HL Deb 29 January 2002 vol 631 cc129-55

6.2 p.

House again in Committee.

Baroness Hollis of Heigham

If I mention to noble Lords that the next amendment is on the subject of polyandry, polygamy and the rest, they may be tempted to stay.

Clause 12 [Polygamous marriages]:

Lord Higgins moved Amendment No. 67:

Page 7, line 37, at end insert "or polyandry".

The noble Lord said: In moving Amendment No. 67, perhaps it would also be convenient to speak to Amendments Nos. 68 and 69. I must stress that we on this side of the Committee are not sexist; that is why we want the Bill to refer to polygamy and polyandry. Thus, we come to a more interesting matter.

First, throughout some 33 years in the other place and four or five years in this House, I cannot remember ever seeing a clause in a Bill which dealt with polygamy. No doubt the Minister will be able to tell us if that is not so. At all events, Clause 12, which apparently seeks to deal with the problem, is very complicated.

Secondly, perhaps the Minister can tell us approximately how many people are involved in such a situation. The issue refers to a question under a law. I presume that that means that a man in a country other than the United Kingdom can legally marry more than one woman or, alternatively, a woman can marry more than one man. Therefore, essentially it is a matter concerning people from another jurisdiction who are immigrants into the jurisdiction of the United Kingdom.

Clause 12 refers, as do so many other parts of the Bill, to making regulations. As I said earlier, in our view it is appropriate to use regulations if something is going to vary over time following the enactment of the Bill. But if an issue can be decided now and is not likely to vary over time, then it should be dealt with on the face of the Bill rather than in regulations.

Therefore, apart from adding the word "polyandry" to "polygamy", the amendment seeks to set out a specific solution to the problem. There are, of course, all kinds of alternatives; for example, a household could be aggregated in line with the approaches which apply elsewhere in social security legislation and the various members of the household could be deemed to comprise a couple. Alternatively. I suppose that one could disregard spouses other than the first wife and make them ineligible for pension credit. Other wives or spouses could then be treated as a single person. There is a whole range of different alternatives.

The matter about which we are not in the least bit clear in relation to this clause is which of the various alternatives the Government will select. I should have thought that, having given attention to the matter. they would now be in a position to tell us how they are going to deal with it. The amendment suggests that the person and other party in question should he treated as a married couple with additional spouses treated as a single person. That appears to he a straightforward way in which to deal with the matter.

At all events, I believe that this issue should be cleared up in legislation on the face of the Bill. Having said that, I hope that the noble Baroness can answer the specific questions that I mentioned at the beginning. We can then take the matter from there.

Baroness Barker

Hats off to the noble Lord. Lord Higgins, for tabling one of the most intriguing amendments in a very long time. I found it most interesting. Ever since I read the amendment, I have been racking my brains to think of a nation on earth where polyandry is a legal state. Thus far, I have not been able to find one, but no doubt the Minister has been able to because she has a crew of people who work on such matters. If I were betting, I should put my money on somewhere in Polynesia. However, I shall be interested to find out.

Lord Higgins

It is the principle that is important; one would not want to discriminate.

Baroness Barker

The noble Lord raises an interesting point. The issue appears to concern polygamous marriages which are contracted in nations other than our own by people who live here. I consider that an interesting question to have raised. I pay tribute to the noble Lord, Lord Higgins, and the noble Baroness, Lady Noakes. Throughout our discussions on the Bill they have attempted to clarify matters by drafting, and that has been extremely helpful to our debates. My understanding is that this matter is covered by existing social security law which recognises that some people who are migrants to this country were married abroad in circumstances where polygamy—by and large, it is polygamy—was acceptable and a part of their culture.

In speaking to the amendment, the noble Lord, Lord Higgins, used the word "problem". When I read the amendment, I tried to ascertain whether a problem existed. Having asked practitioners and researchers, I was interested in the fact that no one is yet sure that there is a problem or, at least, a presenting problem. That is not to say that wives in polygamous marriages do not have problems; it is that those problems are not yet being presented to authorities. It is an interesting question as to whether or not there is a problem. It would be an interesting and useful subject upon which to have some research.

Noble Lords will have heard me say before that the older population is changing, and patterns of migration to this country mean that it is becoming more diverse. There may be a problem. It is not a pressing problem yet. However, in an inadvertent way the noble Lord, Lord Higgins, has raised an interesting issue. It should not perhaps be addressed in the way in which he addressed it. None the less, it is an interesting point to raise.

Baroness Hollis of Heigham

I am sure that the noble Lord, Lord Higgins, would be sorry to think that his amendment was inadvertent. I am sure that he thought it was very advertent.

I am fascinated by the Committee's interest in polygamy. This is not the first time that the subject has been raised. I was looking for some help over in a certain quarter. My understanding is that Section 133 of the Social Security Benefits Act 1992, which relates to council tax benefits, also has a specific subsection relating to polygamy. Therefore, this is not entirely new. However, I understand that the noble Lord may not have that cross reference immediately to mind.

Amendment No. 67 seeks to do a reasonable thing. It looks to give equal recognition in pension credit to the custom of a woman taking several husbands as well as recognising the practice of a man having several wives. However, it is unnecessary. Polygamy includes both men having several wives and women having several husbands. The real distinction is between polyandry and polygamy. I do not know whether the noble Lord lays claim to having studied classics or Greek at school, but "polygamy" is a politically correct word, even if the practice may not be.

The noble Baroness asks where polyandry is practised, by which she understood it to mean a situation in which a woman has several husbands. She knew perfectly well that I would not be able to resist the temptation of trying to find out. Polyandry, unlike polygamy, is prohibited by law in most countries. I am told that two principal forms of polyandry exist, and they are not in Polynesia. Among the Nair people who inhabit the Malabar coast of India a woman may marry several men of equal or superior rank, known by anthropologists as the Nair family. The system also includes the matrilineal social structure, in which children are included in the mother's clan and property is inherited in the female line.

Another distinct type of polyandry is practised in areas of Tibet. In that form a woman may marry the eldest brother of a family and then take his brother also as her partner. Certainly the first form is a way of keeping property going down the female line. I thought that I would share the diffusion of useless knowledge with noble Lords.

Amendment No. 68 seeks to recognise the fact that in a polygamous marriage a person might have more than one additional spouse. Likewise, the Bill also deals with that. Under the Interpretation Act 1978, terms expressed in the singular can he taken to include the plural. So, the phrase "any additional spouse" can justifiably be read as "any additional spouses". Amendment No. 69 is more significant, however. in that it would have the effect of treating the first two members of a polygamous marriage as a married couple, with subsequent spouses treated as single people. I should like to explain to the House why we do not believe that that would be an appropriate approach to people living in such households.

We had a similar discussion on one of the other pension Bills within the memory of noble Lords, As noble Lords will know, the MIG regulations, along with those of other income-related benefits, make provision for those circumstances. Where a polygamously married household exists, a special assessment is made of the amount of benefit payable to the household. We do not know how many, but we think that we are probably talking in the order of not more than 200 households. That is based on the couple rate of benefit for the claimant and his first spouse, and the difference between the couple rate and single person rate of benefit, which is payable for each subsequent spouse. Therefore, the second wife gets the addition of what the first wife would get to the original single person's allowance, and so on clown the line. In addition, the financial resources of each member of the polygamous marriage are aggregated. I believe that that seems reasonable and provides a basis for dealing with the situation.

