With this it will be convenient to discuss the following:
Amendment No. 405, in
clause 205, page 172, line 12, column 1, leave out
'The individual having become so entitled, becoming entitled to payment of the scheme pension, otherwise than in excepted circumstances, at an annual rate which exceeds the rate at which it was last paid by more than the permitted margin'
'The annual rate of a scheme pension which has commenced increasing, other than in prescribed circumstances, to an annual rate which exceeds the annual rate at which it was last paid by more than the permitted margin.'.
Amendment No. 404, in
clause 205, page 172, line 20, column 1, leave out
'The individual becoming entitled to a lifetime annuity purchased under a money purchase arrangement under any of the relevant pension schemes'
'Payment to the individual commencing of a lifetime annuity purchased under a money purchase arrangement under any of the relevant pension schemes.'.
Amendment No. 408, in
schedule 32, page 451, line 27, leave out
'the individual becomes entitled to it'
'payment to the individual commences.
Government amendment No. 377.
We are now coming to the part of the Bill that is about the lifetime allowance. Clause 205 deals in particular with benefit crystallisation events, which are not, by the way, about chemistry sets but about testing someone's pension pot against their lifetime allowance to see whether they are liable for the lifetime allowance charge. The table on page 172 sets out the range of different benefit crystallisation events. For example, receiving a pension or lifetime annuity, or turning 75. It is a source of dismay to the official Opposition that that remains in the Bill, but there it is.
Events 2, 3 and 4—receiving a pension, receiving a lifetime annuity or, in the best way that I can put it, receiving a particularly generous pension—are expressed as the individual ''becoming entitled to'' whatever it happens to be, such as a scheme pension. In other words, it is not the act of receiving payment but the act of becoming entitled to payment that triggers the benefit crystallisation event. We are not sure that that is the right criterion, which is why we tabled the amendments. Each of them in a different way seeks to achieve the objective that benefit crystallisation should occur only when payments of a pension or a lifetime annuity are made.
For example, amendment No. 403—this also applies to amendments Nos. 404 and 405—applies to the act of becoming entitled to receive a scheme pension. Without our proposed change, a member may have an actual right to draw a pension—indeed, the pension may be in a scheme in which no consent is required for payment at a particular age—but the person who is entitled to the pension may not wish to draw it. Under the clause, the benefit crystallisation takes place regardless.
The Financial Secretary may say that clause 155(3) on pension rules defines entitlement to a pension as including acquiring a right to receive one, but it can be amended on Report if the Government accept these amendments. Surely the point is that people should be judged on when they actually start to receive something, not when they become entitled to receive it. For example, someone may not wish to receive a fairly trivial pension—say, a 50p a month pension. They do not wish to trigger a benefit crystallisation event or take the pension. That is the point that we are trying to get across.
May I give an illustration? Say these rules had been in place in 1998, and someone had been entitled to take a pension. Their pension pot may have been well over the limit, but by 2003 it may have been down by 40 per cent. as a result of falling markets. They might have had a tax bill and yet they were nowhere near the limit when they took the pension.
As always, my hon. Friend brings his experience to the Committee and makes a telling point. It is just common sense that benefit crystallisation should be when one starts to receive a scheme pension or lifetime annuity. Our amendments are designed to achieve that.
The hon. Gentlemen seem to have misunderstood the Bill. The concept of entitlement is clearly defined. It is consistent and it recurs throughout the tax simplification legislation. A benefit crystallisation event is triggered on the individual becoming entitled to a certain benefit. Entitlement has a clear meaning in the legislation, as set out in clause 155. The legislation uses ''entitled'' to mean the point at which an individual's rights to receive benefits under a pension scheme cease to be prospective and become actual.
I think that is the point that the hon. Member for Tatton is making. I contend that it is one that is already made in the Bill, and that his amendments are unnecessary.
It is great if my amendments are unnecessary, but that is not how I read the legislation. As I read it, benefit crystallisation is not triggered by actual payment but by entitlement. The Financial Secretary shakes her head, but line 9 of page 172 says:
''The individual becoming entitled to a scheme pension under any of the relevant pension schemes''.
If the definition of ''entitled'' means actually receiving payments, that is good news and we have achieved the objective of clarifying the legislation. We certainly did not read it that way, nor indeed did others who know even more than we do about the issue.
Given the Financial Secretary's assurances, I beg to ask leave to withdraw the amendment.
