Clause 47 - Lifetime allowance charge: new standard lifetime allowance for the tax year 2014-15 and subsequent tax years

Finance Bill – in a Public Bill Committee am 12:45 pm ar 6 Mehefin 2013.

Danfonwch hysbysiad imi am ddadleuon fel hyn

Question proposed, That the clause stand part of the Bill.

Photo of Sir David Amess Sir David Amess Ceidwadwyr, Southend West

With this we will discuss the following:

That schedule 21 be the Twenty-first schedule to the Bill.

Photo of Chris Leslie Chris Leslie Shadow Minister (Treasury)

We are continuing our conversation about lifetime allowance charges. In the autumn statement, the Chancellor announced that by 2016-17—perhaps that is where the number comes from—the Treasury would accrue a number of savings because of the reduction in the standard lifetime allowance from £1.5 million to £1.25 million.

The tax charge on the lifetime allowance over the standard amount only occurs on the excess and, if the excess is paid as a lump sum, the charge is 55%. If it is paid as a pension payment the charge is 25%. Pensioners  who already have savings with more than the new lifetime allowance can apply for the protections that we debated on the previous clause.

As the measure is being implemented from the tax year beginning 2014, it would be useful to get some clarity from the Minister about how much the Treasury will save in financial years 2014-15 and 2015-16. I will double check in the Red Book in a moment, but I wonder whether he could share with the Committee the revenue implications of that. While he is at it, could he explain why a lifetime allowance reduction was not taken from April 2013?

Obviously, there is a delay in this provision; I wonder what the rationale is for that delay. If there were revenue issues and a particular sum of money involved then there could have been potential revenue for the Exchequer if the change had been made in 2013 as opposed to 2014. Could the Minister set out what the sum of money would have been in terms of yield to the Exchequer had that lifetime allowance decreased to £1.25 million from April 2013?

It is important that the Government should have a clear strategy that avoids confusion, unintended consequences and unexpected arrangements for people to make. I should be grateful if the Minister set out the Government’s strategy on this issue so that everyone is confident that they can plan effectively over the long term. Obviously, the Government have not budged much of the deficit, which has stuck pretty much at the same level over a three-year period. Deficit reduction is a thing of the past. They will be looking at revenue generation in a number of different ways and tweaking a number of pension arrangements.

It would be helpful for all concerned to get a sense of whether the Treasury is just making judgments on a month-by-month, year-by-year basis or whether it has an overall settled view about what the lifetime and annual allowance arrangements ought to be. One of the facets of pensions policy is the need for some level of permanence, stability and predictability, so that everyone is clear about the rules. There is a sense that some of them are changing.

I am not against settling at a level that is fairer for the taxpayer, and we would not necessarily object to some of the arrangements. A tighter lifetime allowance is perfectly reasonable. In fact, under clause 48, we will discuss the annual amounts involved. Again, however, it is strange that the Government decided to end the 20% limit on tax relief on pension contributions for people earning over £150,000 and put it back up to 45%, in particular when some of that revenue could have been used for more beneficial purposes.

Will the Minister set out how much the Treasury will save over those tax years and how much would have been saved in 2013-14? Will he give us an insight into the strategy and whether there is any prospect of stability in this field or are further reviews likely in future Budgets?

Photo of Sajid Javid Sajid Javid The Economic Secretary to the Treasury

Clause 47 and schedule 21, together with clause 48, make changes to ensure that the cost of pensions tax relief is fair, affordable and sustainable. The reduction in the lifetime and annual allowances is an integral part of the Government’s deficit reduction  plan and protects the public finances from the growing cost of relief by limiting the amount of pension relief going to the highest earners.

I will clarify the dates that the hon. Gentleman asked me about earlier. As he correctly mentioned, the change in lifetime allowance announced in the Budget takes effect from April 2014 onwards. If I understood him correctly, he also asked, “Why not April 2013?” The delay is deliberate to allow the protection regime to be clarified and also to give individuals affected some time to reorganise their tax affairs.

The hon. Gentleman also asked about the two protection regimes—the fixed and individual protection regimes—about which I will talk further, and about how much time the individuals have to apply for such protection. For fixed protection, they must apply by April 2014. For individual protection, the deadline is April 2017.