A glance at Clause 12, with which the amendment is grouped but to which the noble Lord did not speak, reveals that we are dealing with the same basic structure as with MIG: an unambiguous definition of what is meant by a polygamous marriage and provision to prescribe for a non- standard amount of pension credit and aggregation of the household resources. In the light of those comments, I hope that the noble Lord will feel able to withdraw the amendment.

Baroness Noakes

Before the Minister sits down, can she tell the Committee how she intends to treat unmarried polygamous family units?

Baroness Hollis of Heigham

I suspect that that would be blasphemous. If a person has a polygamous marriage and comes to the UK, that is being incorporated into the UK from outside. If such persons come over here as a couple and then acquire a subsequent "spouse", that "spouse" is not legal under British law and would be a mistress. There is no recognition in social security law of funding for a mistress as well as a wife for a UK resident. If I have misled the noble Baroness or in any sense cramped her or anyone else's aspirations, I shall seek to ensure that my comments are correct.

Lord Higgins

On the last point, I would have said that that is bigamy. Despite the clear explanation given by the noble Baroness, I am still unclear as to why this needs to be in regulations. I am not in the least clear about why we cannot simply put it on the face of the Bill. Presumably this is something which will not change. The noble Baroness has set this out clearly. Therefore, I would have thought that she could table an amendment on Report which puts on the face of the Bill exactly what she has just said.

I turn to the amount of state pension credit which such individuals receive. I presume that they would all have become UK citizens at this point. Will they receive state pension credit—I emphasise "state"—as a result of this legislation if they arrive in this country as a polygamous household but are not UK citizens? The noble Baroness mentioned that there are 200. Presumably that is 200 households. Will they also receive widows' pensions, for example? Once we go down that particular route, I am not sure where the matter ends.

Baroness Hollis of Heigham

Neither am I, given the world that the noble Lord has opened up. As I understand it, for eligibility to income-related benefits, one has to establish habitual residence in this country. Therefore, persons in this situation who have come to this country in their sixties or seventies—it is hard to work out what family permutations might be possible—might well not have a complete retirement pension record; that seems probable. They would need to pass the habitual residence test and not fall foul of refugees' exceptional leave to remain, asylum status and so forth. They might be elderly relatives of someone who is already resident here. Normally, they would have to show that they would not be dependent upon public funds. However, if they were entitled for whatever reason under the habitual residence test, they would then be eligible for minimum income guarantee. In that sense, they would receive part of the state pension credit in the form of MIG. In response to the noble Lord, it seems unlikely that they would be eligible for the savings element of the pension credit.

I am told that since August 1998 immigration legislation has prevented a polygamous wife settling in Great Britain with her husband if another wife is already in the country. Given that, the number of polygamous households in Great Britain should diminish over time.

The figure of 200 was the approximate figure we have of those households eligible to claim MIG. I find it hard to envisage circumstances, other than in a handful of cases, in which someone has a complete retirement pension—that is, that he has been here for a working life of 40 years—and savings from an occupational pension, and all of his marriages occurred legitimately outside the UK. It is conceivable. I hope that answers the noble Lord.

The basic arrangement is that for one of the marriages—presumably that to the first wife—the members are treated as husband and wife. Subsequent wives are treated as dependants receiving the same moneys. The noble Lord asked why this is being done by regulation. In the light of changes perhaps in immigration law, for example, it is conceivable that legislation might need to change in future. Having a regulation power to amplify the words in the Bill seems to me to be a wise precaution.

Given the concepts of human rights and so on, it is not impossible that attitudes and conventions and the responses of government to the treatment of polygamy may change over time. Therefore, the Government might want to revisit this matter at some unspecified date in the future. It is not wise to do that through primary legislation.

Lord Higgins

I am grateful to the Minister for that further comment. I do not want to prolong proceedings unnecessarily. This subject is rather like peeling an onion—one keeps getting more and more layers that one did not expect. The noble Baroness has now suddenly said that, since 1998, if one was polygamously married quite legally in another country, one can bring in only one wife.

Baroness Hollis of Heigham

I did not actually say that. I said, prevented from settling in Great Britain with a husband if another wife is already in the country. In other words, going back and importing yet another one in.

Lord Higgins

I understand. Otherwise one is slap into the Human Rights Act problems. I think that we should study carefully what the noble Baroness has said to see what further complications may ensue. If anything, the matter is more complicated than I had supposed. I am grateful to the noble Baroness, as always, for her extremely clear exposition. I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

[Amendments Nos. 68 and 69 not moved.]

Clause 12 agreed to.

Clause 13 [Transitional provisions]:

Lord Higgins moved Amendment No. 70:

Page 8, line 18, at end insert "or"

The noble Lord said: In moving Amendment No. 70, standing in my name and that of my noble friend Lady Noakes, I shall speak also to Amendment No. 71.

Amendment No. 71 is a rather unusual amendment. It seeks to knock out the words "or savings" from Clause 13(11). Clause 13(1) states:

"The Secretary of State may by regulations make such transitional provision, consequential provisions or savings as he considers necessary or expedient for the purposes of, or in connection with",

and so on. I am not clear how the Secretary of State makes savings. It seems to me that that is probably a misprint. Am I right or wrong? I beg to move.

Baroness Hollis of Heigham

I can well understand the noble Lord's perplexity. It is a quite technical matter. He may see the need for the words after I have explained the matter to him.

The amendment limits the power of the Secretary of State to introduce regulations that will protect pensioners who get income support—MIG—immediately prior to the introduction of state pension credit.

Clause 13 provides for the transitional powers that the Secretary of State will require in order to provide for the smooth transfer of 1.8 million pensioners from the current system of financial support in income support to state pension credit. Subsection (1) provides the power to make transitional, consequential and savings provisions. The distinction between them is quite technical. A savings provision preserves the effect of a provision that has been repealed or amended. It is normally applied in limited cases so as to preserve rights that have accrued under those provisions.

It is essential that the Secretary of State has a range of powers available to him to introduce regulations that will enable him to transfer people from MIG to pension credit without fuss and hassle. It would be unfair on these pensioners if they could lose income because the Secretary of State had not been granted the power to protect them.

No one will lose out. It is the Government's intention to ensure that a person who should qualify for protected support under the IS scheme will not lose out from the introduction of state pension credit, and that the calculation of their new entitlement will take account of the protection they receive. We do not think that there are any such people whom we would not cover by the transitional regulations. But if there are, the power to save existing provisions will ensure that if any unforeseen issues are identified before the introduction of state pension credit the Secretary of State will be able to protect the very small number of people who could be affected. Any provisions made under the savings power would then work in tandem with any of the other arrangements for transition.

Previous social security legislation has included powers that have permitted successive Secretaries of State to protect the position of people who transfer from one scheme to another. It seems unwise to depart from this principle now.

State pension credit is being introduced to improve the financial position of many pensioners. It makes little sense to penalise some of the poorer pensioners by removing these essentially protective transitional powers. With that explanation, I hope that the noble Lord will feel able to withdraw his arnendment.

