Priti Patel
Main Page: Priti Patel (Conservative - Witham)Department Debates - View all Priti Patel's debates with the HM Treasury
(9 years, 8 months ago)
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It is a pleasure to serve under your chairmanship, Mr Sanders. I thank the hon. Member for Edinburgh North and Leith (Mark Lazarowicz) for raising this issue in a thoughtful and considered way. I also thank all others Members who have contributed to the debate. In addition to interventions, the hon. Members for Edmonton (Mr Love), for Strangford (Jim Shannon) and for Livingston (Graeme Morrice) made considered contributions.
It is fair to say that this is a serious and important issue. Members have rightfully raised their points and concerns on behalf of their constituents in a considered way. As the hon. Member for Kilmarnock and Loudoun (Cathy Jamieson) just said, these are serious concerns about people’s pensions. These individuals have done the right thing by saving and investing in their pensions. That is right and proper, and they have had the opportunity to do that through an employer’s scheme, which is to be commended. Not only the Government, but all Members are concerned when we hear about issues of this nature.
I start by putting the debate into context from a Treasury point of view. The subject reaches into the territory of the Department for Work and Pensions, and I will come on to that, but it would be helpful if I set out the facts of the case as they are known to the Treasury. Following the sale of BMI by Lufthansa, the BMI pension scheme was admitted to the Pension Protection Fund. Admittance to the PPF for a particular scheme is not a matter for Her Majesty’s Treasury, but for the PPF and the Pensions Regulator. Members will appreciate that I cannot comment on the details of that decision, but I will, as all Members here today have asked, follow up with the Department for Work and Pensions on that. I will also pick up on the point that the hon. Member for Edmonton made on the pensions cap. As he suggested, I will ask for a response on the points highlighted about the DWP, the cap and the Pensions Regulator to be sent to every Member who has contributed to today’s debate.
The PPF provides compensation to members of eligible defined benefit occupational pension schemes. The PPF provides two levels of compensation depending on a member’s circumstances at the time the scheme enters the fund assessment period. The first is for members who have reached their scheme’s normal pension age or are already in receipt of a survivor’s pension or a pension on the grounds of ill health. The second is for the majority of people below their scheme’s normal pension age. Those members are entitled to 90% of the compensation and are subject to the compensation cap, as has been outlined. The PPF rules and restrictions apply to all members, which means that they will not receive all the pension benefits they anticipated. However, while the PPF strives to award compensation fairly, compensation relating to pensionable service before April 1997 does not increase in line with inflation each year, so compensation may not equate to the full value members would have received had their scheme not been admitted to the PPF.
As has been discussed, to compensate BMI pension scheme members for the loss in expected benefits, Lufthansa offered to make an £84 million voluntary payment either as cash payments to the members or into another registered pension scheme on their behalf. The debate is about the tax treatment of that payment. Retirement benefits are subject to tax when they are received, so one would expect the £84 million payment to be taxed.
It may be helpful for me to set out how the tax treatment changes depending on how the payments are made. Where pension schemes can make cash payments to individuals, the tax legislation clearly sets out how those payments are taxed. Any one-off cash payment would be liable to income tax and national insurance contributions, as they are what are known as relevant benefits. It has been put that those payments cannot be subject to income tax and NICS because the members of the BMI scheme were not employed by Lufthansa. However, it is not because the payments are earnings that income tax would apply, but because they are deemed to be relevant benefits. Cash payments are subject to tax as relevant benefits when, for example, they are paid after retirement in connection with past service, as is the situation in the highlighted cases. Relevant benefits are taxable as employment income, and there does not need to be a direct link between the employer and the payee to establish relevant benefits. There is also no statutory requirement for the benefits to be financed by an employer of the beneficiaries. A scheme for the provision of relevant benefits to employees or former employees of an employer commercially linked to the one financing the benefits will be in the legislation for tax and national insurance contributions.
Where payments are made into a registered pension scheme on behalf of the individuals concerned, there will be a different tax treatment. Members would receive pensions tax relief on their share of the £84 million payment as well as the exemption from national insurance and income tax on the payment they would get with any contribution to a registered pension scheme.
However, the payment to a registered pension scheme could give rise to annual allowance or lifetime allowance charges. Let me explain that further. Pensions tax relief is one of the Government’s most expensive tax reliefs and the gross cost doubled from £17.5 billion in 2001-02 to £33 billion in 2010-11. The annual and lifetime allowance has been set to protect the public finances from that growing cost. However, the Government are still likely to forgo more than £36 billion in tax revenue this year and more than £39 billion in 2016-17.
The annual allowance is therefore designed to strike an appropriate balance between providing financial incentives to encourage and support saving for retirement and the fiscal risk to the Exchequer. Therefore, while there is no limit to the amount any individual may contribute to their pension scheme, there is a limit—the annual allowance—on the amount of tax relief those contributions can attract in any one year.
