HC Deb 12 June 1956 vol 554 cc414-38

Motion made, and Question proposed, That the Clause stand part of the Bill.

Major Hicks Beach

This Clause proposes to extend the privilege of complete exemption from tax on interest during the build-up period of pensions schemes. That concession is at present enjoyed only by self-administered pensions approved under Section 379 of the Income Tax Act, which is the old Section 21 mentioned during the course of this afternoon's discussions.

The concession given by this Clause means that those funds which reassure their liabilities with life policies, provided they comply with the conditions of Section 379, will now get the tax-free concession during the build-up period. I think it would be proper if I declare my interest as a director of an insurance company. This is a very valuable concession, which is appreciated by everyone who takes an interest in these pensions schemes, but it is a little complicated and I shall take a little time in explaining how it will work. The concession will be made by allowing life offices underwriting schemes to accumulate contributions in what is described in the Clause as a separate pensions annuity fund. That, as I have indicated, will be totally exempt from tax.

In my judgment, there is one snag to this proposal. That is that at the moment, as the Clause is drawn, it is made to apply only to schemes approved by the Treasury under Section 379. A great number of valuable pensions schemes are in operation under Section 388 of the Income Tax Act, 1952, which I understand will not get the concession. From the practical point of view of people trying to run these pensions schemes, that is a very serious problem, because it will mean that those who are running the Section 21 or Section 379 schemes will have a great advantage. Presumably—I say this advisedly—they will be prepared to reduce their rates in view of the tax concession they get. From a practical point of view, it will mean that unless the concession is extended to a limited extent—and I will explain the limitation I suggest should be put on it by the Government—a vast number of Section 388 proposals will switch to Section 379 proposals. I cannot see that anyone can argue that anything else will happen; I suggest that is inevitable.

The result will be twofold. First—I say this quite openly—a vast amount of quite unproductive work will fall on life offices and, second—I hope my right hon. Friend will take note of this—in the next few months a vast amount of work will fall on the Treasury because the proposals switched from Section 388 schemes to Section 379 schemes will all have to be approved and resubmitted. If the Financial Secretary will make inquiries as to the number of Section 388 schemes in operation, he will find that there are several thousands which his Department will have to approve.

12 midnight

So far as the Treasury is concerned, the result in the long run will be exactly the same, because there will be a switch-over to the Section 379 schemes. In the long run, there will be no saving of tax, so I cannot see why, when the Government are considering this between now and the Report stage, they should not table some form of Amendment which will, to a limited extent at any rate, incorporate the Section 388 schemes.

During the course of today's discussion, there have been continual references to the point—and I do not propose to argue it now, although I do not agree altogether with it—that there should be no tax concession in regard to pension schemes which provide for a capital sum or one which is commutable. That has been accepted by the Government, and I do not propose to argue about it now. But I do think the difficulty can be overcome by the Government in principle accepting, when considering this Clause before we reach the Report stage, that employers and employees should be given the opportunity of selecting the particular type of scheme they want.

I would also suggest that the present difficulty can be overcome by ensuring that at least such part of the premium as is paid on behalf of an employee to provide him with a pension, as opposed to anything paid to provide a lump sum on retirement, should have the privilege of accumulating free of tax in the same way as the Section 379 policies do at the moment. That does not mean that when the annuity becomes payable it is not subject to tax. The present position under Section 379 is that the interest on the premium element being accumulated is free of tax. All I ask is that the Government should consider whether some similar concession cannot be given to this great number of excellent policies and proposals which are at present operating under Section 388.

Mrs. White

I do not wish to follow the hon. and gallant Member for Cheltenham (Major Hicks Beach), who is no doubt better versed than I in the complexities of these matters, although we have had representations from this side that this particular arrangement is likely to lead to a very great deal of switching from one scheme to another, involving a good deal of unnecessary clerical labour. As I say, I shall leave that matter to those better versed in these intricacies than I am.

I wish to raise a quite different point on this Clause. The Amendment standing in the name of my hon. Friend the Member for Walthamstow, West (Mr. Redhead) and myself has not been called. so it would be improper for me to go into the details of it, but I should like to raise a matter of principle upon which I touched on Second Reading, and that is that these very considerable tax concessions should not be given to pension schemes which do not make proper provision for arrangements in certain circumstances for transfer—what are sometimes called "cold storage" arrangements—for the people concerned.

A fair number of existing schemes do make some arrangements, but these arrangements are not required by the Revenue authorities as a condition of approval. My suggestion is that some such condition should be required before a pension scheme is approved. I am fortified in this opinion by the attention paid to this matter, not merely in the Millard Tucker Report—which is rather negative—but much more so in the Report of the Phillips Committee. We have never had a chance to debate that Committee's Report, but it was most em- phatic on the desirability of allowing people to carry their superannuation rights from one employment to another.