Lord Higgins

I am sure that the draftsman gave careful attention to the provision. But it seems to me that if there is not a misprint, there is a word missing. If one leaves out the transition and consequential provisions and so on, Clause 13(1) reads: The Secretary of State may by regulations make such … savings as he considers necessary or expedient". It may be that he can make savings provisions, but there is no way in which he makes savings in any possible normal interpretation of the word.

Baroness Hollis of Heigham

The noble Lord is confusing "savings" in the form of cash savings, which is not what the matter is about, and saving an existing right or entitlement. That is the point about transitional protection. I agree with the noble Lord that the provision does not bear the conventional use of the word "savings". This is a quasi-legal term. It is a power to save for a few individuals the current rights that they enjoy. Without that power, he might be able to pick up only the people not protected by conventional transitional arrangements.

Lord Hodgson of Astley Abbotts

Would it be helpful if the word "legislative" was inserted in front of the word "savings"?

Baroness Hollis of Heigham

This is a fairly conventional clause which is put into all changes as a form of belt-and-braces safety net in case there are some instances which are not caught up by the conventional regulations which offer transitional protection. Some benefits one keeps for ever and a day—for example, invalidity benefit going over to incapacity benefit. With others one takes the people out, and so on. But one needs the extra power. The word "savings" is often used to refer to savings provisions. I can understand why the noble Lord has perhaps assumed that the term relates to cash savings. But it does not. It is about keeping those powers available.

Lord Higgins

I did not suppose that "savings" related to cash savings. It simply did not make sense. It may be a technical expression. I do not know to what extent it has ever been challenged in the courts or elsewhere, but on the grounds of clear drafting and so on, it is a remarkably esoteric and unnecessarily obscure way of putting the matter. If the provision simply wants to say that the Secretary of State may preserve existing provisions as a transitional arrangement, that would be sensible. I do not want to press the point. But it is not a satisfactory way of drafting legislation. I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

[Amendment No. 71 not moved.]

Clause 13 agreed to.

Clause 14 agreed to.

Clause 15 [Income and capital]:

The Deputy Chairman of Committees (Lord Dean of Harptree)

If Amendment No. 72 is agreed to, I shall not be able to call Amendments Nos. 73 to 81 inclusive on grounds of pre-emption.

Baroness Noakes moved Amendment No. 72:

Page 9, line 6, leave out subsection (1) and insert— "(I) Income and capital shall be defined and treated as for income tax purposes."

The noble Baroness said: We now turn to a large batch of amendments which deal with an important part of the Bill; namely, the definition of income and capital. I referred in previous amendments to different definitions of income used in the Bill. All of these, to a greater or lesser extent, draw on the definitions of income and capital that are contained in Clause 15. There are a number of concerns which will be explored in the amendments. They are partly about the theoretical bases of the calculations and getting clarity about what is and what is not intended. Lying behind a number of these amendments are some practical issues and, in particular, the impact on savings. That is an important aim which the Government have and which we, on these Benches, share.

Amendment No. 72 is a probing amendment. It deals with the complication of defining income and capital in the Bill. It eliminates the list of income sources in subsection (1) and in later regulations and replaces it with the simple concept of using the definitions that have been developed and are used for income tax purposes.

I am sure the Committee will be aware that there is an extensive body of case law about whether something is or is not income for the purposes of tax rules. I suggest that we use that. I am well aware that the Department for Work and Pensions has developed over the years its own rules on what it treats as income, capital and so on. However, in the interests of simplicity, accessibility and understanding, I suggest that the income tax rules are a good basis. It is the Inland Revenue's core business to define income, to spot new forms of income which may not have been brought previously within the net. On the ground of public sector efficiency income might be left to the Inland Revenue while the Department for Work and Pensions deals with its core role—calculating and paying benefits.

I refer to the Government's consultation paper on pension credit in November 2000. In referring to the integration of tax and benefits, the aspiration was expressed of making the pension credit more automatic and reducing overlap between the tax and benefit systems. The paper states:

"The Government will look to the tax system to consider whether there could be alignment with tax rules on the treatment of income, smoothing the path to greater tax benefit integration in due course".

That is very laudable. However, the way in which the pension credit has been constructed goes completely against that aim because it uses income concepts which are in some cases alien to those for income tax purposes and, in particular, the deeming of income to which we shall refer later.

I hope that this simpler approach—it will be consistent with the Government's aims for the tax and benefit system and more understandable and simpler for those dealing with the system—will be commend itself. I beg to move.

6.30 p.m.

Baroness Hollis of Heigham

The big difference is that something like 1.7 or 1.8 million pensioners currently enjoy minimum income guarantee under social security legislation. I understand that only about 70,000 or so (if that) of pensioners who will be entitled to state pension credit pay tax. Therefore, to move all those on to a tax basis would seem to be folly.

Amendment No. 72 seeks to bring the treatment of income in pension credit fully into line with the tax system. Pension credit and its new income assessment share many of the objectives of the new tax credits, both incorporating longer awards and a simpler administration process. But we designed pension credit to suit the needs of pensioners. It is more tax-like, wherever that made sense, but we are not being driven by dogma.

Pensioners themselves are not interested in the arguments about tax-like or benefit-like systems. Most do not pay tax. They will be more interested in whether we can deliver a system effectively meeting their needs without stigma—the word used by the noble Baroness, Lady Barker—which they see as an entitlement and, therefore, have no hesitation and no obstacle to claiming. That is why we have concentrated on designing a system that effectively gives extra money to pensioners who need it most as well as rewarding thrift when we come to the savings element.

Research has demonstrated concerns about the claims process and weekly means tests. We have gone to the five-year period. The tax system and the new tax credits deal with a quite different group of people from the group pension credit has been designed to help. Unlike people of working age—those are the people the tax credits deal with—pension credit has been designed to help pensioners. Few pensioners have contact with the tax system. Pensioners' income fluctuates much less than the incomes of the working age population. Pension credit is not taxable. So where a tax-like approach was not sensible, we chose a different solution for pension credit.

For instance, the new tax credits will usually assess someone on the basis of their income over the previous year. That relates back to an earlier discussion. This approach is sensible in that context because earnings do fluctuate and vary. It could not work well for pension credit.

Another example is the treatment of capital in pension credit. In the consultation document we said that we would consider the options for reforming the system to take income from capital into account:. We could follow the tax system and take actual income and savings into account but we have listened to pensioner groups which said that pensioners would find it onerous and complex to record actual income from their savings. What is gross? What is net? We decided, therefore, on the notional rather than actual rate of return, plus the £6,000 disregard. This will be simpler for pensioners who will not have to declare precisely how much interest they have received.

Not following the tax-like approach here has also allowed us to deliver on our objective of taking many pensioners out of the capital rules—by ignoring the first £6,000 of savings. I hope that the Committee agrees that this makes better sense. When I referred to 70,000 who may pay tax, I should have said that 70,000 people may come within the new tax credit framework, not necessarily paying tax.

