§ Mr. George Osborne (Tatton) (Con)
I beg to move amendment No. 27, in page 151, line 16, leave out
'70% of the basis amount for the alternatively secured pension year'and insert
the greater of:
- 70% of the basis amount for that alternatively secured pension year, or
- in an alternatively secured pension year other than the first alternatively secured pension year, the aggregate of:
- (i) the total amount of alternatively secured pension which could have been paid to the member in all previous alternatively secured pension years less the amount actually paid to the member in those alternatively secured pension years ("the undrawn alternatively secured pension"), and
- (ii) 70% of the basis amount for that alternatively secured pension year (calculated after deducting from the sums and assets representing the member's alternatively secured pension fund on the nominated date the amount of the undrawn alternatively secured pension).'.
§ Amendment No. 28, in page 152, line 44, leave out
'70% of the basis amount for the alternatively secured pension year'
'the greater of-
- 70% of the basis amount for that alternatively secured pension year, or
- in an alternatively secured pension year other than the first alternatively secured pension year, the aggregate of:
- the total amount of alternatively secured pension which could have been paid to the dependant in all previous alternatively secured pension years less the amount actually paid to the dependant in those alternatively secured pension years ("the undrawn alternatively secured pension"), and
- 70% of the basis amount for that alternatively secured pension year (calculated after deducting from the sums and assets representing the dependant's alternatively secured pension fund on the nominated date the amount of the undrawn alternatively secured pension).'.
§ Amendment No. 18, in schedule 28, page 441, line 3, leave out '50 members' and insert
20 members or such other number of members as may be prescribed from time to time'.
Amendment No. 19, in schedule 28, page 441, line 9, leave out
'with 50 or more members'
'to which sub-paragraph (1) does not apply'.
§ Amendment No. 29, in schedule 28, page 445, line 22, at beginning insert
'Where this sub-paragraph (4) applies by virtue of subparagraph (3), when the member dies,'.
§ Amendment No. 30, in schedule 28, page 445, line 37, leave out second 'the' and insert 'that'.
§ Amendment No. 31, in schedule 28, page 445, line 39, leave out second 'the' and insert 'that'.
§ Amendment No. 20, in schedule 28, page 446, line 26, leave out '50 members' and insert
'20 members or such other number of members as may be prescribed from time to time'.
Amendment No. 21, in schedule 28, page 446, line 33, leave out
'with 50 or more members'
'to which sub-paragraph (1) does not apply'.
§ Amendment No. 32, in schedule 28, page 450, line 31, leave out second 'the' and insert 'that'.
§ Amendment No. 33, in schedule 28, page 450, line 33, leave out second 'the' and insert 'that'.
§ Government amendments Nos. 112 and 113.
§ Amendment No. 34, in clause 186, page 165, line 31, at end insert—
'(6) An individual may by notice to the Board of Inland Revenue elect that contributions made on or before 31st January in any tax year are to be treated as having been paid during the preceding tax year.'.
§ Amendment No. 15, in schedule 31, page 470, line 12, at end insert—
§ '(2A) In that subsection, immediately before the entry relating to section 616, insert—
section 607 (retirement annuity contracts)".
§ Mr. Osborne
We now come to a group of amendments on the Government's reform of pensions taxation, which detained us for a few Committee sittings. The Government call it simplification, but with 151 pages of primary legislation, well over 100 pages of secondary legislation, and 350 page of guidance notes, that is something of a euphemism.
The Government say that they are sweeping away eight pension regimes, and replacing them with one. However, Price water house Coopers say:
The Bill reveals that the Government's original intention to reduce eight tax regimes to one has actually resulted in the creation of six separate regimes.Nevertheless, at the beginning of the Committee, I welcomed the overall package of reform. Our amendments in Committee were designed to remedy mistakes that we thought we had identified, and that the industry had asked us to remedy, to highlight issues for debate, and to tackle what we thought were major injustices. Sadly, none of our amendments were accepted in Committee, which was a great shame, not least because I had voted for the Financial Secretary to be Minister of the year in The House Magazine awards, which are taking place this evening. I hope that our proceedings do not go on so long that she is unable to attend the awards ceremony, as that would be a great shame. We will see how we get on.
As I said, the amendments that we tabled in Committee were probing, technical and so on. The amendments that we have tabled on Report focus by and large on what we regard as the major injustices that remain in the package and the big issues of principle.
