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

Finance Bill (except clauses 4, 5, 20, 28, 57 to 77, 86, 111 and 282 to 289, and schedules 1, 3, 11, 12, 21 and 37 to 39) – in a Public Bill Committee on 15th June 2004.

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Amendment proposed [8 June]: No. 220, in

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

'on or after the day on which'.—[Mr. George Osborne.]

Question again proposed, That the amendment be made.

Photo of Mr John McWilliam Mr John McWilliam Labour, Blaydon 9:30 am, 15th June 2004

I remind the Committee that with this we are discussing 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 Ruth Kelly Ruth Kelly Financial Secretary, HM Treasury

I thank the hon. Member for Tatton (Mr. Osborne) for his exposition of this group of amendments, which is intended to make changes to the lump sum rules in the schedule. Amendment No. 220 involves a minor change to the pension commencement lump sum rules. Pension commencement lump sums may be paid once the

member has reached minimum pension age, or retires on the ground of ill health. The lump sum rules state that a lump sum is a pension commencement lump sum if

''it is paid when the member has reached normal minimum pension age''.

The amendment would change ''when'' to ''on or after''.

I am going to have to disappoint the hon. Gentleman. I am advised that it is absolutely clear from the pension rules that the term

''when the member has reached normal minimum pension age''

will permit the payment of a lump sum once the member has reached minimum pension age and, as provided in the lump sum rules, up until they reach age 75. So, the amendment is unnecessary.

Amendment No. 225 would extend the definition of an authorised short service refund lump sum to include in the amount refunded to the member not only a return of the member's contributions, but an element of interest on the contributions. A short service refund lump sum, which is taxable on the scheme administrator, is an authorised payment and including an element of interest in the lump sum refund would make the interest an authorised payment, too. We do not accept that amendment No. 225 is necessary.

A short service refund lump sum will arise when a member of an occupational pension scheme receives a refund of his or her pension contributions following a short period of pensionable employment that does not bring a right to pension benefits under pensions law. There is a similar provision in the current regime. It allows for interest to be added to the refund of contributions, but the amount of interest that may be paid is subject to Inland Revenue discretion. Therefore, when a refund of contributions is made that includes interest, both the refund of the contribution and the interest are taxable in the hands of the scheme administrator, who is allowed to make a payment to the member net of the tax already paid.

In the new simplified regime, we are codifying the rules on which payments are authorised, so that it is clear what payments can and cannot be made. We accept that a scheme should be able to pay genuine interest at a commercial rate on the refunds. In the new regime, if a scheme makes such a payment, that will be classed as a ''scheme administrator member payment''. Such interest would be taxable on the member at the marginal rate under the normal rules applicable to the payment of interest. Any excess over a commercial amount of interest would be charged as an unauthorised payment.

Therefore, the Bill already achieves the effect that amendment No. 225 is intended to achieve in that schemes can include an element of commercial interest in any refund of contributions to the member on account of short service. I do not, therefore, accept that amendment No. 225 is necessary.

Before turning to the final amendment, amendment No. 226, I will explain a little of the background to the changes to the trivial commutation rules. The current

regime provides for two sets of trivial commutation rules. Occupational schemes may permit commutation of all benefits in respect of the employment, where they do not exceed the value of a pension of £260 per annum. For personal pensions, all the member's benefits in personal pension schemes must be brought together before they can be commuted. Then, if the arrangements do not include protected rights, they can be commuted where the member's fund does not exceed £2,500.

In the new regime, we propose a single set of rules. The new rules provide that, where the member's total benefit rights do not exceed 1 per cent. of the lifetime allowance, the member may commute all the benefits within one 12-month period between the age of 60 and 75.

Undoubtedly, this is a very tricky issue and the trivial commutation rules provided are based on extensive discussions with the industry. The proposals in the Bill differ from those in the second consultation document, which provided for commutation on a scheme-by-scheme basis rather than on a member basis. That did not receive a favourable response from the pensions industry, which suggested that it would lead to more, rather than fewer, trivial pensions being paid and allow the setting up of multiple schemes providing trivial benefits to strip out capital from pension funds.