The noble Baroness referred to the consultation document. In that document we said that we sought to simplify and raise the guaranteed minimum income level to over £100 a week by 2003. We are doing that. We said that we wanted to replace the old pound for pound withdrawal system by a much fairer system which would abolish the savings trap. We are doing that. We said that we would abolish the capital rules and replace them with an income test more in line with the income tax system. We are not doing that, as I have said, because we listened to pensioners and pensioner groups prefer the approach that we have adopted. That was riot necessarily our first thought but it is so after consultation. That is the point of a consultation paper.

We said that we would move away from the intrusive weekly means test to a system where awards are fixed over much longer time periods. We are doing that. We said that we would reduce the income tax burden on pensioners by raising the personal tax allowances available to those aged 65 or over. We are doing that.

In terms of the consultation document to which the noble Baroness referred, we have met our proposals apart from that on the treatment of capital, and there we have moved in response to pensioners' organisations and the consultation exercise. That Is, of course, what a consultation exercise is for.

In the light of this response, I hope that the noble Baroness will feel able to withdraw the amendment.

Baroness Barker

Before the Minister sits down. will she clarify her statement about the 70,000 pensioners coming within the new tax credit framework? I should find that enormously helpful.

Baroness Hollis of Heigham

This relates to questions about earnings: those aged between 60 and 64 who may or may not be in the labour market. I understand that 70,000 people could get pension credit and the new tax credit. I do not have figures on how many on pension credit will pay tax. The figure could be 10 or 15 per cent. None the less, compared with the fact that 1.7 million pensioners of those we are targeting are currently on minimum income guarantee, it is a substantial number.

Baroness Noakes

If the figure of 70,000 relates to the 1.9 million on MIG, how many does the Minister estimate will receive the pension credit? It is a considerably higher number.

Baroness Hollis of Heigham

We estimate the number receiving pension credit to be between 5.5 and 6 million in the total scheme.

Baroness Noakes

Of those, how many does the noble Baroness estimate will pay tax?

Baroness Hollis of Heigham

I cannot give the precise figure. I cannot give a breakdown between the two. It depends on the size of the family, whether one refers to singles or couples. We think that the figure may be 10 or 15 per cent.

Baroness Noakes

I cannot say that I am surprised by what the Minister said. Pensioners normally come from a working environment. They learn the concepts about how their income is taxed. The Minister seeks to create a system where pensioners feel that they can claim the pension credit without stigma. Would not it be easier if the in-work treatment of income were moved to pensions?

The pension credit feels more like a core social security benefit, with means-testing and all that goes with it, and the problems of it not being taken up rather than an extension of a pension entitlement. The noble Baroness was keen to stress that factor earlier when we referred to means-tested benefit. I believe the department is missing an opportunity.

Baroness Hollis of Heigham

Before the noble Baroness sits down, perhaps I may point out that, given that about three-quarters of the number of pensioners do not pay tax and that the tax threshold for those aged over 75 kicks in at about £6,200 after personal allowances, she can see the point at which the provision begins. Is the noble Baroness really saying that she would wish to bring all the other pensioners into a regime which meant that they would have to have annual assessments of their income based on the tax system?

Baroness Noakes

Perhaps I may clarify the situation. In moving this amendment I did not say that I was moving toward an annual assessment. It is a separate issue as to whether one can combine the tax and benefit system at some stage where one would move to assessment on an annual basis. I am simply moving an amendment which states that how one calculates income is not by any deemed rules or putting things in or out, but one would simply use whatever the income tax system used as income. It is not the same as moving to an annual basis for assessment, but using the concept of income which has no additional need for regulation put forward by the department. There is both statute and case law about what is and what is not income.

My only point was that they are a set of concepts broadly familiar to those who have been in work and who have dealt with the income tax rules in their lives, notwithstanding the fact that when they retire many of them fall out of the tax net. I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Lord Higgins moved Amendment No. 73:

Page 9, line 6, after "In" insert "calculating re-entitlement to a state pension credit, any income or capital gains on a PEP or an ISA shall be completely disregarded, and subject to this, in"

The noble Lord said: In moving this amendment I believe that it will be convenient to speak to Amendments Nos. 82 and 83. As the Committee will realise, Amendment No. 73 contains one possible formulation of the point we wish to raise and Amendments Nos. 82 and 83 are alternatives in rather more technical language.

Quite simply, the amendments we are now considering are concerned with the definition of an income. In these amendments we are suggesting that income from PEPs and ISAs should not be included. On the whole, the intiatives taken by Chancellors on PEPs and ISAs have been very successful in doing something to increase the level of savings. A crucial point about them, which I believe many people found to be greatly convenient, is that one does not have to include them in the income tax return: they are totally out with the existing system.

As the noble Baroness said a moment or two ago, it is true that a very large percentage of pensioners do not pay tax anyway. I could not help wondering to what extent they have been slightly terrified by those unbelievably moronic adverts on television which keep asking people whether they have sent in their tax return. They might have given considerable worry to many pensioners who, as the noble Baroness has pointed out, do not pay tax but may have wondered in the circumstances whether they were supposed to.

As regards these amendments, there would appear to be a strong case for excluding any income or capital consequences—perhaps the noble Baroness can tell us whether it is relevant as regards the capital arrangements—to preserve the incentive which successive Chancellors have given for individuals to save. I believe that the present arrangement is convenient.

Of course, it is the case that many people, particularly those who have been driven away from with-profits funds with insurance companies and all the problems they have been running into, have been recommended in the Sunday papers to choose ISAs or PEPs rather than some other form of pension provision. From the wording of Clause 15 as it now stands, I am not absolutely clear whether or not other retirement pension income is to be included in the definition of earnings. If not, there seems to be a very strong case for excluding any income from ISAs and PEPs. I hope that the noble Baroness can clarify the situation as regards these two forms of saving. I beg to move.

6.45 p.m.

Baroness Hollis of Heigham

The provisions in Clause 15 abolish the rules that exclude pensioners with £12,000 or more of savings from any help. As we have said, we will apply a notional rate of return of 10 per cent on any capital sum over £6,000 disregard but £10,000 for people in residential care or nursing homes. This means that 85 per cent of pensioners entitled to pension credit will see any income received from their savings ignored entirely. Ignoring the first £6,000 of savings also helps better-off pensioners; for example, only pensioners with capital above £12,000 will face effective assumed rates of return greater than 5 per cent.

The noble Lord's amendments then consider the treatment of ISAs and PEPs. I believe that in tabling these amendments the noble Lord intended that actual income and capital gains from PEPs and ISAs should be disregarded in the pension credit income and capital assessments. Achieving such an aim would make the administration of pension credit extremely difficult. For example, we would have to find a way to distinguish the proportion of a person's fund made up of interest and capital growth and how we broke it down between the two.

In addition, I believe that the suggested policy would result in complex incentive effects. PEPs and ISAs would become a more attractive investment vehicle, and in addition to distorting the financial products market, it would also make it extremely difficult for financial advisers to give clear information and advice.

The fundamental difficulty with the proposed amendments is that the Bill, as drafted, already takes no account of actual income or capital gains from PEPs and ISAs, as I have mentioned. We are only proposing to apply a notional tariff sum of 10 per cent to capital sums over £6,000. Thus the only practical way to implement Amendments Nos. 73 and 82 within the structure of a pension credit would be to disregard the whole amount of capital held in a PEP or ISA; in other words, to set the notional rate of return to zero for those savings products. As a result, capital held in ISAs and PEPs would thus be treated more favourably than savings in other vehicles.

