Pensions: special annual allowance charge

Amendment proposed (this day): 202, in schedule 35, page 280, line 36, leave out from ‘year’ to end of line 38.—(Mr. Hoban.)

Question again proposed, That the amendment be made.

I remind the Committee that with this we are discussing the following: amendment 203, in schedule 35, page 280, line 39, leave out sub-paragraph (2).

Amendment 204, in schedule 35, page 291, line 7, at end insert

‘but this Schedule shall not apply where the individual concerned is aged 50 or over at some time in the tax years 2009-10 and 2010-11.’.

Welcome to the Chair for this afternoon’s sitting, Mr. Atkinson.

The Financial Secretary promised us that we would see the new Exchequer Secretary this afternoon, but I understand after talking to her that she is currently trying to complete her transitional arrangements between Departments.

Before lunch, I was concluding the debate on the amendments by pointing out that the Government’s desire to clamp down on potential tax leakage through the forestalling arrangements is at risk of masking some of the people who will fall victim to the hard edges of the scheme. The Government should think about the individuals who may be affected by the measure, in particular those who will fall foul of the £150,000 earnings barrier. Having said that, the Minister has made some important points about the cost of some the changes proposed in the amendments. As I have said before, the main show in town is the next group of amendments, and I am anxious to speak to them. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

I beg to move amendment 228, in schedule 35, page 283, line 15, leave out paragraphs 7 to 13 and insert—

‘Protected pension input amounts

6A (1) A protected pension input amount in relation to an individual is any amount of regular contributions exceeding the special annual allowance, having been paid immediately prior to  22 April 2009 or where an application to pay regular contributions was received by the scheme administrator prior to noon on 22 April 2009.

(2) Regular premiums are—

(a) quarterly or more frequent contributions in which case the protected pension input amount is the highest amount of regular premium paid in the tax-year immediately preceding the current tax-year multiplied by the frequency of contributions, or

(b) annual or recurring single contributions in which case the protected pension input amount is the total contributions paid to the scheme or arrangement over the three tax-years immediately preceding the current tax-year dividend by three.

(3) In the case of a defined benefit scheme, the pension input value of further accruals for tax-years 2009-10 and 2010-11 is protected as long as there is no material change to the scheme that results in the rate of benefit accrual increasing.’.

With this it will be convenient to discuss the following: amendment 182, in schedule 35, page 283, line 40, after ‘paid’, insert

‘under this sub-paragraph or under sub-paragraph (3A)’.

Amendment 190, in schedule 35, page 284, line 3, leave out ‘a quarterly’ and insert ‘an annual’.

Amendment 183, in schedule 35, page 284, line 11, at end insert—

‘(3A) To the extent such amount exceeds that referred to in paragraph 8(3), relevant added years contributions also include contributions paid—

(a) with a view to securing that the calculation of benefits under the arrangement is by reference to a period of service in excess of pensionable service by the individual; and

(b) which do not exceed the average amount of contributions made by the individual in each of the three tax years ending 5 April 2009 (or if the individual has not been a member of the pension scheme for those tax years, the contributions made, in a case where he has been a member for only one complete tax year, during that tax year, and the average contributions, if he has been a member of this scheme for two complete tax years, for those two tax years) or if provided that if in any of those years the contribution exceeded the amount of the annual allowance for that tax year (see section 228 of FA 2004) such contribution shall be taken to be an amount equal to the annual allowance for that tax year.’.

Amendment 184, in schedule 35, page 284, line 41, after ‘paid’, insert

‘under this sub-paragraph or under sub-paragraph (3A)’.

Amendment 191, in schedule 35, page 284, line 46, leave out ‘a quarterly’ and insert ‘an annual’.

