Standing Committee F
Thursday 13 June 2002
[Mr. Joe Benton in the Chair]
(Except clauses 4, 19, 23, 26 to 29, 87 to 92,
131 and 134 and schedules 1, 5 and 38)
Life policies etc: chargeable events
Amendment proposed [this day]: No. 187, in page 60, line 35, at end insert—
'(1A) Section 539 (introductory) is amended as follows.
(1B) In subsection (1) (scope of Chapter II of Part XIII of the Taxes Act 1988) after ''policies of life insurance, contracts for life annuities and capital redemption policies'', insert ''but any gain falling to be treated as taxable income by virtue of this Chapter shall be disregarded from total income in applying section 257(5) (reduction in personal allowance for elderly taxpayers by reference to total income).''.'.—[Mr. Flight.]
Question again proposed, That the amendment be made.
Mr. Edward Davey (Kingston and Surbiton): As our erstwhile football-supporting colleagues return to their places having seen Italy qualify by the skin of their teeth, much to our joint chagrin, I can return to the matter in hand. I had risen to support the amendment tabled by the hon. Member for Arundel and South Downs (Mr. Flight) because it is important. It would deal with a real unfairness that hits many pensioners on modest incomes when they cash in a life assurance policy, life annuity or capital redemption policy, because the value they realise is added to their income for that year, which often takes them above the age allowances, so they sometimes pay a significant amount of income tax when, in normal years, they have a very modest income. The amendment would tackle that genuine unfairness so that pensioner savers would not suffer that tax hit.
My guess is that the Government will not accept the amendment, but I hope that the Financial Secretary, when she responds to this useful debate, will not dismiss it out of hand. The Government would be wise to realise that the hon. Gentleman has flagged up a serious matter for many pensioners and I hope that the Financial Secretary will assure the Committee that she will discuss the amendment with her Treasury colleagues and consider whether they might take such action in future, either by accepting the amendment or by introducing top-slicing relief so that pensioners will no longer be hit by that tax.
The Financial Secretary to the Treasury (Ruth Kelly): I welcome you, Mr. Benton, back to the Chair.
It is incumbent on those Opposition Members who support the amendment to explain why life assurance policies should be treated differently from other forms of savings policy. They seem to misunderstand the purpose of the age-related allowance, which is to give extra help to those aged 65 and over who must rely on
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relatively modest incomes. That is why it is given in full only to those whose income does not exceed a certain limit. A life assurance policy is income and it is right to take that into account. A pensioner pays no more income tax than a younger person with the same income and the same family circumstances. Most life assurance is taken out as a form of saving and there is no good reason to treat it differently from income from other savings products. The amendment would give a unique tax privilege to income from life assurance.
Life assurance is a very flexible savings vehicle and it is possible to take income of up to 5 per cent. with no tax until the end of the policy. Life assurance products can also be structured to produce a regular stream of income through arrangements grouping together a number of different policies. Age-related allowances exist to help people on relatively modest means. If the amendment were accepted, it would allow all such income to be received without its affecting age-related personal allowances. For example, it would allow someone over the age of 65 with a pension income of less than £20,870—a significant amount of money—to receive investment income from insurance without losing any of the allowances they would lose if their money had been directly invested in a bank account. For that reason it would give a tax advantage to part of the population aged over 65 who are relatively well off compared with their peers.
I shall not detain the Committee with a long discussion of our record on pensioner poverty, which speaks for itself. We are determined to tackle pensioner poverty. The amendment before us would privilege one section of the elderly without helping us target pensioner poverty.
Mr. Davey: Does the Financial Secretary agree that many forms of income from savings have tax exemptions, in addition to the age-related allowances? For example, there are individual savings accounts, which do not suffer tax. We are talking about one particular form of saving, which compared to savings that can be put easily into an ISA, does not gain those benefits. The logic of the current tax position is against her.
Ruth Kelly: Certain savings vehicles are taxed in very different ways. As the hon. Gentleman knows from our earlier debate, there is a difference between qualifying and non-qualifying life policies. If we compared the annual income paid from a life assurance product to an individual with income from savings invested in a bank or building society account, we would not choose to tax privilege the life assurance product versus savings in other forms. That would not be a very effective use of resources, nor would it add significantly to the pursuit of reducing pensioner poverty.