Amendments Nos. 73 and 82, therefore, have the same practical effect as the noble Lord's final amendment on this topic. Amendment No. 83 proposes a complete disregard of capital held in a PEP or ISA in the pension credit income assessment. They would all have significant effects on both the cost of the pension credit package and on wider incentives to save in various vehicles.

Any of these amendments would result in a large initial cost in the region of £300 million, with rnany pensioners with capital held in PEPs and ISAs becoming entitled to pension credit for the first time. In addition, many pensioners with capital held in different vehicles would probably respond to this policy by moving their savings into a PEP or ISA.

Eventually, the noble Lord's amendments would thus amount to a near total disregard of all capital in the pension credit income assessment at a cost of about £1 billion per year. Moreover, the incentive to save in a pension for those who expected to be eligible for pension credit would be eroded.

We developed the provisions in Clause 15 after listening to both Age Concern, which told us that pensioners did not want the hassle of recording actual income from capital and would prefer a notional rate of return, and the Financial Services Authority, which advised that a 10 per cent rate of return enables it to give clear advice to savers about the benefits of second pensions.

Therefore, I hope that Members of the Committee opposite accept that by ring-fencing ISAs and PEPs as they suggest would not only produce very substantial costs but also deform the patterns of saving in the future. In the light of what I have said, I hope that the noble Lord will not seek to pursue the amendments.

Lord Higgins

I am not sure whether the Chancellor of the Exchequer has read the speech which the noble Baroness has just made. She said that if the amendment was accepted PEPs and ISAs would be given more favourable treatment than other forms of saving. That is the whole point about PEPs and ISAs: they are given more favourable treatment than other forms of saving. That is one of the reasons why we thought it appropriate to raise this point.

The noble Baroness said that in addition people will move their savings into PEPs and ISAs. If it is worth while to do so, they would have done so anyway. There would not be any change as far as this issue is concerned. Perhaps the noble Baroness can rebut that.

I understand the point she made as regards costs. We on this side of the House must take that into account. As regards the capital value of a PEP or ISA, I am not sure whether it is going to be the original amount put into the PEP or ISA or whether it is to be their value at this moment or whenever the Act comes into operation. If someone put £3,000 into an individual company PEP five years ago, and the value of that has decreased to, say, 50p, will he still be judged under the Bill to have capital of £3,000 when the actual value of his asset is 50p? That would be grossly unfair.

Baroness Hollis of Heigham

If I am wrong about this I shall obviously write to the noble Lord, but my understanding is that when income is assessed, the value of PEPs, ISAs and other forms of capital will he taken at that point to produce a notional income. If there were to be a bust equivalent to that of the technology funds and the capital value fell and as a result notional income became exaggerated, pensioners would have the right to have the assumed or putative income for those purposes reconsidered. We debated that earlier. In other words, the five-year period will apply. At the end of that five-year period. we can consider what income is being deemed.

Lord Higgins

But we are starting at the beginning of the five-year period. Let me put my example simply. Five years ago, someone had invested £3,000 in a single company PEP. Let us say that the value of that PEP is now 50p. Which capital value is to be taken into account for the purposes of the Bill?

Baroness Hollis of Heigham

As I said, 50p. In other words, at the point at which the snapshot is taken, the income is taken into account. Then, live years later, it is revisited. If at any time pensioners feel that it is to their financial advantage to report circumstances and to have their pension recalculated, they can.

Lord Higgins

That is a helpful and clear answer. As to the broader issue, I am impressed by the argument about cost, which, on the other side of the coin, merely reflect the loss to the individuals concerned. In the light of that, I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Lord Higgins moved Amendment No. 74:

Page 9, line 7, leave out paragraph (a).

The noble Lord said: This amendment is not as well focused—in the jargon—as it perhaps might be It refers to Clause 15, which states:

"in this Act, 'income' means income of any of the following descriptions".

Paragraph (a), to which the amendment relates, refers to earnings. Let me give an example. An individual who falls within the scope of the Bill, being at a fairly low level of income and wealth, decides to take a job as a supermarket checkout assistant. Depending on how many days and hours he works, he may receive a very low remuneration. Pensioners may decide to try to make up their meagre income by taking up some form of employment—not full-time employment, but limited employment such as I have described. It would be unfortunate if they were deterred from seeking to better their circumstances by their own means because they would be clobbered for doing so. I should be grateful if the noble Baroness would tell us how she envisages low earnings being treated under the Bill. I beg to move.

Baroness Turner of Camden

I rise to speak to Amendment No. 95, which is grouped with Amendment No. 74. The amendment again concerns earnings, which we discussed in Committee last week. The amendment tabled in my name and that of my noble friend Lady Castle would insert the words: £40 of a person's earnings in any week, or the whole of his earnings if less than £40, shall be disregarded". That embodies a proposal made by the National Pensioners Convention in evidence to the House of Commons Select Committee on Work and Pensions in which it told the committee that the present £5 earnings disregard is much too small to constitute an incentive to seek or accept part-time employment. Rather than including earnings in the types of income qualifying for the 60 per cent disregard, it would be simpler and more effective to retain a separate earnings disregard but raise it to a level—say, the £40 mentioned in the amendment—that would in most cases allow a day or so's work without any loss of benefit. In that way, part-time earnings could have a significant impact on pensioner poverty, if only in a minority of cases.

Last week, my noble friend the Minister told us that the Government were considering earnings anyway, and that they accept that it is a good idea for people to work when they can for as long as they can—doing light work, part-time work, and so on. I think that most people—particularly in this House—would acknowledge that work keeps people healthier and more in touch with others. It prevents social exclusion, which we know is often a problem for pensioners who are left in a single state. Where they can, people should be encouraged to do some sort of work in retirement. Even if it does not bring in much money, it is good from a social point of view. I therefore hope that my noble friend will be prepared to look with favour on the proposition in the amendment when the whole issue of earnings is under consideration.

Lord Addington

It is very odd when one has to wait this long to make a first intervention on a Bill, having listened to so much of the debate, to discover that virtually everything that one wanted to say about an amendment has already been said. My name is attached to the amendment moved by the noble Lord, Lord Higgins, for the simple reason that those falling within the scope of the Bill will not be earning much money. Surely, they should benefit in that way. The point made by the noble Baroness, Lady Turner, about social interaction and not letting people think that they are totally switched off and left on the shelf is absolutely valid. Social interaction is an important part of everyone's life; we are a social animal and we need it. In our society, work is the basis of most forms of social interaction. That is a fact. I entirely endorse that point.

We are not talking about vast sums of money. We are probably talking about the national minimum wage across the board. We should include in the Bill—or at least at the first available opportunity—a provision to allow earnings. I cannot see how we would do anything other than benefit from that.

7 p.m.

Baroness Hollis of Heigham

I welcome—I think, although perhaps I should phrase that differently—the opportunity to debate Amendments Nos. 74 and 95, which concern the treatment of earnings in pension credit. The amendments would change Clause 15 of the Bill, which details the sources of income and capital that can be included in the income assessment.

