With this it will be convenient to discuss the following: Amendment 189, in schedule 18, page 290, line 2, leave out ‘£18,000’ and insert ‘£21,500’.
Amendment 190, in schedule 18, page 290, line 9, leave out ‘£18,000’ and insert ‘£21,500’.
Amendment 191, in schedule 18, page 290, line 17, leave out ‘£18,000’ and insert ‘£21,500’.
Amendment 192, in schedule 18, page 290, line 24, leave out ‘£18,000’ and insert ‘£21,500’.
That schedule 18 be the Eighteenth schedule to the Bill.
I shall be quick because the amendments are relatively self-explanatory and I hope the Minister will consider accepting them. If an individual’s pension and savings pot is very small, it is defined in the Bill as trivial. When he retires, an individual can choose to take it as a lump sum or a commutation. Under the old rules, that could be done if the pension pot was less than 1% of the lifetime pension allowance. The Minister has, I accept, listened to representations about this. Given that the Bill brings down the lifetime allowance, the figure needs to be changed. The Government have therefore gone for a figure of £18,000 and below for the new definition of trivial.
The only problem is that the effective date of implementation of the trivial commutation limit of £18,000 is for 2012-13. However, by the end of 2012-13, the trivial commutation limit will have already been fixed at £18,000 for three years. It strikes me that it would be possible for the Government to consider raising the limit slightly; we suggest the figure of £21,500 in the amendments. That would allow a few more of the poorer pensioners, who have slightly bigger but still relatively small pension pots, to take them as a lump sum. The cost to the Exchequer would be negligible, because the Government would still get some tax from lump sum payments.
The amendments are designed to tease out the answer to the following questions. On what basis has the Minister fixed the limit of £18,000? Why has it not been raised in line with inflation, over the course of the years in which it has been operating? Does he intend to raise it in future years? At the moment, freezing it at £18,000 for an effective three-year period to 2012-13 means that the value of £18,000 is diminished accordingly. Our suggestion is to index it initially at £21,500, which could be reviewed in due course. I welcome the prospect of finding out whether the Minister will accept the amendment. In anticipation that he may not, I would like to know when he intends to monitor the change in the value of £18,000, or if it is fixed in perpetuity.
The clause and schedule seek to reduce the lifetime allowance from £1.8 million to £1.5 million. That takes it back to the same level as on A-day in 2006, and it would raise around £0.5 billion in annual revenues. The reduction means that the annual allowance will be higher than we originally proposed, which will help protect those on moderate incomes. There are provisions in the schedule to protect those who have pots in excess of £1.5 million already, but I will not go through those as they are clearly not the point that the right hon. Gentleman is keen to focus on.
The right hon. Gentleman is right to say that the limit is set at £18,000. In the past, the limit has been effectively 1% of the lifetime allowance. Clearly, reducing the lifetime allowance to £1.5 million gives us the opportunity to decouple that link, which is helpful. The right hon. Gentleman’s amendments would increase the amount to be paid out to registered pension schemes in certain circumstances without incurring unauthorised payment charges. It is proposed that the limit should be raised from £18,000 to £21,500.
Pension tax rules currently allow pension pots to be taken out as a lump sum, if an individual’s aggregate pension savings are below a specified limit. Some 25% of the lump sum can be paid tax free, while the remainder is taxable as income. That is known as trivial commutation, but the rules also extend to a number of other, different circumstances, which are also covered by the amendments.
We need to bear in mind the point that the right hon. Gentleman made in an earlier debate. We are seeking to encourage people to build up pension pots to support themselves and provide an income in retirement. Evidence shows that an annuity can be purchased with as little as £5,000. The median wealth held by individuals in a defined contribution occupational pension is £6,500, while in a defined contribution personal pension, it is £12,000. Those are both way under the £18,000 limit currently in statute, and the £21,500 level proposed by the right hon. Gentleman. Against the background of the relatively low amounts held in defined contribution schemes and the fact that annuities can be bought with as little as £5,000, the current limit is set at an appropriate level. It is not right to increase it by £3,500 at this point.
What we have said—and this returns to the consultation document that the right hon. Gentleman mentioned earlier, when we discussed early access—is that we will explore reform to trivial commutation rules to improve flexibility for those with very small levels of savings in personal pension schemes. We will keep the lifetime trivial commutation limit under review, and we will consider any evidence on the benefit of an increased limit. I hope that that provides the right hon. Gentleman with the reassurance that he is looking for.