Schedule 19

Finance Bill – in a Public Bill Committee am 10:30 am ar 5 Mehefin 2007.

Danfonwch hysbysiad imi am ddadleuon fel hyn

Alternatively secured pensions and transfer lump sum death benefit etc

Photo of Stephen Timms Stephen Timms The Chief Secretary to the Treasury

I beg to move amendment No. 134, in schedule 19, page 228, line 9, leave out from ‘arrangement’ to end of line 11.

Photo of Roger Gale Roger Gale Ceidwadwyr, North Thanet

With this it will be convenient to discuss Government amendment No. 135.

Photo of Stephen Timms Stephen Timms The Chief Secretary to the Treasury

I welcome you back to the Chair, Mr. Gale, refreshed after the break and raring to go, as I am sure we all are.

I am pleased to have the opportunity to speak to the two Government amendments and I shall say a few words about what we are doing with schedule 19. The amendments will make minor drafting changes. Amendment No. 134 clarifies the fact that there will be no further charge to inheritance tax on the death of a dependant where the left-over funds in an alternatively secured pension—ASP—were chargeable to inheritance tax on the death of a scheme member. AmendmentNo. 135 ensures that the changes to remove an option to transfer funds on death from an ASP fund will not affect any members with ASPs who died before 6 April 2007.

I shall briefly remind the Committee of the principles that we have set out in relation to pensions tax relief. The key point is that generous tax relief is provided to encourage and support pension saving that will produce  an income in retirement. Pensions tax relief is intended neither to support pre-retirement incomes, nor to support open-ended asset accumulation or bequests. Pension savings are necessarily less flexible than other savings—they are locked away until retirement—which is why it is right to provide favourable tax treatment for pensions savings.

In 2005-06, the tax incentives to encourage people to save for retirement totalled about £14 billion. The best way to secure an income in retirement is via a scheme pension or an annuity. At the time of the 2006 pre-Budget report, we published a paper on the annuities market that explained the underlying policy and the academic evidence base for that policy, and responded in detail to the views of the Pensions Commission on that area.

As we developed our proposals for the new pensions tax regime, the A-day regime, we received a number of representations from groups with principled, religious objections to the pooling of mortality risk in annuities. Therefore, in the December 2003 consultation document “Simplifying the taxation of pensions”, the Government set out our proposals for the ASP. That option and the rules that apply to the sums remaining on the death of member of an ASP were enacted in the Finance Act 2004. Our intentions in doing that were very clear, but it was apparent that some people wanted to use ASPs for uses other than providing a pension.

Some changes were therefore announced in the pre-Budget report in 2006. I will remind the Committee of what it said:

“In line with the principle that pensions tax relief is provided to produce an income in retirement, the Government will bring forward legislation to make changes to the rules governing Alternatively Secured Pensions (ASPs). This will introduce a new requirement to withdraw a minimum level of income each year from an ASP fund. The facility to transfer funds on death as a lump sum to pension funds of other members of the scheme will be removed from the authorised payments rules, with these payments attracting an unauthorised payments charge.”

Clause 68 and schedule 19 change the ASP rules in line with the announcements that we have made. I would be very happy to go through the detail of the proposals, but for now I simply commend the amendments and the schedule to the Committee.

Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

May I, too, welcome you back to the Chair, Mr. Gale? It is a remarkable testament to the lure of the Committee that my hon. Friend the Member for Rayleigh, now the shadow Minister for Europe, has come back to enjoy the proceedings for one last time. We look forward to the debut of my hon. Friend the Member for South-West Hertfordshire later this week, who has joined our Front-Bench team.

It seems like only a year ago that we last discussed the taxation of ASPs. I then debated with the Economic Secretary, and I had rather hoped for a re-run, but I understand that he is currently in Luxemburg at the ECOFIN meeting, so the Chief Secretary will be dealing with this issue. It is quite remarkable that it is only a year since we last debated these changes, and at that time the House and the Government had settled views on what was the appropriate rate of taxation for ASPs, yet here we are, a year later, with yet another U-turn on pensions policy, discussing a different way of taxing ASPs.

