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Two points emerge from that
analysis. First, the shorter the period of the annuity, the lower the
inherent risk, the lower the risk premium priced in the product and,
therefore, the higher the income that people can secure for their
retirement. That is an argument for later annuitisation. The commission
contends that policies need to be in place to encourage later
annuitisation. One policy option is the proposal
that the requirement for annuitisation at any age should be limited.
That is similar to the proposal in the new clause. The report
states:
“The Pension Commission is not convinced by the arguments that annuitisation requirements should be waived entirely. Since the whole objective of either compelling or encouraging people to save, and of providing tax relief as an incentive, is to ensure that people make adequate provision, it is reasonable to require that pension savings are turned into regular pension income at some time. But this objective could be pursued via requiring annuitisation up to some defined level of income. And tax relief given on contributions can be reclaimed via the tax treatment of pension funds at point of inheritance or drawdown. While only a minority of people would use this freedom, anything which removes demand from the annuity market will at the margin improve ease of supply and pricing for others.”
The Turner commission highlighted two matters that are vital to our debate. First, it supports the idea of minimum annuitisation, reflecting the provision for the minimum income requirement in the new clause. Secondly, it tackles head-on one of the arguments that the Government have used persistently—the fact that the measures will directly benefit only a minority. Yes, that may well be the case, but that relieves the pressure on the annuity market and, indirectly, helps the remaining population, who wish to buy annuities.
It is therefore short-sighted of the Government to reject the Turner report’s approach.
Rob Marris: What does the hon. Gentleman believe that the minimum retirement income should be? How much?
Mr. Hoban: I shall not go down that route. As was debated during consideration of the private Members’ Bills—the issue has been debated in depth— several factors should be borne in mind. I am trying to emphasise that an alternative to the current arrangement could give people a wider choice in retirement. The minimum retirement income should be enough to ensure that people are not a burden on the state.
The outstanding issue from the Finance Act 2004 is the tax treatment of left-over funds. It is an inevitable consequence of the structure of alternatively secured pensions that there will be left-over funds, because the rules set a ceiling on the amount that can be withdrawn from the pension. It is therefore inevitable that, on death, the member will leave some left-over funds. That likelihood was mentioned in our deliberations on the Finance Bill in 2004, when the then Financial Secretary to the Treasury, the right hon. Member for Bolton, West (Ruth Kelly), said:
“We have made this concession because people hold significant, principled, religious objections to the pooling of mortality risk. We will keep the matter under review and check to see whether abuse is occurring. We stand ready to make any changes needed to preserve the integrity of the tax system.”—[ Official Report, Standing Committee A, 8 June 2004; c. 485.]
Since that
debate in 2004, a tax treatment has been introduced for the left-over
funds in alternatively secured pensions that prevents them from being
passed between generations tax-free and therefore achieves the goal set
out in 2004 of preserving the integrity of the tax system. In new
clause 7 and amendments Nos. 107 to 120, we are seeking to mirror that
provision for the left-over funds in retirement income funds, so that
they
can be taxed in the same way as the left-over funds in an alternatively
secured pension, and so that, when the funds pass to the spouse and
dependents, inheritance tax would be paid.
We had a discussion in Committee about the interaction between income tax and inheritance tax. For the purposes of this debate, although we accept the position that the Government outlined in Committee, we would point out that tax rules are now in place to tackle the transfer of wealth from generation to generation, and that those same rules could be applied to retirement income funds.
The Government have now created the architecture to enable more people to opt out of compulsory annuitisation, through the introduction of alternatively secured pensions in the Finance Act 2004 and the inheritance tax regime in the Finance Bill. I do not wish to rehearse the arguments about why it is appropriate to end compulsory annuitisation, nor do I think that the Government will rush to accept the new clauses and amendments, but the fact that they have given way on the principle of compulsory annuitisation through the introduction of alternatively secured pensions creates a window of opportunity for them to think again.
