(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 269 - Transitionals and savings

Part of Finance Bill – in a Public Bill Committee at 9:30 am on 22nd June 2004.

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Photo of Ruth Kelly Ruth Kelly Financial Secretary, HM Treasury 9:30 am, 22nd June 2004

It is a pleasure to be here under your chairmanship yet again, Sir John.

As I said in opening the debate, we want to ensure that the move from the old pension regime to the new, simplified regime is as smooth as possible. I reject the charge that the hon. Member for Arundel and South Downs (Mr. Flight) made that we are somehow introducing retrospective taxation. He—or perhaps he and a few of his colleagues—seem to be the only people suggesting that that is how the new regime operates. We want to ensure that the transitional arrangements provide appropriate protection for existing pension rights, while being as straightforward as possible to understand and administer, and that they carry forward as little complexity as possible from the existing regimes.

I do not want to anticipate the debate that we are likely to have on the sixth group of amendments to the schedule, which suggest that we should carry forward all the previous regimes into the new, simplified regime.

I believe that the schedule, as amended, meets our objectives fully. It is in four parts. The first part will allow approved schemes to move into the new regime without the need to register doing so with the Inland Revenue. Schemes not intending to become registered schemes may give the Inland Revenue notice of that intention before 6 April 2006. There will be a tax charge that applies to such schemes that is equivalent to the existing withdrawal of approval charge on occupational pension schemes.

The second part of the schedule provides protection for those rights accrued before 6 April 2006 that, when

brought into payment, are likely to be worth more than the lifetime allowance.

Part 3 of the schedule covers individuals who have registered for enhanced or primary protection who also have lump sum rights of more than £375,000 that they can protect. In addition, there will be protection for lump sum rights accrued before 6 April 2006 that, although not in excess of £375,000, breach the limit of 25 per cent. of the total fund. Schemes will be able to make tax-free lump sums that exceed the new limit of 25 per cent. of the total fund if those rights were accrued before 6 April 2006.

Simplification also seeks to introduce a single minimum pension age of 55 for all by 2010. We debated that in the previous sitting. Without some extra protection, that could create some hard cases. In the current regime, a number of occupations have their own minimum pension age, ranging from 35 to 50. It is not possible to get from here to there in a single step. Members of schemes who already have rights to early pensions will, subject to meeting some conditions, receive transitional protection.

In general, members with the right to take pension at an age younger than 50 will continue to be able to do so, but in recognition of that early retirement, the value of the pension will be assessed against a reduced lifetime allowance. The lifetime allowance will be reduced by 2.5 per cent. for each year in advance of age 55 that the pension is taken.

Part 4 of the schedule covers a range of miscellaneous transitional issues, for example those schemes approved before 1970. I believe that those are sometimes referred to as old code schemes. They will be able to wind up before the end of 2006–07 and pay out all the benefits as a lump sum. Of the total benefits, 25 per cent. will be tax-free and the remainder paid as a lump sum taxed at the member's marginal rate of tax. That will ease the transition to the new regime for those insurance companies with old code schemes on their books, most of which have only small pension funds.

We are also protecting the rights of occupational schemes to pay the balance of five years' pension payments on the death of a member, even if that death occurs after the age of 75.

The clause allows the Treasury to make regulations on transitional issues. As the industry focuses on the detail of moving to the new regime, other difficult issues may arise. That is not surprising, given the complexity of the current rules and regulations. There will be further discussions between the Government and the industry about the exact workings of the transition. I do not accept, however, that the transitional rules are overly complex; they merely reflect the rules of the current pension regime. Those powers will enable us to respond flexibly.

We will discuss the other points raised by the hon. Gentleman when we debate the amendments that he has tabled to the schedule. I commend the clause to the Committee.