Amendment 185, in schedule 35, page 285, line 6, at end insert—

‘(3A) To the extent such amount exceeds that referred to in paragraph 9(3), relevant added years contributions also include contributions paid—

(a) with a view to securing that the calculation of benefits under the arrangement is by reference to a period of service in excess of pensionable service by the individual; and

(b) which do not exceed the average amount of contributions made by the individual in each of the three tax years ending 5 April 2009 (or if the individual has not been a member of the pension scheme for those tax years, the contributions made, in a case where he has been a member for only one  complete tax year, during that tax year, and the average contributions, if he has been a member of this scheme for two complete tax years, for those two tax years) or if provided that if in any of those years the contribution exceeded the amount of the annual allowance for that tax year (see section 228 of FA 2004) such contribution shall be taken to be an amount equal to the annual allowance for that tax year.’.

Amendment 186, in schedule 35, page 285, line 39, after ‘paid’, insert

‘under this sub-paragraph or under sub-paragraph (3A)’.

Amendment 192, in schedule 35, page 285, line 44, leave out ‘a quarterly’ and insert ‘an annual’.

Amendment 187, in schedule 35, page 286, line 4, at end insert—

‘(3A) To the extent such amount exceeds that referred to in paragraph 10(3) or 10(5), relevant added years contributions also include contributions paid—

(a) with a view to securing that the calculation of benefits under the arrangement is by reference to a period of service in excess of pensionable service by the individual; and

(b) which do not exceed the average amount of contributions made by the individual in each of the three tax years ending 5 April 2009 (or if the individual has not been a member of the pension scheme for those tax years, the contributions made, in a case where he has been a member for only one complete tax year, during that tax year, and the average contributions, if he has been a member of this scheme for two complete tax years, for those two tax years) or if provided that if in any of those years the contribution exceeded the amount of the annual allowance for that tax year (see section 228 of FA 2004) such contribution shall be taken to be an amount equal to the annual allowance for that tax year.’.

Amendment 193, in schedule 35, page 286, line 13, leave out ‘a quarterly’ and insert ‘an annual’.

Amendment 194, in schedule 35, page 286, line 37, leave out ‘a quarterly’ and insert ‘an annual’.

Amendment 188, in schedule 35, page 286, line 42, at end insert—

‘(2A) To the extent such amount exceeds that referred to in paragraph 11(2) the amount arrived at under paragraph 3(2) in relation to the arrangement is a protected pension input amount to the extent that it is attributable to contributions paid which do not exceed the average amount of contributions made by the individual in each of the three tax years ending 5 April 2009 (or if the individual has not been a member of the pension scheme for those tax years, the contributions made, in a case where he has been a member for only one complete tax year, during that tax year, and the average contributions, if he has been a member of this scheme for two complete tax years, for those two tax years) provided that if in any of those years the contribution exceeded the amount of the annual allowance for that tax year (see section 228 of FA 2004) such contribution shall be taken to be an amount equal to the annual allowance for that year.’.

Amendment 195, in schedule 35, page 289, line 20, leave out ‘a quarterly’ and insert ‘an annual’.

Amendment 197, in schedule 35, page 290, line 3, leave out from ‘contributions’ to end of line and insert ‘which—

(a) are paid on a quarterly or more frequent basis pursuant to an agreement for the payment of such contributions, or

(b) if paid less frequently than quarterly, half of the sum of the two highest contributions made in the periods 6 April to 21 April in each of the tax years 2006-07,  200-08 and 2008-09 and for these purposes if only one such contribution has been made in those three periods, half of that amount.’.

Amendment 196, in schedule 35, page 290, line 3, leave out ‘a quarterly’ and insert ‘an annual’.

The list of amendments is fairly substantial. It is not so much an Ă la carte or table d’hôte menu as a buffet.

SmĂśrgĂĽsbord.

I was going to use that word, but my hon. Friend the Member for Hammersmith and Fulham has the monopoly in our ranks on the correct pronunciation of foreign words. I am sure that he will find the opportunity at some point before the end of the proceedings to use the word smĂśrgĂĽsbord.

The amendments are all, in different ways, designed to address the issue of the pattern of contributions that people make towards their pension schemes, which I have touched upon in earlier discussions. I am concerned that the schedule as drafted refers to regular contributions in the context of “quarterly or more frequent” payments into a pension scheme.

