Standard lifetime allowance from 2016-17

Finance Bill – in a Public Bill Committee am 12:30 pm ar 30 Mehefin 2016.

Danfonwch hysbysiad imi am ddadleuon fel hyn

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

With this it will be convenient to discuss that schedule 4 be the Fourth schedule to the Bill.

Photo of David Gauke David Gauke The Financial Secretary to the Treasury

Clause 19, together with schedule 4, reduces the lifetime allowance from £1.25 million to £1 million from April 2016. This change will restrict the benefits of pensions tax relief for the wealthiest pension savers, ensuring that the pensions tax system is fair, manageable and affordable.

Pensions tax relief is one of the Government’s most expensive reliefs. In 2013-14, the Government spent or forwent revenue of more than £34 billion on income tax relief for pensions. That has increased from £17.6 billion in 2001. About two thirds of pensions tax relief currently goes to higher and additional rate taxpayers. In the last Parliament, we took steps to control that cost, in order to ensure that pensions tax relief is appropriately targeted. This clause takes further significant steps to help us achieve that.

As I have said, the changes made by clause 19 will reduce the lifetime allowance from £1.25 million to £1 million. As I have also said, the lifetime allowance is the maximum amount of tax relief on pension savings that an individual can build up over a lifetime. Only 4% of individuals who are currently approaching retirement have a pension pot worth more than £1 million; reducing the allowance will make sure that the wealthiest pension savers do not receive a disproportionate benefit from the pensions tax system. However, it would be unfair for the lifetime allowance to be eroded by future inflation, so the clause also makes provision for the lifetime allowance to be uprated in line with the CPI from 2018, which will maintain fairness between those retiring this year and those retiring in the future.

Clause 19 also introduces two transitional protection schemes for those affected by the reduction of the lifetime allowance. These will protect individuals who have saved on the basis that the lifetime allowance would be at least £1.25 million, who have UK tax-relieved pension rights of more than £1 million, or who think that they will have rights of more than £1 million by the time they come to take their pension benefits. Two types of protection are available: fixed protection 2016 and individual protection 2016.

The details of the protection regimes are set out in schedule 4. Individuals applying for fixed protection 2016 will have their lifetime allowance protected at £1.25 million after 5 April 2016, regardless of the value of their pension savings on that date, which means that if their pension pot gains value, they will not be subject to the lifetime allowance charge unless the value is greater than £1.25 million. Individual protection 2016 is intended to help those who would not be able to receive their employer contribution as additional income if they stopped saving into their pension scheme. Individuals applying for individual protection 2016 will have a protected lifetime allowance equal to the amount of any pension savings they had on 5 April 2016, subject to an overall maximum of £1.25 million. Individuals will be able to apply for both individual and fixed protection 2016; when they hold both, fixed protection 2016 will take precedence. These protections are intended to ensure that the reduction of the lifetime allowance does not inadvertently advantage or disadvantage certain individuals.

In conclusion, the Government believe that this approach is a fair and balanced way to reduce the cost of pensions, tax-free; indeed, it is estimated that the measure will save almost £2 billion by the end of this Parliament. In addition, it limits the benefit that the wealthiest pension savers can receive, while maintaining fairness between people retiring now and people retiring in the future.

Photo of Rob Marris Rob Marris Shadow Minister (Treasury) 12:45, 30 Mehefin 2016

Oh, I do wish I could declare an interest in this clause.

We welcome the transitional protections—the fixed protection and the individual protection—and, indeed, the clause’s overall architecture. Schedule 4, though—not many of us are that technical about this stuff, but schedule 4 runs to 17 pages. Talk about complexity in the tax regime!

On the overall approach, I am delighted that the Government are moving in a direction that I urged on the Labour Government back in 2002, when the forgone revenue was £18 billion a year, from memory—it was £17.6 billion in 2001, as the Minister said—first because the pension tax regime is very regressive, and secondly because there was no evidence then that that tax relief encouraged people to save for pensions. Earlier this year I checked with the Library for an update on the situation, and it could find hardly any evidence that the forgone tax revenue, which is now £34 billion per year, encourages the very behaviour it is intended to encourage. It is probably the biggest single tax relief in the whole tax regime; it is regressive; and it does not do what it is intended to do. This pottiness continues, though clause 19 and schedule 4 make some welcome steps in the right direction.

I have a more minor point, connected to HMRC’s cuts in staff numbers—although those have increased a bit—and its unfortunate proposal to close a whole load of offices. The tax information and impact note published on 9 December 2015 estimated that the additional cost to HMRC of administering and monitoring the protection regimes would be £2.4 million for IT and—get this—£500,000 for staff resources over a five-year period. On average, that is £100,000 a year in extra staffing costs due to the protection regime.

Perhaps the Minister can assure me that I am misinterpreting the situation. If not, HMRC is living in a different world. As he pointed out, 4% of individuals might be caught by having a pension pot approaching or exceeding £1 million, and therefore might face the protection regime, whether fixed or individual. That 4% of pensioners is not just a whole lot of people, but people with around £1 million in their pension pot. They are likely to be some of the most educated and articulate pensioners, or prospective pensioners, and are certainly some of the most prosperous. I may be misinterpreting this, but does HMRC really think that an average of £100,000 a year in additional staffing costs will deal with the protection regime, the queries arising from it and so on? How will that 4% of pensioners or prospective pensioners who are likely to raise queries, quite properly, with HMRC be dealt with on £100,000 a year?

Photo of David Gauke David Gauke The Financial Secretary to the Treasury

This is an area where HMRC has some experience, from making changes to the lifetime allowance. It is therefore in a position to assess how many customer contacts it will receive and is well placed to assess the various demands likely to result from the transitional arrangements. It is also worth pointing out that HMRC is moving to digital processes, allowing the organisation to reduce numbers and making processes simpler and easier to use, so that individuals can self-serve. I argue that the assessment was made in good faith, based on previous experience.

Photo of Rob Marris Rob Marris Shadow Minister (Treasury)

I will enable the Minister to gather his thoughts. The figure that I have devolved upon—I appreciate that it is an average; £500,000 over five years is £100,000 a year—is, very roughly, three members of staff, depending on their seniority and so on. That is three members of staff dealing with, potentially, thousands of prospective pensioners of the sort who will, quite properly, get in contact. It does not seem enough. Am I missing something in the equation? Technology alone will not solve it.

Photo of David Gauke David Gauke The Financial Secretary to the Treasury

On the ability to cope with additional phone calls and so on, let us remember that in some cases these people will be well advised. The hon. Gentleman makes the point that, often, they will be the people best placed to understand the changes, and many will also be well placed to make use of new technology. On the demands likely to be placed on HMRC over the next few years, it is difficult to argue that they are likely to be particularly significant. To make a point that applies more widely than the transitional regime, this is similar to what we have done in the past and there is some experience of how it will operate, so I think that it is reasonable.

HMRC will keep the matter under review. If there is evidence that further resources are needed to deal with it, then of course resources will be redeployed in that area. With that reassurance, I hope that this measure will have the support of the Committee.

Question put and agreed to.

Clause 19 accordingly ordered to stand part of the Bill.

Schedule 4 agreed to.

Clause 20