Taxation of Pensions Bill
Debate between Nigel Mills and Andrew Love(9 years, 6 months ago)
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Nigel Mills (Amber Valley) (Con)
I speak as a member of the Pension Schemes Bill Committee; for me, this has been a week of complicated pension rules.
I welcome the freedoms that the Taxation of Pensions Bill provides. We want people to save for pensions to provide for their own retirements; it has to be right to give them the freedom to use the money they have saved as they want to, without there being penal tax charges that might force their behaviour into certain directions. It is absolutely right for these choices to be added to the whole landscape.
We should bear the context of the current situation in mind. Basically, we force people with relatively small and medium-sized pension pots to take an annuity. The tragic thing is that in many cases those annuities are not suitable—people are mis-sold them, do not understand them and do not shop around or get the best deal for themselves. People cost themselves large amounts of their retirement money because the market simply does not work in a fair manner.
The Work and Pensions Committee and others have been trying to find various ways in which to reform the annuity market, to make it fairer and make it work better for people—to encourage shopping around, to stop mis-selling and to get people to think about whether their life expectancy might be shorter than the average. We need people to think about what will happen if they predecease their spouse. Will the product that they are buying provide for that person?
Of all the solutions brought forward, the Government’s is by far the most radical. It effectively says, “You don’t need to buy an annuity any more if that is not right for you. You can draw down in a much simpler, cheaper way and try to live off and control the savings that you have produced for yourself.” That sounds a fairer approach. If people have chosen to save money for their retirement, they can now choose how and when they spend that, in a flexible way. We should all want that to be available. That is not to say that that would be right for everyone; it might be entirely wrong for many people. There is absolutely no reason why we should take products away, but we need people to make informed choices about what they want in their retirement—how much income they want, how they want to spend it and over how many years. In that way, they will not be locked into a totally unsuitable situation.
There are various nightmare scenarios. One is when someone has run out of money—they have drawn down and spent too much. They never thought they would live past 75, but live until they are 93. They run out of money in their later years and do not have the standard of living that they wanted. We absolutely do not want that to happen. The flip side, of course, is that if someone buys an annuity at 66 and dies at 67 and has no protection, they have burned their whole pension pot for them and their family.
We need to find a way of taking those two extremes out of the situation. We want new products to smooth the situation out. People should be able to say that they want a product that not only guarantees a certain income for life—so they know they can pay the heating and food bills, have the annual holiday and treat the grandchildren—but allows the flexibility to spend money on a cruise or an active lifestyle when they first retire. They might want funding for care costs in their very late life; during the previous years, their income could dip a bit as they would not be so active or have such big bills. How do we get people to understand that they can make those choices? How do we get the products that fit those choices? Those questions are key.
I entirely agree with the comments made so far: getting people to understand the choices—what they need, want to do and can do—at the point of retirement is the secret, but also probably the hardest bit. That is why we need to get the guidance guarantee to work. I have tabled amendments to the Pension Schemes Bill to try to strengthen how that guidance will work. But we need to be careful: it is not when someone is 65 and a half and about to retire at 66 that they need to understand what is going on. Under the rules as they are today, that might be fine—the person saves into a pension scheme, which will assume that funds will move into an annuity when retirement age comes so plans can be made on the basis that the person will need their pot at 66. Funds can start to de-risk when the person gets to 56 on the central assumption that they will want a safe pot when they retire.
Once the changes come in, however, people might not want to do anything with their pots at age 66; they might stay in work until they are 70. They may want to use other savings or defer their pensions for a while. Do they want their pension scheme by default to start de-risking and reducing investment return 15 years before they want to retire? That would be disastrous for the pension pot.
Choices will have to be made about which pension scheme to join, about risk profile and about when de-risking should start. People will have to understand that when they are 40 or perhaps 35, not 65 and a half. There needs to be clear guidance to which people can be signposted. Pension funds need to say to people, “You have important choices to make all the way along the process. Here is what you need to know, here is how you can find it and here is what you should be doing.” If people do not get the message earlier, the guidance for those aged 65 and a half might well be, “Here is what you could have won, but sadly you have not won it because you did not do the right things earlier on.” When the guidance providers come in, they need to provide clear, web-based guidance that people can access at any age, rather than being locked out until they are 65 and a half.
We also need the regulator to think carefully about what pension schemes will do with people who just do not engage. Some people will be enrolled automatically; they do not really understand the system but they do not opt out. They are saving money and get to 55. They are asked whether they want to de-risk, but there is no reply. They get to 65 and are told that they can draw their pensions, but there is still no reply. What should be done with the pension pot in that situation? An annuity will not be bought, so what should the default be? Should there be some kind of drawdown so that the money is left sitting somewhere for a while under some strange investment profile?
In this landscape, we need to think about a lot of things on behalf of those who have choices to make and a pension pot about which it is worth making choices. I suspect that a sizeable number of people will have relatively small pension pots and that taking the cash, tax-free, will remain their best option. Those who have the pension choices but are not so well off that they can afford expensive advice are the ones who will need to understand the options and try to pick the right ones.