Given the nature of the Chief Secretary’s introduction, we are effectively having a stand part debate here. I will ask him to respond to some particular issues in detail later, but it is worth noting, by way of introduction, that the issue of compulsory annuitisation and the role that ASPs play in tackling it continues to create interest in this House and in the other place. Indeed, on Second Reading of the Pensions Bill just before the recess, Baroness Hollis, a former Minister at the Department for Work and Pensions, stated:

“As others have already said, given the growth of DC schemes we need a fresh look at the annuities-at-75 rule, which is increasingly absurd. After all, a man on median earnings, contracted in, after 40 years on 4 per cent. plus 4 per cent. contribution—a very modest scheme—will have a DC pot of £240,000, £100,000 more than necessary to float him off income-related benefits if he annuitised to that degree... So this is not—I repeat, not—a matter only for the rich any more, but for those on average earnings and a standard rate tax.”—[Official Report, House of Lords, 14 May 2007; Vol. 692, c. 39-40.]

I think that the noble Lady was right. In the past, the Government have criticised moves to end compulsory annuitisation on the back of the argument that it is there only to help the wealthy, but as she rightly said, the growth of defined contribution schemes and the move away from defined benefit schemes means that more and more people have an interest in compulsory annuitisation at 75, and it will be a growing issue. The Chief Secretary explained how the Government’s thinking on this issue has evolved over the last few months and rightly highlighted the fact that the genesis of this measure came from the theological concerns of the Plymouth Brethren, who objected to the pooling of mortality.

Interestingly, the Treasury considered, in the regulatory impact assessment, ending the scheme or restricting discrimination on the grounds of religion, but thankfully that idea was dismissed. In looking at how this product should be sold, at one stage, the Financial Services Authority considered, and issued guidance, that financial advisers should inquire about the religious beliefs of potential purchasers of ASPs. That indicates that the debate that took place last summer and in the autumn became rather overheated and rather too focused on the origin of the idea of why we should have ASPs, rather than on thinking about how best to put the policy into practice.

I could talk about those arguments at some length, but I suspect that this is probably not the occasion to do so. There may be an opportunity to rehearse those arguments at a later stage. I want to concentrate instead on the particular changes that are being made by schedule 19. I understand the reasons for the Chief Secretary tabling the amendments and I have no particular quibbles with them, but I want to focus on a number of issues.

The first issue is how the schedule introduces new rules on the minimum income that can be drawn down from a fund, as well as increasing the maximum draw-down. It introduces a minimum of 55 per cent. and raises the maximum from 70 to 90 per cent. Those are the Government Actuary’s Department rates, as set at the age of 75, but people who have ASPs get older, and there is a serious argument to be made for reviewing the rates that can be used so that the draw-down is based not on GAD rates at 75, but on the  ASP member’s actual age. As someone gets older, the opportunity to withdraw funds from their ASP will increase and my concern is that, by not allowing that flexibility to change or for people to draw down more later in life, the unutilised pot that is left on death will grow.

If the Government increased the rates used for the ages of 75, 85 or 95, that would give the ASP holder the opportunity to withdraw more of their income from the plan and to ensure that there was very little of it left at the time of death. The Government’s objective of using tax-relief savings to meet income in retirement would be achieved more fully than under their current proposals.

The other comment that has been made about the draw-down rules is that for unsecured pensions—the situation that arises before the age of 75—the maximum draw-down is not 90 but 120 per cent. of the GAD rate. There does appear to be a mismatch, or a discontinuity, between the rules that apply for unsecured pensions and those for ASPs. It would be helpful if the Chief Secretary addressed the reason for that inconsistency between the draw-down rules for ASPs and USPs, and also explained why there is not an uprating or revision of the maximum draw-down based on someone’s actual age, rather than the rates set at the age of 75.

The second point is about the exit charge on death. Effectively, the Bill introduces an 82 per cent. tax charge on death when the member dies and there are no financial dependants, or where the balance of the pot does not go to a charity. The 82 per cent. charge arises because there is both an inheritance tax charge of 40 per cent. and a charge of 55 per cent. on the unutilised costs. The 55 per cent. charge normally applies where the value of a pension fund exceeds the lifetime allowance. That appears to be quite a high charge and has certainly caused some comment among financial advisers as to why a 55 per cent. charge is applied in addition to the 40 per cent. charge.

I would understand it if the Chief Secretary said that, based on the Government’s principle that tax relief savings should not be used to fund benefits or to enable a pension pot to be passed from a person to members of their family, particularly where there are no financial dependants, it is important to recover all the tax relief gained or obtained by any pension fund member. I could accept that—it would be appropriate to try to claw back that tax relief. I understand that that tax relief is clawed back at a rate of about 55 per cent. That goes back to the situation in which the pension fund value exceeds the lifetime allowance.