Tax relief is given on contributions up to £40,000 a year, but any contributions in excess of that limit will be subject to an annual allowance charge. To ease the impact of the annual allowance charge, the Government introduced a carry-forward facility, which allows individuals to make use of any unused annual allowances from the three previous years by offsetting them against excess savings. In many cases, that will result in there not being an annual allowance charge to pay.
As a result, the only people affected will be those whose pension savings over the past four tax years, including their share of the £84 million contribution, are worth more than £190,000 for 2014-15 or £180,000 for 2015-16. If an individual takes pension benefits valued at more than the lifetime allowance—currently set at £1.25 million—when they become entitled to those benefits, they will be liable for the lifetime allowance charge. The lifetime allowance charge is 25% if the excess is taken as a pension or 55% if it taken as a lump sum. As the allowance is set at those generous levels, that charge is likely to affect only a small number of people.
What estimate has the Treasury made of the number of people who are affected by the lifetime allowance charge and what income will the Exchequer receive as a result of collecting that charge?
I will come on to that and address other Members’ points as well once I have made some progress. Some individuals may have existing enhanced or fixed protection, which means that they can test their pensions against the lifetime allowance at the time at which those protections were granted. That is subject to no further contributions being made to their pension schemes. As payments from the £84 million will be relievable contributions, members who have existing enhanced or fixed protection would lose those rights if the contribution was made to a defined contribution scheme. Again, only a small number of people will be affected by that.
Individuals will have a choice about how they access their share of the £84 million paid by Lufthansa to a defined contribution pension scheme on their behalf. From April 2015, individuals will be able to access the funds as a lump sum or as a series of payments or they can choose to purchase an annuity or draw-down product, provided that they are aged 55 or older. Alternatively, they could choose to transfer to a different pension arrangement. Payments on pensions will be subject to the individual’s marginal rate of income tax and no NICs will be payable.
I will come on to many of the points addressed in the debate. The hon. Member for Kilmarnock and Loudoun mentioned the costs for those affected. Those will depend on the precise circumstances and how payments are made. Such payments made direct to a scheme will be taxable, but the contributions will receive tax relief up to the normal limits. We do not have an estimate of the total cost to the Treasury should tax charges not be applied, but, as I said, that is dependent on the circumstances of how the payments are made.
The scheme was compared in a number of contributions to the Government’s approach in the one-off payments made under the Equitable Life payment scheme. It is worth highlighting that that scheme was established back in 2011 in response to the parliamentary ombudsman report that identified areas of Government maladministration in respect to the regulation of Equitable Life. The Government accepted the then ombudsman’s report and, as a result, made the ex-gratia payment for the loss stemming from what was Government maladministration at the time. The circumstances surrounding the loss of pensions relief for members of the BMI scheme is not owing to the Government’s maladministration and, therefore, it is not comparable in that sense at all.
The hon. Member for Edinburgh North and Leith as well as other Members touched on HMRC and reviewing rules relating to the annual allowance and lifetime allowance. As my hon. Friend the Financial Secretary has set out, HMRC must apply tax legislation consistently and it does not have discretion to waive tax charges intended by Parliament. The legislation is clear in respect of that: all new contributions into defined contribution schemes are tested against the annual allowance and all benefits are tested against the lifetime allowance.
It is fair to say that this is a complicated matter that is not at all comparable to Equitable Life. The Government are familiar with the case, which has been raised by many Members in the debate today as well as in previous representations.
I accept that there is no direct parallel with Equitable Life except in the sense that the BMI pension fund members and others have also been the victims of a regulatory system that did not deliver what it ought to have done in some way. In recognition of that, they too deserve some action by Government. Tax treatment is one suggestion, but the House should be able to take forward other suggestions as well.
The hon. Gentleman makes a valid point that we have an issue with regards to amending legislation that is meant to apply to all pension savers. We are obviously sympathetic and it is clear that the situation is not satisfactory. I will commit to taking away all the considerations and points raised and I intend to raise them directly with the Department for Work and Pensions, because what has happened and the effect that that has had on people is unacceptable. I am unable to be any more specific than that, because I am looking at this matter from the perspective of tax implications and not the overall implications, which would be done by the Department for Work and Pensions.
Finally, I will address a point made by the hon. Members for Livingston, for Banff and Buchan (Dr Whiteford) and for Kilmarnock and Loudoun about the Pensions Regulator and the PPF. I assure the House that the Pensions Regulator has the power to take action when it feels that there is deliberate manipulation in the affairs of an employer who is effectively seeking to walk away from their pensions liabilities. That is a valid point and the Pensions Regulator has powers to deal with that. It would be wrong for any organisation to seek to do that and it is solely for the Pensions Regulator to address that.
It is clearly not right to seek to offload pension obligations for the wrong reasons. The debate has highlighted that where individuals have done the right thing by seeking to save for the future by investing in their pensions, it is proper that we have the right safeguards in place. As I have said to all Members today, I will look to discuss this matter with the Department for Work and Pensions to see how we can take it further.