I should now like to remind the Committee that the Phillips Report states: In our view, arrangements whereby the accrued pension rights of a person with substantial service— it makes that condition: may be preserved on a change of employment including movement between the public services and private employment, are in the general national interest … The Phillips Committee stresses it particularly from the point of view of the need to adapt ourselves to rapid changes in demand and technological advances. It points out that re-adjustment of manpower ought not to be impeded by an artificial restriction arising from pension arrangements. So there is a strong economic argument for making certain that in giving these tax concessions to this large and increasing number of pension schemes we do something which is obviously in the national economic interest. I will not weary the Committee by quoting further from the Report, but there is no doubt of its view on the principle.

Perhaps more strongly, I feel that this concession is necessary from the point of view of the individual. As I said on Second Reading, the individual can be placed in an extremely burdensome position when he has accumulated pension right over a period of years if, for some reason, he considers it desirable to change his employment but feels tied and shackled to a particular employer because, should he leave him, he may lose all his pension right if it is a non-contributory scheme. Or a substantial part if it is a contributory scheme.

Other countries have made such provision. Two to which I would draw attention are the Netherlands—a sensible small nation—and the great Dominion of Canada. I understand that in both these countries, and there may be others of which I am not aware, tax concessions of the kind we are discussing are not made unless there is provision for transferability of pension right. They provide that this shall be done after a period of service.

One does not expect a person who has served a company for only a few months to be able to go in and out; but any person with substantial service ought not to take out only his own contributions but also something from the employer's side. The employer has enjoyed the service of that employee for a certain period. I feel strongly that it is in the interest of the individual—a matter of personal freedom—and in the interest of the country's economy, that this change should be made.

The Millard Tucker Committee is less emphatic than is the Phillips Committee partly because it was not particularly required to consider the position of those who were in middle life or a little older. It overlooked the social and economic implications. It confined itself to the much narrower question of taxation, and it makes a negative recommendation that the existence of a rule permitting transfer of pension should not be an obstacle to approval. That is too negative an attitude, and this Committee ought to make clear that it recognises the strong argument now for ensuring that the question of transferability of accrued rights should be made available to a person who wishes to change his job as being in the general interest. I hope that the Chancellor will take note of these arguments, even if he is not able to do anything positive in this Finance Bill.

We have heard from the Financial Secretary that the Chancellor is considering the whole question of superannuation schemes for employees. Therefore, I have said this now in the hope that when the wider review takes place this extremely important principle will be given full weight by the Chancellor.

Mr. Shepherd

I should like to urge upon my right hon. Friend the Financial Secretary the merits of what has been said by the hon. Lady the Member for Flint, East (Mrs. White). If we are to get compulsory vesting, it can best be obtained on this occasion where the Government are making a substantial concession. Obviously, employers will not be too delighted about any compulsory vesting, and the occasion of a major concession is the best occasion on which to bring in this innovation.

I hope that between now and the Report stage my right hon. Friend will look at the possibility of following the lead of the Netherlands and Canada in making the remission of tax a condition of vesting after, say, a period of five years or some similar period. I want to try to impress upon my right hon. Friend the importance of what was said by my hon. and gallant Friend the Member for Cheltenham (Major Hicks Beach) about the undesirability of forcing, as the Bill will do, schemes which are now under Section 388 into the rather old-fashioned Section 379. I cannot see that a Section designed largely for private trust funds is really a suitable Section under which to operate schemes which are run by outside assurance companies.

I say right away that I have no financial interest whatever in this business. I only want to see that, as far as we can, we do the job in the right way. I feel very strongly indeed that the Treasury have got this the wrong way and that, if we carry on as is proposed now, we are going to rob the community of some very substantial advantages which it could have had had a different course been taken. It is perfectly obvious that hardly any employer will be able to continue the Section 388 schemes when his accountant, or somebody else, shows him the figures which will result if the Clause is approved. The compound interest of 7s. 6d. in the £ remission for, say, thirty years is a very substantial amount indeed. No employer, in the interests either of himself or his employers, could continue the old Section 388 when he sees the advantages which would accrue under Section 379 as far as pension value is concerned.

There is no need to subject the Treasury and the insurance companies to the enormous burden of work of rewriting all these policies and, as my hon. and gallant Friend rightly said, there is the burden which will fall upon the Treasury in having to approve these new policies. There is no necessity to subject the Treasury and individual firms and persons to this bother.

Moreover, Section 379 prevents insured persons and employers from selecting the kind of policy best fitted to their needs. I want those who want to insure for pension rights for their employees to have as wide as possible a choice of policy. Let them select the kind of policy which will best suit their needs. Section 379 says that one cannot do that. The Government are saying "Although we know that in the last ten or twelve years, for example, endowment policies have been fashioned so that they meet the needs better than most other methods, under Section 379 endowment policies will not be allowed." It is most unfortunate to say that endowment policies will not be allowed under this provision when, clearly, they are in many cases the better form of insurance for pension purposes.

12.15 a.m.

