HC Deb 07 July 2004 vol 423 cc923-30
Ruth Kelly

I beg to move amendment No. 117, in page 184, line 16, leave out from 'an' to end of line 19 and insert 'increased annual rate which exceeds by more than the permitted margin the rate at which it was payable on the day on which the individual became entitled to it'.

Mr. Deputy Speaker (Sir Alan Haselhurst)

With this it will be convenient to discuss the following:

Amendment No. 23, in page 184, line 20, leave out

'The aggregate of the amount of such of the sums, and the market value of such of the assets, representing the individual's rights under the arrangement as are applied to purchase the lifetime annuity' and insert

'The lesser of:

  1. the aggregate of the amount of such of the sums, and the market value of such of the assets, representing the individual's rights under the arrangement as are applied to purchase the lifetime annuity; and
  2. AAF x A'.

Government amendment No. 119

Amendment No. 22, in schedule 32, page 472, line 27, leave out '50 pensioner members' and insert

'20 members or such other number of members as may be prescribed from time to time'.

Government amendments Nos. 120 to 124.

Amendment No. 24, in schedule 32, page 473, line 41, at end insert—

'Benefit crystallisation event 4: meaning of "AAF

14A For the purpose of benefit crystallisation event 4 "AAF" is:

  1. in the case of a lifetime annuity which is not a level annuity, the relevant valuation factor (see section 263); and
  2. in the case of a lifetime annuity which is a level annuity, the factor certified from time to time by the Government Actuary to be appropriate.
  3. Benefit crystallisation event 4: meaning of "A"

14B For the purpose of benefit crystallisation event 4 "A" is the annual amount of the lifetime annuity which will be payable to the individual in the period of 12 months beginning with the day on which the individual becomes entitled to it (assuming that it remains payable throughout that period at the rate at which it is payable on that day).'. Government amendments Nos. 125 and 132.

Ruth Kelly

We turn now to a group of amendments on the lifetime allowance rules. I hope that Opposition Members will welcome Government amendments Nos. 117, 119 and 120 to 124 because they concern a matter that they raised in Committee with which I sympathised in principle and agreed to look at further. I have now done so, and am pleased to introduce our amendments, which have the effect that they sought.

When a scheme pension is increased, there may be a benefit crystallisation event, which we have discussed at length. There will be no such event, however, if the increase is within the "permitted margin". The amendments ensure that the permitted margin is applied to the overall increase in the pension from the time that it commences, putting someone who receives a one-off discretionary catch-up increase in the same position as someone who receives steady annual increases in their pension. Government amendment No. 125 adds to the existing rules that prevent a benefit crystallisation event from occurring twice on the same funds. It applies when an individual has a crystallised pension in payment, then transfers their pension fund to an overseas scheme.

Government amendment No. 132 merely clarifies the valuation rules that apply where an individual's uncrystallised rights need to be valued. It ensures that the valuation will be made in relation to someone's benefits at a specific date. I commend the Government amendments to the House. The remaining amendments on clause 212 and schedule 32 touch on points raised by Opposition Members in Committee.

Amendment No. 22 is another attempt to dilute the 50-member rule. To recap, that rule allows schemes to increase the value of pensions in payment above the permitted margin without creating a benefit crystallisation event, but only if the scheme has at least 50 members, all of whom benefit from that increase. That anti-avoidance rule acts as a curb on small schemes, giving generous pension increases to a small number of retired members without being caught by the lifetime allowance. Reducing the threshold to 20, as suggested by Opposition Members, would weaken the rule. I admit that no threshold is obviously right, and one could go round in circles arguing about whether 50, 30 or 60 is the appropriate number. We could spend hours on that, but we believe that 50 is about the right level to prevent circumvention of the lifetime allowance test. Hon. Members may be reassured to learn that that was announced in the second consultation document and has elicited very little comment.

