(9 years, 5 months ago)
Commons ChamberRead Hansard Text Read Debate Ministerial Extracts
16:55 - The House divided: - Ayes: 209 / Noes: 292 - Question accordingly negatived.
Cathy Jamieson (Kilmarnock and Loudoun) (Lab/Co-op)
I beg to move, That the clause be read a Second time.
Madam Deputy Speaker (Mrs Eleanor Laing)
With this it will be convenient to discuss the following:
New clause 2—Pension flexibility: Treasury review—
‘(1) The Chancellor of the Exchequer shall, within a period of no more than 18 months from 6 April 2015, publish and lay before the House of Commons a comprehensive review of the impact of the changes made by this Act to the Finance Act 2004 and the Income Tax (Earnings and Pensions) Act 2003.
(2) The information published under subsection (1) must include—
(a) the distributional impact, by income decile of the population, of changes made by this Act to the Finance Act 2004 and Income Tax (Earnings and Pensions) Act 2003;
(b) the impact on Exchequer revenues of measures contained within Schedule 2: Death of a Pension Scheme Member, related to changes to the taxation of pensions at death;
(c) a behavioural analysis;
(d) an analysis of the cumulative impact of this Act on Exchequer revenues;
(e) an analysis of the impact of this Act on the purchase of annuities.”
Amendment (a) to new clause 2, line 13 at end insert—
“() an analysis of the impact of the changes introduced by this Act on the housing market;”
Cathy Jamieson
It is a pleasure to be here this afternoon for Report stage and Third Reading, and I do not think I can quite do justice to the excitement and delight that I felt when I saw that the final stages were indeed to be taken straight after the autumn statement. I am sure that is a view shared by the Minister, who will also be grateful for this miraculous feat of scheduling. Given the vast numbers who have turned out to hear us this afternoon, the excitement is obviously broadly shared across the House.
This is a serious Bill, however, and we have serious matters to discuss this afternoon, so I will now turn to the content of new clauses 1 and 2. There is a certain symmetry to the scheduling of today’s proceedings, because the reforms in the Bill were first announced in the Budget statement and we are now discussing the Bill’s final stages alongside the autumn statement. We should be impressed—if that is the right word—by the speed with which the Government have rushed through these very significant pension reforms, although, given that we will now rush through something else even more quickly as a result of the autumn statement, perhaps I should have waited to hear that statement before writing that line in my script for this debate.
Toby Perkins (Chesterfield) (Lab)
My hon. Friend has congratulated the Government on the speed with which they have brought in these measures. She will be aware that I have secured an Adjournment debate later today on the unintended consequences that have been visited on some of my constituents as a result of previous hastily introduced pension legislation. The Government have attempted to undo that legislation but, unfortunately, without any great success. Will my hon. Friend therefore temper her praise and reflect on the fact that hastily introduced pension legislation can often have unintended consequences?
Cathy Jamieson
I thank my hon. Friend for his intervention. If I had continued my speech for another couple of lines, he would have understood that my praise was somewhat tongue in cheek, given what I am about to say about the haste with which the measures have been introduced, about the impact that that has had, and about the concerns expressed by the industry. I know that my hon. Friend is taking up these issues on behalf of his constituents and putting them forward very seriously. We still do not know all the unintended consequences that will result from this Bill and the Pension Schemes Bill, which has now gone through the House, and that is one reason why I want to speak to the new clauses today.
At least one of the new clauses will seem familiar to those who had the pleasure, as I did, of serving on the Bill Committee. We have been consistent in our approach to the reforms. We have always said that we supported the principles of greater freedom and choice, but only when that leads to better outcomes for consumers. That is why we have consistently called on the Government to give us evidence that they have undertaken the appropriate assessment and analysis of the impact and potential consequences of the reforms. This also relates to what my hon. Friend has just said. For as long as we have pressed the Financial Secretary to the Treasury to provide that information, he has politely but firmly refused to do so. We on this side of the House are nothing if not persistent, however, and it would be remiss of us not to make one final attempt to bring the Government round to our way of thinking and to persuade them to accept our new clauses.
In a moment, I shall ask the Minister some questions on the figures that have been published today, but first I want to refer to some of the points that have been made about the speed with which the Bill has been taken through Parliament. Comments have been made in briefings and submitted in evidence as we have approached Third Reading. For example, the Association of British Insurers has stated that
“it is becoming increasingly clear that the first phase of the introduction of these reforms will be delivered in a period of regulatory uncertainty.”
The impact of that will be felt by the constituents of my hon. Friend the Member for Chesterfield (Toby Perkins). The ABI goes on to say:
“There is still a lack of clarity about what is expected of anyone offering retirement products from next April.”
I will come back to those points in a moment. The Bill has had thorough scrutiny, but a number of issues remain that we wish to pursue.
New clause 1 calls for a Treasury review within two years of the reforms coming into force on 6 April 2015, detailing the impact of the Bill on Government revenues, with particular reference to opportunities for tax avoidance and national insurance contributions avoidance. In Committee, we tried to get more details and figures, and the comments of John Greenwood and others were often quoted, particularly those relating to concerns that the Bill could allow individuals to divert large sums into their pensions through salary sacrifice. Those individuals would then be able to take as much as they wished from that pension in the following year, as 25% would be tax- free and the rest would be charged at their marginal rate, with no money deducted through national insurance contributions. Although the introduction of the money purchase annual allowance rules is supposed to prevent that, the reduced £10,000 limit is activated only after the pension has been flexibly accessed for the first time.
The Association of Accounting Technicians has raised concerns about this, saying:
“In the first year, before the £40,000 allowance is lost, individuals over the age of 55 will still have the scope to save tax and NI on the full £40,000, provided they have the necessary earnings, less their existing pension contributions. Where an individual flushes (passes) an extra £30,000 through pension rather than drawing salary they will achieve a saving of £3,600 in employee NI, more than £1,500 in income tax and, also, £4,140 in employer NI (13.8%) in the first year. A total loss to the public purse of £9,240. The “Freedom and choice in pensions” rules mean this money can be withdrawn immediately if an individual is over 55. This fact means that there will not be clear distinction between salary and pension for this age group.”
I have some questions for the Minister about that. Does he agree that the Bill, as it stands, would afford additional scope for tax avoidance of the type outlined? I know we have discussed this matter in Committee, but it is important to probe it until the last possible moment.
Ian Swales (Redcar) (LD)
The hon. Lady has obviously done a lot of research on this. As I understand it, once a flexible draw-down is started, the tax relief is then limited beyond that, so cascading £40,000 of tax relief year after year is not possible. That is my reading of the Bill.
Cathy Jamieson
I thank the hon. Gentleman for that intervention, as those are exactly the kind of detailed points that I hope the Minister will respond to when he gives his views on the provisions. These are exactly the sort of questions to ask: is that the type of tax avoidance that we have described and the AAT has suggested would be an issue? Is it possible? Is it an intended consequence of the Bill? During the Public Bill Committee he explicitly told us that allowing individuals to avoid income tax and national insurance contributions is “not the intention” of the reforms, and I had no doubt that he was genuine on that. However, people are still coming to us and repeatedly outlining concerns about the scale of tax avoidance that could be facilitated by the Bill. Therefore, it is important that we continue to pursue the matter, even at this late stage, and be given assurances on it.
Towers Watson has said that Ministers seem “sanguine” on this matter. I am sure that the Minister is not sanguine in any shape or form about the potential for tax avoidance, that he would want to close any loopholes and that he would want to send a clear message that it was not his intention that the Bill be used for any attempt at tax avoidance. That is particularly the case because, as has been repeated again today, tax revenues and the take into the Exchequer are falling, because of some of the Government’s other economic policies, particularly on wages and the impact on income tax and national insurance. It is not as though the Exchequer is going to be able to afford to lose hundreds of millions of pounds of tax income.
Interestingly, the written evidence from Towers Watson cited the Minister’s assurance that
“the government will be closely monitoring behaviour under the new system”,
and will take action “if loss accelerates” Towers Watson’s evidence suggests that it is very likely that action will be required. Complementing the AAT estimates of how much tax could be lost if individuals use salary sacrifice before they have accessed their pensions flexibly, Towers Watson provides an estimate of how much tax could be lost after a pension has been accessed flexibly and the money purchase annual allowance imposed. Towers Watson’s projection returns us to the point made by the hon. Member for Redcar (Ian Swales) and shows why we have pursued this matter vigorously. Towers Watson states that
“if £10,000 of salary is given up in exchange for an employer pension contribution, the employer could pay £1,380 less National Insurance while the employee would pay between £200 and £1,200 less”.
Although the annual allowance does not altogether remove the scope for tax avoidance, it does have a limiting effect, which of course we welcome. The crucial point made by Towers Watson, however, is that this is not a potential tax avoidance opportunity that has been “dreamt up by accountants”, but one that could be “created by legislation” before us today.
Taxpayers and employers need to know whether the Government will regard the diversion of salary through pensions as legitimate. Some people have suggested that the Government drafted the legislation oblivious to the loophole they were creating and that when they realised the consequences, they came up with the money purchase annual allowance rules as a partial stop-gap. I am inclined to be slightly more generous, because I am sure that the Government were very conscientious in drafting the Bill and gave consideration to all its component parts. I am sure that the Minister will reassure us on that point in his response. I know that he is concerned about the potential for tax avoidance, because he has repeatedly told us that he will “closely monitor behaviour” under the new system and that he will work with the industry to ensure that the system remains “fair and proportionate”.