Amendment, by leave, withdrawn.
I beg to move amendment No. 406, in
clause 205, page 172, line 20, column 2, leave out
'The aggregate of the amount of such of the sums, and the market value of such of the assets, representing the individual's rights under the arrangement as are applied to purchase the lifetime annuity'
and insert 'RVF x P'.
There was a Government amendment tagged on to the last group, but it did not receive the parliamentary scrutiny that it deserves. One has to trust the Inland Revenue that it was not very important and trust that the Clerk would have put it as a separate item for discussion if it had been significant.
Amendment No. 406 recalls an earlier argument that we were having about the unlevel playing field in the evaluation of DB and DC schemes—to use the shorthand. Under benefit crystallisation event 4, where the individual becomes
''entitled to a lifetime annuity purchased under a money purchase arrangement'',
and the amount crystallised is defined as the amount of money or assets in the pot.
Our argument is stronger than it was in the earlier debate, which concerned the charge that might be levelled in circumstances where the Inland Revenue needed to value uncrystallised pots. In amendment No. 406 we are talking about benefit crystallisation. It would change the way that the amount is valued from simply considering the amount of money in the pot to using a new formula, which is RVF x P. We were not entirely original in coming up with that formula: it is used for defined benefit schemes. RVF is the relevant valuation factor, which is defined in clause 263 as 20, and P is the amount of pension payable to an individual over the next 12 months. In other words, we seek to achieve exactly the same method for testing a defined contribution pension against the lifetime allowance as currently applies for a defined benefit pension. That would mean that holders of defined contribution pensions would be treated fairly and could enjoy the same pension.
I return to the point that I made earlier. If we take a step back from the legislation, we can see what its end effect will be: a person with a defined benefit pension will be entitled to a pension of around £75,000 and someone with a money purchase pension will be entitled to a pension of only £55,000. Whatever arguments are deployed, those are the basic facts. The defined benefit schemes in the private sector—not in the public sector, not in the case of the MPs' scheme—are closing and more and more people are being moved to defined contribution schemes. It is possible to envisage the virtual elimination of the defined benefit scheme over a period of many years—certainly in the private sector and possibly even in the public sector at some point.
The legislation is constructive and I understand why the Government want to simplify the calculation of the lifetime allowance for people with defined benefit schemes. I applaud them for coming up with the 20 to 1 factor and for changing their view during the consultation process and listening to the Association of Consulting Actuaries and others. However, the result has been the creation of an unlevel playing field. Although the Financial Secretary will tell me that annuity rates may change over time, as far as I can see at the moment, people with defined contribution
schemes will be limited in the amount of pension that they will be entitled to in comparison with people with defined benefit schemes.
Of course, we are talking about people who have very large pension pots—the upper end of the market—but the issue is important because it sends a signal to the rest of the market about what the Government value and what they do not, and whether they are treating both kinds of arrangement fairly. There is a widespread feeling, which we are all aware of, that people in the public sector feather their own nest while people in the private sector have had enormous problems with their pension schemes over the past few years.
In a small but significant way, this issue contributes to that argument and I can foresee us all receiving letters in the next few years from pensions experts—there are a surprising number of them—in our constituencies, saying, ''Here is yet another example of you politicians having one rule for yourselves and civil servants, and another rule for others.'' This is a good opportunity for the Government to send a signal that that is not the case.
We had a protracted debate this morning in which I set out the case relating to a single valuation factor. I made the point that the arrangement was simple, that it had been called for by the actuary profession and others, that we had responded to consultation and that it was generous. I said that it would not make sense to apply a single valuation factor to all types of pension, given that there is income draw-down, as well as defined benefit and defined contribution arrangements. I argued that this arrangement was by far the most sensible way forward. I do not intend to rehearse all those arguments yet again.
The amendment would change the way in which lifetime annuities are valued at benefit crystallisation events so that, instead of the purchase price of an annuity, the factor of 20, as applied to the first year's annuity payments, would apply. That is apparently to equalise the treatment of defined benefit and defined contribution schemes, although I would point out that people in income draw-down will necessarily have their pensions valued in a completely different way.
The hon. Gentleman misses the fact, however, that that would disadvantage the vast majority of taxpayers. First, it would create uncertainty as to the amount that was crystallised, as the level of annuity payments could not be known in advance—depending, as they do, on fluctuating annuity rates. Secondly, it would result in a much more complex calculation. Indeed, some might call it an absurd calculation that would involve taking a capital amount, turning it into an annual pension, applying one factor and then, using a slightly different factor, turning it back to a slightly different notional capital amount. That is neither simple nor sensible.
