§ Mr. Patrick Jenkin
I beg to move Amendment No. 92, in page 14, leave out line 4 and insert: 1272'"or under a contract for the time being approved under section 226A of this Act"'.
§ Mr. Jenkin
That would be for the convenience of the House, Mr. Speaker, as these matters are all consequential upon the main Amendment, which is Amendment No. 96. Amendment No. 92 is a paving Amendment to deal with retirement annuities for the self-employed.
In Committee I gave an undertaking to my hon. Friend the Member for Kensington, South (Sir B. Rhys Williams) and to my hon. Friend the Member for Surrey, East (Mr. William Clark) that we would consider whether it was possible to give the self-employed a facility similar to the lump sum death-in-service benefit available to employees through approved occupational pension schemes. My hon. Friend the Member for Kensington, South also asked whether we could not allow a man to make provision for his dependants and why a self-employed woman should not be able to provide for her husband or other dependant.
The new Clause 226A, contained in Amendment No. 96, provides for all those matters. The remaining Amendments in the group are consequential on it. We have more than met the undertaking which I gave in Committee.
I shall be very happy to answer any questions on this matter, but I do not consider it necessary to elaborate any further at this stage.
§ Amendment agreed to.
§ Mr. Hordern
I beg to move Amendment No. 74, in page 14, line 4, at beginning insert:'or an annuity payable on his becomning incapable through infirmity of body or mind of carrying on his occupation (hereinafter called a disability annuity)'.My hon. Friend the Financial Secretary will appreciate that this is a small point but one which rests on a difference of fact between himself and myself. The Amendment refers to the £1,500 premium which can now, as a result of the Bill, be paid by self-employed persons. It was the object of my original Amendment 1273 that part of the £1,500 should be allowed to be expended in the form of a disability benefit scheme. It was, according to the advice that I had, impossible for any self-employed person to devote part of the sum allowed for this purpose, which was previously £750 but is now to be increased to £1,500, for the purpose of taking out a disability scheme.
In Committee I adduced the arguments. The Financial Secretary, on the advice available to him, answered in these words:There is obviously a difference of fact between my hon. Friend and myself"—that is me.I think that probably the right thing to do is for men to agree to look at it again.This is why I raise the point at this stage, so that the position can be clarified for those who are interested and for the insurance world in particular.It may be that one of us has misunderstood the position. If my hon. Friend takes out a separate policy for disability, I agree that there would be no tax relief for that, of course But if he were to enter into a contract the main purpose of which was to provide him with a retirement annuity, and he had a subsidiary purpose to cover on insurance principles, not on the question of building up contributions, the actuarial risk of his becoming permanently disabled before retirement age, such a policy or such a scheme would be approved by the Inland Revenue under Section 226 (3) (b) which I read out.It may be that my hon. Friend has not explored the market as fully as may be in order to find out what the possibilities are. I am assured by my advisers that such arrangements are not infrequent and that in the overwhelming majority of cases they are readily approved by the Inland Revenue."—[OFFICIAL REPORT, Standing Committee H; 26th May, 1971, cc. 225–26.]My hon. Friend is seized of the point. What is required is for a separate disability to be made on actuarial principles on the likelihood of the pensioner's being disabled, quite separate from that of the ordinary retirement annuity scheme. The difference of fact emerges as to whether such a scheme is available. I wish to achieve this point of clarification. In Committee my hon. Friend recommended me to make some researches in the market. Naturally, I followed his advice.
First, I approached the largest group concerned with unit trusts and retirement 1274 annuity pension schemes. It had no idea that the possibility of allowing disability pension schemes existed. I next approached the Life Offices Association. It had no idea that such possibilities existed. I then approached one of the leading firms of brokers at Lloyds, which was kind enough to reply to my letter in these terms:Various insurance companies have endeavoured to include a sickness benefit with their self-employed annuity contract whereby a premium is paid to a sickness insurance of such an amount as will maintain payments to the annuity policy. The Revenue have stopped this on the basis that in infirmity earned income will fall drastically by definition of underwriters, and premium payments to the annuity policy cannot be automatically maintained in the absence of earned income.The point simply is that there is a difference of fact between my hon. Friend and myself. I regret that my hon. Friend's advice was insufficient in this respect, because the insurance world had not even heard of such a scheme and, when it had applied to the Inland Revenue, it had been told that it could not introduce it. All that is required on this Amendment is for my hon. Friend to make perfectly clear to the insurance world that such policies are allowed and will be welcomed by the Inland Revenue.