I know that, in the pensions White Paper, the Government rejected some of the ideas from the Turner commission on changes to the annuities market, but they will have to monitor the appetite of the market for alternatively secured pensions, following A-day and the introduction of the new inheritance tax regime. They will need to respond to the pressures from the market for an alternative to the annuitisation of pensions at the age of 75.
For the benefit of those Members who did not participate in the Standing Committee, amendments Nos. 62 and 14 relate to the rules on the recycling of lump sums in clause 159. In Committee, I expressed concern that the clause could be applied broadly, as it seeks to capture circumstances in which peoplepay significantly higher pension premiums in the knowledge that they will receive a higher lump sum. That opportunity has been available for some time, but it is only since the simplification of pensions after A-day that this has become an issue, because of the relaxation of the contribution cap and the facility for pension scheme members to withdraw a lump sum without drawing a full pension.
The Government’s principal concern was what the Economic Secretary referred to as “turbo-charging”. The example that he used in Committee was of someone who withdrew a cash lump sum from their pension, reinvested it in another scheme, obtained40 per cent. tax relief on that reinvestment, withdrew 25 per cent. of the amount invested as a lump sum, reinvested that 25 per cent. in another scheme, obtained a further batch of tax relief at 40 per cent., withdrew 25 per cent. of that amount—and so the cycle would continue as the contributions were recycled.
Clause 159 would stop the abuse
of that mechanism, but it could also capture a series of legitimate
pre-retirement tax planning arrangements. However, to limit the scope
of this rather brief clause, Her Majesty’s Revenue and Customs
has produced a significant
quantity of guidance notes—28 pages containing 21 different
examples of how the rules apply—to clarify its remit. The rules
are complex, and some industry experts have expressed their concern
about that. The Institute of Chartered Accountants of England and Wales
has said that
“the rule will apply only if ‘the member envisaged at the relevant time that that would be so’. This is a highly unusual and unclear phrase and is not used in the guidance, which refers to ‘pre-planned’. We think it should be redrafted to make it clear that at the time the lump sum was paid, it was the intention of the taxpayer to use all or part of the lump sum to fund additional contributions.”
I will come back to the use of the word “envisaged” later, so as to recapture the spirit of our debate in Committee.
Rachel Vahey of Scottish Widows has said:
“Advisers and providers may both have a role to play. Advisers will need to make sure through factfinds that the contribution does not come from a tax-free cash sum. Providers cannot be expected to know where contributions come from. In practical terms, picking out exactly which income stream is the source for a pension contribution could be problematic for affluent clients phasing in their retirement. There is a real danger that the anti-avoidance rule to be inserted into Finance Bill 2006 to stop this practice will be overly onerous and, in the end, create more problems than it solves.”
She has also said that the rules are worrying as they seem to be very complicated—which is what had been feared—particularly as all the examples show how difficult it is to calculate whether contributions have increased significantly. She points out that, as it is up to the scheme administrator to apply the charge to the member if they own up to recycling tax-free cash, any charge that the administrator incurs may also be passed on to the individual, which could leave the member with a charge equivalent to about 70 per cent. of the tax-free lump sum.
“After putting all these rules in place, it will be very difficult to police. Providers will probably have to change application forms to ask about pre-planning as a part of recycling, and if someone does recycle after denying it on a form, can providers go back to HMRC and say it’s not our fault because we asked for a declaration, in order to avoid an administrator’s charge?”
Her conclusion about the Government was:
“The approach they’ve taken is using a sledgehammer to crack a nut.”
Iain Oliver, the head of pensions at Norwich Union, has said:
“HMRC’s approach is inconsistent with the aims of simplification. We urge them to fundamentally rethink their approach to prevent unnecessary complication to the retirement and financial advice approach”.
He also said that recycling pension contributions—by taking a tax-free lump sum and reinvesting it to obtain tax relief and a further lump sum—could perhaps be prevented by changes to the self-assessment form or by ruling out its promotion in the Financial Services Authority’s code of business rules. He went on to say that HMRC’s latest guidance would mean additional paperwork for clients to read and a penalty charge of 55 per cent. on lump sums paid.