The approach that we propose is practical. It ensures that administration and scope for abuse are minimised, while recognising the value of commutation for genuine small funds. The new rules will often be more generous than those of the old regime and will allow members greater flexibility in deciding if and when they should commute their pensions. They will, for example, allow a member with a single defined benefits arrangement to commute a benefit of up to £750 per annum, compared with the current limit of £260 per annum.

The hon. Member for Tatton raised a point about the pension protection fund levy. The number of members in a scheme is only one of the factors on which the levy may be based. Officials from the Department for Work and Pensions will work closely with the pension protection fund board during the next few months to ensure that issues such as the important one that he raised are taken into account in setting the levy.

Amendment No. 226 would, in essence, do two things. First, it would increase the value of the amount that can be commuted on the ground of triviality by allowing such commutations to occur at the age of 50. That age would rise to 55 in 2010. Secondly, it would extend the period in which a member may opt for trivial commutation from one 12-month period between the member's 60th and 75th birthday to a potential period of 25 or 30 years.

If we assume real growth of 3.5 per cent., £15,000—the limit that we propose, which is 1 per cent. of the lifetime allowance—at age 50 would be worth about £21,100 by the age of 60, and £15,000 at age 55 would

be worth about £17,800 at the age of 60. That means that the potential number of pensions that can be trivially commuted would increase. I accept that that would not have a large tax cost, but it would mean that the cost to the state of providing social security benefits for those who chose to commute their pensions at the age of 50 and who no longer had a pension income would increase significantly.

The second effect of the amendment would be to allow trivial commutation at any time between the ages of 50 and 80, rather than in the 12-month window we propose. In discussion with the industry, we came to the conclusion that the record keeping for individuals, their advisers and the Revenue needed for such a long period would be disproportionate to the benefits that extending that window would bring. The one-year window for trivial commutation strikes a balance, in that it offers those with small pensions the opportunity to commute, while removing the need for schemes and individuals to keep comprehensive records about the amounts of capital paid out on the ground of trivial commutation.

Given that it would increase the cost of future state benefits and the administrative burden on schemes, I suggest that the hon. Gentleman withdraw his amendment.

Photo of George Osborne George Osborne Conservative, Tatton

What a joy it is, on this sunny day, to be in the Committee Room serving under your chairmanship, Mr. McWilliam. As I said before, there is nowhere we would rather be.

Amendment No. 220 was a technical, or typographical amendment. The Financial Secretary said that the Inland Revenue has considered the issue and thinks that it is absolutely clear. The pensions lawyers who have talked to me say that it is not. One is right and one is wrong. I think that the lawyers will have their day in court arguing the toss on the issue and will pick up a big fee for doing so. If the Inland Revenue wants to let that happen, so be it. I was just trying to help.

Amendment No. 225 is about short service refunds. To be fair—I am in a generous spirit, because my son woke me up at about 5 this morning by jumping on my bed dressed as Buzz Lightyear

Photo of Mr John McWilliam Mr John McWilliam Labour, Blaydon

I thought that that was what children were for.

Photo of George Osborne George Osborne Conservative, Tatton

You seem to have more experience than I do, Mr. McWilliam. I am still learning.

The Financial Secretary addressed my concern on the short service refund by saying that a scheme administrator member payment would allow schemes to pay interest. There may be some related tax complications because people would end up having to compute their tax liability on what could be small sums of money; the bulk of the tax will be paid by the scheme itself. If I understood the Financial Secretary correctly, the member will be responsible for paying tax on what could be fairly small sums of money, which is the interest earned on the short service pension. I was trying to establish that there would still be an opportunity to receive interest on short service refunds, and she assured me of that.

On the more substantive amendment relating to trivial commutation, I was not entirely satisfied with what the Financial Secretary said. She explained the history of it briefly. The idea in the consultation document aroused a lot of criticism from the industry. The Inland Revenue probably spotted that there was a potential tax loophole that people might exploit by setting up a large number of small pensions then commuting them all to avoid tax. However, I am not sure that the new system is better. The Financial Secretary said that the first proposal in the consultation document was not warmly welcomed by the industry. As I am sure she already knows, the new system is not warmly welcomed by the industry either.

