HL Deb 01 July 2004 vol 663 cc365-8

11.24 a.m.

Lord Peyton of Yeovil

asked Her Majesty's Government:

Whether they propose to reverse any of the taxation measures which they have taken in relation to pensions.

Lord Davies of Oldham

My Lords, the Government propose, from 6 April 2006, radically to simplify the current taxation rules for pensions. The new rules, set out in the Finance Bill currently before Parliament, will make it easier for individuals to plan with confidence for a comfortable retirement by creating a simpler and more flexible environment for pension saving.

Lord Peyton of Yeovil

My Lords, I mean no offence to the noble Lord when I say that I had rather expected my Question to be answered by someone a little more familiar with the subtleties of the Treasury then he perhaps is. There is nothing offensive in that remark.

I shall ask him a simple question. When the Chancellor of the Exchequer changed the rules for advance corporation tax, did he or did he not anticipate the dire consequences that that would have for pension funds? If he did, should he not now offer some explanation to pensioners? If he did not, if it was just an accident, perhaps the time has come to repair the damage.

Lord Davies of Oldham

Well, my Lords, I do not have to be too familiar with the intricacies of the Treasury to recognise that that question is a little old hat. The changes were made in 1997 and I bring to the noble Lord's attention the fact that they were part of a wider range of measures to benefit long-term investment in our economy. I think that he would recognise that, subsequent to that, we have had a structure of increasing confidence in investment in the economy and that it is the security of the economy that brings return to investment funds, not the marginal issues of taxation.

Lord Forsyth of Drumlean

My Lords, on the subject of old hats, perhaps the Minister could tell us how much smaller are the pension funds of our country as a result of the changes that the Chancellor made to taxation. If he does not know the answer to that question, my noble friend may have illustrated how irresponsible that change of policy has been for the nation's pensioners.

Lord Davies of Oldham

My Lords, I do not have the answer to that question, but I can tell the noble Lord that the overall position of the economy and the indices of shares are much more significant to pension funds than taxation. Of course I recognise that taxation has its part to play, but we all recognise that the strength of the resources available to pension funds depends on the strength of the economy. The noble Lord will recognise that in isolating the issue of the 1997 changes, he is altogether ignoring the reduction in corporation tax and the other measures that the Chancellor took to ensure that investment in our economy would increase.

Lord Marsh

My Lords, I am somewhat puzzled by the Minister, because all pension funds exist to invest their money in industry and commerce. I always have a go at a Latin phrase, never having learnt the language, but ispo facto, if you remove £5 billion sterling per annum from pension funds, you reduce investment that would otherwise go into industry and commerce.

Lord Davies of Oldham

My Lords, I emphasise the point that I made a moment ago. Of course the noble Lord is right that that impacted on pension funds; no one would deny that. I seek to emphasise that the Chancellor brought forward a package of measures at that time to improve investment in our economy. The results of that package of measures are bearing fruit as we move on. The Opposition seek constantly to refer to only one element of the 1997 Budget, when it is clear that the Budget as a whole acted very differently in relation to the overall increase in investment and the position of pension funds.

Lord Oakeshott of Seagrove Bay

My Lords—

Lord Davies of Coity

My Lords—

Baroness Symons of Vernham Dean

My Lords, I think that it is the turn of the Labour Benches.

Lord Davies of Coity

My Lords, does my noble friend agree with me that, when the Chancellor decided to introduce taxation on pension fund surpluses, the stock market was such that those pension funds could meet them? Things have changed since then Catastrophically, as a result of a change in stock market circumstances, plus the £5 billion a year that has been taken out, employers have moved away from occupational pension schemes to the detriment of pensioners. Is it not now time to rethink the position in view of those circumstances?

Lord Davies of Oldham

My Lords, my noble friend is right to say that the Government need to rethink the position. That is exactly what the provisions in the existing Finance Acts do. They simplify pensions legislation thereby creating circumstances in which individuals can judge the advisability of any scheme that they might enter. Employers and contributors have lower administration costs, and we provide a climate in which the development of pensions takes account of what I recognise have been a difficult past few years.

Baroness Symons of Vernham Dean

My Lords, I am sure that noble Lords will have noticed that we have had an accident with the clock. I propose that we take questions from both the Opposition and the Liberal Democrats. I ask that both questions be very brief and that my noble friend be brief in his answers.

Lord Oakeshott of Seagrove Bay

My Lords, I am quite happy to have an answer from the Minister, because my question is very simple. Do the Government realise that the state pension system is now so mean and so means-tested that most people will face a marginal top tax rate of 40 per cent on their pension savings when they retire? When will the Government understand that the only way to cut through that disincentive and to start people saving again is to give everyone a decent citizens' pension as of right, not on the basis of means-testing?

Lord Davies of Oldham

My Lords, the noble Lord raises a very important point about the state pension. He will recognise that we are producing reforms in the Finance Bill and the Pensions Bill before the House, which will clarify the position and lower administration costs. He will also recognise that the Government are concerned to tackle poverty wherever they find it. He will pay tribute to our record of taking significant numbers of children out of poverty since 1997. He is right to draw attention to our need to address the problems of the elderly.

Lord Higgins

My Lords, my noble friend's Question should be put in the context of the appalling figures reported today. The Office for National Statistics estimates that the amount in funded pension schemes, having already been reduced from £81 billion to £53 billion, has now been reduced to £41 billion. It is half what it estimated two years ago. As the noble Lord, Lord Peyton, pointed out, a significant reason for that reduction is the change in advance corporation tax. It affects not only private schemes but local authorities, which will have to increase council tax as a result.

Lord Davies of Oldham

But, my Lords, that is not entirely so. The noble Lord has identified figures for the reduction of the value of the funds. He will know that taxation change is a marginal aspect of that; it is not a substantial element in that computation. We all recognise that there have been significant dips on the Stock Exchange and problems over the past three years or so. However, the noble Lord will recognise that the Government's proposals in the Finance Bill and the Pensions Bill create the basis on which we can improve pensions in this country, particularly by simplifying the situation so that all involved with pensions can understand the costs and benefits of such investment. That is bound to improve the situation.