§ 11.30 p.m.
§ Mr. Patrick Jenkin
I am happy to respond to my hon. Friend the Member for Horsham (Mr. Horclern), and I am grateful to him for the way in which he has moved the Amendment. I think it fair to say that, between us, we got ourselves in a bit of a tangle in Standing Committee, and I am sure that we took the right way out, both of us agreeing to look into the matter again.
I entirely concede that I was too optimistic in the view which I took of what the market had on offer, but I stated the position correctly when I explained what would be permitted by the Inland Revenue under legislation already on the Statute Book, namely, that, where there is a retirement annuity contract and, as a subsidiary purpose, the self-employed man wishes to take out cover against permanent disability as part of that arrangement, the cost of that permanent disability contract will be regarded as part of the qualifying premium under the retirement annuity scheme.
1275 Further, I can confirm that it is not in law limited—I quote my hon. Friend's words in Committee—tothe sum of the contributions that he makes"—[OFFICIAL REPORT, Standing Committee H, 26th May, 1971; c. 223.]It can be taken out on, as he said, normal actuarial principles.
That being the case, it is now up to the market to provide for the self-employed contracts which, clearly, some of them wish to take out. I have every sympathy with my hon. Friend and any other self-employed people who wish to protect themselves, as part of their retirement benefit scheme, against the hazard of becoming permanently disabled before reaching retirement. This is allowed under existing legislation. I hope that the market will respond by providing the necessary cover, and I hope that those who want that cover will go to the market and make their wishes known so that the necessary arrangements can be made by the life offices, by Lloyd's or by anyone else who chooses to underwrite this kind of business. So long as it is for permanent disablement of the self-employed person, it is within the scope of the existing legislation.
§ Mr. Hordern
I am glad to have that assurance and clarification from my hon. Friend. In the circumstances, I beg to ask leave to withdraw the Amendment.
§ Amendment, by leave, withdrawn.
Amendments made: No. 93, in page 14, line 18, leave out 'widow's annuity contract)' and insert:
contract approved under section 226A of this Act)'.
No. 94, in page 14, line 25, leave out 'widow's annuity contract' and insert:
'contract aproved under section 226A of this Act'—[Mr. Patrick Jenkin.]
§ Mr. Hordern
I beg to move Amendment No. 73, in page 14, line 36, at end insert:Provided that if full relief under this section cannot be given in any year of assessment by reason of an insufficiency of net relevant earnings in that year the amount so unallowed shall be carried forward to the next succeeding year of assessment and added to the qualifying premium for that year (so as to be part thereof for all purposes) and so on for succeeding years until fully relieved.This Amendment also was referred to in Standing Committee, and there was a 1276 slight misunderstanding about the purport of what my hon. Friend the Financial Secretary said. However, I fear that the outcome is not likely to be quite so happy as it was on Amendment No. 74.
The purpose here is to provide that, where a self-employed person has, for whatever reason, been unable to afford the full sum of £1,500 in payment of premium for his retirement annuity, such unexpended portion should be allowed to be rolled over into the following year and succeeding years. The principle is this. The new figure of £1,500 has been arrived at after making allowance for the rate of inflation which has proceeded since the old figure of £750 was fixed as long ago as 1956. We do not know what will happen in the future. We cannot tell at what rate premiums will run in a few years.
What is certain is that those who are self-employed have no other means of creating pension annuities for themselves. It must have been the clear intention of my right hon. Friend's proposals that an average of £1,500 a year could be spent by those who are self-employed in providing retirement annuities for themselves—in other words, that the pension which they could derive for themselves when they retired would be based on £1,500 a year. There can, therefore, be no question of any possible loss to the revenue arising from deferring any payment from one year to another, except marginally on the time scale.
The effect of the present proposal will be that those who are self-employed and who have large earned incomes will be able to devote £1,500 per annum to this purpose but those who are younger and whose incomes fluctuate markedly from one year to another may be able to afford £1,500 one year and not to afford it the next year. Surely those who have widely fluctuating incomes should be able to implement the principle and purpose of my right hon. Friend's proposal; they should be able to spend £1,500 a year in building up a capital sum to provide a retirement annuity.