I would be grateful if the Chief Secretary advised the Committee at what rate the Government will recover the tax relief given on pension fund savings. That is important when assessing what the right level of the tax charge on death should be. There is, however, another inconsistency. I referred earlier to USPs. In those, different rules apply on the death of a member. If a USP member dies without drawing any pension benefits, his pension pot is transferred to his nominated beneficiaries free of inheritance tax. If he had started to draw benefits, a 35 per cent. charge would be levied on that pot.

Legislation intended to simplify pensions back in 2004 is now creating different tax charges depending on when someone dies. Somebody who died aged 74 years 364 days without having drawn their pension could pass their pension pot on free of tax. If, however, they died a couple of days later, or even some minutes or hours later, an 82 per cent. charge could be levied on their pension pot. That does not strike me as a consistent set of regulations to cover what is a difficult area.

I would also like to ask what the Government believe the impact of the 82 per cent. charge will be. The regulatory impact assessment is silent about the additional revenue that the measure will produce, or what impact it will have in saving or protecting tax revenues. Given the wide interest in ASPs, it is important that the Government are more transparent about what they consider to be the revenue implications of introducing the 82 per cent. charge, and what those implications would be if that charge were not introduced and the rate agreed in last year’s Finance Act continued to hold. It would be useful if the Chief Secretary said what modelling the Treasury has done to assess what would have happened if those changes, particularly on the exit charge, had not taken place.

Finally, I would like to touch on three other matters of concern that have been raised with me. The first is in paragraph 2 of the schedule. The Finance Act 2004 introduced ASPs and led to simplification of the pension tax system. It also allowed for annuity payment scheme pension payments and payments from ASPs to be guaranteed for up to 10 years. Therefore, if a member died within 10 years, the payments would continue. Paragraph 2 withdraws that guarantee for ASPs, although it remains in place for annuities and scheme pensions. I would be grateful if the Chief Secretary explained why that change was made only for ASPs.

In paragraph 12, there is a further change that has raised some concerns. When a member of a small self-administered scheme, or SSAS, dies, the funds that he has built up are distributed to other members as an increase in their rights. That reduces the cost of the benefits to the remaining members and to the employer, in the same way that in a large defined-benefit scheme the cost to members is reduced by any savings coming from deceased members. The SSASs are important for many small businesses, and there is a concern that the changes set out in paragraph 12 of schedule 19 will increase the cost to small and medium-sized enterprises by levying a 55 per cent. charge on reallocations within SSASs. Will the Chief Secretary confirm whether SSASs are caught by the changes outlined in paragraph 12?

On paragraph 20, in cases where there is an unutilised pot at the time of death, that ASP pot is top-sliced in the IHT calculation. In the pre-Budget report, however, the nil rate band was to be apportioned between the ASP and the rest of the estate. I would be grateful to the Chief Secretary if he could explain why that change has taken place. Will he also confirm that, where the rest of the estate does not exhaust the nil rate band, the unutilised amount will be offset against ASPs, thus reducing the IHT bill?

The changes in schedule 19 are quite difficult and they will start to have two effects. As the Government intend, they make life difficult for those who want to exercise greater control over their pensions by increasing the exit charge on death and restricting the draw-down of funds so that there will always be a significant pot left on which the 82 per cent. effective rate can be charged. The changes also create a degree of administrative complexity, for example—I have already touched on this—there are particular rules about the circumstances in which pension pots are passed on to dependants, what happens when that dependant dies and what rate of inheritance tax is applied to those funds. We need to go back to the inheritance tax calculation of the original ASP member. Changes such as those are quite complicated and hard for people to understand. There is a niggling doubt at the back of my mind that they are meant to discourage, and make life difficult for, those who want to exercise control over the use of their pension funds in retirement.

The reforms were not properly thought through in the first place. This is the third significant U-turn on the pensions simplification announced in 2001, and the Secretary of State for Communities and Local Government must be wondering why on earth her reforms are being unpicked, almost on an annualbasis. There appears to be a continual retrenchment away from the spirit of simplification in the Finance Act 2004 towards a more complicated and difficult system. It is remarkable for a Government who have embraced choice on schools, health care and hospitals not to embrace choice on the release of pension funds in retirement. Something is not quite right in the way in which the Government are approaching the issue.