Let me start with an issue that we did not discuss in Committee. Amendment No. 34 is to clause 186, which says that the maximum tax relief on contributions to which a person is entitled in a tax year is equal to their taxable earnings for that year or £3,600, whichever is higher, although, of course, there is an annual limit of £215,000. The Institute of Chartered Accountants contacted us to raise its fear that
909these proposals will put the self-employed at a serious disadvantage as compared to the employed and…this will undermine the Government's overall objective in relation to pension reform".The reason is that most self-employed people will not know their taxable earnings until after the end of the tax year, so they will be unaware of the maximum tax relief on contributions to which they would have been entitled. That makes financial planning extremely difficult for them. There will even be those whose UK earnings are zero in a particular year: for example, because they have made a loss in that year.
The current pensions taxation regime accommodates those fluctuations by allowing individuals to nominate that any single year's earnings can count not just for that year but for the five subsequent years, and a payment to a pension scheme made by 31 January in the following tax year, or, if earlier, the date that a tax return is filed, can be treated as if it is paid in the previous year of assessment.
Again, the Institute of Chartered Accountants tells us:
We believe that both these existing measures provide considerable flexibility and certainty to the self-employed and think that the rules in the Finance Bill should be amended.It goes on to say:
We recognise that the new limit of contributions of an amount equal to a person's relevant earnings rather than a percentage of new relevant earnings is more generous than the current rules and that the Government may not wish to allow net earnings for a year to be nominated for the next five years. Our suggestion is that the rules should be amended so that taxpayers can elect to treat a payment made by 31 January in the following tax year as made in the previous tax year.That is what amendment No. 34 does. It is not an issue that we discussed in Committee, but it is relevant. There is a large number of self-employed people. The Institute of Chartered Accountants is an extremely reputable organisation. If it has identified the problem, I am sure it has a point.
I should be interested to hear what the Minister says. If she cannot accept our amendment—given the track
record so far, I would be optimistic if I thought she was about to accept it—I ask her at least to consider the matter. We have another Finance Bill next year, before the reforms come into place. I hope we will get an assurance from her that she will examine the problem that we have brought to the attention of the House.
I turn to two issues that were discussed in Committee—first, that to which amendments Nos. 18 and 19 apply: the strange requirement, which appears in paragraph 2 of schedule 28, that a pension scheme with fewer than 50 members secures scheme pensions through an insurance company, for example, by buying an annuity. I say that that is a strange requirement, first, because it did not appear in any of the consultation documents and the industry was not consulted on it. It was one of the big surprises when the Bill was published.
Secondly, the requirement is strange because, of all the debates that we had in Committee, I feel that this is the one on which the Minister was least sure of her arguments. She said that it was all to do with protection—that small schemes ran the risk of not providing a pension for life because they were not large enough to pool the mortality risk of members. But she produced no evidence to back up that assertion. She 910 provided no facts about the number of small schemes that were unable to honour their scheme pensions. Then she conceded that the issue of member protection was really a matter for the Department for Work and Pensions.
In Committee the Minister said:
I also recognise that the DWP is in the process of making changes to its rules on scheme funding requirements and that, together with the pension protection fund, it should protect the pension funds of some small schemes. However, we are not yet in a position to know exactly what those protections should be.I will, however, give a commitment to the Committee that once that has been fully decided and those rules are in the public domain, we will examine this again to see whether there is any overlap of regulation, and whether this is the appropriate way to ensure that members of smaller schemes are protected against longevity risk. In the meantime, I suggest that the provision remains in the Bill."—[Official Report, Standing Committee A, 8 June 2004; c. 498.]
That hardly reflects the confidence and assurance that one expects from a Treasury Minister seeking to change the law. To paraphrase, she said, "I know that the Department for Work and Pensions is working on this. I am not sure exactly what it will come up with, but in the meantime let's put the provision in the Finance Act and if we don't need it, I suppose we can take it out."
I believe we should approach the matter in a different manner. Let us see what the Department of Work and Pensions comes up with, see whether the provision is necessary, and if it is necessary, put it in the Finance Bill next year. It is a stand-alone provision, in the sense that it does not affect the rest of the new pensions taxation regime.
The Minister also conceded in Committee that the number 50 was "a relatively arbitrary figure". She guessed, using a Government Actuary survey, that between 86,000 and 98,000 schemes could fall into that category, but she was not sure. She revealed that the 50-member cut-off would not apply where a scheme originally had more than 50 members, which we did not know until then.