I hope that the Financial Secretary will not use the sort of argument which I have heard from the Treasury Bench—that this is rather different from the normal type of retirement benefit of those who are in ordinary employment. I 1277 hope that he will not say that this envisages the build-up of a capital sum which is in every way different from the normal retirement benefits. It is well known that those who are in employment receive retirement benefits from their companies who can adjust those benefits to suit the circumstances of inflation or what they deem to be a proper sum, and that in doing so the companies can take advantage of the tax concessions made to them in allowing sums to be built up to provide retirement benefits.
We are dealing here with a fixed sum of £1,500 a year. There is no other way in which a self-employed person can protect himself for his old age and from inflation. I therefore hope that my hon. Friend will accept the Amendment.
§ Mr. Patrick Jenkin
My hon. Friend the Member for Horsham (Mr. Hordern) recognised in his opening remarks that this Amendment offers slightly more difficulty than the last. The original Act of 1956 provided for a 10 per cent. qualifying premium up to a limit of £750. This was based on the reasoning in the Millard Tucker Report—although not on the Millard Tucker proposal, which was too complex. The reasoning was that the self-employed cannot for all purposes be equated to the employed man who is a member of an occupational pension scheme because a large number of them, notably controlling directors, self-employed traders and self-employed people in partnership who have built up a share in the partnership are in a position through their work to build up capital assets, and that therefore it was appropriate to fix an upper limit on the qualifying premium which might be paid under a retirement annuity scheme.
In the Bill we have increased the 10 per cent. to 15 per cent. and doubled the limit from £750 to £1,500. It might have been the case from the beginning that one should look at each year separately and take the 15 per cent. and £1,500 and say that no premium could be paid in excess of 15 per cent. or £1,500. In fact, even since 1956 that has not been the rule. The 10 per cent.—now 15 per cent.—was the figure allowed to be rolled forward. Any premium in excess of the 10 per cent.—now 15 per cent.—figure in any one year could be set against tax in the following year and so on. But 1278 The ceiling, if it is to be effective, must apply in each year individually.
We argued in Committee about whether there was any need for a ceiling at all. In the end the Committee came to the conclusion that this was an appropriate feature of retirement schemes. That being so, it would make a bit of a nonsense of it if we were to allow those with incomes of £10,000 a year and more—it is only they who would be interested in rolling it forward—to treat a premium paid one year in excess of the £1,500 in such a way as to set it against the income of a succeeding year, which might be less than the £1,500.
I appreciate that this does not go the whole way to abolishing the £1,500 limit, but it renders it very much less efficacious in its basic purpose of keeping down to a reasonable limit the amount of retirement benefit that a self-employed person may take out for himself. If we wanted to remove that limit, that is a separate matter. It is not before the House now. It would be wrong, and it would erode the principle, if we sought to roll it forward by enabling the premiums in excess of the 15 per cent. to be set against income for the following year. We are building into the system a considerable degree of flexibility already.
My hon. Friend's Amendment goes too far, and I could not recommend the House to accept it.
§ Mr. Peter Rees (Dover)
In intervening briefly I should declare a personal interest. In my brief hours away from the House I am self-employed. In spite of the very welcome reductions introduced in the Bill, we still have a steeply progressive tax system, and one which pays insufficient heed to the fact that self-employed people may experience very severe fluctuations of income. That was taken care of in the past by the three-year average rule. I hope that my right hon. and hon. Friends may consider its reintroduction on another occasion.
§ The Amendment takes some account of fluctuations of income encountered by self-employed professional people and could be accepted on that basis. It is no answer to it to say that it will render ineffective the limit proposed in the Bill. It will merely mean that the limit is carried forward; it will still remain, though not an annual limit.1279
§ As our tax code does not pay sufficient regard to fluctuations in personal incomes, I feel that the Amendment is fully justified.
§ Mr. Hordern
I listened to my hon. Friend the Minister with great care and attention, and I know that he is doing his best to deal sympathetically with my Amendment. It applies to only a comparatively few people, and perhaps we should not devote too much concern to those earning £10,000 a year. But the fact of the matter is that the people concerned are self-employed, and they may have very widely fluctuating incomes. There is no way in which they can otherwise provide for themselves.