A number of groups of individuals, by nature of their employment or the profitability of their business, are not in a position to make a regular payment to a pension scheme. A curious situation may arise where somebody who makes pension payments of £100,000 in quarterly instalments throughout the year will get full relief under the anti-forestalling provisions, but somebody whose pension contributions are not that regular will only get full relief for £20,000. We need to think carefully about whether we are penalising people who are self-employed, who are partners in businesses, or who run small businesses, and who may lose out as a consequence.

I understand what the Government are trying to achieve: they do not want people to use the interregnum between now and the introduction of the cap on the higher rate relief in 2011 to make huge annual contributions within the level of the lifetime allowance. That is why I suggested reducing the level of the allowance during the stand part debate on clause 71. However, some people will be caught out as a consequence of the rules, because they do not make a regular pattern of contributions, and this is a serious matter for them. We need to find a way to meet their concerns, while recognising the point the Minister has made and will make again that some people will seek to use the flexibility over the next two years to reduce their tax bills.

My amendment buffet contains various groups that represent different approaches to the same issue. I would be pleased if the Minister chose from my selection, but I suspect that he will want to return to this important matter on Report.

The amendments would affect what is defined in the Bill as a protected pension input amount, at term that covers existing pension arrangements. Contributions made under pension arrangements that are already in place should be able to continue up to the current levels of relief until the new regime is introduced in 2011. Our problem is with the design of the measures.

The provisions that determine what will count as a protected input amount are drawn quite narrowly. The wording adopted throughout paragraphs 7 to 13 refers to contributions that are made

“on a quarterly or more frequent basis”.

That means that anyone who has had an arrangement to make graded contributions on an annual basis will be subject to a reduction in tax relief. As I said before, that could apply to the self-employed, those who own small businesses, or partners in lawyers’ or accountants’ firms.

A number of my hon. Friends have been in those circumstances. My hon. Friends the Members for Henley and for Poole have both been involved in businesses in which pension contributions have been managed in such a way. They will know how difficult it can be to predict their profits or share of earnings and therefore their pension contributions. Those amounts differ from year to year, depending on how successful the business is and the investment decisions that are made; as a result, their total contributions would vary from year to year. Also, they might have paid their contributions to different institutions from year to year, because one pension provider was better than another. That would have an impact under the rules. Under the provisions in the schedule, such people will lose the additional tax relief on any contribution in excess of £20,000.

The Association of British Insurers submission to the House of Lords Economic Affairs Committee’s sub-committee on the Finance Bill gave the example of an individual seeking to wind up his affairs to fund his retirement. The individual received a salary of £150,000 in 2008, but he received a reduced salary of £70,000 in 2009 because business had been affected by the economic downturn. He sold the business for £250,000 in 2009—probably less than he would have got for it before—but then paid £200,000 into his pension. Even though the individual has suffered a reduction in his earnings and has been forced to sell his business, he will not be able to gain full relief for his contributions, because his salary exceeded £150,000 in the previous year.

The Minister recognises this problem, as his remarks in the previous debate demonstrated. His written statement on Budget day stated:

“The Government recognise that those with less regular contribution patterns may be affected and would welcome views on whether there are ways of ensuring the contributions of this group are protected in the same way as those making more regular patterns”.—[Official Report, 22 April 2009; Vol. 491, c. 16WS.]

A number of proposals have emerged from our discussions with interested parties, and they are reflected in the group of amendments. Some of the amendments are mutually exclusive, but we have tried to give a feel for the types of approach the Government may wish to take.

Amendment 228 is probably the most straightforward, but also the most prone to defective drafting. It would delete paragraphs 7 to 13 and replace them with a simple regime that encompasses all the various arrangements, including annual contributions. It refers in particular to defined-benefit schemes. It represents a crude way of approaching the problem, but it would move us to an annual basis.

Amendments 190 to 196 change the language on payments in the paragraphs from “a quarterly” or more frequent to “an annual” or more frequent. It would prevent small business owners, the self-employed or those who contribute to their pensions from annual bonuses losing the tax relief they currently receive.