I briefly give one or two reasons why an endowment policy, disallowed by the present provisions, is better for the insured person. First, it provides the insured person with a death benefit, which is a very important consideration for a man with a family. On a deferred annuity one gets the repayment in part of the premiums, but an endowment policy gives one a death benefit, very important to a man with a wife and family. Moreover, the endowment policy is of great advantage in an inflationary condition. Whereas a deferred annuity gives an individual at the stated period of 20, 30, or 40 years a specific annuity, an endowment policy accumulates the capital year by year, and when the accumulation is complete the annuity is bought. It is quite possible that in the circumstances 30 or 40 years ahead one will get a better deal by that means, and a hedge against inflation that one certainly will not get through a deferred annuity. Moreover the deferred annuity is a rather noncompetitive element in the insurance world, whereas endowment is a highly competitive one, and I want to see people have the advantage of the highly competitive side of the business.

I know that my right hon. Friend has in mind that Section 379 does not allow commutation, and he feels commutation is probably not justified. I think there are arguments about that, but I would myself be prepared to accept the view that commutation without some quid pro quo ought not to be allowed. As we suggested earlier in our discussions, there is no reason why we should not allow the insurance to continue under Section 338 and cause any commuted amount to attract the same sort of tax attention as do the trivial pensions and repayments under deferred annuities; that is to say, if we allow commuting of a certain amount, the amount commuted shall be taxed as to a quarter of the total at the standard rate of tax of 8s. 6d. in the £.

I do not think all of us take the view some of my hon. Friends do, and necessarily stand on the right of commuting, and we could hope to drop the idea of commuting altogether, but I think any commuted portion should attract the same sort of tax as the trivial pension and the return on deferred annuity premiums.

Therefore, I hope that between now and Report my right hon. Friends will look at this very carefully indeed, because we do not intend to let this matter rest. We think it is a new departure, but there is no real reason why we should have the second best if we can have the best, and certainly there is real scope for believing that by forcing policies into Section 379 and abandoning Section 378 we are not giving the insured persons the best value they can possibly get. I hope that by Report we shall see some suitable Amendments down by the Government, and if we do not we shall feel inclined to put our Amendments down again.

Mr. Harold Lever (Manchester, Cheetham)

I suppose it is rather late in the night for me to air my somewhat eccentric minority view, which is against subsidising by public money any of these schemes at all. We apparently live in an age when the Committee is content to confer sectional benefits at the expense of the community and the taxpayers as a whole. A member of the community, having one child, gets no family allowance; but another, having two children, gets family allowance. If he is working in a factory where there is a pension scheme we all pay more for our beer, our tobacco, and in Income Tax and Surtax, because we want to foster thrift in the workpeople and stability in the mental atmosphere in the factory. As for the millions of people who do not participate in these share-outs, they can lump it, while they, and those also who do share in them wonder why Income Tax and indirect taxation are so high. Fortunately, the instruments of law which make these curious exceptional benefits available usually have the unanimous approval of the Committee because hon. Members do not understand the drafting of such Clauses. I submit that nobody could follow this complex Clause unless he had uncommon enthusiasm or a very good legal training.

So, on this note of dissent, I say that public money, raised from the very heavily taxed population at large, should be distributed fairly and not distributed in a sectional manner as exemplified by this Clause. I have only just read it, and hope that I am not wrong, but the effect of the Clause as I understand it is that insurance companies can now offer employers with pension schemes in factories arrangements whereby accumulated funds can be invested, with interest, in any direction at all and be exempt from Income Tax. In other words, if any hon. Member here is putting aside £50 a year towards his old age, the interest which he receives will be taxed; but the income of those who benefit under this Clause will not be taxed and, providing the money is drawn in the manner, style, and amount approved by a number of Treasury officials, they will go to a richer old age than any of us who do not come within the ambit of this concession.

It is not only a late hour, but getting rather late in the century, when we should have known better, for us to confer piecemeal benefits on sections of the population while some get no benefits at all. People living in slums in my constituency may wonder why they should pay to subsidise very nice flats to be lived in by persons with three times their income; but now it will be possible to benefit some of the highly paid artisans in the factories as a result of the Chancellor's proposal. En addition, we shall now have the privilege of helping the profits of the insurance companies which, if I understand it correctly, are competing successfully with these works pension schemes. This Clause puts the insurance companies, whether profit-making or mutual, in a more competitive position vis-à-vis the works pension schemes which are free from tax, and it also raises a serious question as to what the Chancellor is going to do, having ladled out this money in so sectional a manner.

Once one starts on a piecemeal scheme it becomes difficult not to continue piecemeal. It is difficult to know if one should support piecemeal legislation of this sort, although, of course, we might end up by covering the entire population in this way with the blessing of the Chancellor.

The point has now been reached concerning the insurance subsidy at the expense of the Income Tax when the Chancellor should take serious responsibility, not merely for the terms of the scheme in the sense that it must be a Section 379 scheme, as somebody called it, in which one gets an annual sum, and not a certain other Section scheme in which one gets at the age of 65 or 70 an endowment policy or some other thing that the hon. Member for Cheadle (Mr. Shepherd) sought to have brought within the benefits, where the aged recipient at the end of his years of thrift and labour would receive a large sum which he would be liable to spend thriftlessly. The Chancellor is encouraging the weekly payment kind of policy.

