Clause 162 - Benefits

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 at 10:30 am on 15th June 2004.

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Amendments made: No. 319, in

clause 162, page 143, line 38, leave out 'the' and insert 'a'.

No. 320, in

clause 162, page 143, line 38, at end insert­

'(3A) A registered pension scheme is to be treated as having made an unauthorised payment in respect of a member of the pension scheme if after the member's death an asset held for the purposes of the pension scheme is used to provide a benefit (other than a payment) to a person who, at the date of the member's death, was a member of the member's family or household.

(3B) The person who receives the benefit is to be treated as having received the unauthorised payment.

(3C) If the benefit is received by reason of an employment which is not an excluded employment, subsections (3A) and (3B) do not apply.

(3D) If the benefit is received by reason of an excluded employment, subsections (3A) and (3B) only apply if­

(a) paragraphs (a) and (b) of subsection (3) apply, and

(b) at the date of the member's death the member, or a member of the member's family or household, was a director of, and had a material interest in, a sponsoring employer.'.

No. 321, in

clause 162, page 143, line 39, leave out 'the unauthorised payment' and insert

'an unauthorised payment treated as having been made by this section'.­[Ruth Kelly.]

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

Photo of George Osborne George Osborne Conservative, Tatton

I do not intend to speak in many stand part debates, but this is a significant clause, and it is worth drawing the Committee's attention to it and asking the Financial Secretary a couple of questions.

The clause deals with pension benefits in kind, and ensures that they are subject to tax. The provisions are quite a departure, in that under current rules no, or very few, benefits in kind are allowed; but the clause opens up the possibility of the pension penthouse, the pension Porsche and the pension Picasso, and that is something that people might exploit, in the best sense of the word.

First, what will the tax charge be? As I read subsection (4), the charge will either be the same amount that would apply if we were talking about an employee benefit in kind, or

''may be prescribed by regulations made by the Board of Inland Revenue''.

That caused me to raise my eyebrows last night. What regulations does the Board of Inland Revenue have in mind? In what circumstances will pension benefits in kind be treated differently from other benefits in kind? Perhaps the Financial Secretary could explain why there is that flexibility in subsection (4), and why paragraph (a) is needed.

My second question is broader: what assessment has the Treasury made of the likely take-up of those benefits in kind? The provisions make a substantial change to the investment rules and mean, for example, that pensions can now be invested in residential property. Can we expect large numbers of people to use pensions to buy their homes, and then to pay rent to the pension scheme in order to avoid an unauthorised benefit in kind? Of course, if a scheme buys the home and one pays rent to the scheme, one also avoids inheritance tax.

Could the measure thus be used as a form of equity release? People might use their pension pots to buy their homes, and give themselves a large tax-free sum. For example, if one had a pension pot of £100,000, one could use it to buy a house worth £80,000, and suddenly get an £80,000 tax-free sum, provided that one then pays rent to the pension scheme. I make the point because the pension companies that advertise throughout the day on Sky and other channels are already proposing such equity release options. People may find themselves tempted into using their pension to invest in their home. That is not an idle threat: I have already been told of companies in Glasgow that are developing right-to-buy schemes for council properties and encouraging people to use their pension pots to exercise their right to buy. It is

important that we are aware of such schemes, and I would be interested to know whether the Treasury is aware of them, and if so, what view it takes. What consumer protection issues exist as a result of them? In short, I want to know whether the Treasury has thought the matter through.

Photo of Ruth Kelly Ruth Kelly Financial Secretary, HM Treasury

This is the second of three clauses providing for unauthorised payments to arise in specific circumstances. An unauthorised payment is made by a registered pension scheme if the payment does not accord with the Government's intention to provide generous up-front tax relief for pension saving.

Our intention is that tax-relieved funds are used to provide for an income for life in retirement. The legislation makes it clear what sort of payments a registered pension scheme may make in accordance with that purpose. Where payments are made outside those rules­unauthorised payments­there are tax consequences.

Clauses 161 to 163 set out three additional specific circumstances in which unauthorised payments are deemed to arise. Clause 162 deals with cases where the assets of the pension scheme are used to provide a benefit to the member, their family or their household.

The new regime will provide tax-favoured pension schemes with a much freer choice over what investments they make. I hope not to anticipate a debate, which I believe we will have later, about whether there should be greater restriction on the use of pension fund assets. We believe that schemes should, as far as possible, be left to decide in the light of market developments their own investment strategy and choice of investment assets. The new, simplified regime significantly reduces the current number of restrictions on the investments that can be held by pension schemes.

In the new, simplified regime, a registered pension scheme may invest in an asset that may be used to provide a benefit to a member, their family or household. However, if a benefit is provided in that way, clause 162 deems an unauthorised payment from the scheme to have arisen, and that will attract an income tax charge. The clause provides for the amount of an unauthorised payment of this type to be valued for tax purposes in the same way as amounts under the existing benefits-in-kind tax legislation, which applies where an employee obtains a non-monetary benefit from their employer. It is an integral part of the more flexible approach to investments in the new, simplified regime.