Ian Swales
I am following the hon. Lady’s argument closely. Is she suggesting that this Bill creates new avenues for employer contributions to pension schemes? As I understand it, what she describes is available in the current system.
Cathy Jamieson
I thank the hon. Gentleman for his intervention. I hope the Minister will provide a clear steer to people about what would be acceptable both to employers and employees. I would also be interested to learn what he plans to do if the system turns out not to be fair and proportionate, and what form the monitoring will take. That is why we have proposed new clause 1. We did debate the matter in Committee, but we are still concerned that we have not heard exactly how the monitoring will take place and what the Minister intends to do.
Essentially, new clause 1 asks the Government to commit to doing something that the Minister has already said that they would do—to monitor and review the reforms to ensure that they are not used for the purpose of tax avoidance. We simply want that commitment in the Bill, to ensure that there are reports back to the House.
When we first debated the issue, concerns were raised about the time scale in which we were asking for the review. We had not, at that stage, fully anticipated how long it would be before patterns were established and problems had manifested themselves, which is why the new clause includes a two-year-time frame.
Mr Geoffrey Robinson (Coventry North West) (Lab)
Did I hear my hon. Friend correctly when she said that the Minister was minded to carry out a review of precisely the areas that we have suggested in new clauses 1 and 2? If so, will the Minister make that clear in his reply to my hon. Friend, because then we could avoid a vote on the new clause?
Cathy Jamieson
My hon. Friend makes an important point. As I have said, we did have some of this debate in Committee. I know that the Minister, at various stages, has said that everything is under review and that all things are reviewed. What we seek to do is to put some structure around that so that all reports are brought back before the House.
I think I have made my point in previous Bill Committees and probably at the Dispatch Box as well. Even in my relatively short time in this place and on the Front Bench, I have seen Ministers come and go before my very eyes. I have no doubt that the Minister is concerned to ensure that he does the right thing and monitors what is happening, but it is important to have that commitment on behalf of the Government, which is why I have tabled the new clause.
New clause 2 would provide for a Treasury review of the Bill’s operation within 18 months of 6 April 2015. Such a review would include an analysis of its distributional impact by income decile, an analysis of the impact on Government revenues of changes to the taxation of pensions on death, a behavioural analysis and an analysis of the impact on the purchase of annuities. Any Bill that will have a significant impact on not only people’s lives, but the broader industry and the economy, must be based on evidence, engagement and analysis. We know from our probing in Committee why the Government announced the reforms without consultation, and the Minister explained his position on concerns about the impact on the market. However, it would be helpful to have some idea of whether the Government had carried out the behavioural analysis and impact assessment that we are requesting, and indeed of not only the extent to which that had been done, but what information they could set out. Those points have also been pursued by my hon. Friend the Member for Cumbernauld, Kilsyth and Kirkintilloch East (Gregg McClymont), who worked tirelessly on the Pension Schemes Bill. That Bill includes provisions on the guidance guarantee, which is crucial to the Bill.
David Mowat (Warrington South) (Con)
Surely the purpose of such a review would be to drive action. We have an expectation of the Bill’s effect on the annuities market, so will the hon. Lady tell us how the results of the annuities aspect of her proposed review would affect a future Government’s actions? Does she think that it would make any difference to Government policy if there was a 10% or a 90% change in the purchase of annuities, because it seems to me that it would not?
Cathy Jamieson
The purpose of the monitoring is to determine whether the Bill has unintended consequences. We would want the process to deal with our concerns of whether the market responds to the changes and if the products that people have envisaged will be available. There is the oft-quoted example of what happened in Australia: people drew down money, but many found that they had not properly planned for the future.
The hon. Gentleman asks what the Government would do, but I think that the Government have a responsibility to keep all legislation under review by looking at its effects and examining whether measures are fit for purpose and if they do what they say on the tin. If changes need to be made, the Government of the day will bring forward appropriate provisions. They have a responsibility to make themselves aware of any unintended consequences that might arise from the Bill and they should tell us how they will close any loopholes.
Hywel Williams (Arfon) (PC)
I am sure that the hon. Lady agrees with the TUC when it says that it believes that
“greater emphasis should be placed on developing strong default options at retirement. These may include a combination of drawdown and annuitisation.”
Cathy Jamieson
The hon. Gentleman makes a valuable point. The Public Bill Committee examined what options will be available to people and how we can ensure that the balance is right so that they are encouraged not only to take up pensions at the earliest possible stage, such as through auto-enrolment, but to think about planning for their long-term future. The aim was to ensure that people would not think that there was a windfall at age 55, perhaps make wrong decisions about it, and find by their 75th birthday that they had not done the correct planning. The new clause is very much about trying to see how the provisions will impact on real people when the time comes for them to make these decisions. That is why we were talking about behavioural analysis; we want to ensure that lessons are learned from it.
David Mowat
Surely we know the answer to the question prompted by new clause 2(2)(e), more or less; it is that dramatically fewer annuities will be purchased. Okay, a review might show that the figure is 12% as opposed to 90%, but what action would be taken pursuant to that answer?
Cathy Jamieson
It is a bit chicken-and-egg: until we do the analysis, we do not really know the extent of the problem. The solution would come once the problems were identified. The hon. Gentleman makes an important point about annuities; that takes me back to the issue that I raised about the opportunity for new products. There is a relatively short period of time in which to develop them. The industry, of course, says that it will try to meet the “challenges”—it consistently uses that word—and ensure that there are options and products. None the less, I find it difficult to understand why the Government seem resistant to the new clauses.
I think it was Ernest Hemingway who said that his novels were like icebergs:
“There is seven-eighths of it under water for every part that shows.”
Sometimes the same can be said of legislation, because the devil is in the detail. One has to see the detail, and be on top of it over a period, to find out what the ongoing impact is. That is why, throughout the passage of the Bill, we have tried to identify and probe any fault-lines on the surface of the legislation.
The guidance guarantee has been the subject of considerable debate, although it essentially formed part of the Pension Schemes Bill. Although we have now seen information on the overarching standards and the apportioning of the levy, published on Friday by the Financial Conduct Authority, we have yet to see all the content of that guarantee. Of course, that is the responsibility of the Government, in tandem with delivery partners. It is vital that the guidance is up and running, and is equal to consumer needs, come April next year. The FCA policy statement published on Friday confirmed that, at least initially, there will be no “second line of defence”, as it was described, which makes it even more important that the guidance is fit for purpose.
In the Public Bill Committee, I talked about the potential impact of the reforms on eligibility for social care. We identified two separate but related points on social care that we believe the Government have not yet adequately addressed. The first is the impact that drawing down money under flexi-access may have on an individual’s entitlement to means-tested benefits and eligibility for social care. The second is a point that I raised earlier: the danger that too much emphasis has been placed on early access to funds. That may result in people taking too much, too quickly, and being left with insufficient funds to cover the cost of care later in life. That is why our review calls for a distributional impact of the reforms by income decile. That is also why we need behavioural analysis. Signs may emerge that consumers are accessing their pensions earlier, which increases the chance that they may be left short of money in later life.
As we heard in Committee, many individuals who access their pension flexibly risk being hit with an unexpected tax bill—a point that the Association of British Insurers highlighted:
“Many people will struggle to understand the tax consequences of these reforms. Apart from tax free lump sums, withdrawals from pension pots are taxable pension income…Not only may people find themselves unexpectedly paying higher rate tax, it is possible that some will be unaware that their tax may not be settled for a year after they have accessed their funds through a self-assessment process that they may be unfamiliar with.”
These risks have to be monitored and reviewed, so that any unintended consequences can be picked up and dealt with.
We also need to see—this comes back to the point raised earlier—whether the Bill results in a proliferation of new products. The impact of such products on consumer behaviour should be monitored. In its 2014 risk outlook the Financial Conduct Authority expressed concern that
“retirement income products and distribution may deliver poor customer outcomes”.
It said:
“While recent proposals for pension reform plan to allow consumers to access any amount of their pension pot at age 55, the need for consumers to understand the options available to them at retirement is still paramount. Any future innovation in decumulation products will compound these risks.”
The FCA was, again, trying to look to the future. We share those concerns. We do not want poor outcomes for consumers, and I am sure the Minister does not want that either.
A further issue is that new products may carry additional charges that eat away at an individual’s pension. Research from the House of Commons Library found that current income drawdown products could see 27% of an average pension pot of £30,000 eaten up in fees and charges. If the reforms lead to continued abuse of charges, the Government may have to consider the introduction of a charge cap.
The changes made in schedule 2 abolish the 55% tax on pension funds on the death of the member. We can see the Government’s reasons for doing this, but it would be worth monitoring the impact on consumer behaviour and Government revenue.
I said that I wanted to ask the Minister some particular questions in relation to the autumn statement and the figures that had been published. Throughout the Committee stage, when we were pressing for information and numbers, the Minister said that those would be published in due course. True to his word, that information is now available to us. What effect will the revisions have on the initial costings of the impact of these reforms? Has he had cause to reconsider the impact of the reforms? Can he explain why the tax take increases because of the annual allowance in 2015-16, but falls in subsequent years? What is the basis for those figures?