John Lawson, the
head of pensions policy at Standard Life, has said that the proposals
will be unworkable because the reporting requirements
will
fall on the individual taxpayer, creating the strong possibility that
they will make mistakes or overlook parts of the guidance. He
said:
“It’s just incredible, and mind-numbingly complex. I don’t think people will be able to get to grips with it. I don’t think they can be serious. They’ve come up with probably their best fist of it, but there’s no way it’s workable.”
Lawson also asks how the Revenue will prove that people are pre-planning the recycling of tax-free cash, saying:
“In order for the rule to apply, it has to be pre-meditated, but how do you prove it—how are the Revenue going to read your mind? The only way is to assume guilt in every case, which is a bit harsh”.
I am afraid that anyone seeking clarity on the interaction of those elements from the proceedings in the Committee will end up confused. The Economic Secretary waxed philosophical in Committee. In a Committee stage that had previously been characterised by arguments based on law and accountancy, that was the first debate that drew on the works of the American philosopher Donald Davidson, whose work “Actions, Reasons and Causes” was on the Economic Secretary’s reading list and clearly influenced the debate on the word “envisaged”. During an exchange on what is now sub-paragraph (2)(b) of new schedule 3A, the Economic Secretary said
“Envisaging is a broader term; it might be an intention on behalf of someone else, rather than a personal intention. ‘Envisaging’ may mean opening up the possibility that someone else may use the provision—in this case, to recycle the lump sum on that date. If ‘envisaging’ were used, that case would be caught. The difference between ‘envisaged’ and ‘intended’ is subtle but essential. ‘Envisage’ will cover the concept of intention, as sought by the amendment, and will go a little wider, so as to ensure that we catch all necessary cases.”—[ Official Report, Standing Committee A, 20 June 2006; c. 743.]
The Institute of Chartered Accountants has said of the word “envisaged”:
“This is... highly unusual and unclear”.
My goodness! That exchange, and those surrounding it, certainly demonstrated that.
Before the debate, I took the opportunity to find out a bit more about Professor Davidson. He wrote copiously about natural semantics, something with which I suspect the Economic Secretary is familiar. Perhaps he has used natural semantics himself at various times in his professional career, both inside and outside the House.
Mr. Paul Goodman (Wycombe) (Con): What about neo-endogenous growth theory?
Hon. Members: Post-neo-classical!
Mr. Hoban: Was it “neo-classical post-endogenous growth cycle”, or a combination of those words in no particular order?
I consulted Professor Davidson’s biography to see whether he had written anything about economics, but he had refrained from doing so, dealing entirely with semantics, causes and actions.
Madam Deputy Speaker: Order. I have allowed some relaxation of the strict rules of debate, but I think that now we are straying a little wide of the new clause.
Mr. John Gummer (Suffolk, Coastal) (Con): Will my hon. Friend give way? I may be able to help him to return to the new clause.
Mr. Hoban: I give way to my right hon. Friend.
Mr. Gummer: Will my hon. Friend again explain to the Minister that once tax law is complicated to the extent that it is beyond the ken of ordinary people, they cease to believe in its fairness? There is a fundamental problem with the kind of complication with which he has delighted us today. It is not reasonable to make people expect their affairs to be so complicated that they require the kind of advice that is available only to the very richest.
Mr. Hoban: I am grateful to my right hon. Friend for putting me back on track—as, indeed, did you, Madam Deputy Speaker. He has made an important point. We are asking taxpayers to examine the rules carefully, and to draw their own conclusions about whether they may be recycling lump sums. The amounts involved are relatively small: they may be as little as 1 per cent. of a person’s lifetime allowance, which is £15,000.
Rob Marris rose—
Mr. Hoban: The hon. Gentleman must realise that a number of people will build up £60,000 in their pension funds, and £15,000 is 25 per cent. of that. People with pension funds of that size will not be in a financial position to seek the expertise of members of the Institute of Chartered Accountants, such as myself, or lawyers or pension advisers. There is a real issue here: to what extent will people be able to interpret the Bill and the fairly detailed explanatory notes, and reach their own conclusions?
