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With this it will be convenient to discuss the following amendments: No. 23, in page 6, line 15, after ‘of’, insert ‘accredited’.
No. 25, in page 6, line 28, at end insert—
(a)a grandson or granddaughter of the account investor, or
(b)a person in respect of whom the account investor’s child had parental responsibility when that person reached the age of 16;’.
The amendments are technical and designed mainly to extend the purpose of this part of the Bill. Clause 5(6) specifies three or four different ways in which drawdown can take place early from a SaRA. Subsection (6)(b) specifies that an account holder can allow drawdown to provide financial assistance to a child
“in making his first house purchase for his occupation as his principal residence”.
Under amendments Nos. 24 and 25, the provision would be extended to include grandchildren, the purpose clearly being, first, that the provision was still within the family and, secondly, because it would be more likely that grandparents will have amassed a sufficiently large pot of funds in their SaRA to afford to help out another family member, whereas those at an earlier stage of life—perhaps in their 30s and 40s—might find that a little hard.
Amendment No. 23 would amend subsection (6)(c), which is designed to allow drawdown from a SaRA when someone is about to undertake a course of higher or further education. It would add “accredited” because a number of courses offered by further education colleges are not fully accredited. Many are commonly known as leisure and pleasure courses.
It might not be appropriate to allow a drawdown from a retirement fund for a course on something comparatively simple such as flower arranging; one should try to arrange for something that carries a formal qualification. The amendment would ensure that it is done for sober and serious purposes rather than for less serious ones.
I am extremely grateful to my hon. Friend for moving the amendment. I indicated on Second Reading that the drawdown examples given in the Bill could be added to or subtracted from. First, there is the basic principle that a drawdown facility would encourage younger savers, particularly those in their 20s and 30s, who will not want to lock up funds for 30 or 40 years; by investing in such an account they would not cut off access to those funds if they were needed to cope with some of the fundamental decisions that might affect them and their families.
The proposal is based on a scheme that operates in Canada; it covers the same two categories. I have said that if the Committee or the House wishes to broaden the opportunities for drawdown, I would have no objection in principle. I would be happy to acquiesce in what my hon. Friend proposes.
Subsection (6) proposes three quite different purposes for which drawdown would be permitted. The first and third of them are interesting. The first is the purpose of
“providing financial assistance to the account investor in making his first house purchase”.
The Government are committed to extending the extent of home ownership. I can also see a case for the third, particularly with the addition of the word “accredited” as suggested by the hon. Member for Weston-super-Mare (John Penrose). However, the second purpose sits rather oddly—the purpose of assisting a child to make
“the child’s first house purchase for his occupation as his principal residence.”
We need to be clear in our minds about the purpose of the substantial tax advantages that would be conferred on people saving for a pension. Why are those substantial tax benefits provided? It would be difficult to argue plausibly that it was right for the generous tax advantages of pension saving to be extended to providing access to funds to a child, let alone a grandchild, to buy a first house. Indeed, if we were to extend them to grandchildren, why not other people?
I am interested in purposes (a) and (c), but purpose (b) is much harder to justify, especially if it is to be amended as suggested by the hon. Gentleman.
It is my understanding of the clause that if money is drawn down from a SaRA but is not repaid within a certain period—the time specified in the Bill—the tax advantages would be lost. If money that is drawn down for a child or grandchild to assist them in buying a house is not repaid, the tax advantages would vanish, and the Minister’s point becomes less important.
It remains very important, because that framework would encourage people to save for retirement. That is the purpose of the vehicle; it has extra flexibility to encourage people to save. However, the purposes need to be tightly defined. I presume that the reason for the three purposes is that the Government already use the tax system to encourage people to save for such purposes. Although it is true that the tax benefits would be lost if the loan was not repaid in a particular time, it is still a tax advantage saving vehicle for these purposes. I suggest that it is very difficult to argue that the tax advantage character of that vehicle should be available for the purpose in paragraph (b) unamended, let alone amended.
Amendments made: No. 23, in page 6, line 15, after ‘of’, insert ‘accredited’.
No. 25, in page 6, line 28, at end insert—
(a)a grandson or granddaughter of the account investor, or
(b)a person in respect of whom the account investor’s child had parental responsibility when that person reached the age of 16;’.—[John Penrose.]