Can the Minister give us any more detail about the costing of the salary sacrifice and welfare forecast provisions? The numbers are there, but we do not have further information in the autumn statement policy costing document. In comparison to some of the figures provided in Committee, the estimates still seem low. Given that the Minister has revised his forecast to take into account salary sacrifice and welfare at such short notice that it is not included in the autumn statement documents, had the Government fully considered those factors when they initially drew up these reforms, or did they only later recognise the significance of those factors?
We have asked for a review, as set out in new clause 1, to show whether the Bill increases the scope for tax avoidance and the avoidance of national insurance contributions. In the light of the figures that have been published, is the Minister confident that all his projections will prove to be accurate?
I have had a fair opportunity to set out the case for new clauses 1 and 2, which will allow the Minister to keep his word and monitor, review and report information as appropriate. It is important that the clauses are added to the Bill to ensure that that happens. We need to keep a close watch on the progress of the reforms to make sure that they do not lead to adverse outcomes for consumers or place increased costs on the state. The Government have consistently assured us that they will closely monitor the impact of the Bill, so we see no reason why, even at this late stage, they cannot commit to make good on that assurance and accept the new clauses.
Hywel Williams
I rise to speak on behalf of Plaid Cymru and in support of amendment (a), which stands in my name, to Labour’s new clause 2. I agree with much of that new clause, but I wish to add that the Government should bring forward a report on the impact of the changes introduced by the Bill specifically on the housing market and introduce measures to rectify any problems, should it become apparent that there are negative consequences. I sincerely hope that my concerns are entirely unfounded.
Although we welcome the Government’s desire to reform the private pensions system, we in Plaid Cymru have concerns about the consequences of behavioural changes in the pensions industry, particularly in relation to individual pensioners taking large draw-downs of money. We are not against pension savers being able to access their pension pots as a lump sum. If that is how people wish to access their money, it is up to them to do as they see fit. Given the rates of return achieved these days, it is not surprising that many people will wish to take that route.
Our concern is that the effect might not be quite what the Government intend. Aside from consumer protection issues and stopping people being targeted by sharks and cowboys seeking to exploit those who are newly able to access comparatively large amounts of money, attention needs to be given to the longer-term possibility that those who draw down large amounts and whose subsequent investments fail, for whatever reason, will be left with little or no money on which to see out their final years, despite having contributed to a pension scheme for most of their lives, and that they will then become a burden on the public purse. It is fair enough to say that the buyer should beware, but we are not talking about purchasing a new television; a wrong decision in this case might have grave, long-term effects on people’s basic incomes.
As has already been mentioned, in Australia, where the Government have introduced changes similar to those intended here, many people took large draw-downs and invested the money in buy-to-let properties. As the TUC has noted, much evidence indicates that the same will happen here, despite Ministers’ talk of people making home improvements, buying new kitchens or going out and buying cars and other consumer goods that will boost the productive economy.
Research by the Australian investment management firm Challenger has found that one third of savers used their pension cash to buy a home, pay off an outstanding mortgage or make home improvements; one in five splashed out on a new car; and one in seven spent at least some of their pension on a holiday. The evidence from Australia is that, when given the choice, only one in 25 Australians now buy an annuity. In the US, another country where annuities are not mandatory, most people take their pension money as cash, rather than buying an annuity. Indeed, a buy-to-let property might appear to be one of the better options for many people, rather than keeping their money in their pension scheme or making other, more conservative investments.
Some large accountancy firms, such as PricewaterhouseCoopers, have said that the changes to the annuities system will be a net positive for the Treasury. They perhaps foresee the revenue raised through stamp duty and other associated taxes. But it is not the Treasury’s coffers that will suffer, at least not in the short term. It is the potential bubble in house prices that concerns me, particularly at a local level, and the potentially growing number of people who would then be unable to buy their own home, the strengthening of the historical over-reliance of the British economy on a buoyant housing market, and the potential effects on investors’ incomes should, or rather when, the bubble bursts.
I need hardly remind the House of the dangers of an over-inflated property market, of which buy-to-let is a significant factor, and indeed one of the significant causes of the financial crash in 2008. Even prior to the crash, in August 2007, Oxford Economics noted that buy to let
“is undoubtedly contributing to the overvaluation of housing.”
Were I cynical, I might even characterise inflation of the housing market as some sort of giant Ponzi scheme, helping to keep the economy afloat while doing little to contribute to productive capital, the epitome of the rentier society—if I were cynical.
Of more significance to my constituents, and to people throughout Wales and the more picturesque areas of the UK, is the potential that those taking large draw-downs would decide to buy holiday homes. I need not rehearse in any detail the arguments about the problems associated with an over-preponderance of holiday homes. Hon. Members who represent constituencies where that is a problem will be only too aware of the negative effects. Anyone who really wants to know about it might read my maiden speech from 2001, which addressed housing matters and this problem, in particular. To put it briefly, having too many holiday homes in an area has a negative, deadweight effect on the local economy. Local people, especially young people, are unable to afford homes because of price inflation and are forced to leave. In my constituency, and in much of rural Wales, there is the added dimension of the damaging effect that has on the Welsh language. We have been largely spared some of those effects over the years of economic difficulty, but now, if the Chancellor is to be believed, we are moving towards a new golden age of plenty, possibly financed in part by pension lump sums, with a consequent revival of these risks.
Mr Robinson
I am pleased to take part in the Report stage of a Bill that we discussed at some length in Committee, as my hon. Friend the Member for Kilmarnock and Loudoun (Cathy Jamieson) will know. She has led for us throughout with such conscientiousness and command of detail that we probably do not need to labour further the points that we have pressed on the Minister. I am pleased that the hon. Member for Arfon (Hywel Williams) has added to our thinking on new clause 2 by suggesting that the effect on the housing market, in particular, should be kept under strict review.
I fear that the Minister is not going to accept either new clause, so I ask him to make a clear statement on the areas where the Bill is likely to have an impact, with potentially severe economic consequences. In the light of the Chancellor’s autumn statement earlier today, we see just how severe the problems on the deficit and Government borrowing are. If the Bill is going to have a further major impact in terms of tax receipts—which are already disappointingly low, as the Minister himself must recognise, being very well acquainted with that area of the Treasury’s affairs—it needs to be regularly reviewed.
In pushing for the changes we propose, we are merely doing what any responsible Opposition may do. I am surprised that the Minister is so reticent about sharing these important matters with the House. As the hon. Member for Arfon said, the consequences in the housing market could be quite severe, particularly in the buy-to-rent sector. In Committee, I mentioned to him anecdotal information that I had received from the housing market in strongly Conservative areas such as Buckinghamshire. House prices are already rising, and this aspect needs to be reviewed.
The point that we made very strongly throughout the Committee stage is that this is an unknown area where there is a fear of scams and abuses emerging—mis-selling and such things that have characterised so much of the industry in the past. Even now, we are still clearing up some of the mess from those previous schemes that went so horribly wrong. Not only that, but looking at this from the point of view of economic management, big sums are involved. I have talked to pension fund and investment fund managers, and they are looking forward to it.
As my hon. Friend the Member for Kilmarnock and Loudoun has made clear, we welcome the Bill. We are not opposed to it in principle, but we want to make sure that it has the effects that are foreseen as regards flexibility and making greater independence available to very many people throughout the country. It is in the spirit of not just avoiding abuses, but ensuring that the Bill does not become counter-productive or have exactly the detrimental consequences that other Bills of this kind have had that we urge the Minister to accept, even at this late stage, both new clause 1 and new clause 2. I am grateful to have had the opportunity to repeat that point on Report.
Toby Perkins
I do not intend to detain the House unduly, but I want to speak briefly in support of new clause 1, tabled by my hon. Friend the Member for Kilmarnock and Loudoun (Cathy Jamieson). I also do not intend to give too much advance notice of my Adjournment debate, which I will have the pleasure of holding later and to which I know that the House is looking forward with considerable interest.
My hon. Friend made an important point about the haste with which some of the changes have been introduced and the impact that that can have. The Government may be entirely well meaning, but such changes can have unintended consequences, and I shall refer to some of them in more detail later.
If I had been contacted by my constituents and had a response from the Minister a few weeks or months earlier, there might have been an appropriate opportunity to propose that the issue was looked into in relation to the Bill, but perhaps there will be an opportunity to consider such issues in the other place.
It is a great pleasure to follow my hon. Friend the Member for Coventry North West (Mr Robinson), who speaks with tremendous knowledge on these issues. He was absolutely right to focus on the way in which some industries operated in the past, and the extent to which the financial services industry had some very negative selling practices back in the deregulatory period of the 1980s. I am pleased that the industry, with Government assistance, has very much got its house in order.
We would be well advised to think about the impact of the changes on the professionalism of very important industries such as financial services. If decisions are not taken in professional enough a way, they can have massive effects on people at the time in their life when they take their pension. Back in the 1980s, there was a huge explosion of private pensions, with people—mineworkers or teachers—advised to give up their pensions. They were told, “No, if you give up your pension, you can opt in to one of these private schemes, with 15% growth every year.” There was a huge mis-selling scandal.
I previously worked—briefly, and largely unheralded—in the financial services industry. I was not necessarily particularly suited for the job, which highlights a point about people being invited into the industry. They were dragged into it on the basis of knowing friends that they could go and sell pensions to. People with very little knowledge came into the industry. Their business plan was based on phoning all their friends and relatives to encourage them to give up their pensions in reliable public sector or other schemes and to go in to private schemes. There was of course a huge explosion, and many of the people in the schemes were seen to have been given very poor advice.