I have received a large number of representations from the different representative organisations, all of which make one point. The new system is likely to lead to schemes having to administer large numbers of very small pensions. It will not be their fault that someone has used up their 1 per cent. The schemes may end up administering a small pension of 50p a month simply because someone has gone over the 1 per cent. level. I agree that there will not be many such examples.

The other, more serious point is that it is the decision of the member to commute, not the decision of the scheme. In some cases, schemes with large numbers of members may have lost track of some, and the members will not be in a position to volunteer to have their pension commuted. One pensions adviser told me that the electricity board apparently has many such pensions from many years ago. The new system will be a big administrative burden for it.

Last week, I raised the question of the PPF levy with the Financial Secretary. She made the point that the number of scheme members is only one factor in the calculation of the PPF levy. Nevertheless, it remains a factor in that calculation. It is possible to envisage a scheme that is paying out a pension of 50p a month also paying a £10-a-year levy for administering that pension. Under the current arrangement, someone would be unable to commute what is clearly a trivial sum.

Photo of Rob Marris Rob Marris Labour, Wolverhampton South West

I am not as familiar with the Bill as the hon. Gentleman. Perhaps he could point out where it specifies that the trivial commutation is the option of the member rather than the scheme. Where in the schedule does it say that?

Photo of George Osborne George Osborne Conservative, Tatton

I am not sure that I can do that as quickly as the hon. Gentleman would like. It may say so in sub-paragraph (3) of paragraph 7. I think that there is also reference to that in line 31 of page 134.

Photo of George Osborne George Osborne Conservative, Tatton

I shall write to the hon. Member for Wolverhampton, South-West (Rob Marris), or get someone else to write to him, which, after all, is no more than what the Financial Secretary does. The hon. Gentleman seems satisfied—another satisfied customer.

Photo of Rob Marris Rob Marris Labour, Wolverhampton South West

I am not satisfied or dissatisfied with the hon. Gentleman. I await with bated breath the letter that he will be writing to me or arranging for someone to write to me.

Photo of George Osborne George Osborne Conservative, Tatton 9:45 am, 15th June 2004

I will be happy to confirm that point, but I think that I am right.

The Financial Secretary deployed two arguments: first, that there would be an increase in tax liability, which she accepted would be very small; secondly, and dubiously, that many people could languish on benefits if we agreed to the amendment. That is not a serious argument. I do not believe that the state would expose itself to a huge risk simply by changing the rules on trivial commutation. These are responsible people who probably have a main pension and several smaller pensions. The hon. Lady says that it would significantly increase the cost of benefits, but I would be very interested to see the evidence of that. I suspect that her argument does not stand up to the facts.

The Financial Secretary stated that people would need to commute within a year and she made some reasonable arguments for that, but why do people have to wait until they reach the new age barrier of 60 before commuting trivial sums? The Government are raising the minimum retirement age from 50 to 55 in 2010, so why cannot people commute trivial pensions at 55? What is so magical about 60?

Photo of Ruth Kelly Ruth Kelly Financial Secretary, HM Treasury

I hope that I can reassure the hon. Gentleman about the number of trivial pensions that may be left after a sum has been commuted from a particular scheme. I accept that, in our original consultation document, we put forward a proposal that might have led to the situation that he describes. However, in response to concerns expressed by the industry, we slightly revised the proposal and made the facility for pension scheme members to commute trivial pensions available only to those with pensions with an aggregate capital value of less than 1 per cent. of the lifetime allowance. That, I think, overcomes the point that he raised. People in that position will be able to choose a year falling between their 60th and 75th birthdays in which to commute their trivial pensions.

The hon. Gentleman raised an interesting point about the pension protection fund levy. As he knows, that is the responsibility of the Department for Work and Pensions, which will work very closely with the pension protection fund. Of course, we will work with them and we will discuss with the industry how the issue should be addressed. It is not a simple issue, as the hon. Gentleman well understands, but we are aware of it and we will work to address it.

The hon. Gentleman also asked about the problem of commutation at age 55, which I think I addressed in my opening response. Commutation at that age could significantly increase the value of the pensions commuted and, although there is little tax cost associated with such a move, it could have a major effect on state benefits, particularly on the cost of the pension credit. It is not possible to assess that cost, but I am advised that there could be a significant cost to the Exchequer.