What will ultimately dissuade those people is the threat of having to pay 55 per cent. of the lump sum as a penalty. People who might otherwise wish to embark on sensible pre-retirement planning may find it difficult. We should also bear in mind that the pension contribution that is required to trigger the charges is only 30 per cent. of £15,000—£4,500. Relatively small sums could have an impact on someone’s overall pension. I believe that the law should be clear and straightforward so that people can understand, and that there should be some certainty.
The Economic Secretary to the Treasury (Ed Balls) rose—
Mr. Hoban: I shall explain in a moment how we might provide that certainty, but I think the Economic Secretary wants to “envisage” something first.
Ed
Balls: I shall resist the temptation to return to past
debates. I merely wanted to give some reassurance to the hon. Gentleman
and the right hon. Member for Suffolk, Coastal (Mr. Gummer). The hon.
Gentleman
quoted a number of advisers who may or may not have been involved in the
marketing of these schemes. May I give him a quotation from the
Chartered Institute of Taxation, which may provide some
reassurance?
“The PBR announced changes in the pension rules to prevent recycling of pension funds. CIOT was worried lest the ordinary taxpayer, with no tax avoidance motive, would be inadvertently caught, and wrote to HMRC setting out these concerns. HMRC were receptive to these comments and took them into account when drafting the proposed legislation and guidance. We believe the resulting provisions are workable and should prevent marketed avoidance without catching the innocent.”
I hope that that does provide some reassurance. This is well-made policy, which means that the innocent will not be caught, but those who are paying large amounts for tax avoidance purposes will.
Mr. Hoban: I am grateful for the quotation. I shall consider the issue of certainty in a moment.
Rob Marris rose—
Mr. Hoban: The hon. Gentleman seems to be hovering on the verge of an intervention. Does he wish to intervene again?
Rob Marris: I am grateful to the hon. Gentleman for his generosity. Perhaps I am not understanding him correctly: I cannot see what is so complicated about knowing whether one has reinvested a lump sum from a pension scheme, returning it to the pension scheme.
Mr. Hoban: If it is so clear, why are 21 examples and 28 pages of guidance necessary? However, let me take up something that the Economic Secretary said. Clause 159 is quite short and has a broad application, but its impact is mitigated by the 28 pages of guidance, which are very clear.
Ed Balls: Let me give the hon. Gentleman some further reassurance. We have debated the issue before, and I shall return to it shortly, but let me give him a second quotation from the Chartered Institute of Taxation:
“HMRC have consulted effectively on these changes; the resulting rules seek to separate structured tax avoidance from accidental or insignificant increases to pension fund payments, while the guidance includes a lot of excellent worked examples”.
In fact, there are almost 28 pages of them. It is the volume of those worked examples that means that the guidance is fit for purpose. The hon. Gentleman ought to praise us for being so open and transparent in our efforts to help people, rather than criticising us.
Mr. Hoban: What the Economic Secretary has said demonstrates why the position is not as clear asthe hon. Member for Wolverhampton, South-West suggested.
Let me now
deal with an issue that relates to amendments Nos. 62 and 14. The
Chartered Institute of Taxation said that it was happy with both the
clause and the guidance notes. The clause will remain on
the
statute book if the Bill is given its Third Reading tomorrow, but the
guidance notes will not be on the statute book. HMRC can alter
them.
My point is that there should be more certainty and more clarity about the tax regime. That is why the amending provisions propose that the Treasury be given regulation-making powers to set out the application of sub-paragraph (2) in order to create that certainty. The issues covered in the guidance notes would then be on the statute book through secondary legislation, so they could not suddenly disappear or be changed overnight without proper parliamentary scrutiny. Revenue and Customs and the Treasury would then be forced to produce clear, watertight wording rather than use 21 examples to clear up the scope and application of clause 159. It provides a way of moving from abstract philosophical treatises to the concrete reality of law and regulation. We would also be able to revisit the guidance when it changes as the statutory instruments would need to be amended.