The Chancellor must realise that, as he is subsidising all these schemes so heavily, he has a great responsibility to ensure that they are fair schemes, that the profits made from them are not excessive and that the interests indicated by my hon. Friend the Member for Flint, East (Mrs. White) and by the hon. Member for Cheadle should not work to the public disadvantage by discouraging a man from moving from place to place, or, what is perhaps more important, that his investment should be protected and the concession which, I take it, the Chancellor means should go to him should benefit him and no one else.

Unless there is a proper arrangement of the kind demanded by my hon. Friends, a man who leaves his job would get 2 per cent. interest less tax, but there is no reason why he should lose the Chancellor's generosity which, misguided as it may be from my eccentric point of view, commends itself to the Committee. When the man leaves his job, what happens to the concession? Is any precaution taken by the Chancellor?

When a man goes to other employment, is there any assurance that the benefits of this tax concession will go to the benefit of the workman who has contributed and not merely to the benefit of the insurance company which has underwritten the policy? Certainly the Chancellor owes it to the Committee to ensure that these concessions should go in the direction in which the House of Commons intends that they should go.

When we had a great spread of insurance in the early days of industrial insurance, the Governments of those days, reactionary as they were, realised that it was necessary to protect the people who paid the premiums and to see that certain principles of law should override the contracts of insurance. In this case, when we are contributing millions of public money to support and encourage these schemes, we ought at least to ensure the maintenance of what was thought reasonable and equitable half a century ago. We should not go backwards. Even the Tory Party should at least stay where it is. We do not expect it to advance, but we do not want it to be in a worse position politically and morally than at the turn of the century, when it was reasonable and intelligent enough to say that with those new policies the ordinary rule of contract could not be allowed to prevail and there must be some rules of law to override the rules of contract.

Laws were enacted. Industrial insurance Acts were passed to protect policyholders from unfair treatment in their contracts of insurance. I am not saying that reputable companies today cheat their policy holders, but it is not for them to judge what is fair and reasonable. It is for the Chancellor, who is providing public money to support their activities, to draw the code, not merely of whether the pensions should be of a particular kind, but whether the whole conditions of the pension fund are fair and reasonable otherwise no insurance company failing to comply with the right hon. Gentleman's code of conduct for these policies should have the benefit of his tax concessions.

I hope that, having heard this exposition, the Chancellor will at least answer the question whether he feels that, having handed out public money for this purpose. it is not his duty to ensure that the benefits of the tax concession go where he obviously intends them to go—to the workmen who subscribe to these policies.

12.30 a.m.

Mr. Gough

I am sure the hon. Member for Cheetham (Mr. H. Lever) will not want me at this very late hour to follow his line of argument, beyond saying that when he started he reminded me irresistibly of the much loved and lately lamented former Member for Orpington.

Mr. H. Lever

Not physically, I hope.

Mr. Gough

Not physically, no. He did, however, prove to me how he was able to achieve, I believe, one of the greatest long distance records in this House, because after merely glancing through the Clause—I hope it was the correct Clause he glanced through—he was able to make a speech of about 20 minutes in length. The only point I should like to make to him—and I think I can say this to him from practical experience—is that as the law already stands the Inland Revenue never approves of any sort of pension scheme unless it does protect, in all circumstances, the contributions of the employee. I think that can be said.

Mr. Lever

I am not sure whether I shall get an answer from the Chancellor, but perhaps I can get one from the hon. Gentleman. Is he satisfied that insurance policies provide in the case of the transfer of a man after, say, three or four years, that he shall get the benefit of accumulated interest together with the tax concession that is being made in this Budget?

Mr. Gough

If we went into that I think we should get ourselves into very involved insurance questions. I should he quite ready to discuss that with the hon. Gentleman outside, because it is a little bit late to do so in the Committee at this stage.

Mr. Mitchison

Would the hon. Gentleman make this clear? I understood him to say that any insurance contract approved by the Revenue always safeguarded the position of the employee. Does it safeguard the position in relation to transferability? That is to say, if the employee moves from one employment to another, does he get the value not only of his own contribution but of the employer's?

Mr. Gough

That raises another point, but I will certainly answer it. The Inland Revenue does not and will not give approval to any pension scheme unless that scheme lays down that an employee always gets the value of his own contribution.

Mr. Lever

And the interest?

Mr. Gough

And the interest, yes.

Mrs. White

Would the hon. Gentleman then be good enough to comment on paragraph 246 of the Phillips Committee's Report, which says that under the existing arrangements of the Inland Revenue

"a withdrawing employee may receive not more than a sum represented by his own contributions (usually accumulated at interest and less a deduction in respect of income tax), the value of which is much lower than the capital value of his accrued pension rights"?
Mr. Gough

I hope the hon. Lady will not think I am being discourteous, but I rose at this stage to raise one point on this Clause. It is a most involved matter the hon. Lady has raised, and I do not think it comes under this Clause.

