Angela Eagle
Main Page: Angela Eagle (Labour - Wallasey)Department Debates - View all Angela Eagle's debates with the HM Treasury
(14 years, 4 months ago)
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The Chairman of Ways and Means (Mr Lindsay Hoyle)
It is too late to object now, so let us proceed.
Clause 4 ordered to stand part of the Bill.
Clause 5
Power to repeal high income excess relief charge
Ms Angela Eagle (Wallasey) (Lab)
I beg to move amendment 60, page 3, line 9, at end add—
‘(4) An order under this section may only be made once the Treasury has published a report, including—
(a) the outline for the proposed replacement arrangement for the provisions contained in Schedule 2 to the Finance Act 2010;
(b) a distributional analysis showing the likely impact of the proposed replacement arrangement; and
(c) the revenue implications of the proposed replacement arrangement.’.
Ms Eagle
The amendment seeks to delay the making of any order under clause 5 until the Treasury has published a report that outlines the proposed replacement for the provisions in section 23 of, and schedule 2 to, the Finance Act 2010, a distributional analysis of the impact of the proposed arrangement and the revenue implications of the replacement provisions themselves. Clause 5 creates a power to remove the paving legislation that would have enabled the so-called high income excess relief charge to be levied in time to be collected in April 2011. That was legislated for in section 23 of, and schedule 2 to, what I suppose we must now call the first Finance Act of 2010, given that we look to be on course to pass three of them this year. I never thought that I would be comparing Finance Acts to buses—none come along for ages and then three come along at once—but it looks like 2010 is going to demonstrate the similarity. We are only in the middle of discussing Finance Bill issues in this Session, and obviously we will resume with part two later in the year.
Ms Eagle
My hon. Friend responds to my mention of instant gratification, but obviously it is in all our interests as a society to recognise that there is merit in assisting people to save for their retirement, so that they can avoid being reliant on benefits in their old age. As a result of the welcome increases in longevity, which have been a feature of our success as a society since the war, the average period of retirement is becoming longer and longer. Indeed, history recalls that when old-age pensions were first created 100 years ago, the life expectancy of those due to access them was a mere one year after they had been lucky enough to qualify. Clearly, by the time pension saving and old-age pensions became more widespread after the second world war, the time had gone up considerably to seven or eight years. It is now 20-odd years for men and—gratifyingly for females—even longer for women.
That shows that there are issues about longevity in society and about how to adapt our pensions arrangements to recognise that we live in what is often referred to as “an ageing society”. I believe that it is a great triumph of our organisation of society. Although it presents us with some difficult issues of policy and affordability, it should not be seen or ever portrayed as a problem; nor should the fact that these days many more pensioners reach retirement age and live longer be seen as representing some kind of burden on our society. After all, we all aspire—as I am sure you do, Mr Hoyle—to reaching retirement age and enjoying an extremely happy, long and hopefully prosperous retirement. That is what we are dealing with when we tackle the issue of pension tax relief.
I was pointing out that pension tax relief is more generous than the relief in many other areas of saving. That is because there are great benefits in encouraging people to save for their own pension, despite the fact that they are putting money away to which they often cannot gain access for many years; and also because it is more effectively and efficiently done if it can be done collectively. That is why Government incentives, in the form of tax reliefs, have always featured in the system.
This form of tax relief is often referred to as EET. This is not a stuttering, Steven Spielberg sci-fi film; it stands for exempt, exempt, taxed. That means that as savings are put away from income, they are exempt from tax. Any investment growth that comes from investment in those funds is also exempt from tax—that is the second E. The T, of course, is the thing that many people worry about—the fact that as these savings are taken as an income stream when retirement happens, taxation applies again at that stage.
I doubt whether any Member on either side of the House would quibble with the very generous tax incentives put in place over many years by Governments of all hues, colours and sorts—whether they be coalitions or otherwise—to privilege such tax savings. However, as that has developed, certain features have brought about unforeseen consequences and have not proved to be in the best interests of fairness or equity.
To establish the size of the issue and to put into perspective the amounts of money that we are dealing with under this clause, let me reveal—although I am sure that many Members will already know—that the gross annual cost of pension tax relief for the financial year 2008-09 was £28.4 billion, which at a full 2% of gross domestic product is a not insubstantial amount. Net of the tax on pension income—the T part of EET—and also of the national insurance contribution relief for employers, which are also granted by the Treasury, the figure was £18.9 billion. Therefore, the net cost of that tax relief for pension savings is close to £19 billion. Again, that is not an insubstantial amount of money or revenue forgone by the Treasury.
Another feature of the net figure is how it has been growing in the past few years, having doubled since 1998-99. From being reasonably stable, it has gone up very quickly in a relatively short space of time when we think about life spans and the development of pensions policy in this area. That change has been accompanied by a change in the distribution of the beneficiaries of the tax relief, so there was a very strong case for taking action to put it on a more sustainable and fairer footing, and that is what we were doing with the tax law that clause 5 seeks to repeal by order.