I wish that it were not necessary for my hon. Friend to use such phrases as "erode the principle" when we are talking about a sum of £1,500 which has been laid down in the Bill as suitable. There is no principle here. The sum has been laid down as £1,500 in any one year. If it cannot be expended in one year, for whatever reason, surely the balance should be allowed to be carried forward into succeeding years? Arguments of what are really convenience, without any possible cost to the Treasury, should not be elevated to a matter of principle and their erosion.
Naturally, I will not press the Amendment. It affects far too few people. But I ask those responsible to produce rather less contentious arguments than those produced by my hon. Friend.
§ Amendment negatived.
§ 11.45 p.m.
§ Mr. Patrick Jenkin
I beg to move Amendment No. 95, in page 14, line 40, leave out from beginning to 'and' in line 45 and insert:Provided that the contract may give the individual the right to receive, by way of commutation of part of the annuity payable to him, a lump sum not exceeding three times the annual amount of the remaining part of the annuity, taking, where the annual amount is or may be different in different years, the initial annual amount'.In Committee we considered the appropriate formula for determining the amount of a lump sum benefit that may be taken under a retirement annuity contract. I was able to agree with a number of my hon. Friends that the formula written into the Bill—three times the 1280 premium paid—was inappropriate and I undertook to consider an alternative formula. It has not proved easy but we have come up with a suggestion which we are satisfied is workable and which bears a not unreasonable relationship to the lump sum benefit which can be taken by a member of an employer's occupational scheme. The formula is that the lump sum should not exceed three times the annual amount of the remaining part of the annuity. This has the merit of being readily and easily calculable. It will, of course, differ depending on the length of time over which the man has contributed to the scheme. In some cases it will be more than 3N/80; in some cases it will be less. But it has the merit of relative ease of administration.
§ Amendment agreed to.
(5) At the end of section 226(3) of the Taxes Act (discretionary approval) add—
(f) for the payment to the individual of an annuity during any period in respect of which he is entitled to an invalidity pension by virtue of paragraph (b) of section 3(1) of the National Insurance Act 1971, or would have been so entitled but for the provisions of section 3(2) of that Act.
§ Mr. Speaker
I understand that it would be convenient to discuss at the same time Amendment No. 14, in Clause 18, page 16, line 19, after 'or' insert:'during any period in respect of which an employee, though not retired, is entitled to an invalidity pension by virtue of paragraph (b) of section 3(1) of the National Insurance Act 1971, or would have been so entitled but for the provisions of section 3(2) of that Act, or'.which also stands in the name of the hon. Member for Kensington, South (Sir B. Rhys Williams).
§ The Amendments would give effect to a recommendation of the Disablement Income Group. I do not think that at this hour it is necessary to dilate very much on the purpose, since hon. Members who are interested will be able to refer to the debates in Committee, particularly the discussion on the Question "That the Clause stand part of the Bill" on 9th June. Then, my hon. Friend the Chief Secretary was helpful enough 1281 to say that he was interested in the arguments of the D.I.G. I think that it was because of his welcome to the points I raised that I have been successful in securing your selection of these Amendments, Mr. Speaker.
§ The Disablement Income Group feels—indeed, everyone who studies the matter must feel—that if a man falls into grave illness during the course of his normal working life it is wrong that the trustees of his occupational pension scheme should be put in the position where they may offer him a pension only if he will accept the fact that he is unable to return to work. It is putting a cash premium on surrender. This is, obviously, for psychological reasons, highly undesirable.
§ If a man insists, perhaps mistakenly, that sooner or later he will be fit enough to get back to work, the trustees are in difficulty in that they may not make him a payment from the scheme. This problem is well understood by the Inland Revenue, which tries to use the greatest sympathy in dealing with such cases, but it would be desirable if this were taken a step further than the discretion of the Inland Revenue, however merciful that may be.
§ I want to comment on some of my hon. Friend's remarks in Committee with regard to the erosion of the tax base. One gets a picture of the entire national income spread out before one and par-celled out between those parts liable 10 tax and the other parts, which are becoming threateningly large, from which taxation cannot be extracted. That is not a very accurate picture of the position.