We recognise what the Government are attempting to achieve, and we support their aims of having greater flexibility for the industry, allowing people to be put back in charge of their investment and ensuring that they have the freedom to decide what to do with the money that they have saved. However, we are also aware of why the annuities method of accessing pensions that people had invested in was introduced. We as a society decided that, in an age when people were living longer and longer, we wanted people to make provision for themselves and, having done so, to buy something that provided a regular income that they could rely on.
If we have a scheme in which people decide what to invest their pension funds in, but, with the best of intentions, those investments go wrong, the people who we thought had provided for themselves in later life will come back to the state and say, “Unfortunately, the investments that I made with my pension pot have gone wrong and I have run out of money.” That will have an impact on the Government. We recognise what the Government are attempting to achieve, but it would be sensible to have a review of how it is working, the impact of the changes on the behaviour of investors, the impact on Government revenues, the impact on the broader economy, and what behaviours are being encouraged and introduced by the changes.
Hywel Williams
I am sure that the hon. Gentleman will accept that there is also a reputational danger for the industry in general and for the entire system of retirement pensions if people who make honest and sincere investments find that the returns are non-existent or that the investment itself disappears, and find themselves not being at leisure in their 70s, but working, like people I know.
Toby Perkins
Absolutely; the hon. Gentleman is right. There was a huge rush of those issues coming to light at the back end of the last century, when people who believed that they had saved into corporate pensions found that the company had disappeared and so had their pension.
When we are debating these issues and supporting the Government in this important initiative, we must be conscious that it must not end up with people effectively gambling with the income that they will rely on, without being aware of the risks. It is important that protections are in place to ensure that when people make such decisions, they have the information and know what they are letting themselves in for. It must be clear not only what impact it will have on them and their future, but what impact it will have on Government resources and revenues.
The FCA risk outlook of 2014 stated:
“Retirement income products and distribution may deliver poor consumer outcomes”.
That means that the Government recognise the dangers that we are highlighting, which adds more weight to the call of my hon. Friend the Member for Kilmarnock and Loudoun for a review of the impact on Government revenue and a review of who is affected, with a
“distributional impact, by income decile of the population”.
The other thing that we must all be conscious of is that this change must not result in an industry that services only the very rich. Financial advice is important. If it becomes the preserve of the very rich, many people will be left out of the market, especially the self-employed, who often see their business as their pension and so never go down the route of choosing financial services products.
In supporting my hon. Friend’s call for a review of the impact of the changes, I wanted to flag up the debate that we will be having later and to put it in the context of the taxation of pensions. I have secured today’s Adjournment debate on the impact of such measures on public sector workers who transferred to the private sector when their public sector job was transferred. They are protected under transfer of undertakings protocols. However, as many staff at CSC in Chesterfield who previously worked for Royal Mail discovered, when they were made redundant, the changes hastily introduced by the Government in 2012-13 meant that although they left their pension with Royal Mail when they were transferred and opened a new pension with CSC, that new pension was treated as a second pension. As far as they were concerned, they sat in the same desks and did the same job. The name above the door may have changed from Royal Mail to CSC—although in this case it did not in practical terms—but those staff were classed as having two different jobs and therefore two different pensions.
The Financial Secretary to the Treasury (Mr David Gauke)
This may not be the most prominent Treasury matter gripping the nation today, but as the hon. Member for Kilmarnock and Loudoun (Cathy Jamieson) said, it is none the less an important Bill and I am grateful for the opportunity to make further progress and respond to this debate.
New clauses 1 and 2, tabled by the hon. Member for Kilmarnock and Loudoun, require the Treasury to publish two reviews of the impact of the Bill. The first review would focus on Exchequer revenues, including the use of salary sacrifice arrangements, income tax receipts and national insurance contributions. The second review would include the distributional impacts by income decile of the population of the pensions flexibility measures; the impact on Exchequer revenue of measures contained within schedule 2, which makes various changes to the taxation of pensions at death; a behavioural analysis; an analysis of the cumulative impact on Exchequer revenues; and an analysis of the impact on the purchase of annuities. An amendment has been tabled by the hon. Member for Arfon (Hywel Williams), which would, as we have heard, require the Government to undertake an analysis of the impact of the changes introduced in the Bill on the housing market.
I would like to explain—I suspect this will not come as a huge shock to hon. Members—why the new clauses are unnecessary. There are a number of reasons. First, on considering new clause 1 and the parts of new clause 2 that relate to Exchequer revenues, it is important to note that the Government have today published estimates of the Exchequer impacts of the policy as a whole. These costings, which have been certified by the independent Office for Budget Responsibility, cover all the changes we have made to the policy since Budget as a result of consultation. I know hon. Members have been concerned about the potential consequences for the Exchequer of the new freedoms. The Government published costings at Budget. I have been clear that we would update the costings to reflect the policy decisions that have been taken since then. A great deal of the debate has rightly focused on that issue.
The Government have taken a number of policy decisions since pension flexibility was announced in March. Those decisions are: introducing a £10,000 annual allowance for those who have flexibly accessed a pension pot of more than £10,000; changing the rules on the taxation of pensions at death; and continuing to allow transfers out of funded defined benefit schemes. Today, as part of the autumn statement, the Government have also confirmed that the notional income rules for assessing eligibility for means-tested benefits will be more generous by assuming that unspent pension savings generate the same income as an annuity, rather than 150% of an annuity as at present. Of course, not all of these measures are contained within the Bill, but I believe that they are relevant to any debate on the fiscal impacts of flexibility. To ensure the Government are being sufficiently transparent, I have today taken the step of writing to members of the former Public Bill Committee to set out further details of the costings. I will now outline those costings to the House.
At Budget 2014, the Government published costings that stated that freedom of choice would cost the Exchequer minus £5 million in 2014-15, and from then on would raise money: £320 million in 2015-16, £600 million in 2016-17, £910 million in 2017-18, £1.22 billion in 2018-19, and £810 million in 2019-20. The overall impact of decisions taken since the policy was announced in March does not significantly alter the numbers published at Budget. As set out in my letter to the Committee and in table 2.1 of the autumn statement document, the decisions I have just described will have the following Exchequer impacts: they will raise £60 million in 2015-16, cost £25 million in both 2016-17 and 2017-18, raise £30 million in 2018-19, and cost £10 million in 2019-20. Further detail on how those costs have been calculated is set out in the policy costings document, which has been published today alongside the autumn statement.
In my letter to Committee members, I explained that the costings published today as part of the autumn statement were based on the same central assumptions that underpinned the costings published at the Budget. Since the Budget, the Government have explored in more detail two aspects of the policy affecting the costing: the increased costs of salary sacrifice and welfare as a result of the reforms—two points that the hon. Member for Kilmarnock and Loudoun dwelt on. The Government have produced these costings and they have been scrutinised by the OBR.
In line with standard practice, these are accounted for as changes to the forecast and so are not outlined in table 2.1 of the autumn statement document. In recognition of the concern raised by Members about the likely impact on the Exchequer, I included the Government’s estimate of the costs in my letter to the Committee, but I will set them out again to the House. The revisions to the forecast to account for salary sacrifice are: minus £5 million in 2014-15; minus £35 million in 2015-16; minus £30 million in 2016-17; and minus £25 million in 2017-18, 2018-19 and 2019-20. The revisions to the forecast to account for the increased cost of welfare are: minus £10 million in 2015-16; minus £15 million in 2016-17; minus £20 million in 2017-18; and minus £25 million in 2018-19 and 2019-20.
The Government have, therefore, already published the information the two new clauses seek on the Exchequer impacts of the various aspects of flexibility, and all that information has been certified by the independent OBR. In addition, the Government have already committed to keeping the policy under review, through the monitoring of information collected on tax returns and tax records, and HMRC regularly publishes data on tax receipts reflecting any impact on the Exchequer. Any such impacts will be reflected in forecasts at fiscal events.
The Government keep tax policy under continual review. There is no need for further reviews of the Exchequer impacts of the policy, because the Government have already committed to keeping them under review through usual processes, and I hope that this will reassure hon. Members regarding the fiscal impacts of measures in the Bill and related policies. At the very least, I hope hon. Members will appreciate that, given this debate has occurred after the autumn statement, I have been able to provide some of the answers the hon. Member for Kilmarnock and Loudoun was seeking in Committee.
New clause 2 would also require the Government to review the distributional impact of the measures in the Bill no less than 18 months after the Bill takes effect. As I set out in Committee, the measures in the Bill do not have a direct consequential impact on household incomes. Distributional effects will be driven by the choices individuals make about how and when to take their pension. In addition, household income is not necessarily a reliable measure of pension wealth, particularly in the years immediately prior to retirement. The impacts of the policy could be misrepresented were we to review them only against the distribution of household income. I appreciate I made that argument in Committee, but it was a good argument then, and it is a good argument now.
In addition, new clause 2 would require the Government to publish behavioural analysis. As discussed in Committee, the costing of tax policies often involves an assessment of the behavioural impacts of the measure and, in some cases, the capacity for additional tax planning and avoidance behaviour. These assumptions and methodologies are certified by the independent OBR, but the Treasury considers that making these detailed behavioural assumptions public might affect the behaviour they relate to and so could be detrimental to policy making.
As I mentioned in relation to the Exchequer impact of the changes to the taxation of pensions at death, a policy costing note published alongside the autumn statement explains how the costings have been calculated. This is in line with the principles outlined in the Government document, “Tax policy making: a new approach”, published alongside the June 2010 Budget.