As I said, the Financial Secretary did not advance her strongest arguments at that point. The requirement could impose a considerable cost on smaller schemes. Buying annuities can be expensive and it may not be appropriate for a scheme to buy a large number of annuities at a particular time. Annuities include upfront administration costs; they are built into the price of the annuity and will fall on the member, whereas in many schemes they are paid by the employer. Members in such schemes could be at a disadvantage. The cost of the annuity also includes the profit margin of the provider. No detailed work has been published on those issues and there has been no consultation with the industry about the possible costs for smaller schemes, nor, as far as I am aware, has there been a detailed regulatory impact assessment.
In Committee, we proposed scrapping the whole requirement by simply removing it from the Bill. We suggested to the Financial Secretary that she reconsider it and that if the provision really were needed, she could include it in next year's Finance Bill. However, we were required to come up with something different on Report so that our amendment would be selected and discussed; 911 our amendment proposes, therefore, to replace the threshold of 50 members with a threshold of 20. That is because there is a much greater risk of a large proportion of members living longer than expected when there are only 20 members. Relatively, a 50-member scheme is not small, and many medium-sized schemes could be affected, whereas a 20-member scheme is, by a distance, smaller.
The amendment includes provision for the Financial Secretary to change that number by regulation. She may discover that the provision is not needed so the requirement could be eliminated, or she could increase the number from 20 to 50 or 100. We have given the hon. Lady some flexibility. She is not even sure whether the original provision is required and is awaiting developments from another Department, so the figure of 50 gives her no flexibility.
The best reason for changing the figure from 50 to 20 is that I have heard from people in the Inland Revenue that they are considering that reduction. I thought that I would help the Government with their discussions by tabling the amendment, so that the Financial Secretary does not have to do what she may already be considering—she can simply accept my amendment.
Finally, I turn to the proposals on alternatively secured income. We had a good, wide-ranging debate on that new concept in Committee. According to the Government, it is designed to tackle the well-established objections of some religious groups, such as the Christian Brethren, to annuities, which they correctly believe are a speculation on the length of a person's life. They heed Corinthians, which tells usye are not your own…For ye are bought with a price",so they decided that it would be wrong for them to purchase annuities. That is a long-established belief of the Brethren, stretching back to the 19th century.
There are 14,000 Brethren in the United Kingdom and until now the Government have steadfastly refused to help them. The issue has been debated many times and has been brought to the attention of the House by Conservative Members. I praise in particular my right hon. Friend the Member for Skipton and Ripon (Mr. Curry) and my hon. Friends the Members for Tiverton and Honiton (Mrs. Browning) and for Arundel and South Downs (Mr. Flight), who in a succession of private Member's Bills and so on have come up with more and more ingenious devices to help the Brethren; for example, they came up with the concept of a retirement fail-safe fund.
Suddenly, however, the Government swept away all their previous objections and came up with a fairly straightforward answer. They said, "Fine, you can draw down up to 70 per cent. of the annuity that you could have bought at the age of 75, provided we assess it each year. We'll call it an alternatively secured pension." In fact, "alternatively secured pension" is a bit of a misnomer, because the pension is not secured against anything in any real sense, but if it makes the Government feel better to call it that, we do not object.
We should pay tribute to the Brethren for their long and, ultimately, pretty successful campaign. We should also pay tribute—as I already have—to my hon. Friends 912 who have advanced their cause here. In a letter to my hon. Friend the Member for Arundel and South Downs, a representative wrote:
We would like to thank you, on behalf of the Brethren, for your constant support in our appeal to Ministers to obtain a pension provision that would accord with our beliefs … thank you for your kind and consistent support that has helped to obtain this provision.The Brethren also wanted us to thank the Minister for listening to our arguments, which I am happy to do.
The solution that the Government have come up with is, however, marred by a great injustice, which my amendments Nos. 27 to 33 seek to remedy. The Government say that a scheme member using an ASP can draw only 70 per cent. of the amount that could be generated by an annuity for someone aged 75. In Committee we tabled amendments to turn the 70 per cent. into 100 per cent., but the Government rejected them. What we have tried to do here is get rid of the requirement always to apply the funds to an annuity, which someone could buy at the age of 75.
The ASP will become increasingly unfair as a member gets older. According to the Association of Consulting Actuaries, by the time that 75-year-old is 80 he or she will be drawing just 55 per cent. of the annuity that could be purchased in the market, and at 80 the amount will be just 43 per cent. The ACA says:
Clearly the government is keen to ensure that people using ASI do not erode their pension savings too quickly and hence have recourse to social security but the basis proposed is far too penal and discriminates unfairly against those who do not wish to buy an annuity on religious grounds.The ACA believes, and we believe, that even if we accept the Government's argument that they want to protect the Exchequer and are not prepared to get rid of the annuity rule in general, the combination of the annual review of someone's fund and the 70 per cent. rule is more than enough protection for the Exchequer. Indeed, I would argue that there is a danger that if people are forced on to such potentially low incomes, they may fall back on means-tested benefits.
