Clause 224 - Defined benefits arrangements:

Finance Bill – in a Public Bill Committee at 3:15 pm on 17th June 2004.

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Photo of George Osborne George Osborne Conservative, Tatton 3:15 pm, 17th June 2004

I beg to move amendment No. 422, in

clause 224, page 186, line 17, leave out from '223(4)' to end of line 18.

Clauses 223 and 224 are about calculating the increase in the value of the defined benefit pension over the year for the purpose of testing it against the annual allowance. Clause 223 introduces the simple factor of 10 as a method of evaluation for active members.

Clause 224, to which my amendment applies, is about deferred members of defined benefit schemes. Increases in accrued rights up to the higher of either the rate of inflation or 5 per cent. do not count towards the annual allowance. This might be fair for deferred members, but it seems a bit unfair on active members, and the treatment is inequitable. Our amendment attempts to create a level playing field, as it would extend the adjustment to the pension at the beginning of the pension period by extending it to both active and deferred members: both could enjoy an uprating without it counting towards an annual allowance. It seems a bit strange that the Government are treating deferred members differently from active members. By the way, in the cash balance plans in clause 220, where the measurement method is very similar, there is no distinction between deferred and active members. If that is the case with the cash balance plans, why is it not the case with defined benefit plans?

Photo of Ruth Kelly Ruth Kelly Financial Secretary, HM Treasury 3:30 pm, 17th June 2004

I am afraid the hon. Gentleman has completely misunderstood the purpose of clause 224, which provides for an adjustment to be made to the pension input amount for defined benefit arrangements in cases where the member does not during the year actively accrue rights under the arrangement. The effect of that adjustment is to reduce the pension input amount by the greater of 5 per cent., the rate by which the retail prices index has increased over the year or the rate provided for in Inland Revenue regulations. The amendment seeks to extend the effect of this clause to cases where the member is actively accruing rights, but the hon. Gentleman fails to appreciate that clause 224 is there purely to ensure that members who do not accrue rights under an arrangement are not put to any trouble of calculating their pension input amounts for the purposes of the annual allowance.

I will give the Committee a couple of examples of how that might work in practice. Many deferred pensions are, under the rules of the scheme, increased by a flat rate of 5 per cent. a year. The clause ensures that deferred members of such schemes do not have to worry about the annual allowance charge. That will be the case even when the inflation rate is low, as it is and as we intend to keep it. Furthermore, many pension schemes are obliged to apply what is called statutory revaluation to the future pensions of deferred members. The regulations made under the clause—I have sent draft copies of them to the Committee—will ensure that where the statutory revaluation is greater than the RPI or 5 per cent., the amount of the statutory revaluation is again ignored for annual allowance purposes.

However, we want to capture the savings of active members of defined benefit schemes to calculate their pension input amount. There is no unfairness in that. The generous annual allowance, which we have just been debating, and the annual increase in that allowance will allow their pension savings to grow by a real amount without being subject to a tax charge.

The hon. Gentleman draws attention to the treatment of cash balance arrangements. They are dealt with under clause 220. However, clause 220 is there for an entirely different purpose. It allows members of cash balance arrangements to deduct whichever is higher, RPI indexation or 5 per cent., from their pension input amount. That provides broad parity of treatment with other money purchase arrangements, under which only the contributions and not the investment build-up are taken into account for annual allowance purposes.

Clause 224 is merely intended to help deferred members of schemes. We actively want to capture active members of such schemes. I therefore urge the hon. Gentleman to withdraw his amendment.

Photo of George Osborne George Osborne Conservative, Tatton

The Financial Secretary accuses me of misunderstanding the clause. In that case, the people in the pensions industry who proposed the amendment have also misunderstood the clause, which seems to prove that the Government have not made their case very clearly. She says that it is all about saving trouble

for deferred members, and actively capturing active members. However, surely the Government could have spared active members the trouble of going through the process if the increase had been within the 5 per cent. or RPI range. However, I will not press the matter to a vote. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 224 ordered to stand part of the Bill.

Clauses 225 to 227 ordered to stand part of the Bill.