Pensions!
ALLISON PLAGER reviews the seven sittings of Standing Committee A covering pension simplification.
Pensions!
ALLISON PLAGER reviews the seven sittings of Standing Committee A covering pension simplification.
JUST IN CASE readers had forgotten why this year's Finance Bill is so long, the next few sittings of the standing committee will serve to remind them. No less than 132 clauses and seven Schedules are devoted to pension simplification, and it took just over seven sittings of the Standing Committee to debate them. Given that for most readers of Taxation the taxation of pension schemes is a peripheral part of their work, I do not intend to regale them in detail with the committee's ponderings; however, they do not deserve to be ignored entirely. Those who would like more detail are referred to the thirteenth to twentieth sittings of the standing committee, which are available from The Stationery Office, or online, http://www.parliament.the-stationery-office.co.uk/pa/cm200304/cmstand/a/cmfin.htm .
Definitions
The first discussions centred on definitions of terms, namely meaning of pension scheme, member and arrangement. Suffice to say that none of the Opposition's proposed amendments were accepted, with Ruth Kelly dismissing them variously as 'pedantic', 'flawed' and with the comment that she was confident that 'it is clear enough for people to understand how their pension arrangements should be treated'.
Clauses 140, 141 and 142 were ordered to stand part of the Bill.
Registration
Clause 143 deals with registration of pension schemes. Possibly the most important clarification made by Ruth Kelly in this respect was that electronic registration of pension schemes was not going to be mandatory. The Government recognised that while many would be happy to register electronically, 'there were concerns about the cost of transition to a fully electronic system'.
With regard to the Revenue granting registration, this was planned to be done on a 'process now, check later' basis. Ms Kelly said that the application form for registering a scheme was 'completely straightforward, and should be easy to check by the Revenue straight away'. Rejected forms would be noted to the administrator, who would have the opportunity of reapplying. The Revenue was expecting to reject 'only a small percentage of applications on the basis of incorrect information'. However, she said that the 'onus is on the person who made the application to get it right'.
Clauses 143 to 146 were accepted.
Other issues
The debate covered many areas of the pension simplification measures, and a few are summarised below.
The long-standing debate over whether to raise the maximum age for buying an annuity from 75 to 80 was pressed to a division, but failed. Ruth Kelly claimed that 'good financial advice' suggested that people should buy an annuity at around the age of 75, since this was 'the efficient way to secure oneself a decent income in retirement'. She added that 'given the amount of Exchequer support for pensions' that was what the money was expected to be used for, i.e. rather than passing the capital on to heirs.
The tax-free lump sum rule ( clause 156 ) also received some clarification. The Government has decided to increase the permitted lump sum as part of the 'wider objective under tax simplification proposals to merge occupational and personal pension régimes'.
Increasing the amount upwards meant that there would 'practically' be no losers. Ruth Kelly also acknowledged that the Government realised that the lump sum was 'very popular' and that this was not a 'silly point', as it encouraged people to save into a pension scheme.
Clause 162 'benefits' provided some interest. The clause deals with pension benefits in kind, and ensures that they are subject to tax. Ms Kelly explained that the intention was that 'tax-relieved funds are used to provide for an income in retirement'. The legislation was clear as to what authorised payments could be made from that fund, but unauthorised payments would be subject to tax. Clause 162 dealt with situations where benefits were provided to the member or his family. Under the new régime, a registered pension could invest in an asset, that could be used to provide a benefit to the member or his family. Whereas, under the old régime, a small scheme could not invest in works of art, while larger schemes could, the same criteria would apply to all schemes under the new rules.
With regard to residential property, Ms Kelly said that the rules would be relaxed to allow self-invested personal pensions and small self administered schemes to invest in such property. However:
- a tax charge would be 'levied on personal or commercial use of the property';
- if the house is rented out, all the rental income must be placed in the pension fund;
- pension funds will be allowed to borrow only up to 50 per cent of the scheme's assets to finance the purchase of a property;
- the property will be owned by the pension fund, so will need to be sold either to provide income in retirement, or to buy an annuity.
Clause 162 was accepted.
Contributions relief
Tax relief due to employers in respect of contributions paid to the pension scheme is covered in clause 185 . Ruth Kelly said that under the clause, tax relief would be allowed on employers' contributions where they were paid 'wholly and exclusively for the purpose of the business'. This included initial contributions to establish a scheme, which might normally be considered to be capital and not deductible. Transfers of assets or money's worth 'could lead to abuse and so would not be allowed, although clause 184 allowed the transfer of certain Revenue-approved shares to be treated as a member contribution.
She said that rather than having an automatic deduction, a 'wholly and exclusively' test was to be instigated for all employer contributions. This test has applied for 14 years to employers' contributions to personal pension schemes 'without causing any great difficulty', and an employer who contributed on equal basis for all employees 'need not worry about falling foul of the test'.
Clause 185 was ordered to stand part of the Bill.
Lump sum taxation
With regard to Schedule 31 'Taxation of benefits under registered pension schemes', Ruth Kelly confirmed that lump sums would not be taxed if they were charity death benefit lump sums, and that they would receive the same treatment as in cases of serious ill health and some other death benefit lump sums.
Ms Kelly confirmed that the tax charge on pension contributions refunded due to short service ( clause 194 ) would be 20 per cent on the first £10,800 of the lump sum, and 40 per cent on the rest. The scheme administrator had to pay the tax, which could be deducted from the lump sum payable to the employee. The rates were 'designed to recoup the tax relief' given on the contributions. As the contributions are paid over a short period, i.e. no more than two years, those over the £10,800 threshold are likely to have received higher rate tax relief. The limits had been set to 'recoup the tax' relief, and did not amount to a 'stealth tax' as claimed by George Osborne.
The clause was agreed.
Lifetime allowance
An entire sitting of the committee, and a few minutes of the next sitting were devoted to debating clause 207 'Individual's lifetime allowance and standard lifetime allowance'. In the event, the debate changed nothing, since no amendments were accepted. The debate was wide-ranging, but perhaps one statement by Rob Marris rings particularly true: 'the poor do not save for their retirement because they cannot afford to do so'. He had previously, with some perspicacity, said that tax relief directs those who can afford to save into a particular savings vehicle, but it does not encourage general saving for retirement.
Final word
The final clause on pension simplification, clause 270 , 'Commencement', was discussed briefly. The original intention had been for the simplified régime to start on 6 April 2005, but that has since changed to 6 April 2006. Howard Flight asked if the part relating to the not having to buy an annuity until age 75 could be introduced earlier. John Healey said that this would not be possible, the new régime would come into effect on 6 April 2006 'and not sooner'.
Thus ended the deliberations of the standing committee relating to the pension simplification clauses and schedules in the Finance Bill.