Our amendments seek to achieve two things. First, they would allow someone with an ASP to draw 70 per cent. of the annuity that can actually be bought with the pension pot available—rather than the amount that could be bought by a 75-year-old—while retaining the annual review, which is the best check that funds will not run out. Secondly, they would allow someone to catch up. A member who had not drawn the full 70 per cent. in the previous year could do so in a subsequent year. There could be a number of years in which their income needs were not particularly great; then suddenly, they might want to go on holiday or to carry out home improvements. In such a situation, they ought to be able to make up the difference through the money that they had not drawn down in previous years. The ability to do so would give them some flexibility.
We had a debate on how attractive the alternatively secured pension will be to the wider public. Many in the industry think that a relatively large number of people might take up that option in order to pass on their pension pot to their children. The Financial Secretary was pretty sure that that would not happen; time will tell. But there is no doubt that that option will be used by religious groups—including the Brethren, one 913 hopes—to provide them with an income in retirement. I have no problem in saying that the Government have taken a major step forward, but they are still in danger of denying such people a decent income in retirement.
The Financial Secretary is likely, to rehearse many of the arguments that we heard in Committee, and to say exactly the same as she said when I made these points then. Perhaps she can at least give a commitment to considering this issue, and to listening to representations from the Brethren. One of the people from that organisation who wrote the original letter phoned me yesterday to discuss this issue, so it is clear that they are still concerned about it. I hope that the Financial Secretary will listen to such views in the course of the next year, and if necessary introduce changes in the next Finance Bill. If she is not prepared to do so, she could just as easily accept my amendment today and solve the problem here and now.
§ Mr. Quentin Davies (Grantham and Stamford) (Con)
I rise to speak to my own amendment in this group—No. 15—but I shall not be seeking your consent to press it to a vote, Mr. Deputy Speaker The issue that I am about to discuss was brought to my attention by the Low Incomes Tax Reform Group and Tax Volunteers, and in that regard I am very grateful to Mr. John Andrews and Mr. Robin Williamson. I was for many years an advisor to the Chartered Institute of Taxation, which supports, but in no sense has a financial interest in, those two bodies. Indeed, nobody has a financial interest in them because they are pro bono bodies; in fact, Tax Volunteers is a registered charity.
The intention behind my amendment is to add to the list of forms of income that can be paid through the pay-as-you-earn system, where tax is deductible at source, payments under retirement annuity contracts. The object is that the tax treatment of retirement annuities should be exactly the same as i hat of occupational pensions or employment earnings. The big advantage is that, if tax is deducted at source and the tax code is correct—one assumes that it is; if not, it can rapidly be modified—the taxpayer receives the exact amount of money that they ought to receive net of tax, and no tax is withheld by the Revenue. Such a withholding involves a very considerable cash-flow loss to the taxpayer.
At the moment, tax is deducted at source from retirement annuity contracts, as with some other forms of savings income, at the standard rate of 22 per cent. The rather sad problem is that many people who have retirement annuities have small annuities and are very poor. The average retirement annuity premium—the capital sum paid to purchase a stream of annuities—is some £22,000. When I first saw that figure, I could not believe it; I thought that it was the average annuity in payment, although I admit that such a figure would be rather high. The fact is that that is the average premium in the country. Labour Members often mention in debates that there are a lot of so-called fat cats earning a large amount of money. Of course there are, but the average must reflect the fact that there are many people whose total accumulated capital, with which they can purchase an annuity contract, is very substantially below £22,000.
914 5 pm
It is a tragic position. We are dealing with many poor people here, and I wish I knew exactly how many. I tabled a question the other day asking how many recipients of retirement annuity contracts in this country were entitled to tax rebates from the Inland Revenue, their marginal tax rate being either zero, when income falls below the required level of the personal allowance, or 10 per cent. In either case, people would be entitled to a repayment by the Revenue, but the Government response to my question was that they did not know the answer either. There are clearly many people who fall into this category—certainly at least tens of thousands—and some of them are in a rather cruel position.
The Government will probably tell me that when people's income is below the personal allowance threshold and they are not liable for any tax, there is the R89 procedure, which enables them to apply to the Revenue to have their retirement annuity paid gross, without deduction. However, that does not work for people whose income is taxable at the marginal rate of 10 per cent.
