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I do not want to detain the Committee for too long on the clause but, with the related clauses through to clause 183, which deal with the issue of tax relief for members' contributions, it raises some fairly important policy issues for the Government, and it would be useful to get the Financial Secretary's comments on some of them.
The background to the Bill and the Government's broader policy on pensions is that they are obviously concerned about whether the existing pension regime is encouraging people to save enough for their retirement. When the Department for Work and Pensions issued its Green Paper in 2002, it said that it thought that as many as 3 million people were not making adequate provision for retirement, and that there might be 5 million to 10 million people on top of that who were making too little provision and who should either be saving more or working longer.
As the Institute for Fiscal Studies pointed out in its paper on the Government's tax proposals, the main tool that the Government use to alter the financial returns of saving in a pension is tax relief, and there are no proposals to alter the rates at which relief is given. This set of clauses, which starts with clause 177, codifies at the existing rates the tax relief that members receive. My question is whether that is the right approach, or whether the Government should be not codifying, but amending their existing proposals.
The Financial Secretary may point out that she is trying to make the tax reliefs that we are dealing with in the clause more transparent and comprehensible by explaining to people that, if they are basic rate taxpayers, for every £1 that is contributed, they will receive back a higher amount thanks to the tax relief. However, as the Institute for Fiscal Studies pointed out in its commentary on the Government's tax proposals, given that there is presumably no legislation preventing private pension providers from promoting tax relief in that way, that seems unlikely to have a significant effect—positive or negative.
When we started debating the series of clauses that deal with tax relief on pensions, the Opposition acknowledged that the Government have put in place, and improved on, a tax regime for pensions that is extremely generous by European and developed-country standards. The Financial Secretary seemed to take some satisfaction from having that confirmed by the Opposition. However, it is significant that, although we have one of the most generous systems of tax relief on pensions in Europe, we also have one of the meanest systems of provision in terms of the basic state pension.
You are quite right, Sir John. I have already offered to send the hon. Gentleman an early copy of our pensions policy. He may even have a ticket of his own to come to the Liberal Democrat conference in September and hear our debate.
In other areas, the Government are seeking to deal with the relative unattractiveness of many of our tax relief savings vehicles by improving tax relief for people on lower incomes so that it is not just those who receive tax relief at the 40 per cent. rate who end up being the major beneficiaries of tax-relieved saving in pensions. They have been considering savings gateways and other mechanisms of giving match relief for people on low incomes. That would unlevel to some extent the current playing field for tax relief on pensions, where there seems to be a broad theme of tax neutrality so that if someone gets relieved on their contributions going into a pension they then pay tax on coming out.
The Minister might therefore say that it would be expensive to give additional tax reliefs for people on lower incomes and to codify that in the Bill as opposed to the existing regulations. However, there is a problem with that argument, which is that the existing system of tax reliefs is already arguably quite generous in relation to the issue of tax neutrality. We have debated the tax-free lump sum on which tax is not paid on the way in or the way out, and I will not return to it. The Government have acknowledged that they are making the tax system more generous in that regard.
A lot of people who get tax relief on their pensions are higher rate payers when they are saving and in work, so they get relieved at the 40 per cent. rate of tax. Many of them will go on to earn under the upper rate threshold in retirement, and they will therefore pay only the basic rate of tax, which is currently 22 per cent. They are getting relief at 40 per cent., and they are paying tax at 22 per cent. Arguably, in terms of the system of tax relief and the extension of the tax-free lump sum, we have very generous tax relief for saving, and compared with the countries of Europe, we have very good provision in terms of people's own private provision for retirement.
That is wonderful for that sector of the population who are able to save because they have the disposable income to do so, and who get the benefit of most of the tax relief. However, it does not do much for people on lower incomes who may not only not have the money to put into these schemes but receive tax relief at a lower rate. The argument is about whether the Government should merely be codifying, through clauses 177 to 183, the existing system of tax reliefs. Should they not be seeking to go further? When we compare the tax regimes that face people on different incomes, we discover that those on lower incomes are reliant on a very mean basic state pension, that they then receive means-tested benefits and after that they get very modest tax reliefs. The question is whether the
Government should be adjusting things in these areas to be more generous.
The hon. Gentleman has made his points. However, I would argue that this is not a debate about taxation policy—we are here to discuss the simplification of the tax regime applying to personal and occupational pensions.
The hon. Gentleman understands that it is the Government's policy to combat pensioner poverty, and I am not going to rehearse the arguments for having introduced the pension credits, the minimum income guarantee and the other measures that this Government have taken to combat pensioner poverty. He also understands other things—for example, that when the stakeholder pension was introduced we made it possible for an individual who has no earnings in any one tax year to contribute to a pension and to gain tax relief up to a value of £3,600. That system is being preserved under the new regime.
We are mindful of the hon. Gentleman's points. We must make tax relief as transparent and accessible to ordinary people as possible, which is why when Ron Sandler examined this area he suggested that we should look more broadly at matching schemes. We have done that through the savings gateway account, and in the pension simplification process we have looked at ways in which pension tax relief can be illustrated.
I am grateful to the Financial Secretary for making those comments, and I will focus on clause 177. She has codified the existing reliefs in clause 177 and the associated clauses, but she has also just acknowledged that with the savings gateway the Government are moving towards more generous tax relief on savings for people on low incomes. Does she rule out returning to this issue and adjusting in a more generous way the tax reliefs for people on lower incomes?
I am very interested to hear the hon. Gentleman argue that that is the direction in which we should be moving. Obviously, I shall take his representation into account when we consider such matters in future tax years. However, as he well understands, it would be totally inappropriate for me, as the Minister with responsibility for pension tax relief, to give any indication of where we might or might not go in the future.
The reforms will give substantial benefits to millions and millions of ordinary taxpayers and people who have no earnings in any particular year. For example, they give increased benefits to women who take career breaks. They will be able in any year before a career break to build up a sizeable pension fund in the full knowledge that they will be unable to make contributions of more than £3,600 in the years in which they are not in work. That will substantially help people on low incomes. I ask the hon. Gentleman
to accept that we have introduced a radical reform that will benefit up to 15 million ordinary pensioners.
Question put and agreed to.
Clause 177 ordered to stand part of the Bill.