The hon. Gentleman called it a Picasso clause and tried to understand the rationale behind schemes investing in works of art or in other assets such as yachts or houses. There may be sound reasons why pension schemes invest in a variety of assets and diversify their investment portfolio. It is a judgment for the scheme trustees or managers to make themselves, bearing in mind the requirement to act in the best interests of the beneficiaries of the scheme and provide pension benefits for members.

In the current regime, only certain types of scheme have restrictions placed on the type of asset in which

they can invest. A small scheme is not allowed to purchase a work of art, whereas larger schemes are. In the new regime, we want to reduce complexity by applying the same criteria to all registered schemes. That will give schemes the same opportunity to take advantage of potential growth in a wider range of assets.

I do not accept that suddenly to start investing in the housing market will prove a particularly attractive option for people who are in small, self-administered schemes. The motivation is not to increase incentives for people to invest in particular forms of equity investment, as the hon. Gentleman said. There are buy-to-let investments and others have mentioned holiday homes in hot spots and different parts of the country.

Most pension funds, covering 14 million active members, are free to invest in residential property, and many of them do. The relaxation of the rules covers only those who have self-invested personal pensions and those with small, self-administered schemes. They are specialised products typically taken out only by very wealthy individuals and held by about 200,000 people, compared with the 15 million people who contribute to pensions overall.

There are already certain restrictions that make it much less attractive than one might initially think for people holding small self-administered pensions and self-invested personal pensions to invest in property. First, a tax charge will be levied on personal or non-commercial use of the property. For example, if it is a holiday home in Wales or Cornwall, a person using it for their personal use will have to pay a tax charge. Secondly, if they rent out the house on a buy-to-let basis they will be required to put all the rental income secured from the property into the pension fund, which may be unsuitable for people who need the money to fund repaying a mortgage on the property. Thirdly, pension schemes will be allowed to borrow only up to 50 per cent. of the scheme's assets to finance the purchase of a property, so anyone who wants to take advantage of this would have to have 50 per cent. of the assets in cash to put into that property, which would rule out a lot of people in the categories to which the hon. Gentleman referred. Lastly­and this is a huge disincentive­the property will be owned by the pension fund rather than the individual, and in most cases it will need to be sold for income in retirement, and it will definitely need to be sold at the age of 75 in order to buy an annuity.

Therefore, the case that has been raised is not likely to be attractive to many people, although there may be some individuals for whom it is an attractive investment to secure income in retirement­which is, of course, the intended purpose of our giving tax relief in the first place.

Photo of George Osborne George Osborne Conservative, Tatton 10:45 am, 15th June 2004

I mentioned the Picasso and the house in Cornwall­or wherever­but my alarm bells started ringing when I heard that a company in Glasgow was using this to allow people to exercise the

right to buy council properties. All the disadvantages that the Financial Secretary has set out merely reinforce my concern that people may be led down this route. The flexibility of the pensions regime allows people to transfer out of pensions such as company pensions into specially designed self-invested pension schemes. If it is the case that the market is already coming up with such schemes, I suggest that she at least investigates that and takes a view on what is actually happening, because whatever we debate in this Committee it seems that out in the real world other things are afoot.

Photo of Ruth Kelly Ruth Kelly Financial Secretary, HM Treasury

When our initial proposals were announced, there was a little flurry of press interest about the possible consequences­and opportunities, for some people­with regard to people buying their own home under the right to buy or buying a second home or holiday home. I think that almost all of that has now evaporated as people have come to realise the disincentives that are built into the system.

Tax relief is provided for a purpose: to allow people to secure their income in retirement. I do not think that huge numbers of people will suddenly want to exercise the right to buy in this way when they are allowed to borrow only up to 50 per cent. of the value of the property, when they will be taxed if they make personal use of the property, and when they will have to sell the property by the age of 75 at least, if not before then, to secure an income in retirement.

I do not know of the particular scheme that the hon. Gentleman mentioned and whether it is still expecting to continue to promote that offer. I would be very surprised if that were possible. Indeed, I would ask whether the company would be mis-selling to that particular category of people. It is not for me to stand here and make judgment. It is more for me to say that the principle behind our tax regime is not to use the tax system to distort investment decisions that are rightly made by the members or trustees of a scheme, and that tax relief should be used to secure an income in retirement.

There may be further prudential rules and considerations that mean that others, including the Financial Services Authority or the pension protection board, may well take an interest in these areas. They may well have a view on some of these issues.

I stand here as the Minister with responsibility for the taxation of pension funds. To a large degree, we have anticipated later debates on whether the tax system should be used to direct particular investment decisions or whether that task should fall to others. However, I hope that I have made my case clear on this point.

Clause 162, as amended, ordered to stand part of the Bill.