Finance Bill

Public Bill Committee, 8 June 2004.

Standing Committee A

Finance Bill

Clause 139 - Overview of Part 4

Ruth Kelly (Labour, Bolton West)

I am delighted to see you in the Chair, Sir John. Not only do I look forward to your expert guidance, but I know how much of an interest you take in this set of clauses. I am sure that, in your wisdom, you will keep us on a safe course.

I will start by introducing the pension simplification provisions. At present, there are eight different sets of rules for pension schemes. The system is complex, expensive to administer and confusing for members, employers and providers. We are sweeping away the existing rules and regulations and replacing them with a single regime for all tax-privileged pension saving. That represents a hugely positive step for those saving or looking to save towards their retirement.

Simplification will introduce greater individual choice and flexibility. For the first time, everyone will have the same opportunity to make tax-relieved pension savings over a lifetime. Our proposals will create a transparent, consistent and flexible system that is readily understood. That will make it easier for people to concentrate on things that matter, such as when and how much to save for their retirement, rather than on trying to understand anomalies between the different tax regimes.

Simplification will reduce the administrative burdens and regulatory cost for pension schemes, their members, operators and sponsors, and will create opportunities for people to save more towards a pension and a retirement lump sum. The new rules will allow everyone to pay what they can afford when they can afford it.

The pension simplification provisions represent the outcome of two formal consultations and extensive informal consultation. At every stage, we have had regard to the views of those who will be affected, whether individuals, employers or pension providers.

The new regime will consist of two key controls: a lifetime allowance and an annual allowance for the amount of tax-relieved savings that can be made. It is important to recognise that the allowances will not prevent people from saving more in registered schemes

if they wish to. The lifetime allowance will initially be set at £1.5 million and will rise to £1.8 million by 2010. The annual allowance will initially be set at £215,000 and will increase to £255,000 by 2010. Those allowances represent very generous levels of tax-relieved savings. They are far in excess of what 99 per cent. of the population currently save or are ever likely to. However, they limit the amount of tax relief that very high earners can obtain, which is fair.

When someone saves more than the lifetime or annual allowance, they will have to pay a charge. There will be a lifetime allowance charge of 25 per cent. on pension funds in excess of the lifetime allowance. The charge will be 55 per cent. if the benefits are taken as a lump sum. There will be an annual allowance charge of 40 per cent. on funds in excess of the annual allowance. Neither of those charges is intended to be punitive. They are simply intended to remove the benefits of the tax advantage given to savings in registered pension schemes.

The two allowances replace a multitude of controls and restrictions in the existing regime. Currently, there are controls on contributions by members, the rate of funding, the level of benefits that can be paid and the amounts of transfers. Different regimes apply depending on the type of pension and when the member joins the scheme. All those restrictions will go, as will the retained benefits rules and all the other rules that arise from the discretionary approval of schemes by the Board of Inland Revenue.

We are replacing regimes that restrict benefits and contributions quite tightly with a regime that restricts tax relief and nothing else. That is a fundamental change and gives schemes much greater freedom when it comes to how they design pensions.

There is a range of other positive measures, including protection of pre-A-day rights from the lifetime allowance charge, the opportunity for schemes to offer all their members a tax-free lump sum of up to 25 per cent.—in most cases, that is far more generous than the current rules—and new flexible retirement rules, which will mean that, for the first time, members of occupational pension schemes will be able to draw retirement benefits while continuing to work for the same employer.

We are also simplifying the administration associated with securing tax privileges for pension funds. There will be new, simpler processes for scheme registration and reporting. The new rules will reduce the regulatory burden on pension administrators and encourage innovation in pension design. The provision for flexible retirement will help to promote active ageing, which will allow the economy to benefit from the skills and experience of older workers, while encouraging them to save more to boost their retirement.

The provisions represent a radical and fundamental simplification of the tax regime on pensions. The responses that we have received to the proposals have been generally positive. I trust the Committee will welcome them with similar enthusiasm.

