(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) - Clause 207 - Individual's lifetime allowance and

Finance Bill – in a Public Bill Committee at 2:36 pm on 17th June 2004.

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Photo of George Osborne George Osborne Conservative, Tatton 2:36 pm, 17th June 2004

I beg to move amendment No. 416, in

clause 207, page 173, line 32, after 'year', insert

'increased by the percentage increase (if any) in national average earnings over that tax year'.

Photo of Mr John McWilliam Mr John McWilliam Labour, Blaydon

With this it will be convenient to discuss the following amendments:

No. 418, in

clause 217, page 183, line 4, after 'year', insert

'increased by the percentage increase (if any) in national average earnings over that tax year'.

No. 381, in

schedule 34, page 468, line 2, leave out 'retail prices index' and insert 'national average earnings'.

No. 385, in

schedule 34, page 471, line 5, leave out 'retail prices index' and insert 'national average earnings'.

Photo of George Osborne George Osborne Conservative, Tatton

I am sorry that the Government do not have much enthusiasm for getting their own business through, but we will crack on.

Photo of Mr John McWilliam Mr John McWilliam Labour, Blaydon

Order. I thought that the delay in our being quorate was due to the fact that Members from all parties had been working so hard, it being Treasury questions today.

Photo of George Osborne George Osborne Conservative, Tatton

The Financial Secretary was working harder than most. She announced a U-turn on stakeholder pension charges and conceded that the Government had made a submission to the parliamentary ombudsman on Equitable Life.

Photo of Mr John McWilliam Mr John McWilliam Labour, Blaydon

Order. I fail to see what that has to do with the amendments.

Photo of George Osborne George Osborne Conservative, Tatton

Not a lot, Mr. McWilliam.

I shall deal first with amendments Nos. 416 and 418, both of which attempt to place in the Bill a clear mechanism by which the value of the lifetime and annual allowances can be increased. The Government indicate in the explanatory notes by how much the allowances will increase in the first years after A-day. We had a debate before lunch about including those amounts in the Bill, but the Opposition were defeated in a Division. As a result, all the clause contains is a statement that the lifetime allowance for each year

''is specified by order made by the Treasury.''

The same is true for the annual allowance in clause 217.

The Bill does not go nearly as far as the Inland Revenue did in its consultation document or in the Budget note, which was, of course, introduced on Budget day. The Inland Revenue said in the note that the lifetime allowance would be reviewed quinquennially, but that statement is not repeated in the Bill or in the explanatory notes, although the Financial Secretary mentioned it in her speech this morning. Perhaps she can explain why it is not in the Bill, where it should be, or in the explanatory notes. Will there be just a single quinquennial review or will the process be ongoing; that is, will there be one every five years? How will the review be conducted? Will it be internal or external? Will the National Audit Office again be asked to conduct it? Will the review welcome submissions from outside bodies, perhaps even the Government Actuary's Department? Perhaps the Financial Secretary could answer those questions.

Could the Financial Secretary also explain—this comes to the thrust of the amendments—what happened to the commitment in paragraph 1.34 on page 9 of the December 2003 consultation document annually to increase the lifetime and annual allowances by the retail prices index? The document stated that

''the lifetime and annual allowances will be uprated annually by RPI. The lifetime allowance will be rounded up to the nearest £10,000 and the annual allowance up to the nearest £1,000.''

There is nothing about that in the Bill.

RPI can be found in other parts of the Bill as a mechanism for judging and increasing things. I will touch on that when I discuss the other two amendments in this group, but there is nothing in the clauses on the lifetime allowance or the annual allowance about operating them with prices. That seems a bit strange, not least because the Government had ignored their own suggestion in the consultation document. The upratings that they announced, for the lifetime allowance at least, vary for the first four years between about 2.9 and 6.6 per cent. I am not complaining about those generous increases; I am just pointing out that the only evidence the Treasury has given us about the future direction of the lifetime and annual allowances is that they will be increased by very much more than RPI.

What has happened to the December 2003 commitment to increase allowances by RPI? Should there not be a mechanism in the Bill to increase allowances not by prices, nor by the arbitrary whim of the Chancellor of the day, but by earnings? The Financial Secretary will say that the earnings cap has increased by RPI since 1989, but that does not necessarily make it right to continue the policy with the lifetime allowance and the annual allowance. After all, pensions are about earnings in retirement; pension contributions are often made as a percentage of earnings; and final salary schemes by definition increase the benefits paid out as someone's earnings increase. Therefore, logically, the lifetime allowance and the annual allowance should increase with earnings as well.