As we have discussed, clause 5 deals with the question of drawdown. It provides that cash up to a specified maximum amount may be withdrawn before retirement for limited specified purposes. There are, however, two main restrictions on the amount that may be withdrawn.
First, a maximum of 60 per cent. of the value of an account at the time of drawdown may be withdrawn. That is designed to prevent funds gained through tax relief from being withdrawn.
Secondly, a maximum of £40,000 may be withdrawn. That amount was chosen to allow sufficient funds to be withdrawn to cover a house deposit or a long-term course of education, but no more. We have considered the sum that would be required, given house prices in various parts of the United Kingdom and the amount would meet that particular need.
Subsection (4) allows for the repayment to be made within a specified time, which it is anticipated should be no later than retirement. It does, however, make provision that that repayment need not be made for four years to allow for any withdrawal that was due to the provisions on education.
Subsection (5) allows for tax relief to be withdrawn from the fund, equivalent to the tax relief given on the money not repaid after drawdown. The particular purposes for which it can be drawn down are either assistance to the investor in making a property purchase that will be his or her principal residence, to allow the account investor to provide financial assistance to his or her child’s first property purchase, which, in the light of the amendment tabled by my hon. Friend the Member for Weston-super-Mare, also applies to a grandchild, or to fund a prescribed apprenticeship or further or higher education course at a publicly funded institution.
I believe that the proposals work very well in north America and are seen to be a very attractive and successful way of encouraging new funds to be made available in saving schemes. They do not cost the Exchequer anything, because the tax relief is withdrawn if repayment is not made. There is therefore no loss to the Revenue, but people, particularly in their younger years, have every incentive to consider contributing towards a scheme of this sort, and I commend it to the Committee.
I express the Official Opposition’s support for the provision. Obviously in an ideal world, people would do the traditional thing of locking away their pensions contributions for 40 years, which would be great. We know, however, that savings in this country have halved since 1997 and that many young people are turned off the idea of locking away their contributions. As my right hon. and learned Friend said, there is ample evidence from north America, witnessed particularly by the success of the 401K schemes, that a limited series of drawdowns can be permitted within very tightly defined constraints.
I am the first to say that there is scope for legitimate debate about the way in which such drawdowns would work and the categories that apply. I am only sad that the Government have not chosen to engage in that debate, but are seeking yet again to scrap the whole clause.
The Official Opposition broadly support the contents of the clause, which we believe would do an enormous amount to encourage particularly younger workers to get back into the savings habit for their retirement.
I welcome engagement in the debate. The evidence from the US on this issue is interesting. I wonder, though, whether the hon. Gentleman has seen the research from the ABI on 401Ks. In the US, 401Ks allow decumulation at the end of every period of employment. The ABI concludes:
“The fact that only a fifth of those in the USA who opt to unlock their pension fund on changing jobs plan to roll their pension savings into a new pension suggests that there are real risks in abandoning the UK’s approach of preventing decumulation until 50 years of age”.
The ABI makes an important point that must be weighed in the debate.
It is true, of course, that money withdrawn would need to be repaid in order to retain the tax privilege position, but there is no requirement for the account holder to make new payments into the account on top of the repayments. Therefore, money withdrawn may be replaced, but money may not be added. There is a question about whether we would, in fact, find that pensions had been reduced rather than increased.
A major practical difficulty is the complexity and possible cost of administering such a scheme. When arrangements have matured in a SaRA, one could have money going in as new savings, money being withdrawn and money being paid in as repayment of one or more previous withdrawals, all at the same time. That would be extraordinarily complex for account holders, account managers, employers who might be making payroll deductions and Her Majesty’s Revenue and Customs, who would have to keep track of the tax position if withdrawals had been made. I suppose that everybody would be required to work out the tax on their self-assessment form, but that would be complex—too complex to be practical, I suspect.
As was pointed out on Second Reading, the sum of £40,000 is beyond the realms of possibility for many people. The things that they might wish to save for, in addition to a pension, will often be more modest than buying a house, which is one of the purposes proposed in subsection (6). The Bill could leave people who have an outstanding and immediate unforeseen debt unable to access their funds in order to clear it, although they could access the funds to buy a house. The rationale for that is difficult to grasp.
There is a discussion to be had about the role of greater flexibility, but the form proposed in the Bill raises at least as many questions as it answers, and I urge my hon. Friends to resist the clause.