New clause 2 would require the Government to review any impact the measures in the Bill might have on the volume of annuity purchases. Considering the policy intent of the changes, this would be unnecessary and inappropriate. These measures are not intended to encourage savers towards or away from any particular product over another. They are intended to offer savers greater choice and flexibility about how they use their hard-earned savings to fund their retirement.
Ian Swales
Does the Minister recognise that the point at which many people draw their pensions, particularly the lump sum element, is the very point at which they might wish to help their children get into the housing market, and that we should not do anything to prevent that?
Mr Gauke
My hon. Friend makes an important and relevant point. We are putting power in the hands of individuals to decide what they do with their retirement pension pot. We are also ensuring—I shall touch on this in a moment—that guidance is available. It may well be that after careful consideration, people conclude that they do want to assist a family member to get into the housing market. That is a choice for them, and I do not think that we here should necessarily condemn such a choice: it might be precisely the right thing for people to do for them and their family.
As part of the new regulatory framework for financial services, we have introduced the Financial Policy Committee, as I was saying, and we have given the FPC strong powers to tackle any threat to financial stability, including a broad power of recommendation, which it used in June 2014 to address risks stemming from mortgage lending and sectoral capital requirements that apply to residential mortgage lending. The Government have consulted on granting the FPC powers of direction over macro-prudential tools for the housing market and aim to legislate for these new powers next year. In line with the new regulatory framework, the FPC is best placed to monitor the housing market and take action, if required.
Let me pick some other points raised in the debate, most of which it would be fair to say were familiar. I was asked whether people would understand the tax consequences involved. The guidance will help consumers to understand the tax implications of their choice of pension, and in addition, the Financial Conduct Authority has published near final rules that will require providers to supply their customers with a description of the possible tax implications when they apply to access their pension funds.
On extortionate draw-down charges, the FCA’s retirement income market study will be published shortly. In June, the FCA expanded the scope of this study to include consideration of products in the new flexible landscape and to identify any competition risks and potential consumer detriment. The guidance guarantee will be relevant here.
It was suggested that people might be charged too much tax without realising it. As with all PAYE income, the tax position will be reconciled at the end of the tax year. All the income received by an individual that was taxed under PAYE will be brought together, and the correct tax will then be calculated. If there was an overpayment, the extra amount will be repaid, and if there was an underpayment, HMRC will contact the individual. People will not be subject to self-assessment solely because they have flexibly accessed their pensions, nor will they have to claim a refund in order to receive it.
I have already touched on the matter of how the new flexibilities will affect entitlements to benefits, but let me say now that the Government want to ensure that the choice that people make between taking their pensions as income—that is, purchasing an annuity and keeping more of their pension as capital—and drawing it down periodically, for example through a drawdown product, will not have a significant impact on how they are assessed for social care support and how their means are assessed for social security purposes. New regulations and statutory guidance on the Care Act 2014, which were published on 23 October, include details about the charging rules for care and support.
Today we announced a change in the rules for people above pension credit qualifying age who claim means-tested benefits. The notional income amount applied to pension pots that have not been used to purchase an annuity will be reduced from 150% to 100% of the income of an equivalent annuity—or the actual income taken, if that is higher—in line with the rules for care and support.
Let me now deal with an issue that was raised by the hon. Members for Kilmarnock and Loudoun and for Chesterfield (Toby Perkins). I shall not try to anticipate the response that my hon. Friend the Economic Secretary to the Treasury will make to the Adjournment debate that the hon. Gentleman will initiate later, but I can say that these matters are not being rushed. We have consulted extensively on the implementation of the policy, and there is widespread support for the changes. We are working closely with industry to ensure that it is ready for April 2015, and have been doing so since the announcement was made. We are making good progress in delivering the changes that are needed through both our Bills.
Toby Perkins
I realise that the Minister does not want to predict the outcome of a debate to which we all look forward with such interest, but will he tell us whether the taxation of pensions element of that debate could be considered during further stages of the Bill’s progress?
Mr Gauke
We are reaching the end of the Commons process, or at least I hope we are. We believe that the Bill delivers the reforms that are necessary to implement the policy announcement that the Chancellor made in the last Budget. We believe that these are good reforms, and we believe that the new flexibility in the pensions system is to be welcomed and will encourage greater savings. Let me add that some perceive Opposition Members’ desire for a review as the precursor of a possible reversal of these changes by the Opposition, were they to be in government. I would not like that to happen, and their proposals create a degree of uncertainty.
I hope that, in the light of the explanations that I have given to the hon. Member for Kilmarnock and Loudoun, she will not press her new clause to a Division, but if she does, I will certainly oppose it.
Cathy Jamieson
The new clauses ask for reviews and monitoring, and that is exactly what we want. As we have said repeatedly during the Bill’s passage so far, our proposals should not be interpreted in any other way. When a Bill is put before us, it is important for us to scrutinise it and try to improve it, and that was my reason for tabling the new clauses.
I am grateful to my hon. Friends the Members for Coventry North West (Mr Robinson), and for Chesterfield (Toby Perkins) and the hon. Member for Arfon (Hywel Williams) for their contributions. All of them have contributed additional information and raised additional issues which need to be considered, particularly my hon. Friend the Member for Chesterfield, who will initiate an Adjournment debate later. He did not want to reveal too much about that debate, lest we decide to miss his exciting speech. None the less, he did an excellent job in laying out some of the issues that he will refer to later on behalf of his constituents.
I have listened to the Minister. I am disappointed—as always—that he has not chosen to accept new clause 1 and new clause 2. On reflection, having listened to the debate, I am minded to press new clause 1 to the vote, but not to press new clause 2 at this stage.
Question put, That the clause be read a Second time.
Mr Gauke
I beg to move amendment 1, page 37, line 37, after “arrangement”,”, insert
““nominee’s flexi-access drawdown fund”,”.
This Amendment, and Amendments 2, 3, 4, 5 and 6, insert two missing definitions into the amendments made by the Bill in each of the two subsisting versions of section 576A of the Income Tax (Earnings and Pensions) Act 2003.
Madam Deputy Speaker (Dame Dawn Primarolo)
With this it will be convenient to discuss Government amendments 2 to 39.
Mr Gauke
Amendments 1 to 8 are all of a minor and technical nature, amending various definitions and removing unnecessary sections. I would be happy to explain those in more detail if hon. Members are interested, but if they are not, I will move on to amendments 9 to 39.
As hon. Members will recall, we had a very useful debate in Committee about the new information requirements for individuals that are set out in part 6 of schedule 1 to the Bill. I said at the time that the Government were keen to work with industry and consumer groups to ensure that the requirements are proportionate, and that we would consider the issue further. We have therefore continued to have constructive discussions with the pensions industry about the impacts of the Bill. As a result of this ongoing consultation, we have tabled a number of amendments that we believe are a proportionate response to the concerns raised. These changes will make the reporting requirements that individuals need to meet easier to comply with, while still ensuring that they have access to the right information to help them pay the right amount of tax. Government amendments 9 to 39 therefore make a number of changes to the information requirements in the Bill to provide that individuals have to tell schemes that they have flexibly accessed their pension savings only if they are an active member of that scheme, and to increase the time they have to comply from 31 days to 91 days.
It might be helpful if I start by setting out why these information requirements are required. As we have discussed many times during the course of this Bill’s passage through the House, when an individual accesses their pension flexibly, their annual allowance for tax-relieved defined contribution pension contributions will reduce from £40,000 to £10,000. That will protect the Exchequer and ensure that the new system cannot be exploited to achieve unintended tax advantages by individuals’ diverting their salary into their pension and withdrawing it immediately with tax relief. It is therefore important that individuals understand the tax consequences of saving into a pension after accessing their savings flexibly. For that reason, the Bill placed a new requirement on individuals to tell all their pension providers once they had flexibly accessed a pension. This was intended to ensure that individuals do not use the new system to gain a tax advantage that is not intended. However, the Government have always been clear that they are keen to ensure these requirements are proportionate. Having considered the issue carefully, we are amending the Bill to provide that people need to tell only the schemes to which they are contributing or that they contribute to in the future. They will also have an extended period of 91 days in which to do so. These changes will make the new system easier for individuals and schemes to comply with, while also ensuring that the new annual allowance is implemented effectively. Again, I would be happy to explain these amendments in more detail if hon. Members are interested.
Ian Swales
I am certainly not asking the Minister to explain all this in a lot more detail and detain the House in doing so. One specific point raised in Committee was that people contributing to a workplace defined benefit scheme will not know how much of their annual allowance is being used in that scheme at the time when they are able to make contributions to a defined contribution scheme. Has he considered the possibility that such people could be treated—I think the Bill tends to do this—as though they are deliberately trying to avoid tax, whereas they may just have a lack of knowledge at the time they do this?
Mr Gauke
My hon. Friend makes an important point. There will be particular issues with defined benefit schemes. It may be that individuals do not know when contributions are paid by their employer. Where the scheme provides defined benefits only, the information requirement does not apply, and individuals will never need to notify it. If the scheme also provides money purchase benefits—for example, if it has a separate AVC section—the requirement can only apply where contributions are made to the AVC section. Defined benefit schemes are excluded as they will not have to send pension saving statements to the individual based on the £10,000 money purchase annual allowance. I hope that helps my hon. Friend.
