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We are moving on to a couple of clauses making technical provisions. I suspect that we may not have so much debate on clauses 41 and, possibly, 42 as we had on the previous two clauses. I will try to move fairly speedily through my points.
The clause offers transitional protection to wealthy savers who are concerned that they may be affected by the reduction in the lifetime allowance to £1.25 million, which was announced in the autumn statement 2012. It introduces a transitional protection regime, known as IP2014 that will protect any UK tax-relieved pension savings that an individual has built up at 5 April 2014, up to an overall limit of £1.5 million. Individual protection was available from 6 April 2014, and must be applied for by 5 April 2017. It is open to those who do not have primary protection. Those with IP2014, unlike those with 2014 fixed protection—FP2014, as it is known—may continue to place savings in pension schemes. If, however, they exceed the limit, they will be subject to the lifetime allowance charge when they take their benefits.
In the autumn statement 2012, the Government announced that they will reduce the lifetime allowance from £1.5 million to £1.25 million from the 2014-15 tax year onwards. In essence, that means that those who have accrued pensions in excess of £1.25 million will now be subject to the lifetime allowance charge. Pension benefits in excess of that are subject to the lifetime charge. The rate of the lifetime allowance charge is 25% if the excess is taken as a pension, or 55% if it is taken as a lump sum.
Going back to the original introduction of the lifetime allowance in April 2006, at £1.5 million, those with pots exceeding that amount before 2006 could apply for that primary protection, or enhanced protection. The intention behind that was to ensure that those whose pots already exceeded the lifetime allowance before its introduction would not incur unfair charges. Following a period of growth, the lifetime allowance was decreased to £1.5 million in 2012, and it is now being decreased again. In order to protect those who have exceeded it in the interim, the Government have introduced the transitional measures. Last year’s Finance Bill introduced the FP2014 scheme, which ensured that the lifetime allowance for certain pots remained at £1.5 million, subject to certain conditions.
We have no objection in principle to what is being done with HMRC’s tax-raising powers. We note, however, that the introduction of the clause will have cost implications for pension providers, mostly through providing checks and evaluations to those who wish to apply for IP2014. We also note the cost implication for HMRC, which is estimated at £1 million.
I have a couple of questions for the Minister about the clause. According to the tax impact and information note accompanying the measure, although an assessment has been made of its impact on small and medium-sized enterprises:
“It would not be appropriate for the measure to apply differently according to the size of the firm within which the affected workers operate.”
Does the Minister have any comment to make on that statement?
The tax impact and information note also provides the estimate that the implementation of the measure will cost HMRC £1 million. The Minister might argue that that is not a huge amount in the global scheme of things, but I would again argue that we are talking about HMRC’s resource and staffing budgets, and any implications for HMRC arising from the measure. Finally, looking ahead, will he confirm whether he has any plans further to reduce the lifetime allowance at any point?
Clause 41 and schedule 4 provide a new transitional protection regime from the lifetime allowance charge, known as individual protection. Its introduction, alongside the previously announced fixed protection, is intended to give individuals greater flexibility in how they choose to protect pension savings built up before 6 April 2014 from the lifetime allowance charge.
To ensure that the pension tax relief system is fair, affordable and sustainable the Government have reduced the lifetime allowance from £1.5 million to £1.25 million, and the annual allowance from £50,000 to £40,000, from the 2014-15 tax year onwards. The changes were legislated for in the Finance Act 2013 and will restrict the cost of pension tax relief by about £1 billion a year.
Around 98% of pension savers nearing retirement have pension pots below £1.25 million and so will be unaffected by the change. To prevent pension savers who have built up pension savings above or near £1.25 million from being subject to retrospective tax charges, we originally introduced fixed protection. That gives individuals a protected lifetime allowance of £1.5 million, although there are restrictions on future savings. Following informal discussions with interested parties on whether a further protection regime should be offered, we announced in last year’s Budget that an individual protection regime would also be offered.
A consultation document on individual protection was published on 10 June 2013. Nearly all respondents welcomed the flexibility provided by the further protection regime. A summary of the consultation responses and updated draft legislation were published alongside the autumn statement.
I understand that some changes were made as a result of the consultation. Will the Minister say whether account was taken of a point raised by the Association of Taxation Technicians about the time scale for notifying HMRC of an intention to rely on IP2014? It suggested that there should be some inflexibility on that. It also suggested a publicity campaign to raise awareness among people who need to make such notifications to HMRC.
HMRC has published comprehensive guidance on both individual and fixed protection, and the Government have issued a number of alerts to highlight the new protection regimes, which have received comprehensive coverage in national newspapers. Messages have recently been published on the HMRC website and websites of intermediaries, and a full communications strategy will be implemented in August when the application form becomes available. HMRC has worked with the pension industry and pension advisers to help to raise awareness of the new protection regime. About 50,000 individuals applied for fixed protection before 6 April this year. I hope that provides some reassurance to the hon. Lady on that point.
The clause and schedule set out the detail of how individual protection will work. Individuals with pension savings greater than £1.25 million on 5 April 2014 will be able to apply for individual protection provided that they do not have existing primary protection. Individual protection will give them a protected lifetime allowance equal to the value of their pension savings on 5 April 2014, subject to an overall maximum of £1.5 million. Unlike fixed protection, there are no restrictions on future pension savings. Individuals with individual protection can therefore continue to save into their pension scheme, if they wish, with tax relief on those savings. However, as their lifetime allowance will be the value of their savings on 5 April 2014, if the value of the savings increases after that, a lifetime allowance charge will be due on the excess when they take their benefits. Individual protection will particularly benefit those who do not want to opt out of their pension scheme, for example, because they receive a valuable employer contribution. It is estimated that some 120,000 individuals will have pension savings above £1.25 million in April 2014 and may be eligible to apply for individual protection.
I was asked about the impact on SMEs and why they are treated the same as large firms. The entire pension industry is treated the same as it is difficult to legislate for different firms. As for whether pension providers will face a cost, the costs are to provide valuations and change guidance, which is much the same as for all other protection regimes when such a change is made. As for HMRC’s implementation costs for a new IT database to monitor compliance and provide certificates, if the hon. Lady wants a lengthy debate on HMRC and its resources, I would be more than happy to oblige, given its ever-increasing yield and improved customer service. I suspect, however, that were I to go on for too long, I would displease you, Mr Streeter, so I shall avoid doing so.
On whether there are further plans to reduce the lifetime allowance, which is the sort of question that the hon. Lady would ask, I would say that the Government have no plans to do that. All tax measures are kept under review, but we have no plans to return to that matter.
Following those clarifications, I shall conclude by saying that the clause ensures that individuals have a choice about how they protect existing pension savings. It follows extensive consultation and supports the steps taken by the Government to ensure that the pension tax regime is affordable and fair. I therefore hope that clause 41 and schedule 4 will meet with the approval of the Committee.