I was grateful to the Economic Secretary in Committee when he made a kind offer, namely, that if significant material changes were made in the guidance, he would ensure that they were circulated to the Opposition so that we would have a chance to comment upon them. He said that he would take advice to ensure that the Government continued to take a consultative approach to guidance issues. I am flattered, as would be my successor, to be given the opportunity to comment at some point when the guidance changes, but rather than leaving it to a single Member to comment, it would be preferable if the Committee had the opportunity to question the regulations. My proposals are an attempt to achieve some clarity, consistency and parliamentary scrutiny to ensure that the guidance notes, which are such an integral part of the application of clause 159, achieve a degree of security and certainty. It is an important matter and I conclude my remarks on that point.
Mr. Dunne: I shall make a couple of brief observations in support of new clause 3, proposed by my hon. Friend the Member for Fareham (Mr. Hoban). His concluding comments about the need for consistency and clarity were well made. We are entering a new era for pensions in this country. Following the introduction of A-day, individuals now have the opportunity to accumulate substantial pensions— [Interruption.] Before the hon. Member for Wolverhampton, South-West (Rob Marris) invites me to declare an interest, I will maintain my consistent and clear conduct before the House by declaring that I will be the beneficiary in due course of a personal pension and I am also a member, like everyone else in the House, of the parliamentary pension scheme. I declare that fully for the record.
The introduction of the new regime under A-day means that, at the upper end of the pension market, a decision needs to be taken by individuals who are considering whether to add to their pension funds over the coming years. The decision means setting aside potentially significant amounts of money—up to £200,000 in the current year. On my parliamentary salary, it is unlikely for me, but it applies to those who have sufficient income. They have to decide whether or not it is an appropriate repository for their funds.
The Government need to deal with the logical inconsistency of having established the alternative secured pension structure, but allowing some individuals not to have to take out an annuity at the age of 75, while others do. If the Government are paying attention, they need to reflect on whether to relax the compulsory annuitisation regime and allow individuals, on reaching 75, to withdraw income and thereby suffer income tax and, if these people were to die with large residual amounts in their pension fund, whether those amounts should form part of the estate and be taxed under the inheritance tax regime. That would an entirely logical and consistent approach to these larger individual pension amounts and would in no way conflict with the objectives of the Turner commission and subsequent White Paper.
7.15 pm
I remind Ministers that the White Paper addresses the part of the population that has little prospect of paying inheritance tax and encourages saving among those earning up to £32,000 a year. Such individuals are unlikely to be able to accumulate sufficient assets over their lifetimes to get into the inheritance tax net, which is an objective of the rules on annuitisation. The Government need to look into that as a means of refining the White Paper, which I would greatly welcome. Like my hon. Friend the Member for Fareham, I do not anticipate that the Government will accept the new clauses, but they need to reflect on these issues as the White Paper becomes an Act over the next year. By next year, I expect the Government to have reflected on these provisions and to introduce them into the Budget.
Rob Marris: What does the hon. Gentleman believe the minimum retirement income should be, as specified in new clause 3?
Mr. Dunne: I am not a statistician or an actuary, so I cannot foresee the right amount, but I suspect that it should be close to the level that would take people out of means-testing. That would be the principle to apply, but I cannot tell the hon. Gentleman exactly how many pounds the amount should be. The hon. Member for Wolverhampton, South-West managed to intervene, just as I concluded my remarks.
Julia Goldsworthy: The Conservative new clause 3 provides an alternative to the current position, whereby people are forced to buy an annuity with their pension funds when they reach 75. The Conservatives have made that proposal before, most notably through the private Member’s Bill of the hon. and learned Member for Harborough (Mr. Garnier) in 2002. As the hon. Member for Fareham (Mr. Hoban) said, the issue was raised more recently in connection with the Finance Act 2004 and the Pensions Act 2004.