I am left thinking that guidance is the right answer and advice is the wrong one. The risk with advice is that it is incredibly expensive; it would cost several hundred pounds at best to give people advice. The last thing we want someone who has been auto-enrolled into a pension pot to do is spend a large percentage of their pension on advice that they really do not need, because they do not have enough money to take advice on. We have to try to keep the cost of the guidance scheme low and make it a way of getting people to their first understanding and thought process about what they could do, rather than trying to put in place a gold-plated system that everyone has to pay for, even though most people would not be taken that far forward. We have the right idea, although we probably have a long journey before people have anywhere near the knowledge and understanding that they need, and that we need them to have.
Mr Love
We have to keep guaranteed guidance at a reasonable cost, but for that guidance to be effective there has to be personalisation to the individual circumstances of the person involved. All the evidence suggests that. The one balances against the other. The challenge is to find a way to make the guidance both cheap and effective.
Nigel Mills
The hon. Gentleman has to be right. The issue was raised in the Pension Schemes Bill Committee evidence sessions last week, and we will get to it again when we discuss the provisions on guidance. It is hard to work out the line between advice, which might say, “The best thing for you is to do x,” and guidance, which just says, “Here are the options and the various things to think about. Make sure you shop around. Thanks for calling.” Guidance such as that will not help people, who will forget it by the time they put the phone down or walk out of the meeting room.
We need the people getting the guidance to have worked out their financial situation—their pension pots, their debts, their other income, their state pensions and other employer provisions—so that when they go to get their guidance, they can set out their circumstances to the person guiding them, and that guidance can be focused on the sorts of choices they could reasonably make. That is probably about as far as we could get, because once someone says, “You should pay off your debts first”, they are getting into giving advice, and that may not always be right; it risks creating liabilities and people being mis-sold things. This will be an extremely hard balance to strike.
Finance (No.2) Bill
Debate between Nigel Mills and Andrew Love(10 years ago)
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Nigel Mills
My hon. Friend is exactly right. I think many Members, not least the Minister, know of my commitment to tax simplification. I was tempted, knowing that we were debating corporation tax, to table my amendment yet again on rewriting the whole corporation tax code to one that is more understandable and less complex.
Mr Love
The hon. Gentleman seems to be arguing that we might need a different policy mix for small businesses and for larger businesses. May I therefore invite him to reject the idea that the amendment somehow splits off small businesses from large businesses? We need a different policy mix.
Nigel Mills
I agree with the hon. Gentleman. There is eminent sense in having a lighter-touch tax regime for small businesses, with perhaps lower taxes in some areas for small business. We clearly do that: there is a separate regime for filing accounts. There is less expectation on small businesses, and, if only in the business rates field, there are exemptions for the very smallest businesses. I think we actually have that graduated system.
Mr Love
Notwithstanding small business rates relief, does the hon. Gentleman accept that for a significant minority of small businesses, business rates are now greater than the rental payments they have to meet, and that therefore there is some merit to the proposal being put forward?
Nigel Mills
I might be tempted to agree that there is some merit in looking at the level of business rate cost, but I am not sure there is much merit in the proposal we are debating here this afternoon for yet another review. I welcome the measures the Government have taken to reduce business rates, or least reducing the increase through the 2% cap and discount for high street businesses. I think we are all very keen to see how we can help our high streets grow. That reduction has to be the right way forward.
Returning to the earliest of the series of interventions, on a 20% capital gains tax rate, companies that realise a capital gain will be paying at 20%. It is only individuals who will end up paying the higher rate. There is sense in having symmetry restored to that situation. I wholeheartedly support getting the corporation tax rate down to 20%. We could trumpet it around the world that we have one of the lowest rates in the G8. That long-term direction of travel has to be one of the most powerful ways to encourage investment in this country by the large corporations we want to see operating here. It would perhaps stop them setting up their headquarters in Switzerland, Ireland or elsewhere. This is now a trend we can see: large corporations choosing to bring more jobs to, and paying tax in, the UK.
Finance (No. 3) Bill
Debate between Nigel Mills and Andrew Love(13 years ago)
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Nigel Mills
It is with a small amount of pleasure that I rise to speak about tax issues, having spent 13 years advising companies on them, mostly under a Labour Government. It was kind of the right hon. Member for Delyn (Mr Hanson) to mention my two former employers and the various comments that they have made, which I happily endorse.
I want to comment on the request for a review of the proposed reduction in capital allowances partly because I think that we are in a strange position overall. The purpose of capital allowances is to give businesses tax relief on their capital investment in order to encourage them to invest in plant and machinery. We used to try to encourage them to invest in industrial buildings and factories, but we have stopped doing that now.