George Osborne (Conservative, Tatton)

May I say what a pleasure it is to take part in the proceedings? Although I have been a member of the Committee, I have not been a particularly visible member in recent weeks. I have a very good excuse: I have been serving on the Committee considering the Pensions Bill. It is a particular pleasure to be serving under your chairmanship, Sir John, because I know that you are a great expert on pensions. I am delighted that you are in the Chair rather than behind me, because you would intervene on me to point out where I had got things wrong and correct my mistakes.

It is a delight to shadow the Financial Secretary. Under the Leader of the Opposition's new arrangements for shadowing, I seem to have ended up shadowing about five Ministers, but the Financial Secretary is undoubtedly my favourite. We had a very good time on the Child Trust Funds Bill with the hon. Member for Yeovil (Mr. Laws) earlier this year. I thought that she conducted herself with great moderation, was very sensible and listened to my arguments. She even accepted one or two of my amendments, which is all one can hope for in opposition. I am sure that I speak for everyone when I say that there is nowhere we would rather be today than in this Committee.

As the Financial Secretary said, we are dealing with the largest single item in the Bill, the pension simplification process. I shall explain why I call it not a simplification process, but a new tax regime for pensions. We generally support what the Government are doing, and we do not object in principle to the overall package. By and large, we think that they have put together something that the industry welcomes. They have consulted. In a number of key areas, they have changed their mind and listened to the industry. Therefore, we shall be giving the provisions, in their broadest sense, our support.

I do not refer to the process as one of simplification for a couple of reasons. First, it is difficult to describe 151 pages of primary legislation, 100 pages of secondary legislation and 350 pages of guidance notes as simplification. Some people in the industry have been quite critical of that. The National Association of Pension Funds has said:

''The quality of drafting of the Bill is also disappointing. It is not transparent, lacks clarity and is not always consistent, which makes for difficult reading. Considering the scope of the new provisions . . . and the amount of effort schemes would need to go through to implement the new regime, one would have expected that, as a minimum, the rules would be clear, consistent and easy to read.''

Secondly, it is not a question of sweeping away eight different pensions tax regimes and replacing them with just one. The new process will create about six regimes. That is certainly the view of PricewaterhouseCoopers, which says:

''Today's Finance Bill clearly illustrates the complexity of delivering pensions tax simplification. The Bill reveals that the Government's original intention to reduce eight tax regimes to one, has actually resulted in the creation of six separate regimes.''

I know that Committee members will be interested to learn that PricewaterhouseCoopers identifies those regimes as the registered schemes regime, the employer finance retirement benefit schemes, overseas

recognised schemes, overseas unrecognised schemes, section 615 schemes and corresponding accepted schemes. That is the view of one of the largest accountants in the world.

Although the process will make pension planning easier for many, it will make it massively more complex for those with the largest pensions, which we shall touch on later—quite a lot of the Bill concerns those with very large pension pots. It is not a simplification, but it is new and it is welcome. We welcome the fact that the Government have made several significant changes since the consultation. They have reduced the recovery charge from 33 1/3 per cent. to 25 per cent. There has been a climbdown on the issue of the lifetime allowance. The Chancellor of the Exchequer dug his heels in and said that he would not shift from the figure of £1.4 million for the lifetime allowance. When the National Audit Office showed that he was 100 per cent. wrong in his estimates of how many people would be affected, he climbed down. We welcome the change to a simple valuation of defined benefits—the 20:1 formula—and the more generous transitional arrangements that we will debate later.

We welcome any measure that supports saving. As we begin the sittings on these provisions, it is important to remember that the measures are being introduced—rather like with the Pensions Bill—against a background of a savings crisis. The savings ratio has halved and confidence in pensions has collapsed for a range of reasons. It is interesting to hear what the chairman of Aviva, which operates Norwich Union, the largest life insurer in the country, said last month:

''We will have a generation of elderly people coming soon who will have a hard time to live above the poverty line. No one should be proud or pleased with that scenario.''

He also said that Aviva is seeing faster rates of savings growth in many continental European markets than in the UK because of people's reluctance to save in this country.

