16:55 - The House divided: - Ayes: 209 / Noes: 292 - Question accordingly negatived.
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.
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.
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.