Amendments Nos. 23 and 24 to clause 212 and schedule 32 deal with the rules on quantifying the value of an individual's pension fund at each benefit crystallisation event, particularly the rule for valuing a lifetime annuity. They seek to change the way in which lifetime annuities are valued at benefit crystallisation events and use the lower purchase price of the annuity and the amount given by applying a factor of 20 to the first year's annuity payments, or a different factor if the annuity does not increase year on year. The aim of the amendments is for people with large money purchase funds to receive a pension income equal to the maximum that a final salary scheme could provide without triggering the lifetime allowance charge. We discussed that at length in Committee, when I explained that the facility would be available if a scheme pension was used instead.

The amendments miss the point of the relevant valuation factor. We are not introducing the factor as a means of favouring defined benefit schemes, nor do we believe that that would be the effect. We are using it as a simple valuation mechanism where there is no identifiable capital amount to use. Where such an identifiable capital amount exists, it is right to use it as the most accurate, simple and straightforward way to value the pension fund and the actuarial profession, which contributed to the consultation process, supports that approach.

Moreover—hon. Members may find this argument more persuasive—the amendments would open up a huge avoidance loophole. They allow a non-level annuity to be valued at 20:1 based on the first year's annuity payments. That would allow an individual to set up an annuity that paid an artificially low income for the first year, keeping the amount crystallised below the lifetime allowance. Later years' payments could then be boosted to an unlimited extent without being tested against the lifetime allowance, which is a hugely attractive tax loophole. I trust that the hon. Member for Tatton (Mr. Osborne) agrees that we cannot afford to open up such avoidance routes and, even if he does not accept the principled arguments will not press his amendments.

Mr. George Osborne

May I say how sorry I am about the deferred Division, because it affects your constituency, Mr. Deputy Speaker? Perhaps that is not in order.

I welcome the Government amendments, because the Government have adopted our proposal in Committee. I have been in Committees since the beginning of the year—such is the life that I have led for the past six months. Occasionally, one tables an amendment and the Government say, "Yes, great idea", but they deny one the chance to change the law there and then by going away to rewrite the amendment. Nevertheless, I am delighted that they listened to us and are changing the Bill accordingly.

The Financial Secretary took a leaf from the Prime Minister's book and launched a pre-emptive strike on my amendments. Like the Government amendments, amendment No. 22 applies to schedule 32 and the crystallisation of benefits. Schedule 32 is important because the amount crystallised is tested against the lifetime allowance. Again, the Financial Secretary did not advance strong arguments why a special rule should apply to schemes with fewer than 50 pensioner members—she turned that point round by referring to the exception for schemes with more than 50 pensioner members. She did not give us a clear idea why the figure should be 50 and admitted that it is, at best, a guess.

The Financial Secretary's main argument, which she advanced today and has advanced previously, concerns the potential for tax avoidance or a scam. The example that she gave in Committee was based on a scheme with only two members. We believe that it is more than adequate to require the scheme to have at least 20 members, as my amendment proposes, and to give the Inland Revenue some flexibility by incorporating a device by which it can change that figure if it senses that it will become a vehicle for tax abuse. The amendment makes provision for it to close that loophole.

Amendments Nos. 23 and 24 attempt to tackle what remains the greatest flaw in these pensions tax proposals—the unequal treatment of defined benefit and defined contribution schemes. The Financial Secretary repeatedly denied that in Committee, but the facts speak for themselves. She cannot get around the basic fact that, under these proposals, a person with a defined benefit pension can have a substantially larger pension income than a person with a defined contribution pension. The Financial Secretary shakes her head. I therefore suggest that after tonight's awards ceremony she should log on to the Financial Services Authority's website. That is what I did last night to check out what a 60-year-old man who is a nonsmoker—I am sorry to disappoint my hon. Friend the Member for Arundel and South Downs (Mr. Flight), but he gets a much better annuity than the rest of us has a spouse three years younger, and is looking for a 50 per cent. survivor's spouse pension that rises with inflation and has a five-year guarantee, could buy with £1.5 million. In other words, I tried to devise what many defined benefit schemes offer, putting some pretty generous things into the package as I did so. When I carried out a similar exercise in Committee, the hon. Member for Wolverhampton, South-West (Rob Marris) picked me up on putting in a two-thirds survivor's pension, which he said was too generous, so I reduced it to 50 per cent. to satisfy him, should he be here.