The amendment tabled by the noble Lord, Lord Higgins, Amendment No. 74, would remove earnings from our interpretation of income. That means that earnings would not figure in the income assessment of any pension credit claimant aged 60 or over. Earnings of their partners—of any age—would also not figure. The noble Lord, Lord Addington, said that that would not cost much. I have news for him. It would cost nearly £2.5 billion—more than the cost of the current pension credit proposed in the Bill. We have designed pension credit to match the personal needs of pensioners. We can do that only if we take into account pensioners' own resources. In the Bill, we have made arrangements that some of those resources can, in part or in full, be set aside for several different reasons.

I shall go into the substance of the matter. Some 800,000 pensioners work beyond state pension age. I agree with the noble Lord, Lord Addington, and my noble friend Lady Turner of Camden that if people can do so, it is welcome and desirable. Many of those people, of course, would not qualify for pension credit, regardless of how we treated earnings in the income assessment, as they will have second pensions and capital to put them well out of the bounds of our ambitions. However, many others working parttime—the noble Lord, Lord Higgins, gave the example of someone working part-time in Tesco—will be entitled to pension credit.

We want to have a debate on earnings, but we did not have it in mind to ignore the earnings of 60 to 64 year- olds, which would be embraced by the noble Lord's amendment. Although many in that group—and older people too—work or aspire to work, the working tax credit is better suited to complementing their needs than the pension credit. As we say in our response to the consultation yellow booklet, there are a range of small earnings disregards in the Minimum Income Guarantee. If we brought those forward into the pension credit, we would have four possible disregards, ranging from £5 a week for a single pensioner to £25 a week, say, for a single pensioner responsible for a child.

We want to consider how best to treat earnings in the context of those disregards and how best to ensure that pension credit contributes to the active ageing agenda. That is why I welcome the opportunity to refer to the amendment tabled by my noble friend Lady Turner of Camden. The amendment would introduce a £40 disregard of earnings into pension credit. As my noble friend said, that is roughly equivalent to a day's work at the minimum wage. I can understand her aim. However, as the amendment stands, the disregard would apply to all people aged 60 and over and would cost nearly £200 million a year to implement.

I am sorry that I cannot produce a more explicit statement of our policy. It is an extremely complicated matter, and we are still working through the implications of the interlocking between the working tax credit and the pension credit. I assure my noble friend and noble Lords on the Opposition Benches that we are considering how the pension credit and earnings disregards will link in with the new working tax credit for younger pensioners. We are considering what arrangements are best suited to rewarding and promoting our ambitions for active ageing for older pensioners who do work.

Given the costs involved—they could be exceedingly large if we took the amendment at face value—and the extent to which older workers would be drawn into a scheme designed for pensioners, I ask the noble Lord to withdraw the amendment.

Lord Higgins

As I said, my amendment is not well focused, as it knocks out earnings altogether. I can understand that, if we were to accept it, it would he extremely expensive. None the less, the points made by noble Lords who have spoken are important.

Can I make clear what the Minister is saying? As I understand it, she is saying that it is a complicated business—none of us would dispute that—and that there may be a particular situation for pensioners aged between 60 and 65. Above that level, can we be clear that it is the Government's intention that there should be a disregard? As I understand it, there is anyway an MIG disregard. I think that it is £15 a week for full-timers and part-timers working more than 16 hours or, in the case of a couple, 24 hours a week. I have had terrible trouble trying to find where it appears; I presume that it is in a statutory instrument, but I could not discover where.

At all events, what we are considering has two elements: the state pension consists of what used to be MIG, on the one hand, and the savings credit, on the other. Am I right to interpret the Minister as saying that there would certainly be a continuation of the MIG disregard for pensioners above 65, let us say, and that the Government are still considering whether to give a disregard as far as concerns the savings credit for people who are also in part-time work. I am not really clear at the moment what the Minister is saying.

Baroness Hollis of Heigham

I understand the noble Lord's point about earnings disregards. Let me clarify the current situation; the noble Lord may not have described it completely.

At the moment, the earnings disregard in general applies to all client groups in receipt of income-related benefits. The different levels of earnings disregard are as follows. and they apply across the board: £5 for a single person; £10 for a couple; and £20 for lone parents, disabled people entitled to the disability premium or aged over 60, carers entitled to the carers' premium and people in certain special occupations. The £25 earnings disregard comes into play with housing benefit and council tax benefit. If the noble Lord were to say to me that we should tidy it all up, I would not disagree. However, that is where we are. In addition, there is, of course, help with childcare costs coming through from the Tax Credits Bill. That is the current state of earnings disregards.

I do not want to make a commitment at this stage. I hope that the noble Lord, Lord Higgins, will bear with me; I can understand his irritation. We should not at this point separate the treatment of earnings from earnings disregards. We seek to have a clear position for those aged over 65. There is an order of difficulty relating to those between the ages of 60 and 65 and people under the age of 60. That is a complex matter that we must resolve.

Certainly, if there is an earnings disregard of any size, we must consider how it interlinks with disregarding earnings in total. If I were to say, for example, that we would keep a minimum of £5 or £10, it might be unnecessary if the subsequent earnings were to be disregarded in total for these purposes. I ask the noble Lord to allow me to return as soon as I can with a clear statement of our proposals, rather than chip away at bits of them. There are two or three different considerations at play. To be frank. I must say that I cannot answer the noble Lord's questions unless I have clearer policy parameters than I have at the moment. They are still being consulted on and worked up for reasons that he will understand.

Lord Higgins

I fear that I do understand them. The whole thing is incredibly complicated, which is a result of the Chancellor of the Exchequer's obsession with the whole idea of credits. At the point at which the Minister is not sure whether she has got it right, I really become terrified—for most of the last speech. in fact.

Baroness Hollis of Heigham

I believe that my description of earnings disregards was accurate. I said that I could not give the noble Lord the policy parameters on whether the disregards should be increased so that it was a full earnings disregard for those over 60 up to those who remain below the pension credit ceiling and, secondly, on the interlock between those under 60, those between 60 and 65 and those over 65.

The problem is the determination of policy parameters. Once we have done that, the rest will fall into place. The noble Lord will understand perfectly what can then be deduced. If I said, for example, that all earnings were to be disregarded or, alternatively, that all earnings were to be qualifying income, the noble Lord and I could agree on the policy implications for pension credit. I cannot do that at the moment.

Lord Higgins

That is unsatisfactory. Can the Minister clarify two points? First, in the course of this consideration, is she considering disregards in respect of both parts of the state pension credit? Secondly, should we not have, by Report. a clearer answer than she has been able to give this evening?

Baroness Hollis of Heigham

I very much hope that I will be able to give a clearer answer by Report. If I cannot, I shall apologise to the noble Lord.

Lord Higgins

We shall wait and see what happens. If necessary, we shall vote on it. I beg leave to w ithdraw the amendment.

Amendment, by leave, withdrawn.

Lord Higgins moved Amendment No. 75:

Page 9, line 10, leave out paragraph (d).