The original proposals allowing commutations from age 65 were drawn up to bring commutation into line with the state pension age so that members could assess their total income at 65. In response to

industry views we lowered the age from 65 to 60 because many schemes allow members to begin to draw their pensions at that age. Allowing commutations at age 60 was a direct response to industry representations.

Photo of Mr John McWilliam Mr John McWilliam Labour, Blaydon

Order. We are all awake this morning, are we not? We have all noticed the misprint on the amendment paper, which would make it appear that we are dealing with schedule 27, not schedule 29: for ''page 420'', read ''page 430''.

Photo of George Osborne George Osborne Conservative, Tatton

I was just testing to see whether anyone would spot that. With your eagle eyes, Mr. McWilliam, you passed the test.

Much more needs to be done on this area with the industry. Most of the representative bodies have raised the matter with me, and the Financial Secretary herself accepts that there is a particular problem with the pension protection levy. To return to a theme that I was developing last week, that suggests that there has not been much joined-up thinking between the DWP and the Inland Revenue in producing these two pensions measures. However, I shall not press the amendment to a vote but beg to ask leave to withdraw it.

Amendment, by leave, withdrawn.

Photo of George Osborne George Osborne Conservative, Tatton

I beg to move amendment No. 348, in

schedule 29, page 430, line 42, leave out from 'satisfied)' to end of line 1 on page 43.

Photo of Mr John McWilliam Mr John McWilliam Labour, Blaydon

With this it will be convenient to discuss the following amendments: No. 349, in

schedule 29, page 433, line 3, leave out from 'arrangement' to end of line 4.

No. 350, in

schedule 29, page 433, line 18, leave out from 'scheme' to end of line 19.

No. 351, in

schedule 29, page 434, line 25, leave out from 'scheme' to end of line 26.

No. 352, in

schedule 29, page 435, line 34, leave out from 'scheme' to end of line 35.

No. 353, in

schedule 29, page 436, line 14, leave out from 'met)' to end of line 15.

No. 354, in

schedule 29, page 436, leave out lines 36 and 37.

No. 355, in

schedule 29, page 437, leave out lines 4 and 5.

No. 356, in

schedule 29, page 437, leave out lines 29 and 30.

No. 357, in

schedule 29, page 438, leave out lines 6 and 7.

No. 358, in

schedule 29, page 438, leave out lines 27 and 28.

No. 359, in

schedule 29, page 438, leave out lines 34 and 35.

No. 360, in

schedule 29, page 440, leave out lines 24 and 25.

No. 361, in

schedule 29, page 440, leave out lines 28 and 29.

Photo of George Osborne George Osborne Conservative, Tatton

The amendments are another attempt to remove an ageist Government policy: the rule that prevents lump sums of various kinds from being paid out if a member dies after age 75. In our discussions about lump sums last week with the hon. Member for Yeovil (Mr. Laws)—I am glad to welcome him to his place and look forward to debating his one amendment, which we will come to some time this afternoon—the Financial Secretary described lump sums as popular and attractive elements of the overall pensions regime and, indeed, as one of the reasons that people save in a pension. Of course, the availability of a lump sum on the death of a member is and equally important reason that people like to save in a pension.

Can the Financial Secretary imagine how much more popular pensions would be if the lump sum could be paid out following the death of the member after the age of 75? My amendments would remove the 75 limit from all kinds of lump sums: ill health, short service, trivial commutation, winding up, lifetime allowance excess and, most importantly, death benefits. I hope that I caught all the 75s when I went through the schedule. However, if I missed a couple, I am sure that, in this spirit of teamwork, the Committee would accept Government amendments that filled in any gaps in my amendments.

The point with lump sums is that most of them attract a 35 per cent. tax charge if the member has not reached the age of 75. One of the biggest obstacles to people taking out a pension is the fact that when it is annuitised the pension pot dies with the member, although in some cases a dependant's pension can be paid. The Government partly recognise that. The Bill is striking in that it recognises that people are discouraged from taking out pensions and annuities because they cannot pass on lump sums when they die. That is why it introduces the concept of value-protected annuities, which, in return for the member's taking a reduced income, will allow any remaining pension pot to be paid to the member's dependant—with the tax charge—provided that the member is not over 75. I concede that that measure is likely to be very popular, and my amendments do not seek to remove it from the Bill.