The point which was raised previously by the hon. Lady, and by my hon. Friends the hon. and gallant Member for Cheltenham (Major Hicks Beach) and the hon. Member for Cheadle (Mr. Shepherd), is in fact this question of leaving out pension schemes approved under Section 388 and not treating them the same as schemes under Section 389. I want, if I may, to put to the Committee a certain amount of practical experience, because I really believe that unless my right hon. Friend can find some compromise whereby he can bring such schemes in, or that portion of the schemes which represents the pure pension, then I really believe there may be chaos in the Inland Revenue.

It takes six or eight weeks, or even three months, for a pension scheme to receive approval by the Inland Revenue. That indicates the number of schemes being adopted. It is no criticism of the Inland Revenue. With its present personnel and working as hard as it can, it cannot do the job quicker than that.

As has been said, if the concession is given in respect of schemes under Section 379 it will make a considerable difference. Far more pension schemes are approved under Section 388 than Section 379. Employers undertaking schemes under Section 388 are bound to be seriously tempted to wind them up and bring them within the scope of the concession.

If that happens, quite apart from the enormous amount of unnecessary work which will fall on the insurance companies, the Inland Revenue, as now constituted, will be completely incapable of coping, and there may be delays of two or three years in the adoption of such schemes. This will mean that other companies which wish to introduce pension schemes for the benefit of their workers will have to go to the back of the queue.

For that reason alone, I would seriously ask my right hon. Friend to look into the matter again to see whether something can be done to prevent such a thing happening.

Mr. Gordon Walker

There is something in the point that, on the face of it, there might be a considerable switch-over from one set of schemes to another simply because under the Bill Section 379 schemes would have an untaxed build-up whereas schemes under Section 388 would continue with a taxed buildup. The Clause will enable companies to build up the annuity fund tax-free, and they will be able, therefore, to offer markedly cheaper premiums for the same sort of annuity than under the other schemes.

Hon. Gentlemen opposite have been talking as if the two sorts of schemes were interchangeable. There is a very good reason why they are different and come under different Sections. The Section 379 schemes are fully approved and have imposed upon them great restrictions from which the Section 388 schemes are free.

I do not agree with the hon. Member for Cheadle (Mr. Shepherd) that, once having got the benefits of the Clause, people should be able to choose which sort of scheme they want. If Section 388 schemes are brought within the benefits of the Clause, they begin to get taxpayers' money.

Mr. Shepherd

Is the right hon. Gentleman saying that there are not fully approved schemes under Section 388?

Mr. Gordon Walker

They do not get the great advantage of a tax-free buildup. They get a smaller benefit. The hon. Gentleman wants them to have a much greater benefit.

Mr. Gough

It is not a question of benefits. Schemes under Section 388 are often approved for far better benefits than those under Section 379.

Mr. Gordon Walker

I meant the benefit of the untaxed build-up. "Benefit" here is a very ambiguous word.

Mr. H. Lever

Will my right hon. Friend say what is the social advantage that makes it necessary to give a tax-free concession or a tax-free build-up where the retirement benefit is received in an annual payment and why the same benefit should not be given to somebody who prefers to have his moderate retirement benefit in the form of a lump sum?

Mr. Gordon Walker

If my hon. Friend will allow me, I was just coming to that point. That is one of the main differences between the two schemes. Section 379 schemes are not allowed to pay tax-free lump sums, whereas Section 388 schemes are, and the Millard Tucker Report referred to cases of lump sums amounting to as much as £40,000 being paid out. I imagine that they are rather exceptional, but they do run as high as that. A scheme which can pay such enormous tax-free lump sums is a very different one from one which is not allowed to pay one at all.

In any case, public money is going to be given, by remission of taxation. If taxation is remitted discriminately, it amounts to using taxpayers' money, because other taxpayers have to bear the burden. Section 388 schemes ought not to have the complete freedom of choice that the hon. Member for Cheadle wants. There must be restrictions. If they are to have the privilege of having their build-up untaxed they must enter under very rigid controls. Above all, there must not be anything at all in the nature of a tax-free lump sum payment.

Mr. Lever

Is there anything to stop a man who is due to receive the benefit of this deferred annuity at the end of his working life from selling his right to receive the annuity. for a tax-free lump sum to a third party or to the insurance company itself?

Mr. Gordon Walker

Certainly. Under the Section 379 schemes that is prohibited.

Mr. Lever

Selling to a third party?

Mr. Gordon Walker

Yes. They cannot be commuted in any way except in respect of one quarter, which is then charged to tax at one quarter of the standard rate. But with the Section 388 schemes one can have a complete tax-free lump sum payment. with which one can do what one likes.

The reason why a tax-free lump sum payment should not be allowed in those circumstances is that these schemes are enjoying a tax-free premium, then a tax-free build-up, and then a tax-free lump sum payment. Too much is being provided at the taxpayers' expense. The Millard Tucker Report says that these schemes have a tax-free build-up and then a tax-free lump sum payment. In other words, there is a double remission of taxation.

Mr. Gough

The point which my hon. and gallant Friend the Member for Cheltenham (Major Hicks Beach was making was that only that portion which represents the pension shall have this benefit, and not the portion which represents the commutable sum.