Rob Marris (Wolverhampton, South-West): Perhaps the Minister could remind us of something. My understanding is that until 1984 there was 15 per cent. tax relief on premiums for life assurance policies. Policies that are more than 18 years old would have had tax relief when the premiums were paid.
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Ruth Kelly: My hon. Friend speaks from a position of great knowledge, and for the sake of the Committee he has made an extremely valuable point. I thank him for it.
The hon. Member for Kingston and Surbiton (Mr. Davey) suggested another potential way of tackling the problem, which is to apply top-slicing relief to the calculation of age-related allowances. The purpose of top-slicing relief is to reduce the possibility of taxpayers who would normally pay tax only at the basic rate paying tax at a higher rate solely because of a one-off gain from a policy that has accrued over many years.
Of course, we have received representations on this issue in the past, not least from the hon. Gentleman, but they do not match the amendment before us. I would like to clarify that. It is not clear to me that applying top-slicing relief to the calculation of age-related allowances would in every respect alleviate pensioner poverty as the hon. Gentleman maintains. It would be incredibly complicated to calculate. One would have to average the gain over the period of the policy, and work out the impact of any age-related allowances in previous years. In many cases, there would be no difference to the amount of tax paid, but it is perfectly possible that individuals would end up paying more tax because they would lose more than one year's age-related allowance during the life of the policy. I do not think that that is a simple solution to the matter, and for those reasons I urge the Committee to reject the amendment.
Mr. Howard Flight (Arundel and South Downs): The Minister asked why, and my reply is as follows. As she knows, the data show that, typically, the more sophisticated and better-off do not save with such life policies. They have learned to save through personal equity plans, ISAs and other ways, and they would not qualify for the age allowance because their incomes are often too high. The typical case study of people with policies that are caught in this case concerns people of quite modest means who may have been oversold a policy in the past. Some of them have a non-qualifying policy, which is different, but the same point obtains. They have worked in a fairly modest way in other parts of the world and have saved a bit in a non-qualifying policy as an alternative to a pension, because they are not eligible for a pension. Their basic income in retirement is very modest, which is why they would otherwise qualify for the age allowance. They have saved in a life policy, which may have gone up by X or Y, depending on the fortunes of the stock markets. For better or worse, they view whatever gain they have been fortunate enough to make not as income but as capital gain.
I am surprised that the Financial Secretary has not received letters from constituents who have discovered that, because of their little nest egg, which, with a bit of luck, has made a bit—unfortunately, it appears that the reverse will be the case for the next few years—they have lost their age allowance. Their incomes are typically only £10,000 or £11,000, and they feel huge resentment. They believe that they are being unfairly
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screwed and, from their perspective, I can understand that.
Rob Marris: The hon. Gentleman seems to suggest, in essence, that the taxpayer should bail out people who have been mis-sold policies. Is that what his amendment is designed to do, or have I misunderstood him?
Mr. Flight: That is an unjust comment, because those people may have saved through life assurance for perfectly good reasons. The wealthier members of society who are not eligible for age allowances have probably saved in more sophisticated ways that may have been more tax efficient. It is a different form of saving.
Just as an observation, the people who have the sort of life policies to which I refer will have been modest savers. If they were in the expatriate category, life policies were probably a good way to save. They did not want to risk direct exposure to equities that might go up or down and wanted to pay only a modest amount each month. Similarly, those in the UK who saved that way in the past were often saving amounts each month that were so small that putting them into unit trusts, given front-end charges, would not have made sense.
I am saying not that the policies were mis-sold but that this is a historic, old-fashioned way of saving that probably suited the person's cash flow. The crucial point is that we are talking not about the better-off members of society but about people whose regular, basic incomes in retirement in old age are very modest. From their perspective—Governments should consider tax from the perspective of citizens, particularly those who are less sophisticated—it is extremely unjust that they should lose their age allowance in the year that their insurance policy delivers a gain.