Last week, the Financial Secretary brandished her report on annuities. I went away and found a different report to brandish, one produced by the Association of British Insurers. Its research found that 47 per cent. of annuitants would be interested in the option of a value-protected annuity and would be willing to give up a reasonable amount of income for one. In fact, one fifth of those whom the ABI surveyed were prepared to give up 20 per cent. of their annuity income in order to be able to pass on something after their death. However, the problem with value-protected annuities—this welcome new product that the Government will allow to be offered—is that they pay out only if the member is under 75. Why is that? What is the Government's argument for such an arbitrary cut-off? If people want to pass on a pension pot after their death, and they are prepared to have a

reduced income while they are alive to pay for that option, they should be free to choose that and the market should be free to provide products that allow it to happen.

The Government's basic argument—I am trying to anticipate what the Financial Secretary will say—is that a pension is intended to provide an income in retirement as opposed to passing capital between generations. That is the great issue of principle on which the edifice of the Government argument is built, but it is undermined by much of the Bill. Pension capital can pass between generations, provided that the member dies before their 75th birthday. It is not as though that principle were sacred; it is sacred only for those over the age of 75.

People can die before the pension is invested, when the entire tax-free pot is handed over to the next generation or a surviving spouse. If they die after vesting, with an unsecured pension, the entire pension pot is handed over—albeit with a 35 per cent. charge. If they die after vesting with a value-protected annuity, the pot is handed over with a 35 per cent. charge. The principle—to use the Government's word—that capital cannot pass between generations does not apply to those who are unfortunate enough to die before the age of 75. It only becomes a great principle for the Inland Revenue when someone reaches their 75th birthday.

The second way in which that principle has been undermined by the Bill is that the provisions do not apply to anyone with an alternatively secured pension. We discussed that at length last week. An alternatively secured income allows money to pass to other generations. Those who were awake last week and have a memory for boring detail will remember the Osborne pension scheme, and the tontine that I described. [Interruption.] I am glad to see that one hon. Member was awake and paying attention. After last week's sitting I reflected on the warning of the hon. Member for Wolverhampton, South-West that this could lead to a ''Kind Hearts and Coronets'' situation, where a member of my family might kill me and other family members in order to get hold of their pension.

Photo of Rob Marris Rob Marris Labour, Wolverhampton South West

On a point of order, Mr. McWilliam. The Official Report will show that I made no direct mention of the hon. Gentleman's family. I just pointed out the generality of Victorian detective novel plots.

Photo of Mr John McWilliam Mr John McWilliam Labour, Blaydon

Order. That is not a point of order. If the hon. Gentleman has a conscience, that is his problem.

Photo of George Osborne George Osborne Conservative, Tatton

I am looking forward to putting those Victorian detective novels on my summer reading list.

The point is that ASI allows the pension pot to be passed from one generation to another, although the Government are doing what they can to make that option unattractive. We disagree with that. It is worth noting that some of the people to whom I have talked since last week, having read the Committee Hansard, disagree with what the Financial Secretary says about the attractiveness of the ASI option. They think that the industry will take it up, and that many people will go for that option. We shall see.

However, we are arguing as to whether there is some great principle that pension pots cannot pass from one generation to another. As I have said, that principle does not apply if one happens to die before the age of 75, if one is a member of the Christian Brethren or if has taken out an ASI for other reasons. The Government seem to be sticking their head in the sand and refusing to budge on the age limit of 75. In effect, they have created a creeping stealth tax because, as life expectancy increases, more people are living beyond 75. I made the point last week that a man now aged 50 has a life expectancy of about 78 years. By 2011, he will have a life expectancy of about 80. According to the Government's own figures, that age will continue to rise.

Photo of Mr John McWilliam Mr John McWilliam Labour, Blaydon 10:00 am, 15th June 2004

Order. The hon. Gentleman cheered me up with that argument last week. He does not need to do it again this week.

Photo of George Osborne George Osborne Conservative, Tatton

I will not continue with that point.