Cathy Jamieson
I thank the Minister for bringing forward these amendments. We had a fair amount of debate and discussion in Committee on some of the issues, so I am not intending to ask him to go through each amendment, especially the minor and technical ones, in great detail.
I recognise that Government amendments 9 to 39 were brought forward as a result of the comments and concerns that we and the industry raised on the reporting requirements. The Bill as introduced placed a requirement on individuals who access their pension flexibly to inform all schemes of which they are a member that they are subject to the new £10,000 allowance. They would have been required to do that within 31 days of receiving a statement from their pension scheme and, as we said in Committee, failure to comply could lead to them being fined.
We pointed out in Committee that it was unreasonable to expect individuals to dig up information on schemes that they might not have paid into for many years and to which the annual allowance rules were therefore unlikely to apply. We also pointed out, with reference to evidence from both Ros Altmann and the Association of Taxation Technicians, that the 31-day time frame was a short and unreasonable deadline. The Government amendments change that, so that individuals will be required only to tell schemes to which they are currently contributing, or subsequently contribute to, that they are subject to the £10,000 annual allowance. They also change the length of time that individuals have to comply with this requirement to 91 days.
We welcome the Government amendments. Although we may not have persuaded the Minister to take on all our concerns, we are glad to have played some small part in persuading him to make those changes and to bring forward those amendments today. As I have said, we welcome and support them.
Amendment 1 agreed to.
Amendments made: 2, page 37, line 38, after “annuity””, insert “, “successor’s flexi-access drawdown fund””.
See the explanatory statement for Amendment 1.
Amendment 3, page 37, line 41, leave out “and 22A” and insert “, 22A, 27E and 27K”.
See the explanatory statement for Amendment 1.
Amendment 4, page 39, line 35, after “arrangement”,”, insert ““nominee’s flexi-access drawdown fund”,”.
See the explanatory statement for Amendment 1.
Amendment 5, page 39, line 36, after “annuity””, insert “, “successor’s flexi-access drawdown fund””.
See the explanatory statement for Amendment 1.
Amendment 6, page 39, line 39, leave out “and 22A” and insert “, 22A, 27E and 27K”.
See the explanatory statement to Amendment 1.
Amendment 7, page 42, leave out lines 1 to 3.
This Amendment, and Amendment 8, each remove a subsection inserted by the Bill into a version of section 576A of the Income Tax (Earnings and Pensions) Act 2003 because the subsections relate to payments not included in the lists of “relevant withdrawals” inserted by the Bill as introduced.
Amendment 8, page 44, leave out lines 28 to 30.
See the explanatory statement for Amendment 7.
Amendment 9, page 46, line 8, at end insert—
“() if the member is entitled to payment of a lifetime annuity under a flexible annuity contract as defined by section 227G(8), a relevant event occurs when the first payment of the annuity is made,
() if—
(i) the member is entitled to payment of a scheme pension under a money purchase arrangement under the scheme,
(ii) the member became entitled to the scheme pension on or after 6 April 2015,
(iii) the member became entitled to the scheme pension at a time when fewer than 11 other individuals were entitled to the present payment of a scheme pension, or dependants’ scheme pension, under the scheme, and
(iv) the scheme pension is not payable under an annuity contract treated under section 153(8) or (8A) as having become a registered pension scheme,
a relevant event occurs when the first payment of the scheme pension is made, and”.
This Amendment inserts, in a list that sets out the events that give rise to an individual first flexibly accessing pension rights, missing entries corresponding to the new section 227G(7) and (9) inserted by paragraph 65 of Schedule 1 to the Bill.
Amendment 10, page 46, leave out lines 26 to 41 and insert
“and
(c) the duties under regulation 14ZB and the circumstances in which the member will have to comply with them.”.
This Amendment condenses the text currently in the Bill of new regulation 14ZA(3)(c) and (d). New regulation 14ZA(3) lists matters that are to be explained in statements under new regulation 14ZA that are provided by scheme administrators to members.
Amendment 11, page 47, line 12, at end insert
“if active or contributing etc”.
This Amendment adds words to the title of the new regulation 14ZB to reflect changes to be made in that new regulation by, in particular, Amendment 12.
Amendment 12, page 47, leave out lines 13 to 35 and insert—
‘(1) Paragraphs (2) and (3) apply if—
(a) an individual receives a statement under regulation 14ZA from the scheme administrator of a registered pension scheme (the “flexed” registered pension scheme), and
(b) on the date of the relevant event concerned, or at any later time, the individual is an accruing member (see paragraph (6)) of the flexed or any other registered pension scheme.
(1A) In this regulation—
“the relevant 13-week period” means the period of 91 days beginning with—
(a) the date of receipt if the individual is an accruing member of any registered pension scheme on any day in the period—
(b) if not, the first day after the date of receipt when the individual is an accruing member of a registered pension scheme, and
“the intervening period” means the period—
(a) beginning with the date of the relevant event concerned, and
(b) ending with the first day of the relevant 13-week period.
(2) The individual must before the end of the relevant 13-week period—
(a) pass on a copy of the statement, or
(b) otherwise give notice—
(i) of receipt of the statement, and
(ii) of the date of the relevant event concerned or (if applicable) of its having occurred more than 2 years before the start of the relevant 13-week period,
to the scheme administrator of each other registered pension scheme of which the individual is an accruing member on any day in the intervening period; but this is subject to paragraph (5).
(3) Where, in the case of a particular registered pension scheme other than the flexed scheme, the individual is not an accruing member of that other scheme on any day in the intervening period but becomes an accruing member of that other scheme on a day (“the activation day”) after the last day of that period, the individual must before the end of the 91 days beginning with the activation day—
(a) pass on a copy of the statement, or
(b) otherwise give notice—
(i) of receipt of the statement, and
(ii) of the date of the relevant event concerned or (if applicable) of its having occurred more than 2 years before the activation day,
to the scheme administrator of that other scheme; but this is subject to paragraphs (4) and (5).”.
This Amendment makes a change in new regulation 14ZB to simplify the obligations for individuals who have flexibly accessed their pension savings. Information will need to be provided to a scheme only when the individual is an accruing member of that scheme and within a 91 day period.
Amendment 13, page 47, line 37, leave out “a” and insert “an accruing”.
This Amendment, and Amendments 14 and 15, are consequential on Amendment 12 and make changes in new regulation 14ZB to ensure that an individual does not have to tell the scheme administrator if they become an accruing member of the scheme as a result of a recognised transfer.
Amendment 14, page 47, line 38, after “becomes”, insert
“an accruing member of that scheme upon or after becoming”.
See the explanatory statement for Amendment 13.
Amendment 15, page 47, line 38, at end insert
“after the date of the relevant event concerned.”
See the explanatory statement for Amendment 13.
Amendment 16, page 47, line 42, after second “(3)”, insert
“, or has previously complied with paragraph (2) or (3),”.
This Amendment ensures that a member of a pension scheme does not have to provide information under new regulation 14ZB more than once to the same pension scheme.
Amendment 17, page 47, line 43, at end insert—
‘(6) For the purposes of this regulation, the individual is an accruing member of a registered pension scheme on any particular day if—
(a) the individual is an active member of the scheme on that day as a result of there presently being arrangements for the accrual of benefits to or in respect of the individual under a cash balance arrangement or hybrid arrangement, or
(b) a relevant contribution is made under the scheme on that day.
(7) For the purposes of this regulation, a relevant contribution is made under a registered pension scheme if—
(a) a relievable pension contribution is paid by or on behalf of the individual under a non-cash-balance money purchase arrangement relating to the individual under the scheme,
(b) a contribution is paid in respect of the individual by an employer of the individual under a non-cash-balance money purchase arrangement relating to the individual under the scheme, or
(c) a contribution—
(i) paid under the scheme by an employer of the individual, and
(ii) paid otherwise than in respect of any individual,
becomes held for the purposes of a non-cash-balance money purchase arrangement relating to the individual under the scheme;
and in this paragraph “non-cash-balance money purchase arrangement” means a money purchase arrangement other than a cash balance arrangement.”
This Amendment defines terms used in the provisions inserted by Amendment 12. The definitions are largely based on the text currently in the Bill of new regulation 14ZD(1)(b) and (8).
Amendment 18, page 48, line 33, leave out “active member” and insert
“accruing member (see paragraph (7A))”.
This Amendment makes a change in new regulation 14ZD to bring that new regulation into line with the changes made by Amendment 12 in new regulation 14ZB.
Amendment 19, page 48, line 34, leave out from “scheme” to end of line 38.
This Amendment makes a change in new regulation 14ZD to bring that new regulation into line with the changes made by Amendment 12 in new regulation 14ZB. The text left out is replaced by the new regulation 14ZD(7A) inserted by Amendment 27.
Amendment 20, page 48, line 38, at end insert—
‘(1A) In this regulation “the relevant 13-week period” means the period of 91 days beginning with—
(a) 6 April 2015 if on that date the individual is an accruing member of any registered pension scheme, or
(b) if not, the first day after 6 April 2015 when the individual is an accruing member of a registered pension scheme.”
This Amendment makes a change in new regulation 14ZD to bring that new regulation into line with the changes made by Amendment 12 in new regulation 14ZB.
Amendment 21, page 48, line 39, leave out from second “the” to end of line 44 and insert “relevant 13-week period,”.
This Amendment makes a change in new regulation 14ZD to bring that new regulation into line with the changes made by Amendment 12 in new regulation 14ZB.
