Taxation of Pensions Bill

Mike Freer Excerpts

Wednesday 29th October 2014 Commons Chamber

[Nigel Mills]

It is certainly interesting that the Bill is 57 pages long and has only three clauses, with the rest dropped into a schedule at the back. However, complicated rules are being changed, to take away some penal tax charges, among other things, and I guess it does not matter how the provisions are drafted; whether they are in a schedule or a clause, we get to the same position in the end. One of the problems with pensions is that everything is so fiendishly complicated that almost nobody can understand what all the rules are.

I am concerned about the provision in which the Government seem to be repealing the requirement that people must, before buying an annuity, have had a chance to check the open market situation. Clearly, we are not taking away the chance for people to compare annuity rates, because we are not compelling them to buy an annuity, so that option will still be there. A fall-back is written into the rules that says that before somebody defaults into buying an annuity from their pension provider, they must, under regulations, have had the chance to shop around and to be given advice. That looks like a sensible provision that should perhaps be kept. Repealing it strikes me as being a little too optimistic about how well this market might work in the early years.

Moving on to the general principle of the Bill, these changes reopen the debate about how we use the tax system to encourage pensions. There is a huge annual bill for allowing people to put untaxed income into their pension scheme. According to the latest figure I have seen, the net cost is about £22.8 billion in income tax, plus £15 billion in national insurance, so we are talking about £38 billion of taxpayers’ money being used to incentivise pensions saving each year. Okay, some of that money comes back when pensions start to be drawn, but it is still a large amount. The more flexible we make savings arrangements, so that people can choose when they draw down their pension and can do so 10 years before they retire, the weaker we make the justification for saying, “We should do this pre-tax”, because we are distorting the savings market.

I suspect that the only reason most people would choose to save into a defined contribution pension, locking their money away at the whim of some unscrupulous pension provider who charges them for things they do not understand and finally getting their money back 30 years later, is that they get this huge tax advantage. If we are going to start enabling people to have large amounts of that money, tax-free, a long time before they retire, does that change the equation? Perhaps we should be thinking about these things. Is this the right way to distort the pensions market? Should we not equally incentivise people to put money into an individual savings account every year and have a bit more control over it and a bit more visibility? Is that better protection for them?

We desperately want people to save money for their retirement, and we want it locked away so that they cannot spend it each year, and I suspect that using the tax system to achieve that is still very much the right answer. However, we probably need to think again about how much we are spending on higher-rate tax relief on pension contributions in order to make the system more flexible.

[Mike Freer (Finchley and Golders Green) (Con)]

I am blessed with articulate constituents who understand pensions issues. One of the issues raised with me is that we are allowing people to take out the tax benefit that they have been given for free by the Government. Does my hon. Friend think it is worth looking at putting the tax relief into something like the protected rights pot that used to, or still may, be in place for personal pensions, so that the tax relief element could not be withdrawn, and only the contributions could be withdrawn?

[Nigel Mills]

That is an interesting idea. I am not sure how we would hypothecate part of a pension pot, and do I really care whether the 25% I am taking out is the tax bit, the bit I paid in, or the bit my employer paid in? If my hon. Friend means that I could not take out the 25% of tax benefits—I could take out only 18% of the pension pot, rather than 25% tax-free in a lump sum—I can see a certain logic to that. In effect, it would just reduce the tax-free lump sum that people can have.

The flipside of rethinking how much tax relief we allow for pension contributions is that it is probably unfair not to give people full tax relief on the way in and then still subject them to higher-rate or top-rate tax when they start drawing their pension. That is an interesting double charge for the Chancellor. If people do not get relief on the higher rate, should they have to pay tax at a higher rate when they draw the pension contribution back out? Frankly, why would somebody who was in that situation pay that amount each year? They would be far better off using the cash—probably to drive up property prices.

At some point after these changes, there will need to be a debate about how we are using the tax system to incentivise pensions. Is that still the right thing to do? Is it worth the cost incurred? Is it encouraging the right behaviours? Is the tax relief really getting more people to save for pensions? Is there evidence of that, and should we continue with it? I suspect that the answer will clearly be yes—we should. However, we are making such radical changes to the pensions landscape that once we have got through this flurry of activity it is worth taking a step back to look at the situation and ask whether we are really in the right place, in terms of how we encourage people to save for their retirement. Are pensions uniquely the best thing for everybody, or could people take up other options that might encourage them to save even more, because they had more control over their funds during their lifetime?

This Bill is absolutely the right thing to do. There are clearly issues to do with making the system work and ensuring that people who need to make choices are not disadvantaged by making the wrong ones. We are moving from a situation where people have, in effect, been forced by the law into choosing something that, sadly, was often wrong for them, towards a situation in which they can choose what they think is right for them. We need them to do that on an informed and fair basis; they must not be ripped off by the next round of mis-selling. I fear that somewhere in these freedoms there is the possibility that that will happen in the next decade, but there are things we can do to try to mitigate that.