The point about rising life expectancy is that more and more people will be caught by this invidious rule and, even when they are prepared to take a much-reduced income during their lifetime, they will be prevented from passing on their pension fund. That undermines what the Government are trying to achieve with this package of reforms.

Photo of Rob Marris Rob Marris Labour, Wolverhampton South West

The hon. Gentleman referred to a creeping stealth tax and cited the average life expectancy of a male as 78. Will he comment on the fact that, mathematically, in the three years from 75 to 78, less income tax would be paid than would be paid under the 35 per cent. arrangement if the lump sum had not been annuitised and had been passed on to another generation? There is no creeping stealth tax: less tax would be paid.

Photo of George Osborne George Osborne Conservative, Tatton

People would lose their entire pot after they were 75. The point is that by sticking with the age limit of 75, the Government will deter people from saving for pensions in the long term. There are people who do not take out pensions and look for alternative savings vehicles because of the 75 rule. It adds significantly to the complexity of the process.

Photo of Rob Marris Rob Marris Labour, Wolverhampton South West

Would the hon. Gentleman care to produce some evidence that the 75 rule is putting people off saving money in pension schemes?

Photo of George Osborne George Osborne Conservative, Tatton

Yes, I would be very happy to do that. I am surprised that in preparing for the Committee the hon. Gentleman did not read the ABI document ''Annuities: The Consumer Experience''. I am happy to lend him a copy. During our extensive correspondence, I might even give him my copy, because once we are through with this Committee I am not sure that I will need it again.

Photo of Mr Howard Flight Mr Howard Flight Shadow Chief Secretary To the Treasury, Economic Affairs, Shadow Chief Secretary to the Treasury

My hon. Friend may be aware that when Canada changed the rules for the equivalent of stakeholder pensions and permitted people to choose not to buy an annuity, but to have a pension account with the investments as they wanted them, and to pass the residue on to their heirs, what had been a failure

became a huge success. Some 70 per cent. of the population participate, unlike in this country.

Photo of George Osborne George Osborne Conservative, Tatton

My hon. Friend, whose knowledge in such areas is unparalleled, reminds me of the Canadian experience, which is good and telling. While I was listening, I found some evidence to quote to the hon. Member for Wolverhampton, South-West. It is from the ABI's commentary on the Bill. It states that the provisions that

''prohibit the return of unused capital once an individual has reached the age of 75''

introduce

''further complexity and, as a result, consumers are likely to continue to find it difficult to identify the type of annuity which best meets their individual needs without taking advice.''

It continues:

''Removing even more of the complexity''—

by getting rid of the 75 requirement—

''will help encourage people to save more for retirement and make pensions simpler to operate for providers and employers.''

Surely the hon. Gentleman wants to see that. [Interruption.] I suspect that he is about to endorse my view.

Photo of Rob Marris Rob Marris Labour, Wolverhampton South West

First, the quote that the hon. Gentleman read out is a mere assertion; it does not appear to be based on any survey, although there may be a survey in the document. Secondly, on the previous point, made by the hon. Member for Arundel and South Downs (Mr. Flight), under the Canadian system, with its registered retirement savings plans, which have existed for more than 30 years, there was not a 70 per cent. penetration rate. In addition, the plans are a very different vehicle: they can be cashed in at any age. I cashed mine in my 30s to fund my education.

Photo of George Osborne George Osborne Conservative, Tatton

There is a survey on page 33 of the ABI document. The hon. Gentleman says that the quote is just an assertion, but it is an assertion by the ABI, which has some experience of providing pensions and knows what it is talking about.

The hon. Gentleman is wasted as a Government Back Bencher. He would be brilliant in opposition: most of an Opposition Member's job involves standing up and talking for a long time. One of the great tragedies of life is that almost by definition he will lose his seat if the Labour party goes into opposition.

The point is that the age limit of 75, which prevents people from passing on their pension pot after their death, adds to the complexity of the pension process, deters people from saving, and is inconsistent with the Government's concept of flexible retirement, because it provides a cut-off point and, elsewhere in the Bill, requires people to retire at 75. It is, as I said, ageist. I can see that the Financial Secretary, having listened to my arguments, is convinced.