It is a feature of the system, which I am not sure could be avoided without putting huge restrictions on it, that tax relief for pension savings is granted at a marginal rate. By definition, that means that it is more valuable for higher rate taxpayers than for basic rate taxpayers. Analysis has shown that the relief was increasingly benefiting those on the very highest incomes rather than just those on higher rates. So, paradoxically, over time, the very reasonable and logical policy of granting tax exemptions on savings for pensions meant that the incentive to save for a pension was being provided, at a cost to all taxpayers, to those who needed it the least because they were the most well-off. That is the definition of “regressive” in terms of how tax relief might hit. The fact that the system was becoming even more distorted, benefiting those in the very top income brackets, was illustrated by a distributional analysis of the benefits, which revealed that higher rate taxpayers received 65% of the relief but constituted only 19% of pensions savers.
The real distortions were at the very, very top, as those on the very highest incomes were benefiting even more disproportionately. Analysis shows that about 2% of savers currently receive a quarter—25%—of all the tax relief available. I hope that the Minister will agree that that is unjustifiable. It means that if a person is privileged enough to be in the top 2% of earners by income, they are entitled to an average of £20,000 of tax relief per year per person on their pension savings, whereas the average relief available for those who are on the basic rate of tax is just £1,000.
The way in which the relief is granted, its connection to the income tax system—the fact that it is at the marginal rate—and the introduction of the 50p rate for income tax mean that if action were not taken, this massively and already grossly regressive relief would become even more distorted. That is why my right hon. Friend the shadow Chancellor, in the pre-Budget report 2009 and the Budget 2009, decided that action had to be taken to deal with the relief, which had become unsustainable and extremely unfair. It was therefore necessary to have a policy response at the medium and low-earning end of the income scale as well as a policy for the very high end. It is the policy for the very high end that is being repealed in clause 5, but I want to spend a tiny amount of time dealing with the policy at the low and medium end.
The decision to create the national employment savings trust was an essential part of the rebalancing of pension tax reliefs to ensure that they could effectively stretch further down the income distribution. Members will recall that the creation of what is now known as NEST was the outcome of a great deal of work across party lines from 2004 to design a system of pension savings that would deal with the obvious market failure in the private sector of the ability to allow low and medium earners to save in a worthwhile way in a low-cost savings vehicle.
Geraint Davies
In terms of the public finances, £3.6 billion is a massive amount to be raised in a very tight period, so given that there is so much uncertainty and change around the Government’s proposals, does my hon. Friend accept that they present an enormous risk? From the viewpoint of the industry, it appears that the Government are playing fast and loose and are undermining the confidence of the financial markets and credit rating organisations in their capability to manage our economy or their finances.
Ms Eagle
My hon. Friend raises an extremely important point and I obviously look forward to the contribution that he will make to our debate in due course. If he looks at the amendment he will see that the point of it is to try to get more detail about what is in the Government’s mind. The time scale for putting the provisions in place is extremely short in relation to the beginning of the new financial year—a point to which I shall return.
The amendment would provide that an order that completely repealed all the paving legislation and all the work to put into effect the higher earnings charge would not be allowed until Parliament has more idea of at least the outline for the proposed replacement arrangements. There are some coy little hints in the Red Book but not much else to go on—certainly no detail—if we are to repeal an already organised charge that has been well consulted on. The amendment also provides for a distributional analysis to show
“the likely impact of the proposed replacement arrangement; and…the revenue implications of the proposed replacement arrangement.”
I accept that the Government have said that they want to replicate the yield, but as my hon. Friend correctly pointed out, the yield is not an insubstantial amount and it rises quickly. In the tax year 2012-13, a yield of fully £3.6 billion for the replacement measure is already on the Budget scorecard.
The planned yield is a considerable sum and the Government need to reassure us that they are not putting it at risk by ripping up all the work that has been done to implement the original policy since it was announced in 2009. There are clear dangers in destroying all that work, wiping it off the statute book and starting again from scratch so close to when the change is meant to come in, not least because of the tight time scales as we approach the start of the financial year 2011-12, when collection of the revenue is meant to begin. The Red Book states:
“The Government wishes to engage employers, pension schemes, experts and other interested parties to determine the best design of a regime.”
That does not fill me with confidence that the Government have the first clue about how their policy intent can be changed into an actual tax change. It is a complex area and they have only a small period to get the measure right.
I assume that the powers will have to be legislated for in the September Finance Bill; perhaps the Economic Secretary can tell me when she replies to the debate. There is not much time—probably only the summer—so I hope she will have a holiday, but I am not sure quite how that will turn out if she is put in charge of sorting out the proposals in an appropriate time. Her officials could get no break at all. To be honest, as they contemplate their second or third Finance Bill of the year, her officials will probably need a break as much as she does. While there is not a lot of time left, there is an awful lot of yield at stake if the Government get this wrong, and that is what we are exploring through amendment 60.