§ Occupational pension schemes operate on the system of "save now, pay tax later." What we are speaking of is a postponement of tax, not an escaping from tax altogether. I recognise that postponement of tax has considerable advantages where capital gains tax and income tax are excused during the whole of the period. It must not be imagined that we are arguing for a complete escape from taxation; it is simply a question of postponement. This principle of "save now, pay tax later" is a highly desirable one and the Government should be looking at ways of extending its application.1282
§ If occupational pension schemes were allowed to develop in such a way that trustees were able to protect members from the results of unexpected disability, that would be all to the good and would be adding an incentive to saving which would be a real and compelling one. It would be particularly valuable in the situation in which we now find ourselves, when we are trying to find every possible means of extending the incentive to save.
§ Let us ask ourselves: What is the object of the occupational pension scheme? Surely it must be to encourage the buildup of real savings for use at the end of working life, whenever that may be. If it comes early, through illness, that seems all the more reason why the trustees should have the right to confer benefit forthwith. I hope that my hon. Friend will consider these arguments seriously. If he cannot undertake to accept the Amendment, let him work over it so that at a later stage we may see this type of inclusion statutorily agreed in occupational pension provisions.
§ Mr. Patrick Jenkin
I am grateful to my hon. Friend the Member for Kensington, South (Sir B. Rhys Williams) for the way in which he moved this Amendment. I have enunciated the principle—I hope that I shall be forgiven by my hon. Friend the Member for Horsham (Mr. Hordern) for referring to a principle, but I think it is a principle—that an occupational pension scheme should be a scheme primarily for providing pensions. The rationale for giving it substantial and valuable tax advantages is that it is now regarded as impracticable for people to save adequately for their old age out of taxed income. They can spread the income which they earn during their working lives over their whole life and it can be taxed accordingly.
I accept the principle my hon. Friend has put forward of "save now, pay tax later." It follows, as a general rule, that we should not attach to the pension scheme other benefits of a substantial nature which would materially change the character of that pension scheme. On an earlier Amendment I said to my hon. Friend the Member for Horsham that it would be appropriate—and the law allows them in the case of retirement annuity schemes and occupational schemes—for subsidiary benefits, such as 1283 permanent disability benefit, to be attached. There can be "death in service" benefit, as we know.
My hon. Friend now seeks to go further, not with a permanent disability but with something of the nature of a temporary sickness benefit attached to this. This is something to which hitherto successive Governments have not felt able to accede. It would be right to say that it would be entirely wrong to rule this out for all time. As my hon. Friend knows, the State pension scheme is under intensive review by my right hon. Friend the Secretary of State for Social Services. Already some modifications—the invalidity pension has been mentioned in the Amendment—have been introduced. A major reform is on the stocks and in due course will be made public for discussion. It would be wrong for me at this stage to take an absolutely rigid view and say that in no circumstances would we be prepared to contemplate the sort of addition to occupational pension schemes which my hon. Friend has put forward.
I cannot accept my hon. Friend's Amendments now. It would not be appropriate to write them into the legislation at this stage. But I do not say that they will remain inappropriate for all time. Certainly I respond to his invitation to study the matter fully and to consider it intensively in the course of the next months or year or so. If we consider that this would be appropriate to do, we can proceed to deal with the matter in subsequent legislation. I must make it clear that I am far from giving any sort of firm undertaking. That would be quite wrong. But I do not think that it would be right to rule it out in perpetuity. We are prepared to look at the matter, but not tonight. I hope that my hon. Friend will be able to respond to that by withdrawing his Amendment.
§ Sir B. Rhys Williams
I am much encouraged by my hon. Friend's remarks. My immediate interest is that we find a solution as soon as possible to the problem of the man who falls into permanent disability which he himself does not choose to recognise as such. There is also the problem of the person who is verging on chronic sickness, where it is not possible to decide his future 1284 working capacity. There are two separate problems, both deserving study, though they may require separate solutions.
However, in view of the Government's first-class record in regard to disability and their widespread keenness to amend our legislation where it bears harshly on the disabled, and recognising that much study needs to be given to the problem but that it is in good hands, I beg to ask leave to withdraw the Amendment.
§ Amendment, by leave, withdrawn.