The Government seem to have accepted that logic. I tabled the amendment and then realised that the Government have accepted the logic because they

announced that in some of the first four or five years allowances will increase by more than earnings. However, because of the statement in the consultation document, there is a nervousness that if, God forbid, this Government were still in power after four or five years they would revert to increasing them by prices. The relative value of the lifetime allowance and the annual allowance would steadily erode, which would mean that the value of tax-privileged pension savings that people can accumulate would also steadily erode. That is no way to encourage saving.

The Financial Secretary or the Chancellor of the Exchequer, whoever it was who made the decision, seems to have accepted the logic of the amendments anyway, because in the first few years after A-day, the allowances will increase by considerably more than RPI in every year—in some years by almost treble RPI. That is good, but the principle is the important thing. There should be a mechanism in the Bill so that people can plan for their retirement with confidence, knowing how things will develop over a longer period, rather than each year hanging on the announcement of the Chancellor of the day about the uprating of the two allowances.

Photo of Mr John McWilliam Mr John McWilliam Labour, Blaydon

Order. Gentleman may remove jackets. For those who have already removed them, I will not insist on them putting them back on.

Photo of Rob Marris Rob Marris Labour, Wolverhampton South West

Amendment No. 418 is very useful because it shows that the Conservative party is concerned about the uprating mechanism for those who will contribute £215,000 to their pensions in one tax year. That is not a particularly important matter for this Committee.

Photo of George Osborne George Osborne Conservative, Tatton

Our concern to increase allowances by earnings rather than prices extends up and down the income scale, because we want to increase the basic state pension by earnings—something that the hon. Gentleman probably supports.

Photo of Mr John McWilliam Mr John McWilliam Labour, Blaydon

Order. Before the hon. Member for Wolverhampton, South-West (Rob Marris) responds, I point out that the debate is not about the basic state pension; it is about a very narrow amendment.

Photo of Rob Marris Rob Marris Labour, Wolverhampton South West 2:45 pm, 17th June 2004

Thank you for your guidance, Mr. McWilliam. I was going to make the same point, and the hon. Member for Tatton (Mr. Osborne) is mistaken about my views on the issue.

Photo of Ruth Kelly Ruth Kelly Financial Secretary, HM Treasury

I am delighted to welcome you back to the Chair this afternoon, Mr. McWilliam, and I look forward to another exciting debate.

Photo of Mr John McWilliam Mr John McWilliam Labour, Blaydon

Order. That has nothing to do with me; I am not allowed to take part.

Photo of Ruth Kelly Ruth Kelly Financial Secretary, HM Treasury

The hon. Member for Tatton raises the question of the quinquennial review and how we intend to index, or link, the lifetime allowance and the annual allowance. We are committed to a review system, which was made clear by the Chancellor, as well as myself, when he addressed the matter in the

Budget. We have said that the first review will take place in 2010. We expect regular reviews after that, but it is not for me in this Room today to tie the hands of future Administrations.

The quinquennial review was called for by the industry and by people who are interested in the future of the lifetime and annual allowances, and the point of it is to consider the level of allowance and allow it to be adjusted according to the prevailing circumstances of the time. The hon. Gentleman asked how it would be conducted. I imagine it will be conducted by Treasury Ministers, having taken advice from Inland Revenue and Treasury officials, and having consulted and listened to representations made by outside bodies.

Photo of Ruth Kelly Ruth Kelly Financial Secretary, HM Treasury

Well, clearly, actuarial factors would be taken into account, as well as factors relating to longevity rates and so forth. Factors such as the inflation rate and the earnings rate may be considered, as well as the number of people bumping their heads against the cap.

The hon. Gentleman asked what happened to the commitment made in December 2003. That was not a commitment, but a proposal that we link the cap to prices, which was put out for consultation. We consulted and we listened. People argued that they wanted certainty; we have provided certainty for the first five years by setting out the likely level of the lifetime and annual allowances in each of the next five years. That is the right approach; it is right to listen to representations.

The hon. Gentleman argues that in future the earnings link should be considered. That would provide for a mechanism that would be, by definition, less certain than the pre-announced arrangements in the Bill. As the hon. Gentleman is so attached to the idea of linking rates to earnings, I would urge him to consider the comments made by a former Member of this House, Norman Lamont, when he was Financial Secretary and he set the earnings cap. During a Standing Committee debate in 1989 he said:

''We gave careful thought to the method of indexation when we designed the pension changes. Despite arguments that have been put forward, we remain convinced that prices indexation is the most appropriate approach.''