Thomas Docherty
My hon. Friend is probably aware of many people’s anger at the size of the pension pots of bankers such as Sir Fred Goodwin. Does she agree that when many people are struggling as a result of the bankers’ decisions, it is outrageous that the Government wish to reward those very bankers by giving them such big pension breaks?
Ms Eagle
I certainly understand that anger, and I suspect that there will be even more anger if the Government do not address the unfair way in which the distribution of the pension tax relief has developed, especially since the simplification from A-day in 2006. We tried to address the problem by targeting the people at the very top who had benefited the most from the relief in particular.
We received representations from stakeholders who called for a simpler system, and it would be wrong of me to try to claim that the system for which we legislated was simple—it was clearly complex. However, when dealing with people on very high earnings who use complex financial arrangements, we often find that that complexity must be matched to ensure that a fair amount of tax is taken from them. In tax and benefit law, as the Economic Secretary will know—she probably struggles with this every day—there is always a trade-off between simplification and fairness, as well as yield. We took the view that despite the complexities of the system that we were introducing, it was right to target very high earners in particular. I state the distributional analysis again: the top 300,000 people receive 25% of £18.9 billion. No right-thinking person in this country with any kind of understanding of what the term “fairness” means would want us to tolerate that kind of distribution.
Simplification is always a popular cry, but there are trade-offs, and it causes different problems if we create a simpler system. We did consider other options, but the trade-offs are inescapable. We want to explore in debate today how the Government are working their way through the trade-offs, so that we can try to assess whether the solution that the Government have hinted at, but have not put before us, is fair, or whether its outcome is less fair than the outcome of the system that we decided on.
The Economic Secretary to the Treasury (Justine Greening)
I can see that the hon. Lady and other Opposition Members are following a particular train of inquiry, and that is perfectly right—it is the purpose of this debate. I just draw her attention to the fact that the clause gives the Government the power to repeal the previous measures if we can find a better alternative. If we cannot, I assure her that we will leave what is in place. However, does she agree with the Institute for Fiscal Studies, which described the measures that the previous Government proposed as unfair?
Ms Eagle
It is up to the entire electorate to decide what is fair or unfair. I have set out some of the reasons why we approached what is a difficult problem in the way that we did, but I certainly welcome the Minister’s comment that if the Government cannot find a different way of doing things, they will leave the current structure in place. I was wondering about the reference in the clause to December this year. I suspected that that might be what we would call a backstop position. It is important that the hon. Lady has put her point on the record. Taking what she says at face value, I assume that the Government will do some work in the next period. I do not know whether a measure will be in the Finance Bill, or how quickly that work will be done, but certainly there is not very much time for a completely new system to be brought in.
Justine Greening
The hon. Lady is very kind. Given that she raises the issue, perhaps it would be helpful for the rest of the debate if I set matters out. On the timelines, she is right; we clearly need to make progress quickly. The aim is to publish draft clauses in the autumn, and to legislate in the Finance Bill 2011.
Ms Eagle
I certainly appreciate the information that the Minister has put before us, and it helps us to get on with the debate. I suppose it means that she and her officials will have time for at least a little bit of a holiday this August. Under our plans, the yield begins to come in during the next financial year. I was under the impression that she would have had to ensure that she legislated for an entirely new system in the September 2010 Finance Bill. She now tells us that potential measures for an alternative system will be forced into next year’s Finance Bill, which means that an extra £0.2 billion of revenue that was scored for the next financial year will have to be raised. I assume that she will take account of that.
Jon Trickett (Hemsworth) (Lab)
The new regime comes in in April 2011. If, as the Minister said, the Government will not bring legislation forward until April 2011, does it mean that we will use the system that we introduced? That will be a second system. There is the current system; the one that we introduced, which will apply from April 2011; and a third one, which will be introduced subsequent to the Government’s Bill. Or will the Government abandon our system, and will there be a period of time in which we get less revenue as a result of the complex process that has just been announced?
Ms Eagle
There are issues of process on which I would appreciate the hon. Lady’s enlightenment in her response to the debate.
There is also an issue about the backstop position. The hon. Lady says that draft clauses might be brought forward, and, although I am sorry to go on about process, it is important when it comes to tax changes. We gave ourselves close to two years to do all the work to introduce the higher rate relief charge, because it was such a difficult and complex area. We wanted to ensure that those who were liable to pay had plenty of time to plan, understand their liabilities—even if they did not like them, which they rarely do in my experience—and get to know the system, so that there was certainty about it. It now seems clear that there is a degree of uncertainty, which those who would have been particularly badly hit by the high charges, the very richest in our society, might welcome. However, we felt that they should shoulder a fairer burden of the necessary fiscal consolidation, because they had done so well during the good times.
