWilliam Labour, Blaydon

With this it will be convenient to discuss the following:

Government amendments Nos. 312 to 314, 324 and 325 and 328 to 330.

Photo of Ruth Kelly Ruth Kelly Financial Secretary, HM Treasury

I hope that this set of amendments will not prove too controversial. They are intended to provide additional clarity and simplification. Some of the amendments concern clauses 207, 208 and 266, the main substance of which we shall come to later. The amendments merely introduce consistency of reference to the lifetime allowance throughout schedule 29. They provide clarity and consistency for taxpayers and pension schemes, and I commend them to the Committee.

Amendment agreed to.

Photo of George Osborne George Osborne Conservative, Tatton

I beg to move amendment No. 220, in

schedule 29, page 430, line 41, leave out 'when' and insert

'on or after the day on which'.

Photo of Mr John McWilliam Mr John McWilliam Labour, Blaydon

With this it will be convenient to discuss the following amendments:

No. 225, in

schedule 29, page 433, line 21, after 'scheme', insert

'together with interest at a prescribed rate,'.

No. 226, in

schedule 29, page 434, line 14, leave out paragraph 7 and insert—

'7. (1) For the purposes of this Part a lump sum is a trivial commutation lump sum if—

(a) on the nominated date, the value of the member's pension rights does not exceed the commutation limit,

(b) it is paid when all or part of the amount which is the individual's lifetime allowance in relation to the member is available,

(c) it extinguishes the member's entitlement to benefits under the pension scheme, and

(d) it is paid when the member has reached the normal minimum pension age but has not reached the age of 80.

(2) The nominated date is any day after the member has reached the normal minimum pension age but has not reached the age of 80 nominated by the member or by the scheme administrator (provided the scheme administrator has given the member at least one month's written notice of the intention to nominate a date and the member has not objected in writing before that date).

(3) The commutation limit is 1 per cent. of the standard lifetime allowance on the nominated date.

(4) The value of the member's pension rights on the nominated date is the aggregate of—

(a) the value of the member's relevant crystallised pension rights on that date (calculated in accordance with paragraph 8), and

(b) the value of the member's uncrystallised rights on that date (calculated in accordance with paragraph 9).'.

Photo of George Osborne George Osborne Conservative, Tatton

Although grouped, the amendments deal with different issues, which I will go through in turn. Amendment No. 220 is a typographical change to achieve what we believe the Government mean to achieve with pension commencement lump sums. That is to say that a pension commencement lump sum be payable not earlier than the normal minimum pension age being reached or, if earlier, on the ill-health condition being satisfied.

The use of ''when'' implies a precise timing at normal minimum pension age and no other time, which is clearly not intended. One of our tax lawyers picked up on that point, saying that it was better to have ''on or after'' than ''when''. Since those people

seem to make large sums of money arguing such points, I think I might save people some money if the Government amend the Bill.

Amendment No. 225 deals with the short service refund. It is normally paid when an individual has been a member of a scheme for less than two years. It is common for the member's contribution—less, if the scheme was contracted out, the cost of buying back his second state pension rights—to be repaid with interest net of tax. The amendment is designed to reflect that common practice and to avoid a tax charge because of the payment of interest.

Amendment No. 226 is more substantial and addresses trivial commutation. I wonder whether the Government will be the victims of unintended consequences. They seem to be introducing a new rule whereby an individual can commute trivial sums up to 1 per cent. of their lifetime allowance. It seems relatively simple for people to commute very small pensions. Some people have very small pensions that pay out, and that is not satisfactory for all concerned. However, the onus seems to be shifting from a decision by the scheme to commute trivial sums that it finds difficult and costly to administer to a decision by the member. Just because an individual has several other trivial sums that have been commuted over their lifetime, a scheme might find itself paying out only 50p a month.

The measure represents a shift, because there are schemes with very large numbers of individuals with very small sums. In the past, schemes have been able to commute those sums and save large sums on their administration. Under the proposed system, the 1 per cent. of the lifetime allowance may be exceeded and the individual may choose not to commute their trivial

sum. As I understand it, the decision is now for the member rather than the scheme. Schemes may not be able to contact members for their approval.

Most of the representative bodies to which I have spoken are greatly concerned because they think that the provision will have unintended consequences and lead to huge extra administrative costs for certain schemes.

I do not know whether the Financial Secretary has spotted it—there has apparently been little conversation between her Department and the Department for Work and Pensions—but there is a direct link to the calculation of the flat-rate levy for the pension protection fund. For example, if someone has a pension that only pays 50p a month, the scheme may have to pay £10 extra on the pension protection fund levy because that levy is calculated per member. Therefore, there could be a very substantial cost impact on schemes that consist of large numbers of trivial sums. The industry raised that point with us—it cropped up in almost every conversation I had—and it is worth bringing it to the Committee's attention.

My amendment is designed to deal with one final point. There seems to be an inconsistency regarding the age at which one can receive a trivial commuted sum. Although from 2010 pensions will be paid from the age of 55, trivially commuted sums will not be payable until the age of 60. Why is the age of 60 suddenly used? It is not used elsewhere in the Bill, and it seems strange that it has just appeared. When the Financial Secretary responds, perhaps she will deal with that point.

Debate adjourned.—[Jim Fitzpatrick.]

Adjourned accordingly at twenty-seven minutes past Five o'clock till Tuesday 15 June at half-past Nine o'clock.