Mr. Gordon Walker

I do not like that. That is something which leads to all sorts of tax avoidance schemes. The hon. Member for Cheadle and others seem to have overlooked the fact that the reason for having such things as Section 388 schemes is to prevent tax avoidance. The provision in the 1947 Act, which is now translated into Section 388 of the 1952 Act, was introduced to stop tax avoidance. One must be very careful in these matters.

There is a case for saying that Section 388 schemes ought to be brought in to avoid the danger of a switch—but only with very rigid conditions, one of which is that there should be an absolute upper limit to the amount of lump sum which can be paid; that in no case should it be more than one quarter, as is the case with the Section 379 schemes, and that it should pay one quarter the standard rate of Income Tax. We are dealing with clever gentlemen, and if we create a law in which it is perfectly legitimate to move things around in different sorts of ways, they will discover all kinds of ways to avoid the tax provided for by the law. On the other hand, so much of this is going on that I should never be a party to helping it. But were there this rigid control as regards lump sums, I think there would be something to be said for the hon. Gentleman's proposal.

12.45 a.m.

The reason I say that is because I think there is going to be this big switch otherwise. It looks very much like it. I do not know whether the Government anticipated that when they originally worked out the cost of the scheme. May I ask the right hon. Gentleman whether they anticipated a switch from the Section 388 fund to the Section 379 fund? Did they expect a massive switch? If not—and all the experts foretell a massive switch—and if they do not do something about it, the cost will be bigger than they thought originally; in fact, the cost will be bigger whatever they do. If they did anticipate a massive switch they have been stupid, and if they did not they have underestimated the cost. I should like to know from the right hon. Gentleman whether the Government anticipated that there might be a considerable switch over.

There is another way in which the switch could be stopped, and that is to withdraw paragraph (b) of subsection (7). If the concession to 379 schemes is withdrawn the switch would be stopped, because there would be no advantage of one over the other. I think that the right hon. Gentleman should do one thing or the other. To face us and his Department and the insurance companies with this enormous switch seems to me to be stupid legislation.

Much more important is the point made by my hon. Friend the Member for Flint, East (Mr. White). It seems that it should be made a condition—I hope that we may get something down about this on Report stage, if the Government do not anticipate us—that no approval should be given unless there is proper provision for the transfer of the actuarial value of the contributor's interest. It seems that he does not get his actuarial value, or in many cases that is so. The point made by my hon. Friend the Member for Cheetham (Mr. H. Lever) was apposite. What happens to the untaxed build-up when, for one reason or another, a man abandons a scheme? The employee gets back his own contributions, but there has been a tax-free build-up in respect of the employer's contribution. If it is a scheme approved under Section 379, who benefits? Does the benefit go to the people who are left in the scheme; does the employer benefit, or does the Chancellor get it in some way or other? What happens to it? It is there, and it is worth something. The employee who contributed originally does not get it, so who does?

I was interested to see from the Millard Tucker Report that two most reputable countries have gone into the State life assurance business. That, of course, is the right and best way to provide transferable pensions. Canada and New Zealand have gone into the State life assurance business, partly, as I understand it, to make it easier for actuarial interest to be transferred. Neither country is Socialist in the extreme sense and neither has a Socialist Government at the moment. I do not think that we should approve of these changes and these great benefits and boons which can be given unless this is a provision of the contract.

There is one other point. The lamentable change made without notice by the Government in an earlier Clause, about which we have expatiated at length, will "slop over" into this Clause. That is the trouble about legislation. What you do in one place begins to pop up in other places. Subsection (7, a) refers to the ability of insurance companies to build up untaxed annuity funds for the people described in Clause 18. This is the thing that enables the insurance companies to get the benefit of an untaxed build-up. But, of course, since Clause 19 has been amended this benefit is now to be given, as it was not previously given, to people who get between £5,000 and £7,500 a year. This changes our whole attitude to this concession to the insurance companies. We were prepared to accept it in its original form, but now it has been inflated in this grotesquely unjust and improper way it changes our whole attitude to Part III. But we would, nonetheless, prefer to see an Amendment on the lines of that on the Order Paper, though not selected, in the name of my hon. Friend the Member for Flint, East, and which I hope we can, in one way or another, discuss again on Report stage.

Mr. H. Brooke

Hon. Members who are not deeply initiated into the intricacies of insurance schemes may by now have come to the conclusion that Clause 20 deals with subjects of extraordinary complexity, and they will not be far wrong. Let me say at once that I intend to read through all that has been said in this short debate, when it is printed in HANSARD, with a clear mind, in case I have failed to appreciate anything that has been said by any hon. Member, and because I wish to take into account the fact that I have now been sitting on the Bench and engaged in this debate for seven-and-a-half hours continuously; and it is possible that the Committee may take my mind as being not quite so acute as it should be. But I will endeavour to address myself briefly to the two main points which have been raised.