In calculating those figures on the website, which is quite easy to do, I used the best—not the worst—annuity rate on offer from a major provider, which was the Prudential. I found that the 60-year-old could buy a pension that pays him £60,264 a year. If he was 55, which would be the minimum retirement age, he could get a pension of £53,496 for his £1.5 million defined contribution pension pot. However, if he was in a defined benefit scheme he could draw £75,000 or more—in other words, almost 50 per cent. higher than what was available to the 55-year-old with a defined contribution scheme. That is a simple fact that the Financial Secretary cannot deny and which exposes the truth—that there is one regime for defined contribution schemes and another for defined benefit schemes.

The Financial Secretary said in Committee, and has said here, "Well, of course people can always, in effect, go off and buy a defined benefit scheme, because they can convert their defined contribution scheme to a defined benefit scheme." I am not sure why the Government should rely on the market to address deficiencies in their legislation: they should ensure in the first place that it does not discriminate between defined benefit and defined contribution pensions.

In Committee, we tried to value defined contribution and defined benefit pensions in exactly the same way by multiplying the actual pension available; after all, most people will not go into the detail as we have, but focus on the pension income that is actually available to them. We suggested multiplying that actual pension income available to the individual, whether on a defined contribution scheme or a defined benefit scheme, by 20 and testing it against the lifetime allowance. That meant that an individual could have had a pension income of £75,000 a year from a defined contribution annuity purchased via a defined contribution pension, as well as from a defined benefit scheme.

5.45 pm

The Government rejected those amendments in Committee and we have therefore tried a new approach of offering an underpin so that people with a defined contribution pension can have the pension pot valued in the way in which the Bill currently sets out or by multiplying the available annuity—A in my equation—by an appropriate actuarial factor, which is represented by AAF. Conservative Members can devise equations, too. That factor would be 20 for a lifetime annuity that increases, for example, with inflation or through being related to an asset value such as risk profits annuity, and less than 20 for a flat lifetime annuity, as defined by the Government Actuary. The latter would be initially higher than an increasing annuity.

The Financial Secretary claims that there is a great flaw in our scheme in that it creates a tax avoidance loophole that would enable someone to have an artificially low pension and subsequently increase it. If that is the case—I am happy to take that on advice—she is more than welcome to go away and consider my amendments, which could easily be tweaked to get around the problem, for example, through different definitions of types of annuity and their treatment. I should be more than happy for her to do that and table relevant amendments to next year's Finance Bill.

If the Financial Secretary is right that the Bill does not treat defined benefit schemes unfairly, she should not mind placing an underpin in the measure because, she would argue, it is not required. However, if the Government turn out to be wrong—I suspect that they will—the underpin will act as a guarantee.

Only a relatively small number of people will have £1.5 million. The pension incomes that we are considering£55,000, £65,000 or £75,000 a year—are much greater than the pension incomes of almost everyone in the country and most of the people whom we represent. However, the Government are conveying a signal that they will treat defined contribution schemes differently from defined benefit schemes. Many people in the country believe that we in the public sector—there is an MPs' final salary scheme—feather our nests with those generous schemes while the final salary schemes of those in the private sector have closed and been replaced with money purchase arrangements.

A survey by JPM organ Fleming showed that 61 per cent. of the top 350 pension schemes have closed or restricted availability to defined benefit schemes and 60 per cent. offer defined contribution schemes. They are almost exclusively ire the private sector. The Bill will confirm a suspicion that there is one rule for us and another rule for the rest of the country. That is the wrong message to send when there is a general perception that pensions are in crisis and people are not saving enough for their retirement. There is a general view that the public sector is insulating itself against the changes and problems.