He went on to say:

''First, it is used in other parts of the tax system—for example for personal allowances. Secondly, and more importantly, it will be indexed. I say that in response to comments that the cap will be eroded . . . The real value of the limit will be maintained. It is only by maintaining the real value that my right hon. Friend the Chancellor was able to propose other aspects of the package''.—[Official Report, Standing Committee G, 8 June 1989; c. 336.]

Clearly, my predecessor had his own views on the matter.

After consultation, we feel that certainty is the right approach. To those who recommend an earnings link I would make this point: how does one propose an earnings link to people who are maintaining the highest pension pots when so many other aspects of the tax system, including the basic state pension, are linked to prices? Having listened to representations, certainty was given overriding consideration in our

deliberations, which is why we have set out the numbers in the way we have. For those reasons, I suggest that the hon. Gentleman withdraw his amendment.

Photo of George Osborne George Osborne Conservative, Tatton

The Financial Secretary has obviously tried to learn a trick or two from her boss, the Chancellor of the Exchequer, who, as we saw at Treasury questions, deploys all sorts of election addresses and past quotes of people speaking against them. It is a pretty effective trick, although I often wonder what the Chancellor and all those on the Labour Benches were saying in 1989, when they had even more outrageous ideas than linking things to prices.

Photo of Mr John McWilliam Mr John McWilliam Labour, Blaydon

Order. Some of us had the benefit of being here to listen to them, but that does not arise out of the amendment. It is quite narrow, and I would be obliged if the hon. Member returned to it.

Photo of George Osborne George Osborne Conservative, Tatton

Thank you, Mr. McWilliam. Norman Lamont was saying those things in my gap year.

I said in my remarks that this Government and previous ones have increased the earnings cap with prices, but I made the point that that was not necessarily a justification for increasing either the lifetime or annual allowance by prices in future. I was interested to hear the Financial Secretary effectively disown the comment in the 2003 document by saying, ''That was only out for consultation; we have listened and we have changed our mind''. Actually, that was not a consultation document in the way that the 2002 document was; it is described as a response to the consultation. In the paragraph that I quoted from to begin with, it is made clear that the issue is not up for discussion. It says:

''Accordingly the lifetime and annual allowances will be uprated annually by RPI.''

I am glad the Government have moved away from that commitment, but they did so not as part of some consultation process but because they have changed their mind on a stated policy position. I welcome that, along with the generous increases in the lifetime and annual allowances that have been set out for the five years after 2006, but I have a question. Are we not to know until the quinquennial review in 2010 what the next set of five lifetime allowances will be? That leaves it late in the day. Whoever is Financial Secretary then—whether it is the hon. Lady, good as she is at her job, or maybe a Conservative—will, I hope, make the announcement about the lifetime allowance for 2011–12 before 2010, because people will need a bit more advance warning than that to make sensible decisions about their retirement.

The Financial Secretary's final argument, which was that the Government use prices to determine things such as the basic state pension, and it would be unfair to raise this figure by earnings, will not carry much weight on these Benches, because we are now in Committee to increase the basic state pension by earnings.

Photo of George Osborne George Osborne Conservative, Tatton

I am happy to give way, because I am very interested to hear the Liberal Democrats' current position on this policy.

Photo of David Laws David Laws Shadow Chief Secretary to the Treasury

I am grateful to the hon. Gentleman. I am not going to derail the Committee in the way that he is trying to, but following his comment about linking the tax system to earnings rather than prices, I wonder whether he would want to see the personal income tax allowance indexed to earnings rather than prices in future. Is that a commitment?

Photo of George Osborne George Osborne Conservative, Tatton

I did not say that I wanted to see the tax system linked to earnings. I was merely pointing out that the argument used by the Financial Secretary was about the basic state pension. She denies that, but the record will show that that was what she employed in her defence, and it was not a particularly strong card to play. However, we are pleased with the generous increases way above RPI, and indeed above earnings, for people who are, as I am constantly reminded very wealthy—it is good to see her looking after them. I beg leave to withdraw my amendment.

Amendment, by leave, withdrawn.

Amendment made: No. 324, in

clause 207, page 174, line 13, at end insert—

'(7) In this Part references (however expressed) to a person's lifetime allowance at any time are to what would be the person's lifetime allowance, calculated in accordance with this section, if a benefit crystallisation event occurred in relation to the person at that time.'.—[Ruth Kelly.]

Clause 207, as amended, ordered to stand part of the Bill.