Question proposed, That the clause stand part of the Bill.

I shall be brief. Clause 2 amends chapter 5 of part 4 of the Finance Act 2004 to reduce the special lump-sum death benefits charge from 55% to 45%, which applies to certain lump-sum benefits, and also removes the tax charge altogether on such lump sums when an individual dies under the age of 75. It also reduces the serious ill health lump-sum charge from 55% to 45%. The Committee will note that the Government have tabled amendments building on the changes, which we have just debated, so I will not go over that old and, I hope, familiar ground. I hope clause 2 will stand part of the Bill.

As the Minister says, clause 2 concerns the payment of lump-sum death benefits. Under the current rules, lump-sum death benefits are taxed at 55% for anyone aged 75 or over. The rate of lump-sum death benefit charge is set at 55% in the Finance Act 2011, which is the same legislation that removed the requirement to buy an annuity at 75. That was intended to reflect the value of tax relief that had already been given. In essence, therefore, clause 2 reduces the charge from 55% to 45%, which is the top marginal rate of taxation.

Clause 2(2) amends section 206(1) of the Finance Act 2004 to provide that, when a lump-sum death benefit is subject to the special lump-sum death benefit charge, it would apply only when the member had reached the age of 75 at their death. Those under 75 are therefore exempt. Subsection (3) reduces the rate of lump-sum death benefit charge from 55% to 45%, and subsection (4) provides that the serious ill health lump-sum charge is likewise reduced from 55% to 45%. Currently, the charge applies when a serious ill health lump sum is paid to a member after they have reached the age of 75. All an individual’s uncrystallised rights can be paid as a serious ill health lump sum when the scheme administrator has received medical evidence that the member has less than 12 months to live.

The broader debate about the changes has mainly centred on whom they would benefit most. The Treasury predicts that savers with smaller pension pots worth between £20,000 and £50,000 would be among the many to benefit. However, according to the National Association of Pension Funds, while the change may encourage some to save more into their pension assured that they will be able to pass on the lion’s share without tax, the reality is that it is likely to affect only those with large pension pots. Once again, while the Government’s intention is moving in one direction, others in the industry differ on the practical implications.

It is worth stating that the amendment of the Finance Act 2004 to reduce the lump-sum charge from 55% to 45% for those in serious ill health and with less than 12 months to live, which would be a critical time for any family, is to be welcomed. However, we are again seeing that difference between what the Government say they want and genuinely intend and what the people on the  ground think might happen, in particular for those with smaller pension pots and those on lower incomes. We need to think carefully about what the changes will mean in practice for such pension pots. There is no reason for the clause not to stand part of the Bill, but it would be helpful if the Minister addressed that point.

I thank the hon. Lady for her support for clause 2. Her concern is essentially that the change is a tax cut for wealthy individuals with big pension pots, but the change means a tax cut for all pension savers and not just the wealthy. Anyone with defined contribution pension savings—12 million people in the UK—will be able to benefit from the changes. Some 320,000 people retire each year with defined-contribution pension savings of all sizes. These people will no longer have to worry about their pension savings being taxed at 55% on death, if they choose to access it flexibly.

I suppose I should also make the point that the well advised were probably always less likely to fall into hitting this particular charge, so probably, all other things being equal, the previous arrangement would have been less likely to affect wealthy individuals having sought advice and so on. The fact is that we have taken this threat away. There was concern that people were inadvertently finding themselves in a position where their estate was being taxed at 55%, whereas if they had acted differently that was less likely to happen. We have removed that threat, as it were.

Potentially many millions of people will benefit from the threat being removed. That is not to say that millions of people paid this tax charge—they did not—but it does mean that the risk of what could be viewed as a punitive charged is removed. Particularly in the context of more people accessing their pension flexibly, it is right that we made that change, because there was a risk that ever more people would find themselves paying the charge. We have anticipated a problem arising with the system down the line if we do not make the change. That is why we made the changes set out in the clause.

I think I am right in saying that, on death, this becomes part of somebody’s estate and is therefore subject to inheritance tax, so the real winners are lower-paid people, who will be below the inheritance tax threshold, and will therefore have a tax cut from 55% to 0%, whereas those who are above the threshold will be paying tax at 40%.

In general terms, the measure falls outside the inheritance tax regime, so it is a little bit different, although it is a tax on death so it shares many similarities, and there are some complexities in the system, as I understand it. None the less, it is a necessary change in the context of the new framework and I am pleased that we are able to introduce it.

Question put and agreed to.

Clause 2 accordingly ordered to stand part of the Bill.