If the Government are serious about protecting the yield, there has to be a trade-off with fairness. The Government have hinted at using the annual allowances as a way of raising that money, rather than our way, and if they introduce that change those on incomes of less than £130,000 will be dragged into the tax net. We wished to avoid that with our solution, so, if the reduction in annual allowances that the Government are considering turns out to be their final decision, in response to the debate will the hon. Lady tell us how many people it will affect? The Government have hinted that that is their preferred way, but our amendment would ensure a distributional analysis of the measure’s effect. Given that we legislated for a particular approach to raising that yield, and given that the Treasury did a great deal of work on developing that system, it would be entirely appropriate for the Treasury to produce some comparisons between that and the preferred approach at which the hon. Lady and, certainly, the Red Book have hinted. How great will the sudden tax liability be of people who earned less than £130,000 a year and would not have been affected had our approach to raising the yield gone ahead? How low down the income scale will the restrictions on tax relief go?
Geraint Davies
For clarity, does my hon. Friend agree that the Government’s proposal consists of a multi-billion-pound giveaway for the richest 2% of people in this country at a time when the rest of the country faces massive financial penalties due to the actions of international bankers? Those very bankers will be given the extra bonus by this Government, and that is an absolute disgrace.
Ms Eagle
Again, my hon. Friend makes an important point in his characteristically acerbic way. I was going to ask the Minister, in a slightly more polite way, how much of the income that the very richest would have paid will now be paid, under the new plans, by those on lower incomes. I hope she can give us that figure.
The key issue with annual investment allowances is that they drag people into paying the extra tax regardless of income. For example, a modest earner might receive a bequest from a deceased relative and make a big payment into a pension, and under our system they would have been able to pay in up to £225,000 without incurring tax. Alternatively, a modest earner might receive a redundancy payment and wish to put it away, and we clearly want to encourage that if they do not have a pension. If the hon. Lady’s system is to be of the sort hinted at in the Red Book, that person would be much more affected, regardless of their ordinary income; they would be deterred from putting anything other than the annual investment allowance into a pension fund because of the nature of the tax. I hope she will at least admit that that is an implication. Has she any numbers that relate to this issue?
Mr Jones
Let us not forget that one. However, the proposal in clause 5 will leave a big black hole in the deficit reduction strategy. The Economic Secretary hinted, “Well, we might not do it, or we might do something different.” I am sorry, but if we are to have a thought-out plan to reduce the deficit, that is not the way to approach the matter. What we need is firm figures that do not make the poorest in society pay, which the proposal clearly will. She needs to explain to the House why neither she nor the Liberal Democrats went into the election saying that they would make this change. A lot of pensioners will find it very difficult to stomach.
Ms Angela Eagle
Does my hon. Friend agree that neither partner in the coalition Government went into the general election telling pensioners that they would change the definition of indexation from the retail prices index to the consumer prices index, either?
The Temporary Chair (Mr David Amess)
Order. I hope that before the hon. Gentleman responds, he will reflect on the fact that the point that has just been made is not really relevant to the matter being discussed.
Justine Greening
May I start by saying what a pleasure it is to serve under your chairmanship, Mr Amess?
We have had a wide-ranging debate today and I will do my best to answer a number of the issues that Opposition Members have raised. However, it would perhaps be best for me first to set out the background to this debate, as the shadow Minister did. This issue was first looked at by the previous Government, and we have returned to it as a new Government. The coalition Government inherited from their predecessor the largest budget deficit of any economy in Europe, with the single exception of Ireland. One pound in every four that we spend is borrowed. The gap stands at £149 billion for this financial year alone.
The previous Government had planned to raise extra revenue through the restriction of pensions relief for higher-rate earners. As we have heard, that approach was due to raise £4 billion to £5 billion a year by 2014-15. Given the appalling state of the public finances that we have been left as a new Government, it is something that we cannot ignore.
On Second Reading, my right hon. Friend the Chief Secretary set out our commitment to fairness. This is a progressive Budget that ensures that every part of society makes a contribution to deficit reduction, while protecting the most vulnerable, especially children in poverty and pensioners. The Budget has a number of measures to support pensioners, not least the triple lock guaranteeing an annual increase in the state pension in line with earnings, prices or a 2.5% increase, whichever is the higher.
Justine Greening
Let me make some progress.
That will benefit 11 million pensioners across the country. Through clause 6, which we will debate next, the Budget will enable individuals to make more flexible use of their pension savings.
Returning to clause 5, the Government have considered pension tax relief issues and believe that reform is a necessary part of their commitment to tackling the fiscal deficit. It is worth citing the views of Robert Chote, who heads up the Institute for Fiscal Studies, following the Budget. He spoke about this measure on 23 June:
“Perhaps the most welcome change was the decision to rethink the last Government’s complex, unfair and inefficient plans to limit pension contributions relief for high earners.”
