Taxation of Pensions Bill

Ian Swales Excerpts

Wednesday 3rd December 2014 Commons Chamber

[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.

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This appears to stem from a concern that the Government’s changes will have an adverse impact on the housing market. With greater choice and flexibility at the point of retirement, people will be allowed to make a decision about their finances that is right for them. This Government are committed to making the aspiration of home ownership a reality for as many people as possible. That is why they have introduced policies such as Help to Buy and further measures announced in the Budget to support the supply of housing. As part of the new regulatory framework for financial services, the Government have introduced the Financial Policy Committee to ensure that risks stemming from the housing market are identified and early mitigating action taken, if required.

[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.

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[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.

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[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.