To conclude, I go back to the comments made by Baroness Hollis in the pensions debate in the other place. I suspect that she was right, considering how the rules have evolved and become more complicated and the Government’s dogmatic opposition to an end to compulsory annuitisation, when she said that

“given the growth of DC schemes we need a fresh look at the annuities-at-75 rule, which is increasingly absurd.”—[Official Report, House of Lords, 14 May 2007; Vol. 692, c. 40.]

The complexity that the Bill introduces indicatesthat the Government’s opposition to compulsory annuitisation is introducing increasingly absurd rules.

Photo of Roger Gale Roger Gale Ceidwadwyr, North Thanet 10:45, 5 Mehefin 2007

It will not have escaped the Committee’s notice that those on the two Front Benches have determined that this shall be a debate upon the schedule being agreed to, as well as the amendment. I am perfectly content with that, as long as hon. Members understand that they cannot have the same debate twice.

Photo of Brooks Newmark Brooks Newmark Ceidwadwyr, Braintree

I, too, welcome you back after the break, Mr. Gale.

My hon. Friend the Member for Fareham has conducted his usual forensic analysis and posed a number of searching questions. I have just three points to add. First, I believe that the Government are in danger of losing touch with the principle behind the rationalisation of the pension system that came into effect last year. The guiding principle of the pension tax simplification reforms was supposedly that, where  there was a conflict between simplicity and unfairness, simplicity would prevail. I am not sure that that is a desirable maxim for legislation because the law tends to think that fairness should prevail over rigidity, but having advanced it, the Government ought to have tried to adhere to it for longer than simply one year.

The complicated new provisions for taxing residual ASP funds after a death are neither simple nor clear. However, I am sure that the increased flexibility offered to pensioners by allowing them to make use of the alternative secured pensions regime is desirable. My concern is that the system was developed in response to a specific inequity caused by religious belief, and that Ministers have clung to that rationale despite the problems that have resulted from it. It is strange peg on which to hang wide-scale pension reform.

I do not doubt the seriousness of the problem experienced by the Christian Brethren’s repudiation of pooled mortality risk. However, the Christian Brethren should perhaps have been mere beneficiaries of the introduction of alternative secured pensions, not the cause of them. An article from December last year in Pensions World—I am sure that the Chief Secretary subscribes to it—states quite rightly:

“Religion should not be a tax avoidance issue.”

However, it should not be a cause for unnecessary complication either. The same article cites a census estimate that there are 738 members of the Christian Brethren. This seems to be a significant understatement, because when the issue was debated in 2004—I see the Chief Secretary looking at me quizzically—the figure cited was close to 14,000. Even so, for perspective, some 942 of my constituents described their religion as “Jedi” in the last census.

I am not suggesting that the Christian Brethren should lose the benefit of alternatively secured pensions, but rather that ASPs should, from their institution, have been seen as possessing wider relevance than to the Christian Brethren. At least by acknowledging that there was a wider ideological issue in play here, the Government could have avoided the introduction of a new scheme and the subsequent familiar clampdown.

My hon. Friend the Member for Tatton (Mr. Osborne) tried valiantly in 2004 to engage the then Financial Secretary, the right hon. Member for Bolton, West (Ruth Kelly) in such an ideological debate by suggesting that ASPs should be seen in the wider context of the trickle-down of wealth from one generation to another. In a colourful debate, he quoted from both Corinthians and Timothy, but sadly the Book of Ruth was a little less forthcoming in the response.

My hon. Friend eventually dredged up an actuarial relic in the form of a tontine, to try to get to grips with some of the consequences of ASPs and how trickle-down of residual lump sums might work in practice. Tontines, as I have found, allow funds contributed by participating scheme members to devolve to the last man or woman standing. They certainly captured the imagination of the hon. Member for Wolverhampton, South-West, who correctly observed their crucial importance to Victorian and Edwardian murder mysteries, due to the unfortunate habit of participants bumping each other off in order to claim the funds. If  the ministerial pension scheme were run on that basis, there would perhaps be fewer candidates for the Labour deputy leadership.

Photo of Brooks Newmark Brooks Newmark Ceidwadwyr, Braintree

But I did.

My point is that the Government tried hard in 2004 to avoid engaging with the issue of the inevitable trickle-down of wealth from ASPs. About as close as we got was the then Financial Secretary’s admission that

“if we find that people intend to use the alternatively secured pensions to bequeath any unused funds to their dependants, we will of course review the provisions, and we could consider ways to tighten up the proposals to make that a very unattractive option.”—[Official Report, 7 July 2004; Vol. 423, c. 919.]