That was what he thought about it.
Justine Greening
Many people on the minimum wage will not view it as progressive for someone who can afford to pay upwards of £100,000 a year into a pension fund to be given a 20% marginal rate tax break. In fact, that was not the only problem. Having listened to the concerns of the pensions industry and employers, this Government have real reservations about the approach towards pensions tax relief that was adopted in the Finance Act 2010. We believe it could have unwelcome consequences for pension saving, bring significant complexity into the tax system and damage UK business and competitiveness. The director general of the CBI said of the previous Government’s measure, brought forward in the Finance Act 2010:
“This will have serious consequences—it will make it much harder for UK business to attract and retain global talent… In every way, it’s a bad move.”
In addition, a number of features of the approach adopted in the Finance Act 2010 were unfair. For example, it included a very complicated income test, which made it difficult for individuals and advisers to understand. It also made it difficult for individuals to plan, as they would not know their final income until the end of the tax year so they would not know until then whether or by how much they would be affected. The income test also created many perverse incentives, avoidance opportunities and anomalies. For example, different charges could arise, depending on whether an individual or their employer made the pension contributions.
Under the approach in the Finance Act 2010, individuals on the highest incomes, who are able to put in very large pension contributions—upwards of £100,000 to £200,000 in one year—would have continued to get pensions tax relief, as they would still have been able to get relief at the basic rate rather than the higher rate. That is worth up to £51,000 a year. Given our concern for fairness, we believe—
Justine Greening
We are proposing a different approach, which would address that very measure. The decision for the hon. Gentleman to take tonight is on whether people who are able to pay £100,000 to £200,000 a year into their pension fund should be able to get tax relief at the basic rate. That is the question for him to answer.
Ms Angela Eagle
There are hints in the Red Book about the annual allowance taking the strain, so will the Minister tell us whether that is the only approach that is going to be looked at, or is she considering a range of different approaches? She is comparing a system that was legislated for and consulted on with a replacement about which the House has no real information. As I say, there is a hint in the Red Book, but nothing else. Will she help us focus on the comparison by doing us the courtesy of telling us what her Government are going to develop as an alternative?
Justine Greening
I was just about to come to that. One thing that we know right now about the existing plans is that if they came in from April 2011, they would curtail, but still give, basic rate tax relief to people who can afford to pay hundreds of thousands of pounds into a pension every year. Our alternative approach looks principally at significantly reducing the annual allowance to curtail that effect. We think that the annual tax relief available will potentially be restricted to less than half that available under the previous Government’s plan, significantly curtailing the ability of the super-rich to benefit from pensions tax relief. That alternative approach is supported by the pensions industry, including the National Association of Pension Funds, as well as employers and their representatives, including the CBI. The Government are keen to continue to engage with the pensions industry, employers and other interested parties to specify the level of the annual allowance, and other relevant design features.
Let me leave no uncertainty about our fiscal objectives. The Government are clear that a reduced annual allowance approach would have to raise no less revenue than the existing plans to restrict pensions tax relief in order to enable us to meet our commitment to deficit reduction. That is why we are not repealing the existing regime at this point, while we are finding a better way of achieving our objectives.
The hon. Member for Wallasey (Ms Eagle) asked for more detail. Our provisional analysis suggests that the appropriate level for the annual allowance could be in the region of £30,000 to £45,000 in order to deliver the necessary yield to the Treasury. However, the level required would be influenced by a number of policy design features in the revised regime. Once those have been decided, we can repeal the measures in the previous Government’s Finance Act 2010. Clause 5 therefore gives the Treasury a power to make an order repealing section 23 and schedule 2 in that Act.
Those measures, which are known as the high income excess relief charge, restrict pensions tax relief to the basic rate for high-income individuals, with effect from 6 April 2011. Let us be clear, however, that they still give basic rate tax relief to high-income individuals. The Government want to consult on a new approach. We want to discuss how best to design an alternative approach to make sure that it can operate fairly and effectively. The power to repeal is time-limited, because we recognise the need to resolve the design of the restriction of pensions tax relief as quickly as possible. We have already begun discussions with groups, which will continue through the summer.
Amendment 60 proposes that we should publish a report outlining the new arrangements and details of the yield implications and distributional impacts. I have some sympathy with the thrust of the amendment, but it will ultimately be unnecessary, because there will clearly be a chance for people to look over the draft legislation, and we will not repeal the high income excess relief charge until details of the alternative regime have been finalised and set out in public.
Ms Angela Eagle
I thank the Minister for giving way on this important point. Will she undertake to provide a distributional analysis so that we can compare directly the effects of the system that she wants to repeal, with the system that the Government finally settle on if she can find an alternative? That is the essence of the amendment, so her answer to this question is quite important.