If we are talking about people whose income falls below the personal income limit—only about £5,000 or £6,000, or perhaps a little more with the age limit—we are talking about people who are, frankly, pretty poor. Let us face it, such people may be unsophisticated in financial matters and perhaps completely foxed by the administrative problems of securing the repayment. They will certainly not be able to afford professional advice. A few hours of professional advice might consume their entire income for the year, so it is wholly unreasonable to assume that they should take such advice to secure the refund. There may be some pathetic, very sad cases—one fears they must exist—where people have their tax deducted quite wrongly by the Revenue and they never claim it back at all. Furthermore, some people who manage to work out the right administrative procedures to reclaim the tax may have to wait a long time. They cannot use the R89 procedure if they are in the 10 per cent. tax bracket. They may have to wait many months—perhaps the Paymaster General can tell us exactly how many. It certainly takes a long time to get money back from the Inland Revenue, as we know.
I would like to cite one or two cases put to me by the Low Incomes Tax Reform Group. One case was that of "Ron", a pensioner aged 76 who lives alone. His income for 2004—05 is his state retirement pension of —4,140 and his retirement annuity of £2,950—a total income of £7,090. This is a man on a very modest income and it is right for the House to pay attention to the position of people in such circumstances. His income tax liability will be £14 for the whole year, yet basic rate tax of £649 is deducted from his retirement annuity at source, leaving him to claim back from the Revenue the £635 that he does not owe. That is a cruel situation—a theoretical example, but it could exist.
Let us consider another case of someone with a total income of £6,831. That figure was chosen in order to make a point, but again there could well be many real people with exactly that income or very close to it. It was chosen because it happens to be £1 above the personal allowance limit. The tax liability in that case is 10p for the year in question. However, the individual has a 915 retirement annuity of £3,000, so £660 tax is deducted before he gets it. In that way, people on very low incomes regularly lend the Inland Revenue over £600, which is a colossal amount of money for them.
I know that the Government understand this, as the problem has been raised with them many times. I should be delighted if I were the first person to bring this matter to the Government's attention, but I am not. The Government have been lobbied on this matter by many people, including the Low Incomes Tax Reform Group, for many years. The Paymaster General is not in her place just now, but she told the House four years ago that the Government were investigating ways of making progress on the matter. She said that they were in discussions with the industry about simplifying the system to make it much more responsive to pensioners.
I asked a parliamentary question on this matter recently in an attempt to keep up the pressure, and I got an answer on 1 July. It was signed by the Paymaster General, and I am sure that the Financial Secretary is aware of what it contained.
§ The Financial Secretary to the Treasury (Ruth Kelly) indicated assent.
§ Mr. Davies
The answer stated:The Inland Revenue are setting up a joint working group, including representatives from both RAC"—that is, retirement annuity contract—
providers and those who represent the pensioners interests such as the Low Incomes Tax Reform Group, to carry out an assessment of the scale of the problem and to explore options for resolving this issue by April 2007. The group will also look at practical solutions in the short term to help those pensioners who may be suffering a cash flow disadvantage under the current system."—[Official Report, 1 July 2004; Vol. 423, c. 381W.]By their own admission, the Government have known about this problem for three or four years. The answer states that the Inland Revenue "are setting up" a working group. The continuous present tense is sometimes used to indicate the immediate future, so that may mean that the working group will be established in August, September or October, with a view to doing something about the problem by April 2007.
The examples that I gave are genuine enough. One may be a typified example, but they offer authentic instances of the impact of the present regime. They show that people in their late 70s—and there will be some in their 80s and 90s—are having hundreds of pounds abstracted from their very low incomes in a way that is very unjust and unfair. I do not believe that the Government can make a case for the present system on the grounds of morality or of economic rationality, or in any other reasonable way.
Many of the people who are suffering from this problem are elderly, and some may be dead by the time the Government resolve the matter in 2007. In bringing forward this matter again, I do not claim credit or originality: it is not as though no one had identified the problem before. I simply beg the Government to show the requisite urgency in dealing with the injustice that I have described.
916 The people who are suffering from the problem are very vulnerable. This afternoon, the House has spent a lot of time talking about people with millions of pounds who are able to perform complicated tax planning about their estates. That is fine, and it is right to pay attention to such things. We need to look at the matter objectively, and ensure that the principles of justice, clarity and transparency in our tax system are applied; but how much greater is our obligation to do that for poor retired people who receive only £5,000, £6,000 or £7,000 a year? They cannot afford professional advice, or paid advocacy.
