Clause 254 - Lifetime allowance charge

Finance Bill – in a Public Bill Committee at 3:30 pm on 17th June 2004.

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Photo of George Osborne George Osborne Conservative, Tatton 3:30 pm, 17th June 2004

I beg to move amendment No. 419, in

clause 254, page 206, line 21, leave out 'and (b)' and insert 'or

(b) the scheme administrator reasonably believed that the liability would be met by another person, and in either case,

(c)'.

I supposed that you would kill me, Mr. McWilliam, if I moved the amendment formally.

Photo of Mr John McWilliam Mr John McWilliam Labour, Blaydon

Order. If the hon. Gentleman wants to move the amendment formally, he could always reply.

Photo of George Osborne George Osborne Conservative, Tatton

Clause 254 allows a scheme administrator to apply to the Inland Revenue to be

excused from a lifetime allowance charge on the ground that an administrator ''reasonably believed'' that there was no such liability. I shall speak narrowly to the amendment because I know that my hon. Friend the Member for Arundel and South Downs (Mr. Flight) wants to catch your eye, Mr. McWilliam, to talk about the stand part debate.

The amendment would simply add another ground upon which a scheme administrator could apply to the Inland Revenue when

''the scheme administrator reasonably believed that the liability would be met by another person''.

If someone takes several pensions from several schemes at the same time and goes over the lifetime allowance and the scheme administrator is told by that person that another scheme is dealing with it, it cannot be right for the scheme administrator to be penalised. I am not sure whether that situation is covered by the clause because the scheme administrator could not claim that they thought that there was no liability. They would have been aware that there was a liability, but thought that someone else was dealing with it.

The point is narrow and one would hope that the Inland Revenue would, in practice, exercise discretion, but I am not sure whether the legislation would allow it to exercise that discretion. Therefore, it might be useful for the Inland Revenue to take that on board.

Photo of Ruth Kelly Ruth Kelly Financial Secretary, HM Treasury

I shall try to respond purely on that point, given that the hon. Member for Arundel and South Downs wants to talk about the purpose behind the clause. It is quite difficult to discuss the amendment without discussing the purpose behind the clause, however. The question is whether it is reasonable for the Revenue to discharge the scheme's liability where the scheme has written an agreement that the member or other scheme will pay. We have to both protect the Exchequer and enforce the lifetime allowance charge where it is legally due, giving schemes a let out only in the very narrow circumstances that I have described.

Schemes have to accept that they are liable for the lifetime allowance charge. It would be unwise of a scheme to enter into an agreement with a member, for example. Such an agreement would not relieve the scheme of its tax obligations. It would be even more unwise for it to enter into an agreement with another scheme because another scheme would have no liability for a lifetime allowance charge arising in respect of a different scheme.

I do not agree that it is appropriate to provide the tax to be discharged to the detriment of the Exchequer simply because the scheme has entered into some understanding with someone that they would satisfy the scheme's liability. On that basis, I ask the hon. Gentleman to withdraw his amendment.

Photo of George Osborne George Osborne Conservative, Tatton

There is the potential for some injustice here, where a scheme administrator doing everything possible to discharge their obligations is misled by the member of the scheme and then gets clobbered by the Inland Revenue. However, one would hope that in practice the Inland Revenue will exercise a bit of discretion and, if not, in the event of an appeal to the commissioners, that it would see that

there were grounds for common sense. However, as my hon. Friend the Member for Arundel and South Downs wants to develop some of the broader points during the stand part debate, I shall not press the amendment to a Division. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Question proposed, That the clause stand part of the Bill.

Photo of Mr Howard Flight Mr Howard Flight Shadow Chief Secretary To the Treasury, Economic Affairs, Shadow Chief Secretary to the Treasury

The clause provides that the administrator will pay the charge where members of the scheme are over the lifetime limit. It strikes me that in principle and, to a lesser extent, in practice, the Government's proposals are somewhat flawed in that area because there is no obligation for the scheme to recoup what it has paid from the member either in straight money or through adjusting their pension.

A growing number of senior people in the public sector will be caught by the lifetime limit, such as justices, senior people in the judiciary and senior executives in local authorities, and I have even been surprised to discover that a number of doctors in my constituency have pensions that will already be over the lifetime limit. To put it bluntly, any part of the public sector could, if it so chooses, simply pass the bill on to the taxpayer. That would constitute a stealth situation where public sector pensions are increasingly subsidised by the taxpayer, while private sector pensions are increasingly hit by higher taxes.