Amendment 22, page 48, line 47, leave out
“a member on the first day of that”
and insert
“an accruing member on the first day of the relevant 13-week”.
This Amendment makes a change in new regulation 14ZD to bring that new regulation into line with the changes made by Amendment 12 in new regulation 14ZB.
Amendment 23, page 49, line 1, leave out from “Where” to “provide” in line 4 and insert
“, in the case of a particular registered pension scheme other than the flexed scheme, the individual is not an accruing member of that other scheme on the first day of the relevant 13-week period but becomes an accruing member of that other scheme on a day (“the activation day”) after the first day of that period, the individual must, before the end of the 91 days beginning with the activation day,”.
This Amendment makes a change in new regulation 14ZD to bring that new regulation into line with the changes made by Amendment 12 in new regulation 14ZB.
Amendment 24, page 49, line 16, after “becomes”, insert
“an accruing member of that scheme upon or after becoming”.
This Amendment, and Amendment 25, are consequential on Amendments changing earlier provisions of new regulation 14ZD and further change that regulation to ensure that an individual does not have to tell the scheme administrator if they become an accruing member of the scheme as a result of a recognised transfer.
Amendment 25, page 49, line 17, at end insert “after 6 April 2015.”
See the explanatory statement for Amendment 24.
Amendment 26, page 49, line 21, after second “(3)”, insert
“, or has previously complied with paragraph (2) or (3),”.
This Amendment ensures that a member of a pension scheme does not have to provide information under new regulation 14ZD more than once to the same pension scheme.
Amendment 27, page 49, line 22, at end insert—
‘(7A) For the purposes of this regulation, the individual is an accruing member of a registered pension scheme on any particular day if—
(a) the individual is an active member of the scheme on that day as a result of there presently being arrangements for the accrual of benefits to or in respect of the individual under a cash balance arrangement or hybrid arrangement, or
(b) a relevant contribution is made under the scheme on that day.”
This Amendment inserts a definition of a phrase used in the text inserted by the Amendments making changes in the earlier provisions of new regulation 14ZD. It replaces the text left out by Amendment 19.
Amendment 28, page 49, line 23, leave out “paid” and insert
“made under a registered pension scheme”.
This Amendment adjusts the definition of “relevant contribution” in new regulation 14ZD to bring it into line with the definition inserted into new regulation 14ZB by Amendment 17.
Amendment 29, page 49, line 27, leave out
“flexed or any other registered pension”.
This Amendment is consequential on Amendment 28 and further adjusts the definition of “relevant contribution” in new regulation 14ZD to bring it into line with the definition inserted into new regulation 14ZB by Amendment 17.
Amendment 30, page 49, line 32, leave out
“flexed or any other registered pension”.
This Amendment is consequential on Amendment 28 and further adjusts the definition of “relevant contribution” in new regulation 14ZD to bring it into line with the definition inserted into new regulation 14ZB by Amendment 17.
Amendment 31, page 49, line 34, leave out
“flexed or any other registered pension”.
This Amendment is consequential on Amendment 28 and further adjusts the definition of “relevant contribution” in new regulation 14ZD to bring it into line with the definition inserted into new regulation 14ZB by Amendment 17.
Amendment 32, page 49, line 39, leave out
“under which the contribution was paid”.
This Amendment is consequential on Amendment 28 and further adjusts the definition of “relevant contribution” in new regulation 14ZD to bring it into line with the definition inserted into new regulation 14ZB by Amendment 17.
Amendment 33, page 49, line 43, after “if”, insert
“active or contributing etc and”.
This Amendment adds words to the title of the new regulation 14ZE to reflect changes to be made in that new regulation by, in particular, Amendment 34.
Amendment 34, page 49, line 45, leave out from beginning to end of line 13 on page 50 and insert—
‘(1) Paragraphs (2) and (3) apply if—
(a) under paragraph 8C of Schedule 28, the drawdown pension fund in respect of an arrangement relating to an individual under a registered pension scheme (the “flexed” registered pension scheme) becomes the individual’s flexi-access drawdown fund in respect of the arrangement, and
(b) on the conversion date, or at any later time, the individual is an accruing member (see paragraph (6)) of the flexed or any other registered pension scheme.
(1A) In this regulation “the relevant 13-week period” means the period of 91 days beginning with—
(a) the conversion date if on that date the individual is an accruing member of any registered pension scheme, or
(b) if not, the first day after that date when the individual is an accruing member of a registered pension scheme.
(2) The individual must, before the end of the relevant 13-week period, inform the scheme administrator of each other registered pension scheme of which the individual is an accruing member on the first day of the relevant 13-week period—
(a) of the conversion, and
(b) of the conversion date or (if applicable) of the conversion’s having occurred more than 2 years before the start of the relevant 13-week period;
but this is subject to paragraph (5).
(3) Where, in the case of a particular registered pension scheme other than the flexed scheme, the individual is not an accruing member of that other scheme on the first day of the relevant 13-week period but becomes an accruing member of that other scheme on a day (“the activation day”) after the first day of that period, the individual must, before the end of the 91 days beginning with the activation day, inform the scheme administrator of that other scheme—
(a) of the conversion, and
(b) of the conversion date or (if applicable) of the conversion’s having occurred more than 2 years before the activation day;
but this is subject to paragraphs (4) and (5).”.
This amendment makes a change in new regulation 14ZE to simplify the obligations for individuals who have converted their existing drawdown fund to a flexi-access drawdown fund, bringing that regulation into line with new regulation 14ZB as amended by Amendment 12.
Amendment 35, page 50, line 15, leave out “a” and insert “an accruing”.
This Amendment, and Amendments 36 and 37, are consequential on Amendment 34 and make changes in new regulation 14ZE to ensure that an individual does not have to tell the scheme administrator if they become an accruing member of the scheme as a result of a recognised transfer.
Amendment 36, page 50, line 16, after “becomes”, insert
“an accruing member of that scheme upon or after becoming”.
See the explanatory statement for Amendment 35.
Amendment 37, page 50, line 16, at end insert “after the conversion date.”
See the explanatory statement for Amendment 35.
Amendment 38, page 50, line 20, after second “(3)”, insert
“, or has previously complied with paragraph (2) or (3),”.
This Amendment ensures that a member of a pension scheme does not have to provide information under new regulation 14ZE more than once to the same pension scheme.
Amendment 39, page 50, line 21, at end insert—
‘(6) For the purposes of this regulation, the individual is an accruing member of a registered pension scheme on any particular day if—
(a) the individual is an active member of the scheme on that day as a result of there presently being arrangements for the accrual of benefits to or in respect of the individual under a cash balance arrangement or hybrid arrangement, or
(b) a relevant contribution is made under the scheme on that day.
(7) For the purposes of this regulation, a relevant contribution is made under a registered pension scheme if—
(a) a relievable pension contribution is paid by or on behalf of the individual under a non-cash-balance money purchase arrangement relating to the individual under the scheme,
(b) a contribution is paid in respect of the individual by an employer of the individual under a non-cash-balance money purchase arrangement relating to the individual under the scheme, or
(c) a contribution—
(i) paid under the scheme by an employer of the individual, and
(ii) paid otherwise than in respect of any individual,
becomes held for the purposes of a non-cash-balance money purchase arrangement relating to the individual under the scheme;
and in this paragraph “non-cash-balance money purchase arrangement” means a money purchase arrangement other than a cash balance arrangement.”” —(Mr Gauke.)
This Amendment defines terms used in the provisions inserted by Amendment 34. The definitions are largely based on the text currently in the Bill of new regulation 14ZD(1)(b) and (8).
Third Reading
Mr Gauke
I beg to move, That the Bill be now read the Third time.
The House has reached the final stage of its consideration of the Bill, which will give individuals more choice about how they access their savings in retirement. I have been pleased by our wide-ranging and informed debates.
I would like to remind hon. Members of the measures in the Bill and their aims. While the Bill makes the tax system fairer by ensuring that people have more choice about how they access their savings, it contains measures to prevent individuals from exploiting that new flexibility to gain an unintended tax advantage, and to ensure that the taxation of pensions savings on death remains fair and appropriate under the new system.
At Budget 2014, the Chancellor announced the most radical reform to how people take their private pensions for nearly 100 years. The current system restricts choice at the point of retirement. Those with the smallest and largest amounts of pension savings are allowed flexibility, but those with a medium amount of savings have very limited options. The Bill will change that by extending flexibility to everyone with a defined contribution pension, regardless of their total pension savings.
The Bill also introduces a new method to allow people to access their pension flexibly. At present, people taking their pension as cash have to take all their tax-free lump sum—25% of their fund—and then place the other 75% in a draw-down fund. Any money they then take out of that fund will be taxed at their marginal rate.
The uncrystallised funds pension lump sum—UFPLUS —is a new option that will give individuals the flexibility to take one or more lump sums from their pension fund without having to enter into draw-down or to take all their tax-free lump sum in one go. When using that option, 25% of each payment will be tax-free, with the other 75% taxed at the individual’s marginal rate. We are also increasing choice by introducing changes to encourage innovation in the retirement income market. Following extensive consultation with the industry, the Bill will give providers scope to make annuities much more flexible products in line with consumers’ needs. I have already discussed the fiscal impacts of those measures and related ones today, but I reiterate that the Government have now published Office for Budget Responsibility-certified costings for the policy overall alongside the autumn statement.
