Schedule 32 - Registered pension schemes: benefit

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

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

I intend to break this large group of amendments into four, taking first amendment No. 407, which would delete some of the rules in the schedule. I shall explain what those rules do and why they are necessary.

The situation catered for is where an individual starts to receive a scheme pension or a lifetime annuity before the minimum pension age has been reached. Such payments will not be authorised in the new regime, unless the benefits are taken early because of ill health, so any that are made when the individual is below minimum pension age will be treated as

unauthorised payments. All the payments made after the member reaches the minimum pension age will be authorised payments, however. We still need to cater for benefit crystallisation events in such circumstances. The schedule therefore provides that where an individual starts to receive a scheme pension or a lifetime annuity before reaching minimum pension age, a benefit crystallisation event will occur when the individual reaches that age.

Valuation rules are also provided. Where the early payment is of a scheme pension, the benefit crystallisation event that occurs on reaching minimum pension age is valued at 20 to 1, as applied to the first year's pension after reaching minimum pension age. The situation is slightly trickier where a lifetime annuity is involved, because the purchase price of the annuity is no longer current. Instead, the 20 to 1 factor is applied to the first year's annuity payments after minimum pension age has been reached. The amendment would delete those rules, but they are necessary to ensure that a benefit crystallisation event occurs in such circumstances and that it is appropriately valued.

Amendments Nos. 409 to 412 would change the rule in the schedule which allows an exemption from benefit crystallisation event 3 in clause 205. Benefit crystallisation event 3 applies where a scheme pension increases by more than the permitted margin, which is broadly the higher of indexation and 5 per cent., as the hon. Gentleman outlined. However, the benefit crystallisation event does not apply where there are excepted circumstances. The schedule sets out the excepted circumstances, which allow increases in scheme pensions in excess of the permitted margin not to be benefit crystallisation events where there are at least 50 pensioner members and the increase applies to all of them.

Amendment No. 409, which the hon. Gentleman tabled, would remove the requirement for the excepted circumstances to be available only where there are at least 50 members, presumably on the grounds of fairness. A small scheme will not have access to the excepted circumstances. However, we believe that the limit is appropriate to prevent opportunities for abuse. For example, without such a requirement, a small self-administered scheme with, say, just two controlling director members, would be able to circumvent the lifetime allowance charge by providing an artificially low pension, then in a later year increasing the pension by an enormous rate, to take it to the level at which it was always intended to be.

The hon. Gentleman asked about our consultation, which was set out in the document published in December 2003. Without the requirement for 50 members there would be a risk that large, uncommercial increases would be made purely for the purpose of avoiding the lifetime allowance charge. It is essential that that limit be in place to prevent such avoidance opportunities. We believe that 50 members is approximately the figure needed for that purpose.

Amendment No. 410 would remove the wording in the excepted circumstances rule that requires

''the increased rate to be applied to all . . . pensioner members''

and replace it with a requirement that the percentage increase in the rate applies to all pensioner members. That would narrow the scope of the excepted circumstances, because the provision in the Bill allows for flat-rate increases as well as for percentage increases. That allows greater flexibility. The amendment would remove that flexibility, limiting the excepted circumstances to percentage increases only.

Amendment No. 411 seeks to extend the excepted circumstances, so that the increased rate applies not only to all the scheme pensions paid under the pension scheme but to

''that part of all scheme pensions''

paid under the pension scheme. It is not clear what ''that part'' refers to in the drafting. I also do not see the need for such a provision.

Amendment No. 412 seeks to extend the availability of ''excepted circumstances''. It would provide for the excluded circumstances to be available when an increased rate is given to all the pensioner members, except those of a ''prescribed class''. The intention appears to be for regulations to list classes of pensioner members to whom the increased rate may be denied. I will not go into whether the hon. Gentleman is correct in using the word ''prescribed'' in such circumstances. We could have a long debate on terminology. We believe that it is technically deficient. I am sure that he will take my word for that.

More important, the amendment would allow individuals to escape a benefit crystallisation event in circumstances where not all the pensioner members were given the same increase. That contradicts the policy intention of the excepted circumstances rules.

I have some better news for the hon. Gentleman on amendments Nos. 413 and 414. As he explained, those amendments seek to extend the meaning of ''permitted margin'' as it applies to benefit crystallisation event 3 in clause 205. Benefit crystallisation event 3 is triggered when a scheme pension is increased by more than the permitted margin. The permitted margin is, broadly, the higher of 5 per cent. and indexation as applied to the rate at which the pension was previously paid.

Amendments Nos. 413 and 414 seek to extend that permitted margin, so that it takes into account not only the increase in the rate at which the pension was previously paid but the overall increase in the pension since it commenced. I have reflected on the amendments and I sympathise with their aim. Unfortunately, they are defective, as they would be inserted in the wrong place in schedule 32.

I am unable to accept the amendments. However, I assure the hon. Gentleman and members of the Committee that I will consider the point further and introduce a Government amendment if that is appropriate. I am delighted that he is pleased with his victory. However, I ask him not to press his amendment or the others that I dealt with.

That brings me to Government amendment No. 434. It clarifies the valuation rules in the area of the lifetime allowance. When an individual becomes

entitled to a scheme pension, the relevant valuation factor of 20 is applied to the first year's pension as a means of valuing the fund. The amendment simply clarifies that the first year's pension used in that calculation must not take into account any reduction in pension payments made by the scheme to fund tax payable on the lifetime allowance charge.

The amendment is another example of the clarity and certainty that have been provided by the rules in valuing individual's rights under such an arrangement. I commend it to the Committee.