I find it hard to believe that the Financial Secretary can refute either the substantive or the normative points that I have made. I hope that she will say that the Government will adopt some urgency in the matter, and all she has to do is give the requisite instructions to her officials. However, we need to get this sorted out a lot quicker than the Government appeared to envisage in their reply to me of 1 July.
§ Ruth Kelly
We have had a good debate so far on this important subject. The debate has touched on pension scheme benefits and contribution rules. In the interests of being precise and concise, I shall deal with the points that have been raised. rather than elaborate on some of the grander themes.
The hon. Member for Tatton (Mr. Osborne) mentioned amendment No. 34. As he well knows, we have introduced a simplified system with generous limits, in which contributions can be made to a pension fund of up to 100 per cent. of an individual's earnings in any given year. He asked especially about the self-employed and how the limits would affect a self-employed person whose earnings are not known until the end of the financial year. He asks how such a person would know what represented 100 per cent. of their earnings, and he has tabled an amendment to try to address the problem. I agree that some self-employed people will not know their final earnings until after year-end, but as the hon. Gentleman acknowledged, the new limits of 100 per cent. of relevant earnings chargeable to tax in the UK are extremely generous compared with existing levels of relief. The self-employed will, over a period, be able to plan pension contributions on a relatively safe basis, by basing contributions on known levels of earnings.
Very few people contribute the maximum under the current rules, which only allow up to 40 per cent. of earnings, depending on age and the type of scheme, and are much more restrictive than the new rules. The new limit of two and half times that figure will provide more than adequate leeway for the vast majority of people. If someone were to inadvertently exceed the 100 per cent. limit, the scheme will have provision to refund the excess without any tax charge on the sum refunded. Those comments more or less deal with the hon. Gentleman's point.
Very few people raised the issue in representations to the Government or to the Inland Revenue. It did not come up in consultation. Only three out of 209 responses referred to it at all, and only one representation on the issue was received following the publication of the Finance Bill. It was probably the same representation as the hon. Gentleman mentioned. Of course, we keep all such provisions under review, but 917 in the interests of simplicity I urge him to accept that the system that we will introduce is not only more generous, but simpler than the one it replaces.
The hon. Gentleman also mentioned the 50-member limit. We had a long and constructive debate in Committee about that and the requirement to buy an annuity for pension funds with fewer than 50 members. I urge him and other members of the Committee to consider that the Government have a responsibility when providing tax relief for pension savings. It is important to ensure that the relief is used for its intended purpose, which is to provide members with a pension for life. The annuity requirement is designed to ensure that it is possible for a fund to provide a pension for life. The hon. Gentleman may dispute the appropriate number of members—whether it should be 20 or 50, or perhaps 60 would be better. We could talk for hours about the appropriate number, but it is not possible to say precisely what size of scheme would provide a large enough pool so that funds would be protected if, for example, all the members lived longer than expected. That could depend on a range of factors, such as the gender of the members or the type of occupation. However, we can say that it is unlikely that a scheme with fewer than 50 members would be of sufficient size adequately to pool the mortality risk.
§ Mr. George Osborne
Can the Financial Secretary give us some evidence of the problem that she has identified of the small schemes being unable to pool mortality risk? How many such small schemes have run into difficulties, and why does she think that it is the Inland Revenue's job through th e tax rules to offer member protection, when we have just had a Pensions Bill from the Department for Work and Pensions that contained many member protection features?
§ Ruth Kelly
I was about to deal with some of those points when the hon. Gentleman intervened. There is a tax rationale, because we provide tax relief to assist people in achieving a secure income in retirement. It is only right that we try to ensure th it the funds are used for the appropriate purpose. There is also a member protection rationale that will rightly be considered by the Department for Work and Pensions in regulations. Those regulations will be produced in the usual way and considered over the coming months. In order to ensure that there is no overlap between the provisions and the Bill, I have given a commitment to look closely at the regulations to ensure that that does not happen. If there is an overlap, we will of course review the requirement. In any event, there is a clear tax rationale for the requirement to take out an annuity.
§ Mr. Flight
Have the Government had any thoughts about transitional arrangements? A final salary pension scheme with, for example, 50 members that has been operating on the basis of an ongoing portfolio is likely to encounter very substantial additional costs in suddenly paying annuities for all its members. With pension funds substantially under water already, that could result in a lot of final salary pension schemes going to the wall.