But the failure to deal with the issue head-on in 2004 is the reason for the draconian measures in this year’s Bill.

There have been more reverse gears used in the Chancellor’s treatment of pensions than are commonly associated with second world war Italian tanks. [Interruption.] Not Italian; second world war. I love the Italians. This heavy-handed crack-down on ASP lump sum transfers on death is just the latest example of what I have just described.

I would be heartened if the Government gave up on the justification of “principled religious objection” and looked again at the wider issue of allowing pension funds to be preserved and transferred. If the provision of tax relief on pension contributions is to encourage healthy provision in old age, it should follow that lump sum transfers should be preserved for that purpose, rather than being wiped out by punitive taxation. For example, allowing lump sum transfers to non-dependent children, which would then count towards their own pension’s lifetime allowance, would encourage independence from means-tested support and would still achieve value in return for the income tax that the Government have forgone.

My second point also concerns inevitability. It was inevitable that there would be plenty of takers using ASPs for non-religious reasons and it was impracticable that any test of faith should be applied to them, which the Government have at least admitted. There was a chorus of warnings in 2004 and, rightly, a chorus of “I told you so” now. However, it does not take too much Sibylline talent to have predicted the use of ASPs to pass on wealth, so I would like to ask the Chief Secretary to provide the Treasury’s original prediction of ASP uptake and what the uptake has in fact been? I am sure that those figures are available in the old regulatory impact assessment, but if he has them to hand, I would be grateful if he could share them.

My final point concerns the change to the maximum draw-down from an ASP under paragraph 2 of schedule 19. I believe that my hon. Friend the Member for Fareham has already asked why the figure should now be set at 90 per cent. as opposed to a higher figure and, throughout our debate, he has spoken persuasively about the need for consistency. However, I would like to probe  the Chief Secretary further as to why the magic number for draw-down was 70 per cent. in 2004, but can be raised to 90 per cent. and no higher in 2007.

I presume that the 70 per cent. figure was arrived at on the basis of an analysis of the risk that some ASP holders would run out of capital. Indeed, that appears to be the case. In 2004, the then Financial Secretary said that, with maximum draw-down set at 70 per cent., only one in 20 people could expect their income from an ASP to fall to a third of its initial value; on the contrary, she said, if people were allowed a draw-down equivalent to 100 per cent. of the maximum annuity, 30 per cent. of people would be placed in a similar situation. I would therefore first like to ask the Chief Secretary whether he believes that these relative risks are still accurate, and secondly what has changed to justify the increased draw-down and the consequently increased risk? Were the Government wrong then and if so, why is the 90 per cent. limit correct now?

Photo of Stephen Timms Stephen Timms The Chief Secretary to the Treasury 11:00, 5 Mehefin 2007

Perhaps I should begin by expressing congratulations—I am sure I do so on behalf of the whole Committee—to the hon. Member for Rayleigh on his promotion to shadow Minister for Europe. I think that he has already got a little bit of business from the debate that we have just had. Nevertheless, we are delighted that he is with us and we look forward to hearing from him during the course of the morning.

To respond to the hon. Member for Fareham, let me give a little more detail about what the schedule does. We indicated in the pre-Budget report that we would require a member of an ASP to be paid a pension of at least 65 per cent. of a comparable annuity for a 75-year-old. We subsequently received a number of representations about the level of minimum income, and that led to the announcement in the Budget that we would reduce that figure to 55 per cent. This is not an exact science—it is a matter of finding a balance—but we concluded that that was the right level in order to reduce the danger of exhausting funds prematurely.

Where the minimum income is not paid, there will be a charge on the scheme administrator on the difference between the minimum income requirement and the amount of pension paid out in the year. The maximum withdrawal permitted from an ASP fund will be increased to 90 per cent. of a comparable annuity of a 75-year-old. That figure was also mentioned by the hon. Member for Fareham. The maximum withdrawal ensures that the ASP fund is not depleted too quickly and will continue to provide a pension for the remainder of the member’s life. That is an important consideration, and raising it to 90 per cent. provides a range within which the member can choose to draw an income to suit his circumstances.

Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

Perhaps I am pre-empting remarks that the Chief Secretary is about to make, but could he explain why 90 per cent. is appropriate for ASPs but 120 per cent. is appropriate for USPs?