Last month, JP Morgan Fleming published a survey that found that 61 per cent. of the top 350 pension funds have closed or restricted availability to defined benefit schemes. We will talk about the balance between defined benefit and defined contribution schemes. The survey found that 60 per cent. of the top 350 funds have a defined contribution scheme. There has been a shift away from occupational pension schemes.

The Government made great play of the Pensions Bill providing security for people with pensions and dealing with the problem of people who lose their pensions. It is worth noting in passing that the Association of Consulting Actuaries survey on that Bill stated:

''Fewer than 1 in 10 firms felt that the measures will improve pensions coverage . . . 9 out of 10 firms say the Bill's measures will either add to costs . . . or make no difference''

to their position. That is the background against which we are examining this change to pensions law.

I will flag up areas of concern, where we will seek to push the Government. The largest area of concern and the greatest disappointment that we and the industry have is that the Government have not used the

opportunity to scrap once and for all the requirement to buy an annuity at the age of 75—that issue is dear to your heart, Sir John, as you introduced a private Member's Bill on it some years ago. The Government have opened the door a bit with the alternatively secured pension—we shall see how much they have opened it when we debate the measure.

The Treasury has presented the measure as a response to the genuine concerns of religious groups such as the Christian Brethren about the pooling of mortality risk. However, many people to whom I have spoken in the industry think that the measure will drive a coach and horses through the requirement to buy an annuity. They think that a huge number of people will take up the opportunity that the measure presents, as death benefits can be exploited to allow people to pass their pension pot on to future generations.

We welcomed the Government's retreat from the figure of £1.4 million for the lifetime allowance. They could hardly have stuck to it once the National Audit Office showed that they were 100 per cent. wrong in their estimates of the number of people affected. When we commented on the consultation, we questioned the need for an allowance at all, provided that schemes were required to offer the same sort of pension with the same sort of benefits to people at every level of the company—from the boardroom to the shop floor. That might have been a way of encouraging the creation of whole company schemes. However, we will not die in a ditch fighting for that proposal in Committee.

I suppose that I will make the point again when we discuss the lifetime allowance but, if we are going to have a lifetime allowance, surely the Bill should include a mechanism for reviewing that allowance, regularly increasing it and linking it to earnings or, perhaps, to prices. At the moment, there is no mechanism for increasing it. Although the explanatory notes tell us what it will be for the first five years post A-day, that information is not in the Bill. We will seek to have it included.

We have some smaller concerns in other areas: for example, the impact of the legislation on occupational schemes with fewer than 50 members and the impact on the future of with-profit annuities. I look forward to explaining those during the next couple of weeks. It is our intention to turn a not bad set of reforms into an excellent set. We look forward to the co-operation of the Financial Secretary in achieving that.

David Laws (Liberal Democrat, Yeovil)

We join the hon. Gentleman in welcoming the broad thrust of this part of the Finance Bill, and in particular its attempts to simplify the existing pension tax regimes. The measures are an attempt to simplify and to codify existing Inland Revenue rules.

It is notable that the measures in their existing form have been welcomed by most of the professional bodies that have commented. They see the proposals as a simplification of existing rules and feel that the

Government have gone out of their way to listen to some of the concerns that were expressed at an earlier stage.

We still have a fairly generous regime on tax relief and pensions in this country, particularly by international standards. As the Financial Secretary suggested, the measures make the existing regime slightly more generous, starting with a cost of £25 million in 2006-07, rising to £165 million by 2008-09.

The first issue that I want to raise at this stage is the £1.5 million lifetime limit. We think that that reflects a sensible balance between the constraints on the Chancellor of the Exchequer in relation to public expenditure and tax reliefs on the one hand, and the need to ensure incentives for people right up the income scale on the other.

Now that the Government have made the adjustments that the Chancellor announced in the Budget, we do not have a problem about the overall magnitude of the £1.5 million limit. We do, perhaps, have a more fundamental concern about the fact that the £1.5 million relates to the total pot of money in pension investments rather than to the amount going in. We are concerned, and perhaps the Government should be as well, about whether, at a time when there is significant asset price inflation, a large number of people moving up into what would be seen as quite penal tax bands in relation to their pensions will cause a problem. There remains an issue about whether we are giving tax relief in relation to pensions in the right way and whether, if there is another surge in the stock market, the Government's chosen mechanism will not create a few problems.