Mr Graham Stuart (Beverley and Holderness) (Con)
My hon. Friend will remember, as I do, that one of the first acts of the previous Labour Government on coming to power was to put a tax on pensions that helped to destroy the healthiest, strongest and most successful pension system in Europe. This Government, however, in much less promising economic times, have managed to bring flexibility and hope to all those who save for a secure retirement.
Mr Gauke
I am grateful to my hon. Friend for helpfully reminding the House of that important point. It is a significant achievement of the Government that we have been able to undertake such a fundamental reform—perhaps the biggest for nearly 100 years—in this area. Our record compares favourably with that of our predecessor. Of course, the Bill is part of a wider set of Government reforms, including the single-tier pension, the rolling out of auto-enrolment and the triple-lock guarantee.
Stephen McPartland
How many people will benefit from this pensions revolution?
Mr Gauke
Some 320,000 people retire each year with defined contribution schemes, and those people will now have far more choice. Of course, people who are saving for their pensions will know that at the end of their working life, or at various points after the age of 55, they will have more flexibility with regard to their pension pot.
I am grateful for the interesting debates that we have had during the Bill’s passage through the House and I would like to reflect briefly on how it has changed since its introduction. The Government's recently tabled amendment regarding how individuals inform schemes if the £10,000 annual allowance applies to them will provide that people only need to tell schemes to which they are contributing, or contribute to in the future, when they access a pension flexibly. They will also have an extended time period of 91 days in which to do so. These changes will make the new system easier for individuals and schemes to comply with, while ensuring that the annual allowance is implemented effectively.
The Government have made a number of minor and technical amendments to the Bill to ensure that it works as intended. The most substantive changes have been to the taxation of pensions at death, to ensure that that taxation remains fair and appropriate under the new system. The changes will allow individuals who die with pension funds remaining to pass those funds on to anyone they choose. The funds can be paid tax-free if the individual dies before the age of 75; if they die having reached that age, and the funds are paid out as a pension, they will be taxed at the beneficiary’s marginal rate—or at 45%, if the funds are paid as a lump sum. The aim of the changes is to ensure that individuals who have made sacrifices to save over the course of their life can pass on their pension savings without worrying about excessive tax charges after they die. They also preserve the incentive for people to keep money in their pension, as there will not be the fear of their beneficiaries being hit by a 55% tax charge.
Members may be interested to note that today, in the autumn statement, the Chancellor announced that the changes will extend to annuities. Death benefit payments from joint life and guaranteed term annuities will also be tax-free when the policyholder dies before the age of 75; such death benefits can be paid to any beneficiary. That will also apply when an individual uses uncrystallised or draw-down funds inherited from someone who dies before the age of 75 to buy a dependant’s annuity. Those changes will be legislated for in due course, although not through this Bill. In conclusion, the Bill is important. It will increase choice at retirement for individuals who have saved all their lives. It contains measures to prevent individuals from using the new flexibilities to gain unintended tax consequences, and ensures that the tax treatment of pensions on death remains fair.
Finally, I thank hon. Members who participated in debates on the Bill, both in the Chamber and in Committee. In particular, I would like to mention the diligence of the hon. Member for Kilmarnock and Loudoun (Cathy Jamieson), who has, I think, accounted for significantly more than 50% of the time taken to scrutinise the Bill. As I said, the Bill increases choice for the 320,000 people retiring each year, and I commend it to the House.
Cathy Jamieson
It is with a heavy heart that I rise to speak for the last time on the Taxation of Pensions Bill. It has been such an enjoyable experience. I am not quite sure how I will fill my days in the next few weeks, given that I will no longer be poring over absolutely every detail of the legislation. It does not seem long ago that I spoke on Second Reading—in fact, it was only two short months ago.
I should like to start where the Minister ended—by thanking everyone who has been involved in the process. I particularly thank right hon. and hon. Friends who have supported me in scrutinising the Bill, including in Committee, not least my hon. Friend the Member for Scunthorpe (Nic Dakin), who kept us all in line. Whenever I was about to take perhaps more than my fair share of time, he would keep me on track. I thank the Clerks in the Public Bill Office for their drafting advice and the role they played in ensuring that amendments were tabled in the appropriate manner. I also thank Library staff, who were excellent as always; they efficiently answered all my questions and responded to all my additional requests for information.
I thank the Minister—[Interruption.] I was going to say that he has, at all times, been polite and courteous; I hope he hears that I am saying something reasonably nice about him. That is not always how things happen. Throughout proceedings on the Bill, he has said no to pretty much all our requests and new clauses, in the nicest possible way. As I have said when speaking to our new clauses and amendments, we have been very consistent in our approach to the reforms; we have been clear that we support the principle of the Bill. We support increased flexibility and choice for savers, and that is why we have long advocated reform to the annuities market to help people to shop around and get a better deal. But we have had concerns about the speed at which the reforms have been pushed through. There was no consultation prior to the Budget statement and it has been difficult at times to get to grips with all the figures and the behavioural impacts relating to the Bill because the Government were not able to publish that analysis.
Nevertheless, we have endeavoured to identify the potential problems that the Bill presents, and we have judged everything against the three tests that we set at the outset—the advice test to ensure that savers get the right guidance, the fairness test to ensure that there are decent products for low and middle income savers, and the cost test to ensure that the reforms do not result in extra pressures on the state. It will be difficult to measure the Bill’s performance against those tests until the reforms take effect. We therefore reserve judgment on how it will work.
The Minister recapped the key issues that we debated. We made our views on the guidance guarantee abundantly clear. There is not a great deal more that we can say about that until we see how it works in practice. Ensuring that guidance meets customer expectation and requirements is a responsibility that now resides firmly with the Government. Our new clauses, which the Minister rejected, were concerned with measuring and reviewing the impact of the Bill because we wanted to gauge the degree to which the reforms produce additional opportunities for tax avoidance and to ensure that the Minister continues to monitor the impact of the Bill carefully as it is implemented.
We did not press new clause 2 to the vote. It called for a comprehensive review of the impact of the reforms, to be published 18 months after they take effect. We were keen to ensure that the Minister had every opportunity to give us the facts and figures. With the autumn statement today and the publication of the OBR policy costings, we now have some of that information and some of the numbers that we did not have previously.
There is one issue that I wish to raise even at this late stage. The Minister mentioned earlier that the OBR has run the rule over the figures, but it is important to note that the OBR policy costings document refers on page 87 to seven measures in the policy decisions table that are judged to have high or very high uncertainty around the central costing. Interestingly, one of those seven measures is pensions flexibility. The document refers to decisions since Budget 2014 and goes on to say:
“This costing receives a ‘very high’ uncertainty rating. The yield over the scorecard period—and the resulting costs in the longer term—depends on take-up and on other behavioural responses. Some people will temporarily increase pension saving in order to benefit from tax-free lump sum withdrawals. It is possible that funds will be redirected from annuities and into other assets, such as other financial products or housing. It is also possible that such funds could be used to finance consumer spending”.
That is exactly what we have been highlighting throughout the Bill proceedings, and exactly why we felt it was important that a review was built into the process. I hope that if the Minister does not take my word for it, although he often did so graciously, he will take account of the OBR’s comments.
We are clear that the success of the Bill will depend on the tests of fairness and cost that we set out. If the reforms have adverse consequences for those on middle or lower incomes or those who cannot afford the expensive regulated advice, they will not have succeeded. If the reforms lead to higher costs for the state because people have accessed their pensions too early and need additional state support, they will, again, not have succeeded. We hope the Government have factored in all the potential consequences, as they have assured us. I am pleased that they listened to us on the reporting requirements.
Does the Bill not look much better since the Government showed some flexibility in their approach? The word “flexibility” was frequently used in our discussions because that is what the Bill is all about. Had the Government taken their own advice and been a little more flexible in their approach from the outset, and perhaps a little less hasty, we might have arrived at a position where the Bill had been significantly improved and some of the outstanding questions could have been answered.
However, we have had a relatively short period to consider the Bill, notwithstanding the fact that, as the Minister pointed out, I seem to have taken up in excess of 50% of the time available to make the points. It is the Opposition’s duty to scrutinise thoroughly, raise the issues, ensure that the Government have thought things through, press them on those points and lay out those areas where we think they need to continue to monitor and evaluate in future.
With those few words, the time has run out for those of us in this place. I would like to close by reiterating my thanks to everyone who has worked on the Bill. I have found this an interesting and enjoyable process—perhaps not everyone involved would agree—and I must say that I never thought I would say that about a Bill on pensions taxation.
Ian Swales
I will not detain the House for long, but, as the Liberal Democrat representative here, I feel that it is important to say something. The Bill supports the pensions revolution being driven by the Minister for Pensions, my right hon. Friend the Member for Thornbury and Yate (Steve Webb), who has done a terrific job. We are well aware, of course, that the main pension aspects of the regulations are in the Department for Work and Pensions Bill, not in this Treasury Bill.
Like the shadow Minister, I enjoyed serving on the Bill Committee. In this place we are often very adversarial, but I think that proceedings on the Bill have been conducted in absolutely the right spirit. When it comes to pensions, it is extremely important to have cross-party support for the arrangements agreed, because pensions, by definition, involve long-term decisions. Were we to keep trying to change the pensions system every year or two, we would not be giving people certainty on what to do about their future. It has been a real pleasure to serve on a Bill on which, although we have sparred over various details, there has been strong agreement on the need to pass it. It has the full support of the Liberal Democrats.
Question put and agreed to.
Bill accordingly read the Third time and passed.