In 2011-12, tax relief for pension savings cost the Government some £35 billion in total, with two thirds of the relief going to higher-rate taxpayers. At the 2012 autumn statement, the Government announced that we would therefore reduce the lifetime allowance from £1.5 million to £1.25 million from the 2014-15 tax year. That reduction in the lifetime allowance, together with the annual allowance reduction, is expected to raise over £1 billion per annum in a steady state. The hon. Gentleman asked whether I had some numbers to provide more granular detail on the expected savings in the early years. I do not have those figures to hand, but I am happy to see what I can provide later in writing.

The Government also announced in the autumn statement that a fixed protection regime will be offered to individuals who think they may be affected by the change. The new fixed protection regime allows individuals to retain a lifetime allowance of £1.5 million when the allowance is reduced to £1.25 million. To keep fixed protection, however, individuals cannot actively accrue new pension benefits after 5 April 2014. The protection will prevent individuals from being subject to retrospective tax changes because of the reduction in lifetime allowance.

Following discussions with the pensions industry and other interested parties at Budget 2013, we announced that, in addition to fixed protection, an individual protection regime will also be offered. Individual protection will give people a lifetime allowance based on the value of their pension savings on 5 April 2014, up to an overall maximum of £1.5 million. Individual protection will allow individuals to continue to make pension savings after 5 April 2014. A consultation on the detail of the individual protection regime will be undertaken shortly.

The changes made by clause 47 will reduce the standard lifetime allowance for tax-privileged pension saving from £1.5 million to £1.25 million from 2014-15 onwards. The reduction in the lifetime allowance will affect only individuals with the largest pension pots. Currently, 98% of individuals approaching retirement have a pension pot worth less than £1.25 million. We estimate that about 30,000 individuals will have pension pots of between £1.25 million and £1.5 million in 2014-15, when the lifetime allowance is reduced.

As I mentioned, two types of transitional protection will be available: fixed protection and individual protection. The detail of the fixed protection regime is in schedule 21 to the Bill, which also includes a number of consequential amendments to the current pensions tax rules. They are  intended to ensure that the reduction to the lifetime allowance does not inadvertently disadvantage or provide an unintended advantage to certain individuals.

When the lifetime allowance was reduced to £1.5 million from April 2012, we offered a fixed protection regime. About 28,000 individuals applied for that, so fixed protection is familiar to the pensions industry and pensions advisers. The new fixed protection regime will therefore follow as closely as possible the existing fixed protection regime, minimising the burdens on industry.

Individuals with fixed protection will continue to benefit from a personalised lifetime allowance of £1.5 million, but there are restrictions on future savings. All estimated 30,000 individuals who have pension pots of between £1.25 million and £1.5 million will be able to benefit from fixed protection. Fixed protection will also be available for individuals who currently have pension savings of less than £1.25 million, but who think that their pension pot will grow to more than £1.25 million if they do not make any further savings to their pension scheme.

Photo of Chris Leslie Chris Leslie Shadow Minister (Treasury)

Will the Minister set out how many individuals will be affected by the change? He talked earlier about percentages of those who have pensions above a certain amount, but I want a specific idea of the number of people who will be affected by the change in the lifetime allowance.

Photo of Sajid Javid Sajid Javid The Economic Secretary to the Treasury

The best estimate that we have at this point is that about 30,000 individuals will have pension pots of between £1.25 million and £1.5 million in 2014-15 and will therefore see their lifetime allowance reduced. I do not believe that we have any more information. It is an estimate at this point, but I believe it to be the best estimate we can make, given the circumstances.

The detail of how to apply for fixed protection will be set out in regulations, which were published in draft for comment in December 2012. The regulations will give individuals until 5 April 2014 to apply to HMRC for fixed protection. We will shortly be consulting on the detail of the individual protection regime. The consultation will include draft legislation to give a clear indication of how we plan the protection to work.

In conclusion, restricting the level of lifetime allowance to £1.25 million will ensure that pensions tax relief is more affordable and sustainable. The new protection regimes offered will ensure that existing savers are protected from retrospective tax charges, in a way that is fair and that is understood by the pensions industry.

Question put and agreed to.

Clause 47accordingly ordered to stand part of the Bill.

Ordered, That further consideration be now adjourned. —(Brooks Newmark.)

Adjourned till this day at Two o’clock.