If people feel that the DB system is more generous, and that there is an advantage to being in a DB scheme rather than a DC one, as I made clear at length this morning, there is no reason for them not to transfer to a scheme pension set up by an insurance company,
should one decide to market such a vehicle to the non-corporate market. I am sure that if such an advantage exists to the extent that the hon. Gentleman seems to suggest, such a vehicle will be invented and promoted.
There is no need for the amendment. There is no unfair advantage for members of DB schemes rather than DC schemes. People can take advantage of whichever they find more attractive. I therefore urge the hon. Gentleman to reconsider the amendment.
I do not believe that the Minister's responses were entirely realistic or correct. It is relatively easy to convert from a defined benefit scheme to a defined contribution scheme, whereas to convert a pot of money saved in a defined contribution scheme into a defined benefit pension is considerably more difficult.
The materiality of the difference in treatment, as things stand and as my hon. Friend pointed out, is substantial. Those in a DB scheme effectively have a limit that is some 50 per cent. higher than those in a DC scheme. That is grossly unfair and unacceptable, particularly in the context that my hon. Friend referred to, namely that those in the private sector are—if hon. Members will pardon my language—screwed by comparison with those with generous public sector DB pensions. The provisions here are not complex. They are extremely easy, as is the arithmetic. One simply says—it applies equally whether people draw down or buy an annuity—''Here's the crystallisation date and here's the pot of money. The Government actuary can tell you precisely what annuity that pot of money would buy, so multiply it by 20 and Bob's your uncle.'' There is nothing very difficult about that, and the calculation is then on exactly the same basis as that for the DB scheme.
There is, in the background, the implication of what provision there is for inflation and whether there is a spouse's benefit. That is part of the reason, as my hon. Friend pointed out, for the size of the gap. It is disingenuous to say that it is nice and simple and actuaries are happy with it. I can assure the Minister that out there in the real world, the majority of people in the private sector with defined contribution pensions are distinctly unhappy at being thus disadvantaged. If the Government do not think that our amendment deals with all aspects of the matter, it behoves them to think a bit more about it.
We are at severe risk of rerunning the debate that we had this morning. As I pointed out this morning, the Association of Consulting Actuaries, from which we took advice, recommended the single factor. Not only did it recommend the single valuation factor but, after considerable research, supported by evidence, it suggested that 20 to 1 was the most appropriate valuation figure, provided that there was an appreciable margin in the lifetime allowance, which there is.
We had the option of trying to reflect market conditions, which the Faculty of Actuaries and the Institute of Actuaries said would not be appropriate. To return to the point made by the hon. Member for
Arundel and South Downs about the difficulty of converting from a DC to a DB scheme, under the new regime, there is no reason why that should not become a simple process. The insurance company merely says to an individual, ''I will pay you such and such an income per year in return for X pounds of your capital.'' It is an extremely simple process. If such opportunities exist, I am absolutely confident that the market will step in to deliver that product, but it is a question for them, not me.
If the insurance companies provide the arrangements that the Financial Secretary describes, she seems to suggest that, in principle, they will determine the value of the pension for the purposes of the limit and then they will switch it back to a defined contribution arrangement. It would be better to deal with the arrangements up front. Until the pension is paid out, if it is as easy as she describes, there is nothing stopping an insurance company switching one way, then switching the other.
I will not rehearse the arguments advanced by my hon. Friend, but I agree with him. The Financial Secretary is trying to make our amendments seem more complicated than they are. It reflects a general strain of thinking that, when it comes to defined benefit schemes, the limit is how much pension one gets, but when it comes to defined contribution schemes, the limit is how much money one has in the pot.
They are two different ways of judging how much pension one can have. That seems unfair. The Financial Secretary is stuck in a mindset that judges how much people have vis-à-vis a lifetime allowance, rather than looking at how much people get as a pension. That is what most people will see at the end of the process, and they will not be too concerned with the details. Given that we are on stronger ground than we were with our previous amendments—even if it is a re-run of a previous argument—and given that I am confident of victory, I will press the amendment to a Division.
Question put, That the amendment be made:—
The Committee divided: Ayes 5, Noes 10.