§ Ruth Kelly
I should like to make a couple of points about that. First, we have not received representations about that issue, which in itself suggests that it is not 918 likely to be a significant problem. Secondly, it is not at all clear that an additional cost will be imposed on small schemes. That is completely dependent on the nature of the scheme. When an insurance company provides the scheme pension, it will be necessary for the entire purchase price to be paid from the scheme to the insurance company as either a one-off lump sum or in a series of payments. However, where the scheme itself pays the pension, cash injections from the employer may be required to ensure that the pension is payable for the member's lifetime. So in the long run, the insurance company route may cost no more and might, in fact, even be cheaper than the in-house pension route. So I do not foresee the situation that the hon. Gentleman envisages arising in many cases.
I now turn to the alternatively secured pension debate that, again, we had in Committee. The hon. Member for Tatton has referred to the Government's decision to set the rate at 70 per cent. of the relevant annuity rate. The reason for that decision is to ensure that an income can be provided for life, thus providing security of income for the members. Indeed, that can be rightly described as a secured pension. He asked why we chose 70 per cent. With a maximum income of 70 per cent., for example, if a group of people all take their fund into alternatively secure pensions at the age of 75, only 5 per cent. of them could expect their maximum income to fall to a third of its initial value if they grew 70 per cent. of a comparable annuity each year. If the maximum income were to increase to 100 per cent., the incomes of 30 per cent. of that group would drop to a third. That is therefore an incredibly important part of our provisions which will ensure a decent and secure income for life. The hon. Gentleman argued that the Brethren have been lobbying him to increase the limit from 70 per cent., but that is not my experience of the Brethren's position, although we always listen to them and will continue to do so.
§ Mr. George Osborne
The thrust of my speech when I mentioned the Brethren was to peg things to the annuity that can be bought at the age of 75. Even when people are 85 or 90-years-old, they must still be measured against the annuity that can be bought at the age of 75. The Financial Secretary is knocking down the arguments that I advanced in Committee, not on Report.
§ Ruth Kelly
I have explained that the rules exist precisely to ensure that the funds are not depleted too quickly. The hon. Gentleman's amendments would create a significant risk in each case that the funds would be depleted too quickly. Clearly, if people are not members of the Brethren, they always have the option of annuitising if they find that the conditions do not suit them and they want to maximise their potential income. I understand that the Brethren fully welcome the Government's proposals and do not argue that any different provision need be made.
I shall not rerun the debate about whether people other than the Christian Brethren will use alternatively secured pensions—other than the hon. Member for Arundel and South Downs (Mr. Flight)—apart from issuing the warning that, if we find that people intend to use the alternatively secured pensions to bequeath any unused funds to their dependants, we will of course 919 review the provisions, and we could consider ways to tighten up the proposals to make that a very unattractive option.
The hon. Member for Grantham and Stamford (Mr. Davies) was absolutely right to table amendment No. 15 and I enjoyed his contribution to the debate. He explained well that in the new regime, all pension incomes from registered pension schemes will be subject to the operation of pay-as-you-earn by the person who pays the pension. That includes income paid from retirement annuity contracts—RACs, as they are commonly referred to—because from 6 April 2006, they will come under the umbrella of registered pension schemes.
During the preparation of our simplification proposals, the industry made strong representations that annuities paid under RACs should not be subject to PAYE for a temporary period. I agree with the hon. Gentleman that we must ensure that pensioners in receipt of RACs do not suffer as a result of the current arrangements, and I stand by the Government's previous commitments to protect their positions as far as possible, to which he drew attention.
We need to ensure that the change is carried out effectively and efficiently. The task will not be achieved without difficulty, because bringing those pensioners under PAYE will take up the time and resources of not only the Inland Revenue, but the industry. For example, all pensioners will have to be contacted to get the necessary information to operate PAYE. Unfortunately, as I am sure that the hon. Gentleman will agree, some pensioners are often reluctant to respond to Inland Revenue requests for such information, so it is an unfortunate fact of life that despite the best will in the world, the task will be resource intensive and its completion will take time. That is why I have asked officials in the Inland Revenue to form a joint working party, including representatives of RAC providers and bodies that represent pensioners' interests, such as the Low Incomes Tax Reform Group to which he referred, to carry out a feasibility study to take account of the scale of the problem with the aim of resolving the matter by 2007, and to examine short-term measures that might help to alleviate the problem to which he referred so that people are not penalised unfairly by the current system. We intend to resolve the matter as quickly as possible.
