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Finance (No. 2) Bill

I shall not go down that route. As was debated during consideration of the private Members’ Bills—the issue has been debated in depth— several factors should be borne in mind. I am trying to emphasise that an alternative to the current arrangement could give people a wider choice in retirement. The minimum retirement income should be enough to ensure that people are not a burden on the state. The outstanding issue from the Finance Act 2004 is the tax treatment of left-over funds. It is an inevitable consequence of the structure of alternatively secured pensions that there will be left-over funds, because the rules set a ceiling on the amount that can be withdrawn from the pension. It is therefore inevitable that, on death, the member will leave some left-over funds. That likelihood was mentioned in our deliberations on the Finance Bill in 2004, when the then Financial Secretary to the Treasury, the right hon. Member for Bolton, West (Ruth Kelly), said:"““We have made this concession because people hold significant, principled, religious objections to the pooling of mortality risk. We will keep the matter under review and check to see whether abuse is occurring. We stand ready to make any changes needed to preserve the integrity of the tax system.””—[Official Report, Standing Committee A, 8 June 2004; c. 485.]" Since that debate in 2004, a tax treatment has been introduced for the left-over funds in alternatively secured pensions that prevents them from being passed between generations tax-free and therefore achieves the goal set out in 2004 of preserving the integrity of the tax system. In new clause 7 and amendments Nos. 107 to 120, we are seeking to mirror that provision for the left-over funds in retirement income funds, so that they can be taxed in the same way as the left-over funds in an alternatively secured pension, and so that, when the funds pass to the spouse and dependents, inheritance tax would be paid. We had a discussion in Committee about the interaction between income tax and inheritance tax. For the purposes of this debate, although we accept the position that the Government outlined in Committee, we would point out that tax rules are now in place to tackle the transfer of wealth from generation to generation, and that those same rules could be applied to retirement income funds. The Government have now created the architecture to enable more people to opt out of compulsory annuitisation, through the introduction of alternatively secured pensions in the Finance Act 2004 and the inheritance tax regime in the Finance Bill. I do not wish to rehearse the arguments about why it is appropriate to end compulsory annuitisation, nor do I think that the Government will rush to accept the new clauses and amendments, but the fact that they have given way on the principle of compulsory annuitisation through the introduction of alternatively secured pensions creates a window of opportunity for them to think again. I know that, in the pensions White Paper, the Government rejected some of the ideas from the Turner commission on changes to the annuities market, but they will have to monitor the appetite of the market for alternatively secured pensions, following A-day and the introduction of the new inheritance tax regime. They will need to respond to the pressures from the market for an alternative to the annuitisation of pensions at the age of 75. For the benefit of those Members who did not participate in the Standing Committee, amendments Nos. 62 and 14 relate to the rules on the recycling of lump sums in clause 159. In Committee, I expressed concern that the clause could be applied broadly, as it seeks to capture circumstances in which people pay significantly higher pension premiums in the knowledge that they will receive a higher lump sum. That opportunity has been available for some time, but it is only since the simplification of pensions after A-day that this has become an issue, because of the relaxation of the contribution cap and the facility for pension scheme members to withdraw a lump sum without drawing a full pension. The Government’s principal concern was what the Economic Secretary referred to as ““turbo-charging””. The example that he used in Committee was of someone who withdrew a cash lump sum from their pension, reinvested it in another scheme, obtained 40 per cent. tax relief on that reinvestment, withdrew 25 per cent. of the amount invested as a lump sum, reinvested that 25 per cent. in another scheme, obtained a further batch of tax relief at 40 per cent., withdrew 25 per cent. of that amount—and so the cycle would continue as the contributions were recycled. Clause 159 would stop the abuse of that mechanism, but it could also capture a series of legitimate pre-retirement tax planning arrangements. However, to limit the scope of this rather brief clause, Her Majesty’s Revenue and Customs has produced a significant quantity of guidance notes—28 pages containing 21 different examples of how the rules apply—to clarify its remit. The rules are complex, and some industry experts have expressed their concern about that. The Institute of Chartered Accountants of England and Wales has said that"““the rule will apply only if ‘the member envisaged at the relevant time that that would be so’. This is a highly unusual and unclear phrase and is not used in