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 Committees 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 2009probably less than he would have got for it beforebut 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.