Photo of Ruth Kelly Ruth Kelly Financial Secretary, HM Treasury

This is the second day of debate on the radical tax simplification proposals. I feel that several times already we have re-run this debate on whether pension incomes should be secured at age 75, or a pension vehicle should be used more widely as an

inheritance tax vehicle with all the risks that that would bring with it.

The amendments seek to raise from 75 to 80 the age at which lump sum benefits can be paid. Having heard the guidance that you offered, Mr. McWilliam, I do not intend to re-run the debate about whether 75 or 80 is the appropriate age at which income should be secured. We had a long enough debate on that during previous sittings. I will say that the amendments wear the clothes of seeking to increase freedom and choice for all. In fact, what they seek to do is ensure that people with very large pension funds are able to build up even greater funds and transform their personal pension schemes into a tax-efficient way of passing capital down through the generations and, if they are fortunate enough to live to the age of 80, of retaining the opportunity to take pension benefits.

The hon. Gentleman talks about the attractiveness that the amendment would lead to and creates the impression that there would be far more pension saving if we were to push back the age limit to 80. There is almost no evidence that that would be the case. Changing the age at which pension income should be secured is not the most pressing issue in pensions reform. Most people buy an annuity directly on retirement. Even those who choose to defer purchase their annuity well before the age of 75.

Photo of George Osborne George Osborne Conservative, Tatton

The Financial Secretary talked about the age at which pension needs to be secured. I am talking about the ability to pass lump sums on after death. This is not a re-run of the debate that we had last week. Passing on lump sums is extremely popular. I suggest that, if she has not done so, the hon. Lady reads the ABI report, as it suggests that a large number of people—47 per cent.—are interested in the issue.

Photo of Ruth Kelly Ruth Kelly Financial Secretary, HM Treasury

I have read that consultation document. The ABI points out that, of those who retired in the last two to three years and purchased an annuity, 95 per cent. did so before the age of 70, so the age ceiling of 75 is clearly not an obstacle for the vast majority of pensioners.

The industry may think that there is an opportunity to sell value-protected annuities. I do not dispute that the industry has said that that would be a welcome addition to its portfolio. The hon. Gentleman sought to anticipate the debating points that I intend to make, but he did so without seeing the merit in those arguments.

Photo of Mr Howard Flight Mr Howard Flight Shadow Chief Secretary To the Treasury, Economic Affairs, Shadow Chief Secretary to the Treasury

The Financial Secretary may recollect from previous debates on the matter that there is at least one annuity contract, if not two, offered by insurance companies based in Gibraltar that are expensive but include a facility to pass on lump sums. Those are affordable only by those with larger pensions. The Inland Revenue approves them. Does not she think it unjust that, by paying for such a facility, those with large pension savings can achieve such arrangements, but the many with smaller savings cannot, because it would be too expensive?

Photo of Ruth Kelly Ruth Kelly Financial Secretary, HM Treasury

The hon. Gentleman's proposals are intended to benefit those with large pension pots. We are debating whether the age of 75 is the right cut-off

point to secure income. I do not accept the arguments for return of capital after 75.

As the hon. Member for Tatton has sought to anticipate my argument, I repeat that pension saving is designed to provide an income in retirement to the member, which on death may continue to be paid to any survivors. It is not a route for conserving or preserving capital, regardless of whether it is properly taxed.

The hon. Gentleman may ask why we allow the passing on of capital before 75 while a person is in income draw-down. We want to ensure that pensions remain a vehicle for securing an income in retirement in later years, but we recognise that those taking their benefits using income draw-down bear mortality and investment risk. For that reason the rules allow that, when a member dies before 75 having taken benefits but without having secured income, any undrawn funds in the pension fund may be repaid as a capital sum, subject as now to tax at 35 per cent.

The hon. Member for Arundel and South Downs draws attention to what I believe is called an open annuity in Gibraltar. I am sorry to disappoint him, but that option will not be available under the new pension tax regime. We operate a principle-based system here. We want people to secure income at the age of 75, and we have based our reforms on maximum simplicity and flexibility for the vast majority of pensioners, but it remains a principle-based system.