Justine Greening
A whole range of analyses and impact statements will come out with the legislation. I suspect that, as my hon. Friend the Member for Chelsea and Fulham (Greg Hands) behind me is saying, any work that is done would give an answer that Opposition Members would not like, because it would show that we are no longer going to give basic rate tax relief to people who can afford to pay hundreds of thousands of pounds into a pension pot every year.
Let me address some of the issues that have been raised. I have set out the time frame within which we want to progress towards a better alternative to the current system. We all agree that, for pensions tax relief to remain affordable, we have to limit high levels of tax-privileged pensions saving, but we think that there is a better way of doing it than the one set out by the previous Government. We believe it is important to reduce the annual allowance to prevent people from saving £255,000 a year tax free.
The hon. Member for Wallasey mentioned instances of people suddenly being able to pay a large amount into a pension fund on a one-off basis. She was right to raise that matter, and we shall be looking at options for protecting basic rate taxpayers and supporting any hard cases caused by such one-off spikes in pension accruals. She also asked about the lifetime allowance being changed. We have not ruled that out, but it is obviously a key mechanism that sits alongside the annual allowance. We shall therefore have to look at it in the context of where we end up going with the annual allowance limit. I should say that all this is subject to being able to work with key stakeholders to get something that we believe we can rely on. That is why the provisions will give us the power to repeal that measure, if we can find a better way.
I particularly want to respond to the argument from Labour Members that our proposals would somehow give a tax break to the most well-off people in the country. Let us have a look at some of the figures involved. Of course, the minute I say that, I lose the relevant bit of paper. Ah, here it is. Under the terms of the Finance Act 2010, someone who is contributing £283,000 to their pension fund on an annual basis would have had a tax charge, net of pension relief, of £85,000. Someone making the same contribution to their pension pot under a potential annual allowance level of £35,000 would have a tax charge, net of relief, of £124,000. The reason for that is that they would get 20% tax relief on the income that they would otherwise have paid a much higher rate of tax on. That is why they would pay just under £40,000 a year more under our proposed scheme than they would have done under the previous Government’s arrangements.
I wonder whether those Labour MPs who are so concerned about the impact of tax policy on the better-off people in this country will go through the Lobby today and vote for a measure that means that people who can afford to pay £283,000 a year into their pension pot will pay £40,000 less tax than they would previously have done. I do not know what Labour Members think “good” looks like in relation to taxing better-off people, but I guess I will find out when we have a Division on this amendment shortly.
Justine Greening
I was asked for some figures and what the impact would be on the very richest. We can probably find in Hansard tomorrow that I have just provided the Committee with that information. That is probably the way in which debates are meant to work. Ministers have questions put to them and if they can answer them in some detail, they do. That is what I have done. I have set out in some detail why we are pursuing the clause. I hope that everyone realises that it is sensible and a pragmatic way to address the industry’s concerns. The industry faced a £1 billion bill for implementing excessively complicated and unfair tax changes on pensions tax relief. We hope that we can reach a conclusion with the industry and all stakeholders, but the key issue is to address the fiscal deficit, so any solution will have to bring in no less money than the mechanism intended by the previous Government.
Ms Angela Eagle
We have had a long discussion, so I will be brief. I appreciate the information, such as it was, that the Minister was able to put before us about the shape of the alternative scheme. It is a bit like shadow boxing when one tries to compare a scheme that has already been legislated for with one that has been only hinted at in the Red Book. That has been the problem with this debate.
I was candid about the issues and trade-offs that we had to go through to come up with the structure for which we legislated in the Finance Act 2010. I hope that the Minister and her colleagues will be as candid as they try to develop this other method. She said that she was sympathetic, but she is still resisting the amendment to put a report before the House that will contain distributional analyses and much more information about this alternative system. That is a great pity. We shall divide the Committee on that amendment as the Minister has not given us an undertaking to provide that information. I also want a separate vote on clause 5.
Question put, That the amendment be made.
Stewart Hosie
I thank the Economic Secretary for her response. Clearly, the way forward for people reaching 75 is sensible. The two-year deferral until the consultation is complete is right. It recognises the problem and ensures that no one else falls through the cracks between now and the end of the consultation. I am slightly disappointed that no hope was offered that the consultation could allow a slightly retrospective element to those very few people who have become 75 in the past few years, did not take an annuity and are managing their own funds. I will not press the amendment, but I will have another think about it before we reach Report next week, when I may revert to it. I beg to ask leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Ms Angela Eagle
I beg to move amendment 61, page 3, line 12, at end add—
‘(2) Schedule 3 shall not have effect unless the Chancellor of the Exchequer has laid before the House of Commons a report on the implications of the abolition of compulsory annuitisation of pensions, including—
(a) the revenue implications of abolition; and
(b) a distributional analysis showing who would benefit from abolition.’.