Photo of Stephen Timms Stephen Timms The Chief Secretary to the Treasury

I think that the hon. Gentleman is asking about the arrangements for draw-down prior to the age of 75, when there is, as he knows—he has already commented on it—a compulsory annuitisation requirement. The arrangements set out here are those  that apply in that post-compulsory annuitisation period, in which an alternative route is now available. The considerations there are different from those that apply prior to the age of compulsory annuitisation. That is the reason for the difference in those numbers.

To deter people from using pension funds as a tax-privileged way of accumulating capital for bequests, an unauthorised payments charge will be imposed on any ASP fund that is transferred to the pension pots of other members when an individual dies. That will not prevent members from providing pensions for their survivors. To pick up a point that was made by the hon. Member for Braintree, remaining funds may be used for a dependant’s pension or paid to charity without attracting an unauthorised payments charge.

Alongside those changes, the clause and the schedule also introduce necessary consequential changes to the inheritance tax rules, mainly to address the interaction between inheritance tax and the unauthorised payments charge where both arise on the same funds. In all cases, the inheritance tax nil rate band will be set in priority against the deceased person’s estate excluding the ASP funds. That will be advantageous for the beneficiaries of the estate in that it will speed up the process for tax-paying estates and it will allow the inheritance tax position to be settled on the ASP funds independently of the remainder of the estate.

Should both unauthorised payment and inheritance tax charges arise on the same funds, the chronological order in which the charges arise will dictate how each is determined. For example, where inheritance tax is due first, the inheritance tax liability will be calculated by reference to the gross value of the ASP fund. In recognition of the fact that the ASP funds will be subject to an unauthorised payment charge in due course, any inheritance tax nil rate band that remains available to be set against them when inheritance tax is due will be grossed up by a formula to prevent double taxation. The subsequent unauthorised payment charge will then be calculated by reference to the value of the funds net of inheritance tax. In all cases, Her Majesty’s Revenue and Customs will calculate the inheritance tax due, if any, on the left-over ASP funds and send the bill to the scheme administrator.

We have consistently made it clear that we do not wish to allow pensions tax relief to be used for purposes other than to secure an income in retirement. Some commentators have expressed the concern that if ASP funds are paid in a manner not authorised bythe pension tax rules, the combined inheritance tax on unauthorised payments charges can in some circumstances reach as much as 82 per cent., the figure named by the hon. Member for Fareham.

The two charges exist for different purposes. The unauthorised payments charge recoups those generous tax reliefs if pension savings have not been used as intended to secure a retirement income, and inheritance tax is a separate charge on wealth being passed on upon death, regardless of the form of that wealth. Together, those measures reinforce the message that the purpose of pensions tax relief is to support saving for an income in retirement and not to help accumulate capital for bequests.

However, those who have principled religious objections to annuitisation maintain the opportunity to benefit from tax relief. I am disappointed that the hon.  Member for Braintree should take so lightly the religious concerns that gave rise to the change. We are not talking about something on a par with “Star Wars”, despite his rather discourteous reference. I reassure the Committee about the views of those who have religious concerns about the risk of pooled annuitisation. We have discussed the matter with them, and they wrote to my hon. Friend the Economic Secretary, after the announcements in the pre-Budget report, saying:

“We are totally satisfied with the revised provisions made by the Government and are sure they will secure the desired result.”

In other words, the changes should not undermine our intentions when we introduced the alternatively secured pension. The hon. Gentleman cited my right hon. Friend, the then the Financial Secretary, who made it clear at the time that if we found that the arrangements were being used in ways that we did not intend, we would introduce further changes. That is precisely what we have done.

The hon. Member for Fareham queried the need for compulsory annuitisation at the age of 75, and he referred to debates in the other place. I say again that we have been consistently clear about the fact that the generous tax relief given for pension savings is to provide for an income in retirement. If one attempted to set a threshold beyond which people could use the money as they wished, and if the threshold used to obtain an annuity was set high enough for one to be sure that it would provide an income in retirement above the means-tested level throughout the remainder of the person’s life, however long they lived, only a very small proportion of annuity pots would be large enough. At most, only the biggest 5 per cent. of pension funds would be eligible to withdraw the remainder of their fund as a lump sum if that approach were taken. In reality, that is not viable.