Photo of George Osborne George Osborne Conservative, Tatton

It is a funny principle if it applies only when one reaches one's 75th birthday. It is a funny principle if it applies only if one does not take out the option of an alternatively secured income. It was interesting to hear the Financial Secretary mount the standard Government defence of the measure, not least because we have discovered that the open annuities provided in Gibraltar will not be allowed in the future. Perhaps the industry was not aware of that, so we have achieved something in this sitting. It is a point of principle for us that people should be able to pass on lump sums whether they have reached their 75th birthday or not, and for that reason I must press the amendment to a Division.

Question put, That the amendment be made:—

The Committee divided: Ayes 6, Noes 11.

Division number 6 Adults Abused in Childhood — Schedule 29 - Registered pension schemes: authorised lump sums — supplementary

Aye: 6 MPs

No: 11 MPs

Ayes: A-Z by last name

Nos: A-Z by last name

Question accordingly negatived.

Amendments made: No. 362, in

schedule 29, page 430, line 42, leave out 'and'.

No. 363, in

schedule 29, page 431, line 1, at end insert

'and

(f) it is not an excluded lump sum (see sub-paragraph (3A)).'.

No. 364, in

schedule 29, page 431, line 7, at end insert—

'(3A) A lump sum is an excluded lump sum if—

(a) the pension in connection with which the member becomes entitled to it is a scheme pension the rate of which is to reduce (or which is to cease to be payable) in accordance with paragraph 2(4)(c) of Schedule 28 when the member becomes entitled to state retirement pension, and

(b) the sole or main purpose of making provision for the pension to be such a pension was to increase the member's entitlement to a lump sum on which there is no liability to income tax.'.

No. 312, in

schedule 29, page 432, line 45, leave out

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

and insert 'member's lifetime allowance'.

No. 313, in

schedule 29, page 434, line 22, leave out

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

and insert 'member's lifetime allowance'.

No. 314, in

schedule 29, page 435, line 31, leave out

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

and insert 'member's lifetime allowance'.

No. 365, in

schedule 29, page 436, line 19, leave out sub-paragraph (2) and insert—

'(2) Where all or part of the member's lifetime allowance is available immediately before a lump sum is paid, sub-paragraph (2A) applies to the lump sum if—

(a) its amount exceeds the member's available lifetime allowance, and

(b) but for that fact, it would satisfy all the requirements of paragraph 1(1), 4(1), 7(1) or 10(1).

(2A) For the purposes of this Schedule, the whole of the lump sum (and not only so much of it as does not exceed the member's available lifetime allowance) is to be treated as paid when all or part of the member's lifetime allowance is available.

(2B) But sub-paragraph (2A) does not apply—

(a) in the case of a lump sum that would satisfy all the requirements of paragraph 1(1), to so much of it as would be prevented from being a pension commencement lump sum by paragraph 1(2), and

(b) in the case of a lump sum that would satisfy all the requirements of paragraph 10(1), to so much of it as would be prevented from being a winding-up lump sum by paragraph 10(2).'.

No. 366, in

schedule 29, page 436, line 25, leave out from 'description' to end of line 27.—[Ruth Kelly.]

Photo of Ruth Kelly Ruth Kelly Financial Secretary, HM Treasury 10:15 am, 15th June 2004

I beg to move amendment No. 315, in

schedule 29, page 437, line 24, after 'paid' insert

'in respect of the pension'.

Photo of Mr John McWilliam Mr John McWilliam Labour, Blaydon

With this it will be convenient to discuss Government amendment No. 316.

Photo of Ruth Kelly Ruth Kelly Financial Secretary, HM Treasury

The amendments give additional clarity to the definitions of two of the death benefit lump sums that may be paid by registered pension schemes: the pension protection lump sum and the annuity protection lump sum. The amount of such lump sums that may be paid out is restricted by any lump sums of the same nature that have previously been paid. The amendments simply add a few words to make it clear that that restriction takes into account only lump sums paid in respect of the same pension or annuity to which the deceased individual was entitled, and not to any other pension or annuity. The amendments provide clarity and certainty for schemes, and I commend them to the Committee.

Amendment agreed to.

Amendment made: No. 316, in

schedule 29, page 438, line 23, after 'paid' insert

'in respect of the pension or annuity'.—[Ruth Kelly.]

Schedule 29, as amended, agreed to.

Clause 159 ordered to stand part of the Bill.