The amendment would mean that the age at which compulsory annuitisation is required could not rise, as the Government announced in the Budget, from the current 75 to 77 until the Chancellor lays before the House a report setting out the implications of abolishing the compulsory annuitisation of pensions savings. That would include the revenue implications and a distributional analysis of who would benefit from the abolition, in the interests of transparency. It is important to explore in more detail the Government’s precise thinking and intentions.
Before I do that, I shall comment on the sudden appearance this morning of a written ministerial statement, to which the Economic Secretary referred, on the matter. It appeared without the courtesy of any warning before our debate on the subject.
I spent some time on the Treasury website trying to avoid the increasingly odious comments on the “spending challenge website”, which continues to publish offensive and outrageous suggestions for savings, such as sterilising the poor, reopening the workhouses and the forced repatriation of immigrants. It appears to be completely unmoderated by the Treasury, and I hope that the Economic Secretary will convey my strong view that something should be done about that thing on the Treasury website.
What I could not find on the Treasury website, right up to the point when I came into the Chamber for today’s debate, was a copy of the consultation document that the written ministerial statement said would be there. I have a copy of the complete list of Treasury consultation documents that was on the website at around 12.30 pm. It featured the bank levy consultation, but not the consultation alluded to in the written statement. I therefore had to go the Library and have it printed so that I had the chance to look at it before I dashed into the Chamber, but the Minister has been waving it about. Will it be the usual behaviour of those on the Treasury Bench to give Members of the House so little time to look at a 53-page document? There was no advance warning, and the document was unavailable on the Treasury website, even though the written ministerial statement said it would be there. The Minister should get her Department to do a lot better than it has done today. That the document was unavailable anywhere other than via a photocopying machine in the Library at the last minute is a discourtesy to the House.
When I had a look at the consultation as I sat on the Front Bench while other debates were going on, the first thing I noticed was that the consultation will be a mere eight weeks long. It starts today and will end on 10 September, which is four weeks shorter than is recommended as good practice in the code on consultation, the second criterion of which states:
“Consultations should normally last for at least 12 weeks with consideration given to longer timescales where feasible and sensible”.
The consultation is an eight-week, rushed consultation that includes the entirety of the August holiday, when many of the people who have expertise on this matter will be sunning themselves in very much nicer climes than most of us could probably afford to visit, before they come back to pronounce. That is a very peculiar way to consult on such an important matter.
Robert Flello (Stoke-on-Trent South) (Lab)
Does my hon. Friend also find it a little strange that there is such a short consultation period when we are talking about a two-year extension? That seems contradictory.
Ms Eagle
I too wanted to ask the Minister this: what on earth is the rush about? One thing about annuitising and pension rules is that she has a little run-in time to consider—at some length—the implications of her proposals. I do not understand why there was such short notice and why the consultation is so rushed. I am forming an impression that the Government have already decided what they are going to do and that the consultation is a sham. If it is, they ought to have the decency to tell us what they have decided and not to consult at all. I would not have thought that the many experts who will be sunning themselves over the August holidays will thank the Government very much for giving them such a short time to respond.
The foreword of the consultation document states:
“The Government wants to foster a new culture of saving in the UK.”
We would all agree with that, and that a rebalancing towards saving is necessary. Therefore, it is important to prioritise large numbers of people saving appropriately. I had a look to see what the Government have done so far to encourage saving, particularly in pensions, which is what annuities are all about. Will the Minister explain quite how reducing public and private pensions by changing their definitions from RPI to CPI helps to increase pension saving? Yesterday, the Daily Mail and various other experts said that that is a raid on people’s pension expectations of more than £100 billion in the private sector, an amount that will accumulate year after year. Can the Minister explain how that encourages pension saving? Will she confirm that the impact assessment in this consultation lets the cat out of the bag when it comes to changing annuitisation rules? We have no particular problem, and certainly no philosophical problem with shifting the age of annuitisation from 75 to 77. Longevity has increased and the last rules—and the age of 75—were set in 1956. Indeed, annuitisation was first made compulsory in the Finance Bill of 1921, which was slightly before my time and I know that it was also before the Minister’s time.
Bill Esterson (Sefton Central) (Lab)
At a time when we need to encourage more people to make pension provision, does my hon. Friend think that these proposals will help? My concern is that having a minimum might reduce the numbers of people providing for their retirement rather than increase them.
Ms Eagle
My hon. Friend raises a reasonable point. Changes in this area have to be made very carefully to avoid the law of unintended consequences, especially when large amounts of tax-privileged income are at stake. The Minister knows that, which is why she said that there would be no increase in tax-avoidance opportunities.
Mr Redwood
Can the hon. Lady remind the House how many private sector final salary pension schemes actually closed as a result of the taxes and regulations introduced by the last Government?
Ms Eagle
We would have to have a long debate about a range of issues to answer that, but I am happy to defend our record. The closure of defined-benefit schemes took place for a range of reasons and the closures began in earnest when I was still at school, so I do not take personal responsibility for that.