Amendments 182 to 188 take a different approach. They recognise that we cannot have a free-for-all in the amount of contributions that may be made on an annual basis, but take into account the history of contributions made in the previous three years and restrict the protected amount to the average of the contributions made in those three years. That has some appeal as it reflects a past pattern of behaviour and recognises that the contributions individuals make to their pension scheme may fluctuate according to the performance of their business. It has some attraction as a way of tackling the issue the Minister outlined, but without allowing much flexibility or latitude in terms of increases.

Amendments 182 to 187 aim to get the regular contributions requirement right between self-employed and employed people by making the same provisions for DB schemes’ existing cash balance arrangements and money purchase arrangements. Paragraph 11 deals with money purchase arrangements that are not part of occupational and public service pensions. Most self-employed people will fall into that jurisdiction. Amendment 188 would ensure that their annual contributions do not disqualify them from the higher rate relief.

Paragraph 16 introduces the pre-22 April 2009 pension input amount. Any such amounts do not give rise to a special annual allowance charge, but they may be deducted in the calculation of adjusted contribution for the tax year 2009-10. In that case, amendment 197 would allow an average amount to be calculated that is half the sum of the two highest annual contributions; or, if only one contribution has been made, half of that. That is perhaps a more generous amendment than the one that averages contributions over the past three years, but it too seeks to provide flexibility.

This is an important group of amendments addressing an issue the Financial Secretary identified. We need to ensure, where possible, that there are tax arrangements in place that recognise how people lead their lives and the flexibility that people may have, not through choice but perhaps through force of circumstances. They are often not able to make the relevant decisions until the end of the tax year. While the Minister has focused so far on how to stop avoidance, we should have regard to those whose pattern of income makes it difficult to make regular quarterly or more frequent contributions to pension schemes.

The amendments offer a range of options. I do not expect the Minister to leap to his feet and say, “I am going to accept amendments x to y,” because I suspect there are some drafting errors in the amendments. However, they represent a genuine attempt to introduce flexibility to the arrangements to reflect the needs of a specific group of people.

I shall be extremely brief because I generally try in Committee not to replicate speeches that have already been made, just to put myself on the record for having agreed with earlier speakers.

I will depart slightly from that sensible rule of thumb on this occasion to say that I am an enthusiast for the constructive approach taken by the hon. Member for Fareham. He recognises the legitimacy of what the Government are trying to do—we all recognise that that is a sensible approach. If one is going down the path of introducing new measures, some provisional arrangements are needed in the interim.

The hon. Gentleman also makes an entirely sensible point—one that has been made to me through representations to which I have been sympathetic and which is reflected in the large group of amendments—that there are people whose pension contributions are inevitably haphazard, because that is the nature of their income. That is most obvious for people who are self-employed, or those whose work is seasonal or has other fluctuations beyond their control. There is a danger—more than that: a likelihood—that the measures the Government have introduced, entirely understandably, will catch people they are not intended to catch.

I hope the Minister will engage seriously with the points made by the hon. Gentleman, myself and others. If the Treasury is able to find a way of drafting the legislation so that penalties are not incurred by those they do not intend to target, that would be appreciated by a large number of people.

Welcome to the Chair this afternoon, Mr. Atkinson.

In keeping with my perennial diet, I shall eat only one of the dishes that my hon. Friend the Member for Fareham has set out so temptingly before us and that is the dish relating to the self-employed. The Select Committee on Work and Pensions has recently finished taking public evidence on pensioner poverty. The questions naturally ranged much more widely than that subject, although there is quite a strong link between pensioner poverty and self-employment, which I will come on to in a minute. I recommend that the Minister visits the website of the Committee and looks at the evidence that was collected.