We set the maximum ASP rate by reference to annuity rate for a 75-year-old. Insurance companies know pretty well how long on average a typical pool of people will live and, by pooling that risk at the aggregate rate, they can pay a secure income to individuals for the remainder of their lives, no matter how long that may be. However, alternatively secured pensions do not have the benefit of such mortality pooling, so limits need to be imposed in order to ensure that the fund continues to provide a level of income for members, even if they live much longer than expected. To ensure that, as I have said, the limit imposed by the rules is a maximum withdrawal rate of 90 per cent.

A number of positive remarks have been made about the changes that we are making by people in the pensions industry. Madeline Forrester, the head of UK distribution of Threadneedle Investments said:

“We are delighted the Government has finally brought more clarity to what was an area of some doubt. We think this makes the ASP a viable alternative to an annuity.”

Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

Does the Chief Secretary not recognise that the considerable doubt in the pension industry was caused by the statements made by the Economic Secretary over the summer? A matter of weeks after last year’s Finance Act received Royal Assent, his comments about further changes created uncertainty in the market. He also talked again about the reasons why ASPs were introduced, saying that they should only be  taken up by people who had religious objections. The position was clear when the 2006 Act received Royal Assent, but it became unclear after the Economic Secretary made his statements.

Photo of Stephen Timms Stephen Timms The Chief Secretary to the Treasury 11:15, 5 Mehefin 2007

I do not agree. I quote to the hon. Gentleman the view of Citywire on 22 August:

“Providers and advisers are ignoring ministerial warnings that alternatively secured pensions... are only for those with religious objections to annuities.”

The intention was very clear. We have safeguarded that by the changes we are making.

Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

The Chief Secretary needs to reflect on the fact that nothing in the legislation would prevent people other than Christians or Plymouth Brethrens from using this. Although the Economic Secretary said that it was only meant to be for people of a particular religious view—I respect those views and I understand their objections—there is nothing in law to prevent other people from using ASPs. It is another example of where the Government have created confusion where non existed before.

Photo of Stephen Timms Stephen Timms The Chief Secretary to the Treasury

As long as people are using ASPs to draw an income for their retirement, there will be no difficulty. The schedule contains safeguards that ensure that the funds will be used in that way, thereby maintaining the benefits that ASPs introduced. It was made quite clear when we discussed the issue on Report last year that we would take steps to ensure that ASP rules could not be used other than as intended, to provide a pension in retirement. We are maintaining that with this Finance Bill.

Let me pick up a couple of the other points made, particularly by the hon. Gentleman. The level of the reliefs within a pension fund depend on the particular circumstances of the individual involved. We give very generous tax reliefs for pension savings, and the unauthorised payment charge at 70 per cent. ensures that all those reliefs are recovered when unauthorised payments are made. That is the appropriate approach.

The hon. Gentleman expressed concern about the wider impact on small businesses. Paragraph 12 of the schedule applies to all schemes that provide ASPs, but we have been clear from the outset that ASPs were not intended to be a product taken up in the mainstream. The changes to the rules strike a balance between the needs of those with principled objections to annuitisation and the needs of the wider public being provided with tax relief.

I think that I have answered the point about unsecured pensions. The hon. Gentleman also asked why the changes to set the inheritance tax middle-rate band against an estate have been made and whether I can confirm that the unused nil-rate band could be set against the ASP. The nil-rate band change to top-slicing the ASP ensured that it is set in priority against other assets so that non-ASP property inherited will benefit from the full nil-rate band and bear less inheritance tax. The inheritance tax will fall instead on the ASP. That change also met requests made to us by the pensions industry. I can confirm that the unused nil-rate band will be set against the ASP.

Both the hon. Gentleman and the hon. Member for Braintree said that we were undermining pension simplification by making these changes. I do not agree. The pension simplification changes have proved to be extremely successful and the initial optimism around them has certainly been maintained. The hon. Member for Braintree read out what my right hon. Friend the Secretary of State for Communities and Local Government said when the ASP was being introduced. As that quotation showed, we have made it clear that ASPs would be reviewed if used beyond their original intentions. That commitment is being fulfilled in this schedule.

Amendment agreed to.

Amendment made: No. 135, in schedule 19, page 228, line 43, leave out from ‘paid’ to end of line 2 onpage 229 and insert

‘in respect of members of schemes whose deaths occur on or after 6th April 2007.’.—[Mr. Timms.]

Schedule 19, as amended, agreed to.