When we look at the impact assessment, we see that the changes will affect a tiny minority at the very top—a mere 8,000 people on the Government’s estimates, out of 445,000 people who annuitise every year. They will affect only those who can afford to live without touching their pension pot until fully 10 years after retiring. We know that two thirds of people take their annuity upon retirement and that only a much smaller number of people last beyond 70, so the flexibilities that the Government are looking for will be required by only a tiny number of very rich people. The Minister therefore needs to justify why this is a priority and why we need a rushed consultation of only eight weeks over the summer to bring it about.
Mr Redwood
I will be brief, Mr Evans, because I believe that some Members have other things to do later on. I also remind the House that in the Register of Members’ Financial Interests I have explained that I offer business advice to a couple of companies.
I would like to briefly praise the Minister and her team for their proposal. For many years, the Conservatives while in opposition urged the then Labour Government to allow people a bit more flexibility and freedom with their money in retirement. Even now, after the election defeat, the party does not get it. This was not the main reason it lost the election, but it was one of many things where it misread the public mood. People want more freedom and flexibility over their own resources and more control over their own lives, but Labour was always trying to stop them. This is a small but important move, and I think we might find that it affects rather more people than the hon. Lady says—
Mr Redwood
The hon. Lady is protesting. I know it is in the Government document, but I am suggesting that the Government might be wrong and might have underestimated the number—it is extremely difficult to know how many people might take advantage of the provision. I also think it will not necessarily be only rich people who are affected. I know that Labour never wants any successful people to make money and be able to spend their money sensibly.
Justine Greening
I thank my right hon. Friend for his kind words. This provision is a step forward. As he said, it might be a small one, but it is an important one that will open up a flexibility that many whom we want to encourage to start saving for a pension will value, which is why it is important that we take the time to make an early start on this matter.
I want to respond to a couple of the shadow Minister’s points, including the one about the consultation document not being published in good time. This clause allows us to engage in a consultation. It was not necessary to launch the consultation today, but as it was it was launched at 12.30 pm, and by the time we got to the clause it was 5 o’clock—several hours after the document became available—which has meant that we have had a more informed debate today.
Justine Greening
We are getting into the same sort of argument that we had in the previous debate, where if we had put the consultation document up and had not had a sentence on an earlier webpage saying that it was there, we would have been accused of hiding it away. I am afraid that we have to do one before the other, and clearly in this case we decided to put out the statement that the consultation was going up on the website, and then we put it there, which is where it has been since 12.30 pm.
Whatever the bluster from the Opposition Benches, it cannot mask the fact that we are taking a positive step forward on pensions today. We have launched what I think will be a landmark consultation. Clause 6 and schedule 3 will give us the time to get that consultation right over the summer and then bring forward legislation in the forthcoming Finance Bill to ensure that people have more flexibility in dealing with their pensions, because ultimately it is their money, which they have put aside for their retirement. We want them to be able to deal with the pot that they have built up in a way that suits them, rather than in a way that suits the country.
Interestingly, we had a brief discussion about the fact that 75 has been the statutory age for some time. It was first agreed in 1976, which is ironic, given the obviously parallels between Britain then and now, with the Labour Government then having to be bailed out by the International Monetary Fund and going on to leave a desolated economy. We are ensuring that we have sustainable finances in our country over the coming years, so hopefully we will reach a different end point from that of that Labour Government.
I very much welcome the fact that the shadow Minister nevertheless supports the consultation going ahead, and I can assure her that we are going to get on with it. We believe that eight weeks is plenty of time to get a response, given that the issue is one that people have been pressing Governments past—and now present—to address. We are a new Government, so we are getting on with adopting a new and improved approach to annuities and pensions, as we can see from today’s debate. I therefore very much hope that the hon. Lady will withdraw her amendment, so that the clause and the consultation can improve the legislation, creating more flexibility in pension law for the people who so badly need it.
Ms Eagle
I am not really that satisfied with the answers that the hon. Lady has given, as she will not be surprised to hear, after that brief reprise of the 1970s. My information is that the Finance Act 1921 introduced compulsory annuitisation and that the current age of 75 was introduced in 1956, which was a Conservative time, not a Labour time.
Regardless of the Minister’s point scoring, however, it is important that we take an appropriate amount of time to see how any changes to the annuitisation regime might work in practice. The Opposition have no objection to the idea of having a higher age. However, there is some scepticism about the practicality of having a minimum retirement income and how it might be worked out, although that is part of the consultation, which no doubt we will now all be struggling with over August. It is a shame that the information was not available in a more timely fashion, so that we could have done more preparation for this debate. Because the amendment seeks more information and because the Government seem to be rushing ahead so precipitously, we would like to press the amendment to a vote.
Question put, That the amendment be made.