The noble Lord said: The amendment would remove paragraph (d), which-1 think I am right in saying—is related to annuities. It is a question of whether income from annuity contracts other than retirement pension income should be included in income as far as concerns the operation of the state pension credit. It appears to be the Government's intention that income from an annuity should count as income. But what puzzles me is the parenthesis which states,

"(other than retirement pension income)".

It would appear therefore that income from a retirement pension income annuity, typical in the case of defined contribution pension schemes, is not to be counted as income. However, if someone has an annuity contract which has nothing to do with their retirement pension income, then it is to be treated as income. That is what the wording states, but it strikes me as rather extraordinary. Perhaps the noble Baroness can explain. I beg to move.

Baroness Hollis of Heigham

Amendment No 75 is another in the series dealing with income. Subsection (1)(d), which the amendment seeks to remove, provides the power to take income from annuity contracts, other than retirement pension income, into account when calculating pension credit entitlement.

Annuities are treated as income within MIG whether they are purchased from a pension fund or other capital. The Government intend to carry forward these provisions into those for pension credit. Therefore income from annuities will be taken into account as a weekly income stream in the calculation of the guarantee credit. The weekly amount will also be used to calculate the savings credit.

We have included this provision because, so far as possible we wish to maintain a level playing field between different retirement savings products, a point we have discussed on earlier amendments. We do not want to make some savings vehicles more financially attractive, nor do we want to encourage people to transfer capital holdings into an annuity contract in order to obtain a larger amount of pension credit or, indeed, to become newly entitled to it.

I hope that I have been able to persuade the noble Lord of the need to take income from annuities into account and I trust that he will feel able to withdraw his amendment.

Lord Higgins

I understand the Minister's response perfectly well, but then the parenthesis, income from annuity contracts (other than retirement pension income) should not be taken into account. As presently worded, it looks as though annuity retirement pension income is not to be taken into account. I am not clear why that should be the case.

Baroness Hollis of Heigham

All I can say is that income from annuity contracts other than retirement pension income covers a list of incomes other than retirement pension. I understand that this paragraph specifies the additional forms. Retirement pension is covered in Clause 15(1)(c), which is defined in Clause 16, and includes in paragraph (h) retirement annuity contracts. I think that this is simply in addition to the retirement pension income that we have been discussing.

Lord Higgins

I fear that I may have slightly misled the Committee on this point.

Baroness Hollis of Heigham

I certainly undertake to write to the noble Lord if he requires a more detailed explanation.

Lord Higgins

I may not have expressed my point as clearly as I might have done because, as has just been pointed out by my noble friend, paragraph (c) lists "retirement pension income". In that case, I am even more puzzled. If paragraph (c) covers retirement pension income, why do we then need the parenthesis under paragraph (d)?

Baroness Hollis of Heigham

I understand that it is possible to turn moneys into an annuity which may have no formal or technical connection with retirement pension, although it may then be enjoyed by someone of retirement age. That, I presume, is why it has been specified in this way.

Lord Higgins

I shall need to think about the matter. I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Lord Higgins had given notice of his intention to move Amendment No. 76:

Page 9, line II. leave out paragraph (e).

The noble Lord said: This amendment seeks to leave out paragraph (e). I apologise to the Committee. I do not wish to move the amendment.

[Amendment No. 76 not moved.]

[Amendment No. 77 not moved.]

7.15 p.m.

Lord Higgins moved Amendment No. 78:

Page 9, line 14, leave out paragraph (g).

The noble Lord said: I have been in this game for a long while. This is the more serious amendment.

The amendment seeks to leave out paragraph (g) which may be an important matter. It suggests that,

"a war disablement pension or war widow's or widower's pension"—

matters which usually raise serious concerns in the Chamber—apparently should be included as part of the income taken into account for the purpose of this legislation. Is that typically the case; namely, that such items are always included in income over all the elements of social security legislation, or is this in any way unusual? I beg to move.

Baroness Hollis of Heigham

The amendment asks us to disregard war disablement, war widow's and war widower's pensions for the purpose of calculating entitlement to pension credit.

However, I do not think that it would be right to calculate the amount of guarantee credit someone needs, or to reward pensioners for having saved, without basing entitlement on the amount of income already available to the pensioner. This amendment proposes 10 do that. It means that pension credit would be paid in addition to a war pension.

It is true that we do disregard some forms of income, such as attendance allowance. That is done because such payments are intended to meet exceptional needs or circumstances. For example, attendance allowance is paid to cover the extra costs of disability needs, not as an income replacement.

I wish to set out a worked example which I shall give with the usual qualification. If I am wrong, I shall come back to the noble Lord on the point. Let us take a war widow or war widower with a retirement pension of £77, and the average war widow or widower's pension of £175, which would total £252. Housing benefit and council tax benefit would be worth, say, £70 and could be disregarded, thus the income would be £322, tax free. If we were to accept the noble Lord's amendment, we would assume for the purposes of pension credit that the income was not £322 tax free, but rather a retirement pension of only £77, which would entitle the claimant to MIG totalling £23. I am sure that that is not what the noble Lord would wish. In no sense could that be regarded as targeting help for those who most need it.

Furthermore, the amendment would add to costs at a rate of around £250 million per year. We take the view that that would not be a reasonable use of public money, to say nothing of the proper treatment of war pensioners, war widows and war widowers. They are properly recompensed in the benefits they currently claim. To ignore those for the purposes of the amendment would be to assume an entitlement to MIG—the difference between £77 and £100—in pension credit. However, I do not think that incomes at the level to which I have just referred could possibly justify such a proposal.

Lord Higgins

I know that concerns have been expressed with regard to this point. It is helpful that the Government's view has now been put on the record. I shall need to consider it. I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

[Amendments Nos. 79 and 80 not moved.]

Baroness Noakes moved Amendment No. 81:

Page 9. line 18, leave out paragraph (j).

The noble Baroness said: This is the last of a series of probing amendments looking at the element:; of income specified in Clause 15(1). Paragraph (j) states,

"income of any prescribed description".

The amendment seeks to delete the paragraph from subsection (1). The Explanatory Notes state that the paragraph would be used to bring in items such as employers' sick pay, matrimonial maintenance payments and could also be used to take into account "new types of income". I hope that the noble Baroness will forgive me for pointing out that if she had an income tax definition, then she would not have to worry about prescribing additional items because those would automatically come into account, including, I suspect, new forms of income.

Perhaps I may concentrate on the element referred to as "new forms of income". Given her experience of other means-tested benefits, can the noble Baroness tell the Committee how often similar powers to specify new types of income have been used in the past; that is, why such a power is required by the Secretary of State? I beg to move.

Baroness Hollis of Heigham

I do not have a clue how often that particular phrase has been used. The noble Baroness is absolutely right—

Baroness Noakes

I thank the Minister. I wish to ascertain how often, having taken the power, it has been used.

Baroness Hollis of Heigham

The noble Baroness has rightly identified that a small number of older people have other forms of income. She cited employers' sick pay and matrimonial maintenance payments. We could, of course, seek to detail all possible income streams currently available in retirement within the State Pension Credit Bill and its regulations, but an element of "future-proofing" is always necessary to ensure that legislation is capable of being reasonably robust. It is a protection, a competence to embrace the new financial products which are continuously being developed and introduced to the market. It is for that purpose that we need this additional power.