We should be scrupulous in our legislation in emphasising that defined contribution schemes are not discriminated against but treated equally by the Government, the state and the Inland Revenue. That is not the case in the Bill as it stands and it should be changed.

Mr. Flight rose—

Mr. Deputy Speaker

Order. It is somewhat unusual for two Front-Bench spokesmen of the same party to speak on the same group when we have had no intervening debate that needs winding up. It would be inappropriate.

Ruth Kelly

I look forward to responding to the points that the hon. Member for Tatton (Mr. Osborne) made. First, I shall deal with the 50-member rule. As he made clear, he knows that the 50-member rule for providing an annuity to ensure that tax relief is used to grant a secure income for life is altogether different from what he referred to. I do not accept that there will be confusion. The measure is clear: the rules have different purposes.

I do not accept that the 20:1 valuation factor gives a more generous result to defined benefit schemes. The factor has been agreed, with consensus from the pensions industry, as providing a broadly accurate result for valuing defined benefit pensions. With defined contribution schemes, there is an identifiable amount available for the provision of benefits to the member, so it is possible to value pension rights accurately using that amount. With defined benefit schemes, that is simply not possible because there is no identifiable amount, so it has been agreed that the valuation factor of 20:1 provides a broadly accurate equivalent.

I accept that using two different valuation methods will inevitably produce slight tax differences. Whether they favour one individual over another in any particular year will depend on a variety of factors. If the hon. Gentleman had proposed a different age—perhaps 65, instead of 55 or 60, for example—he might have come up with a different result. If investment growth rates or annuity rates were to differ, that too would produce different results.

The valuation factor is a broadly accurate method of valuing defined benefit pension. However, if any defined contribution schemes feel that the 20:1 valuation would give them an advantage, they may offer scheme members a scheme pension valued at 20:1 as an alternative. Indeed, any individual who wishes to access the 20:1 valuation factor can move his pension product to the product of his choice.

The representatives of the pension industry who were involved in designing the new simplification rules were not, at the outset, in favour of lifetime annuities being paid at 20:1, and they are still not in favour of their being valued in that way. They accept that. because there is no pot in a defined benefit arrangement, some sort of approximation must be used to value its capital worth, and the single factor is indeed an approximation, but it achieves that end. Those people are highly experienced representatives of the pension industry and they are firmly of the view that, when there is an identifiable pot—as in the case of a lifetime annuity—it is that pot that should be taken as the capital value to be tested against the lifetime allowance. Th it is the simplest and most accurate method. It does not seem sensible to us, or to them, to turn a real capital amount into a notional one.

Mr. Flight

Will the Minister tell us what is the difference between a member of a pension scheme with fewer than 50 members who gets annuity when they retire and someone with a money purchase pension who buys an annuity when they retire? Is she aware of any insurance company that offers some kind of magic formula that puts a defined benefit label on to a defined contribution scheme? I think that she will find that no such product exists. There is no difference between a bought annuity and a defined contribution pension.

Ruth Kelly

I agree that such products may not exist yet, because there is no demand for them. However, as I said in Committee, I firmly believe that there is a market for this kind of financial product. It is not for me to tell the market what to do, but if there is a market for such a product, I am sure that the market will supply it. If not, presumably it will not. The Revenue's contacts in the pensions industry have confirmed that this is also their expectation.

We could continue to debate this matter at length, but we will not know the answer unless someone identifies a demand and proceeds to provide such a product. I would expect that any such demand will be met, and I am sure that the hon. Gentleman would accept that that is likely to be the case, given his feelings on the matter. In that case, the unfairness that he supposes to exist, and which I refute, will not exist at all. On that basis, perhaps he will acknowledge that his amendments are unnecessary.

Amendment agreed to.

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