I will first give precedence to the hon. Lady the Member for Flint, East (Mrs. White). Her suggestion, as I understand it, was to limit the exemption which this Clause gives on the investment income received by insurance companies in relation to approved superannuation funds for employees. She wanted the exemption given only in cases where the rules of the fund included a provision for the actuarial reserves relating to a member to be transferred to another fund if he changes his job, and she prayed in aid the report of the Phillips Committee, as well as other evidence. If the Committee acted in the way she suggested, it would apply a kind of compulsion to those funds which re-insure their liabilities with life insurance companies, while not touching those funds which do not do so. or those pension schemes which are not operated by means of a trust fund.

Mrs. White

I am sure the right hon. Gentleman will appreciate that, within the limits of this particular Finance Bill, that is all one could do.

Mr. Brooke

That brings me to exactly the point I was going to make, and I think it is a point which the hon. Lady herself had in mind: that if the matter to which she was addressing herself requires attention, this is not really the right place in which to deal with it.

Mr. H. Lever

We never get the right place.

Mr. Brooke

If the hon. Member will wait a moment, I think I can explain what I have in mind. I have said, and so has the Chancellor, that it is not possible to attempt to deal this year with all the difficulties, curiosities and anomalies which exist in connection with pensions schemes for employees. That is something which has got to stand over and has got to be tackled. I suggest that the right time for addressing ourselves to the question which the hon. Lady has raised is when we are embarking generally on the law relating to pensions schemes for employees and when we consider whether or not it is desirable that the provision of transfer facilities should be made compulsory, so to speak, or that we should tackle it in another way by ensuring that when an employee leaves a job his pension should go into what is called cold storage.

All those things will have to be considered. I think that in what I have said I have proved to the hon. Lady that the Government are not overlooking the importance of these matters, but it would be a mistake, and we might do a grave injustice, if we attempted to amend this Bill on Report stage to meet the point she raised.

My hon. and gallant Friend the Member for Cheltenham (Major Hicks Beach) raised the question of the Section 388 and Section 379 schemes. The point he was putting was that Clause 20 exempts from tax that part of the income of a life assurance company which arises from the investment of premiums received in connection with annuity contracts which provide pensions for self-employed persons and are approved under Clause 18, and, secondly, in connection with approved superannuation funds which are set up by employers to provide pensions for their employees and have reinsured their liabilities with insurance companies. My hon. and gallant Friend was urging the Government to consider whether we could extend that exemption to a third part of the investment income of a life assurance company, that is to say, the income arising from premiums received in connection with employees' pensions schemes where no superannuation fund is established but where there is a contract directly between the employer and the insurance company.

If I understood my hon. and gallant Friend rightly, he was urging this on the Government on two principal grounds, first that it was unfair to give relief on the investment income of reinsured funds and not on that of the 1947 Act schemes. Secondly, he and the right hon. Member for Smethwick (Mr. Gordon Walker) and other hon. Members suggested that, as the reinsured funds in future will have a tax advantage, employers who now have the 1947 Act schemes will be strongly tempted to change over and that would give everyone concerned a great deal of bother for no clear benefit. He stated the case for doing that, and I will seek briefly to state the reasons why the Government have drafted this Clause in this way.

First and foremost, as I said to the hon. Lady, this Bill is not attempting to deal generally with employees' retirement pensions arrangements. That we have got to come to later, but I quite appreciate that my hon. and gallant Friend will then ask why it was decided in this Bill to deal with the reinsured funds. There is more than one reason for that. One is that the absence of relief on investment income of reinsured funds has been a source of grievance for a long time, as he is aware. Indeed, the first Millard Tucker Committee, which reported as long ago as 1951, drew attention to the matter and recommended that the relief should be given. That view was supported by the second Millard Tucker Committee subsequently.

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There is another reason, which is that, if the relief were not given at all, then employees who are members of reinsured funds would be treated worse than the self-employed. The self-employed will get full tax relief on the build-up, whereas the employees in reinsured funds would get only partial relief on the build-up unless the law is altered as we propose. Although they would get full relief on their premiums, the investment income would not be exempt.

I should here also mention that, in order to fulfil the proviso mentioned by some of my hon. Friends, each premium paid by each individual would, under their safeguarding suggestion, have to be divided into two parts and that, in itself, it seems to me, would cause a great deal of bother and calculation. It is by no means impossible, but it would not simplify matters.

That brings me to the last question—whether we are letting everybody in for a tremendous turn-over. We did consider this very carefully before we brought forward the Bill, and I should like to give the Committee, very shortly, the reasons why we do not anticipate a turn-over on anything like the scale foreshadowed by some people. One reason has already been mentioned. It is that an approved fund cannot pay lump sums, whereas a 1947 Act scheme can pay up to a maximum of a quarter of the total benefit.

Another reason is that approved funds are more restricted in the death benefits which they can pay. A third reason, and one, I fancy, which will prove very cogent, is that even the mere fact of change-over from one type of scheme to another will involve a good deal of trouble and expense. As I have explained to the Committee in relation to earlier Amendments, what we are doing in this Bill is not necessarily to enact a law of the Medes and Persians. It may be seen in the light of experience that further alterations have to be made in future Finance Bills. That, surely, will be appreciated by the employers who have to take their decisions on these matters. It seems to me that that will be another ground for pausing, and not hastening to rush into a switch of schemes.