The self-employed are a major pensions headache because of how they approach pensions. The provisions in the clause and in the schedule do not recognise that behaviour. There is no equivalent now, and none is proposed, for automatic enrolment in pensions for the self-employed. We are unusual in that compared with countries such as Canada, for example, with the result that the self-employed have a strong tendency to procrastinate in dealing with their pensions. That builds up a problem for later, when they tend to rely on selling their business or their house, in a time of recession. It also leads to considerable irregularity of payment, which has already been mentioned. Even for people who regularly earn more than £50,000, for many self-employed people that amount comes in in a very irregular fashion and the main reason for not saving is that they cannot afford to do so. One of the big factors in deciding whether they can afford to do so is directly relevant to the schedule: how much they get back. Getting back what is put in is not enough. In the words of the Pensions Policy Institute, they need to

“see the advantage of the tax relief” in order to make that calculation. We touched on that this morning when my hon. Friend went through some of the calculations involved.

Perversely, the recent reduction of values as a result of the economic crisis may have shocked some out of that procrastination and we may actually see some becoming more regular in their pattern. However, I find it difficult to understand why there should be discrimination between somebody who contributes £2,500 monthly and someone who contributes £30,000 annually. There seems to be no logic in that sort of discrimination.

As my hon. Friend mentioned, I have been in that situation myself. In the years that I was a partner at Ernst and Young, we never made a pension payment until we had seen what the annual profits were going to be. It was a very prudent approach. The amounts certainly differed from year to year, as did the profit and the profit shares that came out. My hon. Friend’s description was quite correct. Each year we made an assessment—on our own back—of which pension providers we would invest that money with. That flexibility was not haphazard, as the hon. Member for Taunton described it, although I appreciate that some have a haphazard way of going about it; it was part of the normal business life and the normal practice of going about dealing with one’s financial affairs.

I cannot believe that the Treasury is not aware of those behaviours—after all, there has been enough flow between the Treasury and firms of accountants in exchanges of personnel and, I hope, the other way. Is the provision an afterthought—a way of dealing with an oversight of the knock-on effect of increasing the 50 per cent. rate of tax in the first place and then realising that it was too expensive to give pension relief at that rate; or was it deliberate, and are we really attacking the self-employed? If so, it would have been much more open to make it clear as a policy objective, rather than going about it somewhat by stealth, as the Bill approaches it.

I welcome you back to the Chair, Mr. Atkinson.

I recognise that the Opposition are, in tabling the amendments, raising an important issue, about which there is some concern. I have argued to the Committee that schedule 35 brings about a balance, on the one hand preventing people from making large increased contributions to pre-empt the reduced relief that is available from April 2011, and on the other ensuring that those who continue with their normal, regular pattern of pension saving will receive higher rate tax relief until the new legislation takes effect in April 2011.

It would have been impossible to design an arrangement that accurately predicted what someone would have contributed to their pension if the future changes had not been announced, so we decided that the fair way to proceed was to look back at past behaviour, to identify forestalling, as opposed to regular pension savings. Those regular pension contributions will continue to attract tax relief, at the individuals’ marginal rate, until the new regime is introduced in April 2011.

Schedule 35, as we have heard, defines regular contributions as those made quarterly or more frequently. It includes provisions to protect regular pension savings, made under different types of arrangements that were in place on Budget day. It is for obvious reasons more  difficult to identify as normal contributions that are made less frequently, particularly when that requires looking back over previous years, not least because the A-day changes that we touched on this morning have altered pension saving habits for some people.

The Opposition amendments are intended, first, to extend protection for annual contributions. By and large the amendments—the buffet that we have to choose from—would do that with reference to an average of previous contributions made by individuals, accounting only for those years within the previous three years in which contributions were made.

The hon. Member for Fareham spent a little time discussing amendment 228 and the replacement of specific provisions in the schedule, for different pension saving arrangements, with something much shorter. That would create some significant and potentially expensive avoidance loopholes, but it could also have significant adverse consequences for some people, with the loss of the protection that the Bill provides for wholly commercial and unexceptional situations.

The amendment would also amend the definition of regular contributions, so that the highest contribution in the past tax year, multiplied by the frequency of payment, would determine the amount protected. Individuals are already protected if their regular contributions have changed as part of a contractual arrangement; but, of course, if the frequency of payment increased it would create an obvious loophole.