Even within the private sector, to the extent that there are comfortably funded defined benefit schemes left that become better placed in the next few years, a situation could develop where the scheme foots the bill for senior staff who are generously pension provided. We want to hear what the Government have to say about that, but otherwise we may want to see whether an amendment can be tabled on Report that clearly obliges the pension scheme to recoup the excess from the member.

Photo of Rob Marris Rob Marris Labour, Wolverhampton South West 3:45 pm, 17th June 2004

Would not the trustees of the pension scheme be in breach of their fiduciary duties if they did not seek to recover that tax in the scenario outlined by the hon. Gentleman? There is already adequate protection.

Photo of Mr Howard Flight Mr Howard Flight Shadow Chief Secretary To the Treasury, Economic Affairs, Shadow Chief Secretary to the Treasury

I thank the hon. Gentleman for his intervention. He is the lawyer, not I, but I am not certain that he is necessarily correct, because the trustees could argue that they had no legal basis on which to recover the tax. There might be certain extant agreements—in local authority pension schemes, for example—where existing agreements with members would be breached.

I hope that the hon. Gentleman is right, but as I am advised that there is not an automatic and secure legal position in which the scheme administrator is obliged to recover the tax that they have paid out, I am interested to hear what the Government have to say. It is not good enough to say, ''We certainly think that that will happen in all cases.'' Will it happen in all cases and, if not, what are the cases in which it will not?

Photo of Ruth Kelly Ruth Kelly Financial Secretary, HM Treasury

We are straight into what happens to the lifetime allowance charge. The hon. Gentleman thinks that there should be a requirement for schemes to reduce members' benefits to fund the tax, arguing that in public sector schemes, for example, the taxpayer could end up footing the bill. In fact, he will be interested to know that the Inland Revenue pensions simplification team benefited from a review conducted by Watson Wyatt, benefits consultants, which asked schemes how they were likely to react in that situation. It says:

''Of the changes being considered, the overwhelming majority are looking at options which do not increase costs to the company with only a very small percentage willing partially to compensate executives for the increase in tax.''

In fact, over 95 per cent. of companies said that they would not consider compensating employees for any increased tax. It is perhaps not surprising that the overwhelming majority will reduce members' benefits to fund the tax.

I put it to the hon. Gentleman that, as part of the recruitment and retention benefits resulting from this change for higher earners, perhaps it is right that employers should have as much as freedom as possible over how and whether they choose to remunerate high earners in different ways. That could be one consequence of the simplification proposal that we introduce. If schemes choose to absorb some of the lifetime allowance charge, they will want to consider how to do so.

Photo of Mr Howard Flight Mr Howard Flight Shadow Chief Secretary To the Treasury, Economic Affairs, Shadow Chief Secretary to the Treasury

I would be grateful if the Financial Secretary could confirm that the Watson Wyatt survey covered only private sector pension schemes. I am particularly interested to know the position for public sector pension arrangements, because the taxpayer, not the company, would ultimately pick up that bill.

I appreciate the Financial Secretary's arguments in favour of flexibility, but she confirms the Government hope that the charge will be passed on at the bottom of the heap, citing surveys to demonstrate its likelihood. There is no certainty that it will be passed on. It would be absolutely wrong if, in the public sector, it was not passed on but levied on the taxpayer. If I recollect, it would mean that the Lord Chancellor, the Prime Minister and potentially quite a large number of highly paid people would escape the limits imposed by the new regime.

Photo of Ruth Kelly Ruth Kelly Financial Secretary, HM Treasury

I will deal with both points. First, on the private sector, I do not have a view about how firms arrange their recruitment and retention or form their executive packages. It is a decision best made by the firms themselves. They could either allow the individual member of a scheme to pay the lifetime allowance charge—they could decide under our new arrangements that they wanted to supplement that with an unfunded scheme that is not subject to pension tax privileges—or they could absorb some of the charge themselves. Clearly, the firms should make that decision when they design their recruitment and retention packages. It would not be right for me to tell them what to do.

However, the hon. Gentleman's point on the public sector is of real public interest. Let me put it on the record absolutely plainly that public sector schemes

will ensure that the individual meets any lifetime allowance charge. There will be no exceptions. The Government, as the employer, will not pay the charge for the individual. As the hon. Gentleman rightly pointed out, that would, in effect, constitute an increase in remuneration.

Photo of Ruth Kelly Ruth Kelly Financial Secretary, HM Treasury

It includes the other members to which the hon. Gentleman referred, and I believe that it also includes local government. If it does not, I shall write to him to correct that answer.

Question put and agreed to.

Clause 254 ordered to stand part of the Bill.

Clauses 255 to 258 ordered to stand part of the Bill.