I wish that I could give the noble Baroness a worked example. I try to do so when I can, but I cannot. But, for example, there has been much discussion in the press recently in regard to David Curry's Bill and new forms of financial products. We have to make sure that, where appropriate, any such development of new products is encompassed within the Bill. This gives us that flexibility.

I see no reason to believe that that power would be applied inappropriately. I cannot give the noble Baroness a worked example, but, in the future, should such a new scheme be devised, it would, where appropriate, fall within the framework of Clause 15.

Baroness Noakes

I thank the Minister for that explanation. I think I understand what she said. We should express some concern that "future-proofing" incorporates an ability completely to rewrite the rules for ever and a day without bringing them back for discussion. I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

[Amendments Nos. 82 and 83 not moved.]

Baroness Noakes moved Amendment No. 84:

Page 9, line 18, at end insert— "( ) For the purposes of this Act a person's earnings shall not include anything which would be chargeable to income tax under Schedule E to section 19 of the Income and Corporation Taxes Act 1988 (c. 1) (schedule E) but for the operation of Schedule 8 to the Finance Act 2000 (c. 17) (employee share ownership plans)."

The noble Baroness said: In moving Amendment No. 84, I shall speak also to Amendment No. 85. We have been through many examples of income which are or are not caught under Clause 15(1). Amendments Nos. 84 and 85 deal with the treatment of gains under employee share schemes.

I should point out that the drafting of the amendments leaves something to be desired. Both amendments refer to "Schedule E to section 19" of ICTA 1988, but they should refer to "Schedule E for the purposes of section 19". I hope that the Committee was not confused by this when reading the amendments.

The basic income tax rule—I am simplifying hugely—is that gains on employee share schemes are taxed as income unless there is a specific exemption. Of course, there are many exemptions as successive governments have encouraged employee equity involvement. The concern that these amendments address is whether the Department for Work and Pensions intends to treat such gains as income for pension credit purposes.

There are specific exemptions from income tax charges for employee share ownership plans—known as ESOPs—under the Finance Act 2000. Amendment No. 84 seeks to ensure that gains made by employees under ESOPs are not treated as income for pension credit purposes. ESOPs are designed to allow employees to build equity stakes—often modest ones—in their employers. The policy of successive governments has been to encourage this. I hope that the pension credit will not bring such gains within its net.

Amendment No. 85 is broader and covers all types of employee share schemes, including both unapproved and approved share option schemes, as well as ESOPs. Again, I hope that the Government will wish to continue to encourage employee involvement in their employers through direct share ownership and that they will not seek to treat the gains realised thereby as income for pension credit purposes.

I imagine that for many pensioners the issue of gains from such share rights will arise only when they are fairly near retirement, although many schemes have qualifying periods which could put such gains well into retirement age. So it is not an issue that could arise only once for a pensioner.

I know that the Government have been encouraging share ownership by employees and I hope that the Minister will look kindly on these amendments. I beg to move.

Baroness Hollis of Heigham

Amendments Nos. 84 and 85 are linked in that they propose that earnings taken into account for pension credit purposes are net of income arising from employee share schemes. As I understand it, the first amendment proposes that earnings that are deducted from salary to invest in an employer's share incentive plan should not show up as earnings in pension credit and therefore should be disregarded in the income assessment. Similarly, the value of free and matching shares received under the plan should be disregarded. Again as I understand it, the second amendment proposes that any gain from employees' share schemes that are treated as earnings should be disregarded as income in the pension credit income assessment.

As the Committee will know, the Government fully support the widening of employee share ownership. Such schemes can only help to increase productivity. Our commitment is clearly demonstrated by the introduction of the two new tax-advantaged schemes in the Finance Bill 2000, which was mentioned by the noble Baroness. Both are very generous.

The share incentive plan—previously known, as the noble Baroness described it, as ESOP—is aimed at promoting shareholding among all employees in order to increase productivity and improve long-term performance. The share incentive scheme allows a company to bring its employees into share ownership in three ways. It can give its employees up to £3,000 of free shares annually, free of income tax and NICs; employees can contribute up to £1,500 per year out of pre-tax and NICs pay to buy "partnership shares"; and the company can award up to two matching shares for each partnership share bought.

At the same time as we introduced the share incentive plan, we introduced the enterprise management incentives aimed at helping smaller, high-risk companies to grow and become successful. This was enhanced on 1st January this year so that more companies could provide tax-advantaged share options to their employees.

The noble Baroness asks us to follow the example of the Inland Revenue and effectively to make contributions to a share incentive plan non-taxable or, in our terms, to disregard them. But she then asks us in the second amendment to steal a march on the Inland Revenue. I am sure such a thought never occurred to the noble Baroness, but she asks us to disregard any gains from employee share schemes should they be paid as earnings. As things stand, such gains, if considered as earnings, are liable to tax in the same way as any other earnings.

My department uses for its definition of "earnings" the same definition as that used to determine liability for NICs. I am pleased to tell the Committee that, as neither contributions by employees to share incentive plans, nor the value of free and matching shares received under those plans. are subject to income tax or are liable for NICs, it follows that this income will be disregarded in the definition of earnings for pension credit purposes.

Turning to the next point, the noble Baroness asks us to disregard in our definition of "earnings" any benefits received by employees from employee share schemes that have the general character of earnings from employment. These benefits are subject to tax and NICs in the normal way. I am sure that the noble Baroness will understand that creating such a disregard in a benefit designed to suit the needs of pensioners with low and modest incomes when the Inland Revenue has no such exception for tax and NICs purposes—although many of the noble Baroness's arguments have been based on analogies, she is now asking to diverge from them—would, at best, be inappropriate.

Given that we have achieved the purpose intended by Amendment No. 84 and given our understandable reluctance to break new ground on Amendment No. 85, I hope that the noble Baroness will feel able to withdraw her amendment.

Baroness Noakes

I thank the Minister for that reply. I shall read carefully what she said in respect of Amendment No. 84. These are complex matters and I shall reflect further on whether I understand exactly what she said.

Amendment No. 85 goes beyond the narrow examples given in the Finance Act 2000. I accept that, as drafted, it may seem particularly broad, but there will be cases of ga ins being made by retired employees under approved share option schemes. These will not be regarded as within the charge to income tax because of the exemptions—their share options fall out of the charge to income tax although they fall into the charge of capital gains tax—but I am not clear whether the noble Baroness intends those kinds of gains to be treated as income. I am unclear as to whether or not we have tied up every point.

I accept the Minister's mild rebuke about stealing a march on the Inland Revenue, but I am not sure that the core of Amendment No. 85 has been dealt with correctly.

Baroness Hollis of Heigham

This is very complex. I could speculate, but it might be wiser—it certainly would be safer—for me to write to the noble Baroness. If she is dissatisfied, she can press me on Report.

Baroness Noakes

I am grateful. I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

[Amendment No. 85 not moved.]

Lord Davies of Oldham

I beg to move that the House do now resume. In moving the Motion, perhaps I may suggest that the Committee stage begins again not before 8.30 p.m.

Moved accordingly, and, on Question, Motion agreed to.

House resumed.