I recognise again, as I have said elsewhere, that this is a matter of judgment. We have examined it very carefully and this is the conclusion that we have reached. Other people are fully entitled to hold, and to express, their own opinions, but I hope in what I have said on this Clause that, if I have not managed to elucidate all its dark places, I have at any rate managed to prove to the Committee that the Government have given very serious thought to both the main points that have been raised.

Mr. Mitchison

I am sure I am not the only member of the Committee to have a very real sympathy with the right hon. Gentleman's long and diligent attendance here. I am the more sympathetic with him because of some of the things that he now has to defend so late in the night.

The last incident we had was squalid. This is merely the story of actual and impending confusion. I shall not say anything more about Clause 18 for the moment. I realise that something or other has to be done in connection with the build-up as far as that scheme is concerned. But there is brought into this Clause—and therefore to the relief in respect of build-up which the Clause supplies—one group of schemes which, rather obstinately, I will continue to call 1921 Act schemes. Schemes under the 1947 Act are not brought in.

The reason for that is said to be, first, that all the 1921 Act schemes ought to be brought in; second, if I followed the right hon. Gentleman rightly, that it would be extremely difficult to bring in the 1947 Act schemes, at any rate in one respect, namely, that they include considerable commutation sums and that these, it is now suggested, would have to be treated separately from the annuity benefits. I gather that that was the main difficulty about bringing in these schemes. I can only say that clearly the Government do not know what the effects of giving this relief to one group of schemes and denying it to another broadly similar group is going to be. They have heard two of their hon. Friends—one of whom no doubt has special experience, and to the other I will merely attribute wide general experience—assure them that there will be a considerable switch in that direction.

Is there any real reason why the one set of schemes should be brought in and the other not be brought in? I am sorry to be quite blunt with the Committee about this. I regard this group of Clauses as a pretty muddled collection of bits of legislation. One sees what the Chancellor has in mind. One sees that he had evolved a scheme up to a point. One then discovers that in a vital matter he has, during the progress of the Committee, changed his mind. Then one comes to the fringes and outskirts of the scheme and finds point after point where the Government have to admit that they were wrong; that they had forgotten this and will alter that in response to representations; or else the Government have given answers which could not satisfy a reasonable person. The conclusion I have reached is that the Chancellor has had one of those fiscal inspirations which sound all right in theory but do not work out in practice.

The minority report of the Millard Tucker Committee, which saw a good deal of the complications of what was asked for in the majority report, made one simple suggestion. Whether that suggestion is adopted in place of that before the Committee, or is alternative to it, it seems to me to be far better, because it is simple. The suggestion is to allow, in certain cases—broadly, the people concerned in Clause 18—increased life insurance relief instead of the complicated matter before us. I think it right that it should be added to it; but when one looks at what we are going into in Clauses 18, 19, and 20, I conclude that the Government do not know what they are doing, and that no one can tell us what the effect of this bit of legislation will be on a whole mass of schemes. What we have heard tonight amounted to not much more than that.

The second outstanding point of this discussion is the question of transferability. That is the question of giving employees in schemes the right to have transferred the full actuarial value not merely of their own contributions, but of those of their employers also. I say at once that I fully recognise that there is nothing of the sort in legislation at present, but then what we are doing at the moment is giving new rights in respect of this kind of matter. We are told, "You must not attach a condition, however wise it may be, to these new rights because we, the Government, are going to think about the matter and we are going to deal with it later on." If it is right that these are new rights, is there any real reason why this condition, if it is a good condition, should not be attached to them?

I would say this much in support of it. One does not really require even the Phillips Committee Report to see that it is only fair to a man. After all, if we take a transfer at present within a very large concern, for instance, the Civil Service, a man carries his full pension rights with him. By and large, the same goes for local government. The same would apply inside a very large concern. Why should a man who is moved from one scheme or fund to another thereby drop the benefit of his employer's previous contributions?

It is said that this can apply only in the case of schemes where an insurance company comes in. That may be so under the Clause, but I am not even sure of that. I see no reason whatever why a person who, without recourse to an insurance company, chooses to work a scheme of his own, should not be made to hand over—or perhaps at this hour of the night I may be allowed to say cough up—the actuarial value of his em- ployee's interest in the scheme when that employee moves away.

I dare say hon. Members will remember that in the Dark Ages, which were quite a long time ago, there were people wandering about Europe who carried their own law with them, so that if one murdered a person of one nationality the penalty was appreciably different from what it would have been if one had hit on someone of another nationality. If people could carry a law about with them even in the Dark Ages, surely people can carry their pension rights with them in the year of grace 1956.

I commend to the earliest attention of the Government not only their own misdeeds and confusions—those, I agree, will take them quite a long time to put right—but also the suggestion put to them tonight about attaching to these benefits the employee's right to carry the full value of his and his employer's accrued contributions with him when he changes his job.

Clause ordered to stand part of the Bill.

Clause 21 ordered to stand part of the Bill.