the guidance, which refers to ‘pre-planned’. We think it should be redrafted to make it clear that at the time the lump sum was paid, it was the intention of the taxpayer to use all or part of the lump sum to fund additional contributions.””" I will come back to the use of the word ““envisaged”” later, so as to recapture the spirit of our debate in Committee. Rachel Vahey of Scottish Widows has said:"““Advisers and providers may both have a role to play. Advisers will need to make sure through factfinds that the contribution does not come from a tax-free cash sum. Providers cannot be expected to know where contributions come from. In practical terms, picking out exactly which income stream is the source for a pension contribution could be problematic for affluent clients phasing in their retirement. There is a real danger that the anti-avoidance rule to be inserted into Finance Bill 2006 to stop this practice will be overly onerous and, in the end, create more problems than it solves.””" She has also said that the rules are worrying as they seem to be very complicated—which is what had been feared—particularly as all the examples show how difficult it is to calculate whether contributions have increased significantly. She points out that, as it is up to the scheme administrator to apply the charge to the member if they own up to recycling tax-free cash, any charge that the administrator incurs may also be passed on to the individual, which could leave the member with a charge equivalent to about 70 per cent. of the tax-free lump sum. Rachel Vahey added:"““After putting all these rules in place, it will be very difficult to police. Providers will probably have to change application forms to ask about pre-planning as a part of recycling, and if someone does recycle after denying it on a form, can providers go back to HMRC and say it’s not our fault because we asked for a declaration, in order to avoid an administrator’s charge?””" Her conclusion about the Government was:"““The approach they’ve taken is using a sledgehammer to crack a nut.””" Iain Oliver, the head of pensions at Norwich Union, has said:"““HMRC’s approach is inconsistent with the aims of simplification. We urge them to fundamentally rethink their approach to prevent unnecessary complication to the retirement and financial advice approach””." He also said that recycling pension contributions—by taking a tax-free lump sum and reinvesting it to obtain tax relief and a further lump sum—could perhaps be prevented by changes to the self-assessment form or by ruling out its promotion in the Financial Services Authority’s code of business rules. He went on to say that HMRC’s latest guidance would mean additional paperwork for clients to read and a penalty charge of 55 per cent. on lump sums paid. John Lawson, the head of pensions policy at Standard Life, has said that the proposals will be unworkable because the reporting requirements will fall on the individual taxpayer, creating the strong possibility that they will make mistakes or overlook parts of the guidance. He said:"““It’s just incredible, and mind-numbingly complex. I don’t think people will be able to get to grips with it. I don’t think they can be serious. They’ve come up with probably their best fist of it, but there’s no way it’s workable.””" Lawson also asks how the Revenue will prove that people are pre-planning the recycling of tax-free cash, saying:"““In order for the rule to apply, it has to be pre-meditated, but how do you prove it—how are the Revenue going to read your mind? The only way is to assume guilt in every case, which is a bit harsh””." That is an understatement. 7 pm I am afraid that anyone seeking clarity on the interaction of those elements from the proceedings in the Committee will end up confused. The Economic Secretary waxed philosophical in Committee. In a Committee stage that had previously been characterised by arguments based on law and accountancy, that was the first debate that drew on the works of the American philosopher Donald Davidson, whose work ““Actions, Reasons and Causes”” was on the Economic Secretary’s reading list and clearly influenced the debate on the word ““envisaged””. During an exchange on what is now sub-paragraph (2)(b) of new schedule 3A, the Economic Secretary said"““Envisaging is a broader term; it might be an intention on behalf of someone else, rather than a personal intention. ‘Envisaging’ may mean opening up the possibility that someone else may use the provision—in this case, to recycle the lump sum on that date. If ‘envisaging’ were used, that case would be caught. The difference between ‘envisaged’ and ‘intended’ is subtle but essential. ‘Envisage’ will cover the concept of intention, as sought by the amendment, and will go a little wider, so as to ensure that we catch all necessary cases.””—[Official Report, Standing Committee A, 20 June 2006; c. 743.]" The Institute of Chartered Accountants has said of the word ““envisaged””:"““This is… highly unusual and unclear””." My goodness! That exchange, and those surrounding it, certainly demonstrated that. Before the debate, I took the opportunity to find out a bit more about Professor Davidson. He wrote copiously about natural semantics, something with which I suspect the Economic Secretary is familiar. Perhaps he has used natural semantics himself at various times in his professional career, both inside and outside the House.