I draw the House’s attention to the ping-pong with the other place at the later stages of the Pensions Bill. This very matter was one of the most significant issues debated and it was the collapse of the Conservative vote in the House of Lords that prevented the opportunity of the provision being written on to the statute books. If the Conservative peers had been able to vote, perhaps we would not be debating the matter now.
The new clause is designed to limit the requirement to purchase an annuity to the amount that would give the annuitant a minimum retirement income, and it would provide greater flexibility over the remaining residual fund. That contrasts with the current situation in which 75 per cent. of the funds from a money purchase pension must be used to purchase an annuity by the age of 75. Since the scheme was set up, life expectancy has increased considerably, which alone might provide the Government with a reason to look into the matter again. The new clause would amend the Finance Act 2004, set up a retirement income fund and create a rule whereby withdrawals cannot be made unless the individual has purchased a relevant annuity that is linked to the retail prices index.
The hon. Member for Fareham will know that the Liberal Democrats have supported the approach in principle in the past and we do not intend to change our minds today—we will still be on the side of the angels. However, I have one query about the drafting of the new clause in respect of an issue that my hon. Friend the Member for Northavon (Steve Webb) has mentioned.
The principle behind the minimum retirement income is that it exists to prevent individuals from withdrawing all their money from their pension and falling on to state benefits. The annuity that would need to be purchased under new clause 3 would prevent that from happening, but in terms of qualifying for state benefits, all income is taken into account, not just the income from the annuity. The hon. Member for Fareham assumed that my hon. Friend the Member for Northavon was talking about fluctuating income, but it could affect someone with a steady income close to the minimum income. If they were below it, they would fall on to state benefits. However, under the provision, all the money in the pension pot would need to go into the annuity to provide a minimum income that, together with their other income, might take them significantly above the minimum income requirement in the new clause. I hope that the hon. Member for Farehamwill clarify the operation of the new clause in that respect.
Finally, I have a question for the Economic Secretary. The Secretary of State for Work and Pensions promised a review of the pensions situation following the Turner report. When might we see that?
Steve Webb: I want to make a brief contribution. These days, I follow health matters, but when I saw that annuities were to be debated today I could not resist one last bash.
I am sure that our new Economic Secretary, who studied philosophy, politics and economics at Oxford, will be familiar with the concept of a Pareto improvement—that it is possible to act in such a way that no one is worse off, but someone is better off. In economics, of course, that is highly desirable. The reform of annuity law is a Pareto improvement—what these days we would call a win-win situation. No one loses if we can reform annuities in a way that gives people choices, at no cost to the taxpayer. As has been noted, the implications for means-tested benefit expenditure and the possible loss of tax revenue arethe two areas of worry in terms of cost to thetaxpayer.
New clause 3 is rather excessive in its attempts to deal with the risk falling on means-tested benefits. It is too prescriptive because, as I said in an earlier intervention, some people might be able to draw down their entire pension pot and still not run any risk of falling within the realm of means-tested benefits. However, new clause 3 would oblige them to buy an index-linked annuity of a certain value. The official Opposition do not know how much that would be, even though they want us to support the new clause, but that proposal is unnecessary and unduly restrictive.
We understand that there has to be a fail-safe—and I believe that it should be individual-specific—to ensure that a person’s pension pot is not raided to such an extent that he or she falls at the mercy of means-tested benefits. However, I have always believed that the Treasury always gets its tax money anyway. For example, tax is paid when a pension pot is drawn down, and also when people leave money when they die.
The Treasury’s ideological line is to convince us that tax relief is some sort of incentive. By and large, with the exception of what happens with the lump sum, tax relief is about taxing things once rather than twice. Our tax regime gives tax exemption on the way in and levies tax on the way out, but that is no reason to say that any change would undermine the incentive purpose of tax relief. Pension tax relief is about avoiding double taxation, not about incentives.
As long as the tax is paid at the end in some way, why should the Treasury care how it is paid? It could be paid as a charge on the un-annuitised fund at death, or on the pension that is eventually drawn at the end. It could be also be paid on the money drawn out while a person remains alive, but the Treasury will always get its tax, so who loses?
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