The attraction of the capital allowance system used to be the ability to incentivise people by accelerating tax relief. Forty years ago someone who invested in a piece of equipment with a 10 or 15-year useful life could accelerate the tax relief on it quite far in advance of the overall spread of its useful life, but I am not sure that that is where we are now. How many businesses in our constituencies will invest in equipment when they are not certain that its useful life will be even 10 years? If they expect it to be five or six years, the present mechanism will not work at all.
A simple calculation will show that, given an 18% writing down rate, an investor will still not have received tax relief on 30% of his investment in a piece of equipment. After eight years, he will still have not have received 20%. He may anticipate a fairly large residual scrap value if he can sell the equipment on, but that is on the assumption that a good deal of its useful life remains, and I am not sure how realistic that assumption is.
If we are to have a review, let us review the whole capital allowance system to establish whether it is really giving businesses an incentive to invest. Perhaps we should have a look at what they are actually doing in their accounts. The right hon. Member for Delyn mentioned that. What is the useful life over which they are writing off assets? I think that we may be adding a huge amount of complexity to the system by preventing all the businesses in the country from employing actual accounts depreciation for this purpose, and requiring the creation of a capital allowance pool requiring all the assets to be tracked separately. In the past it was said that businesses were receiving a tax incentive, but this huge and unnecessarily complex system may have an adverse impact on them. Our review should ask whether the capital allowance regime is the right one.
Later—not today—we will come to clause 12. The Government have responded to some lobbying, and have recognised that it will cause huge problems for manufacturing business in particular. The clause proposes that the lives of short-life assets should end after eight years. Someone who invests in equipment whose life he expects to be less than eight years will have to make a separate election to treat it as a short-life asset rather than putting it in his main capital allowance pool. He can try to obtain the tax relief over the eight years; otherwise, as I have said, he will still have 20% unrelieved. We are building additional complexity into the system, and I am not sure that that is necessary.
The Bill contains various responses to businesses that are trying to find ways around the capital allowance rules. Clause 33, for instance, proposes anti-avoidance rules for long-funding finance leases. Year in year out, we see new and complex rules intended to prevent businesses from getting around the rules. Sometimes they are trying to obtain extra deductions to which they are not entitled, and sometimes they are trying to find ways of receiving a deduction over the period for which they think they should receive it.
If we are to be a tax-simplifying, tax-reforming Government, perhaps the Office of Tax Simplification could conduct a review of whether the capital allowance is still fit for purpose, and whether it is the right way to attract business investment over the next 10 or 15 years. Should we, in fact, try to find a way out of it, and adopt a system that allows businesses simply to look at their accounts to be eligible for some kind of tax relief, rather than having to adjust the depreciation for those assets? I know that that too will be complex, because there will be a huge hangover from the existing system, and there will be problems when people try to accelerate relief over far too short a period. However, I think that all those problems can be addressed, and that we shall be able to stop increasing the complexity of the system.
I cannot vote for the amendment, because I think that it is merely an excuse for a debate. If we are to have a review, let us have a proper one.
Nigel Mills
If we want a competitive corporate tax system, the tax rate is key. However, we probably need to examine four things, which include the tax base, as the hon. Gentleman said, and the complexity, stability and predictability of the system. We are in danger of just ticking the first box; I am not sure we are ticking the tax-base box well with this approach, and we are adding extra complexity. Many regimes around the world do not have capital allowances but do let businesses take the depreciation that they see in their accounts. That is a far more attractive, simple and predictable system, because businesses would not think, “I might invest in this piece of equipment, but they might reduce this to 15% in three years’ time and my relief suddenly starts to look different.” As the hon. Gentleman was trying to say, this involves a combination of things. We need to get not only the rate right, but the base and the underlying system right; we will not get all the advantages from simply reducing the rate.
However, for most businesses the first headline comparison is about the overall tax rate, so that is the main thing to focus on. I am not going to vote against this rate reduction. Paying for the reduced rate partly by reduced capital allowances is the right way to go in this financial situation, but we need to go in the direction of simplifying our incredibly complex corporate tax system. We can all work out the statistics by saying, “When I started work 13 years ago, my tax legislation was so big and when I left a year ago it was much bigger, and I have not even got the VAT and inheritance tax book.” We can look at how many schedules on income—actual capital—we have and consider how many of them we actually need. The capital allowance regime is part of that problem, because it was written 50 or 100 years ago, when it actually worked. A lot of these things are out of date, so we must look to simplify things if we want to ask businesses to invest. I am not sure that they are going to worry about whether something is at 18% or 20%, but they do want tax relief for their investment over the useful life of their asset provided in a way that is simple for them to manage. I am not sure that we are anywhere near providing that at the moment.
A lot of my clients use the capital allowances regime to add flexibility to how they get tax relief in the years when they have profits and in the right entities in which they have profits. They will not entirely welcome my idea of simplifying this system and taking all that away from them. However, if we are to get a modern, competitive corporate tax system, it must be simple and easy to understand. It must also do what we want it to do: incentivise the investment that we desperately need to have a growing economy.