§ Mr. Quentin Davies
I am grateful to the hon. Lady for her response to my points; she is saying all the right things. However, she will agree that the Government have known about the problem for many years and that they have been promising to take action for the past four years—since 2000. There must be a sense of urgency now. I was grateful that she referred to short-term measures that could be introduced before the deadline in 2007. Will she give us an indication of what those measures might be and the time scale in which they could be implemented? I am grateful for the general response that I have received, which will also have been noted by many people in the country with enormous pleasure and relief.
§ Ruth Kelly
I thank the hon. Gentleman for his comments and assure him that officials in the Inland 920 Revenue are already in touch with the Low Incomes Tax Reform Group and industry representatives to try to sort out the problem. We are especially determined, as are they, to try to solve the short-term cash-flow difficulties experienced by pensioners who are disadvantaged by the current system. I believe that one measure under consideration is giving pensioners the ability to claim back tax from the Inland Revenue within year, which should alleviate some of the cash-flow disadvantages to which he referred. We hope to resolve the problem by 2007, and he will agree that if we can both take short-term measures to alleviate problems, and look towards a deadline for resolving longer-term issues, that will represent progress. The Government are intent on solving the problem.
Government amendments Nos. 112 and 113 will clarify and make minor changes to the lump sum rules in schedule 29. They will ensure simply that the definitions of winding up lump sums and winding up lump sum death benefits apply to the whole of part 4 of the Bill, rather than only schedule 29. I urge the House to accept those amendments, and hope that the hon. Member for Tatton and other hon. Members have been reassured by my comments.
§ Mr. George Osborne
I join my hon. Friend the Member for Grantham and Stamford (Mr. Davies) in welcoming what the Minister had to say about his amendment. As he said, we have had previous assurances from the Government—perhaps not as full as the one given by the Financial Secretary—and we shall hold the hon. Lady to what she does rather than to what she says. I am sure that she means to implement these measures and, particularly, to provide short-term measures that she has talked about.
Amendment No. 34 is about the self-employed. The hon. Lady said that the regime was generous in terms of the amount of money that people could put in and that there was more than adequate leeway for the self-employed. She is right that the regime is generous, and I think that I said that. She said that any overpayments would be refunded. but she did not say that the self-employed would be able to make up any underpayments. The system does not help those who are not sure of their income from year to year. They may have zero income some years. They are not helped with their financial planning. However, the hon. Lady said that she would keep the matter under review. Just because she has received one representation on the issue, that does not mean that it was a bad representation.
Amendments Nos. 18 and 19 are' about the limit of 50 scheme members. The Minister has not produced any evidence of a problem. She has asserted that there is a problem and has asserted also a general proposition about mortality risk for schemes with fewer than 50 members, but I have not seen any data, any evidence or any consultation paper. It seems that there is only a general view that perhaps this would be a good moment to introduce the provision. Although the Minister tried bravely to draw a distinction between the tax rationale and the protection rationale for so proceeding, it is basically a protection rationale.
The hon. Lady repeated what she said in Committee, which was that the Department for Work and Pensions is working on the matter and she will see what it comes up with and then reconsider the position. I would argue, 921 as I did previously, that that is putting the cart before the horse. Let us see what the Department with primary responsibility for pension protection comes up with, and then see whether the Inland Revenue needs to do anything. The Inland Revenue is gold plating. It is putting in a requirement when it is not sure that it will be necessary. Who knows, in a year's time, with the next Finance Bill, we could find th it the provision is removed, never having been law in terms of applying to schemes in practice. We shall see. At least the hon. Lady will take another look at what another Department does, which will be a first for a Treasury Minister.
I move on to the remaining amendments. I did not say that the Brethren were not happy with what the Government have done. I went to some lengths to say how pleased they were, and read out that they praised the Financial Secretary, my hon. Friend the Member for Arundel and South Downs (Mr. Flight) and other of my hon. Friends who, over a number of years, have advanced their arguments. I made it clear also that I was not trying to reopen the debate about whether it should be 70 per cent. of an annuity or 100 per cent. I had the feeling that the Minister's speech had been written before she listened to my speech, which was about a different point. It was about the age of 75, and about the fact that 70 per cent. applies to an annuity even by 75, notwithstanding the fact that the person may be 80, 85 or 90. I remind the hon. Lady that the Association of Consulting Actuaries felt that the provision was far too penal and would unfairly discriminate against religious groups. It felt also that the protection provided by both the 70 per cent. requirement and the annual review was more than adequate to protect the interests of the Exchequer. I felt that the hon. Lady did not deal with the substance of my argument, but there we go. Such is life.
§ I beg to ask leave to withdraw the amendment.
§ Amendment, by leave, withdrawn.