We recognise that for some people, particularly those in personal pension arrangements, contributions are often made annually, on an ad hoc basis, as their financial circumstances allow. I entirely accept the points made by the hon. Members for Taunton and for Henley about that. I reassure them that there is no intention of damaging the interests of self-employed people or any other group. The provisions therefore include an annual limit of £20,000 on which individuals are entitled to higher-rate relief. It is worth bearing in mind, as we debate this, that those are people in unusual circumstances—those whose income exceeds £150,000, that is, 1.5 per cent. of pension savers. That group will continue to enjoy full higher rate relief of up to £20,000 a year, even if they have made no contributions at all over the past few years.

I appreciate that for those with less regular contribution patterns, the £20,000 figure may represent a lower pension contribution than they have tended to make in the years since A-day. The hon. Member for Fareham was right to refer to my Budget day statement, which welcomed views on ways to ensure that that group’s contributions were protected in the same way as those of more frequent contributors. While continuing to achieve our core objectives, we need to ensure, as Opposition Members recognise, that the regime remains effective against the risk of forestalling, which is a real risk.

I want a fair regime that is also effective in protecting the Exchequer. We continue to work closely with industry and to gather evidence to identify who is affected and to quantify fully the scale of the issue. Currently, it is not clear how many people would be disadvantaged by the arrangements in the way that hon. Members have suggested. I hope that we can obtain information from industry on  that and on the contribution patterns and levels over previous years. So far that information has been difficult to obtain.

Without effective anti-forestalling legislation, some £2 billion could be at risk. I will shortly be meeting industry representatives to explore the issue in more detail. As I said this morning, I am prepared to return to the subject on Report if necessary. In doing so, I will bear in mind the ideas in the buffet presented this afternoon. I am happy to say to the hon. Member for Taunton that I shall be working seriously and do recognise the genuineness of the points raised. With that in mind, I hope that the hon. Member for Fareham will feel able to withdraw his amendment.

It has been a helpful debate and I am heartened that the Minister has not closed his mind to protection for the self-employed and those who make annual, rather than quarterly or more frequent, contributions. I hope that there are some dishes in the buffet that tempt him at a later stage to reheat these ideas for discussion on Report.

In trying to tackle forestalling, we are in danger of introducing unfairness and discrimination against people who are not in the position to make predictable pension contributions. If we are to look at income going back three years to determine whether the £150,000 threshold has been reached, we should recognise the pattern of pension contributions over that time as well, and use it as a benchmark to compare future pension contributions. We could say, “This is the pattern in the past, anything in excess of that is subject to the regime, and if it is equal to or less than that, it is reasonable”. Alternatively, for those who have not made quarterly or more frequent contributions, the special annual allowance of £20,000 could be higher, but that would add complexity and leave more scope for forestalling than the Minister would be willing to concede.

There are ways to deal with the matter. If I had felt that the Minister had closed his mind to the issue, I would have been tempted to push one of the amendments to a Division. However, the Minister has said he is open to it, although given the limited time between now and Report, his mind must remain open and work quite quickly to get to a satisfactory conclusion by Report. We shall certainly return to this on Report, bearing in mind the points the Minister made, and perhaps come up with more of a table d’hôte of amendments at that stage, rather than the buffet that is before us today. I beg leave to withdraw amendment 228.

Amendment, by leave, withdrawn.

I am not going to say very much about amendment 205. While I am very keen to ensure that there is certainty in the tax regime, particularly for a set of provisions that will last only two years, given that the Minister is open to some of the debates about potential changes and there may be new evidence that arises that persuades him to adjust one or more provisions in this clause, passing amendment 205 at this point may not helpful to the interests of getting a better deal for taxpayers. Therefore, if it is feasible, I do not wish to move the amendment.

Amendment not moved.

Schedule 35 agreed to.

Clause 72 to 74 ordered to stand part of the Bill.