We are frequently teased by Treasury Ministers and by the Prime Minister for having a policy of a 50 per cent. top rate of tax on earnings of more than £100,000 a year. However, as many people have noticed—including noble Lords in another place—the Government are implementing a tax charge of around 55 per cent. in relation to pension fund assets above the £1.5 million cut-off. That is something that we will remind them of in the future.

Our second concern is wider. It relates to the point that the hon. Member for Tatton (Mr. Osborne) made when he said that the Bill is largely about people with the largest pension pots. Much of the discussion that we have had and that we will no doubt continue to have about the measures in the Bill—the £1.5 million cap, the ceiling of £215,000 on annual contributions and so on—will seem completely irrelevant and bizarre to most people in most parts of the country, for whom the idea of having a pension pot of £1.5 million or being able to contribute £215,000 in any one year would be cloud cuckoo land.

I have a great deal of affection for the hon. Member for Arundel and South Downs (Mr. Flight), but in some of his contributions on the Bill so far he has spoken rather in Press Gallery terms, as if the average person in this country was on an income of £100,000 or £200,000 per year. He spoke passionately about country estates and public access to them. In the real

world, which most of our constituents inhabit, average income and earnings are far lower than we in this place and certainly most of the press assume.

I read with some amusement recently an article that appeared in The Daily Telegraph, which I must confess is not my normal read. I could not get my usual paper that day, so I read The Daily Telegraph. As it was a quiet day, I turned to the ''City Comment'' section. Imagine my surprise when I read an article entitled, ''The Chancellor's munificence seems too good to be true''. It began:

''We read it in the Budget Red Book but we didn't quite believe it. Now it's in the Finance Bill, it really does seem that our dear Chancellor has opened up a quite splendid tax loophole for the affluent middle-aged, a group of people for whom he's had little good news for much of the past seven years.''

The article went on to describe how this Chancellor has not only maintained the tax-free lump sum, which a previous Chancellor referred to as a ''much-loved anomaly'', but has extended its influence so that more people can take advantage of it. The article discusses the risk that, in their last year before retirement, people will transfer to their pension funds huge sums that they then will be able to draw down as a tax-exempt sum. Presumably, such people are not average members of the population but those who are on particularly high earnings or who have a large number of assets. Hon. Members may wish to read the article, which also gives details about the prospects for investing pension fund money in second homes and retirement homes.

My concern, which may not be the same as that of the hon. Member for Tatton—we shall explore that in the course of the debate—is that in our debates about pensions and pension tax relief we talk much too much about a tiny proportion of the population. Of course, it is important that the system should be fair for everyone, regardless of how much money they earn. Everyone is entitled to expect the Government to consider their financial interests in a fair and reasonable way, but we spend a great deal of time thinking about the financial interests of and tax relief on pensions for 1 per cent. or 0.5 per cent. of the population. The problem for the vast majority of people is that they do not have incomes that allow them to save easily, and they probably do not understand the existing pension system or tax reliefs because of their complexity, which has got far worse.

George Osborne (Conservative, Tatton)

I share the hon. Gentleman's concern about those who do not have anything like the sums talked about in some parts of the Bill. Just so we know where we stand, could he explain his party's policy on the basic state pension? Is it still the position of Liberal Democrats to link it to earnings, or have they changed their mind on that?

David Laws (Liberal Democrat, Yeovil)

I have exciting news for the hon. Gentleman. I shall be going to a meeting later this morning to discuss the final touches to a paper, to be unveiled at our conference, on that very issue. I shall send him a copy—perhaps even an early copy, before the conference—which he will be able to read in great detail. He will be interested to know that the proposals

will all be carefully costed and worked through, in contrast with the shadow Chancellor's proposals, the pages of which seem to have been glued together for a couple of years. You may be getting slightly impatient with the detour on which the hon. Member for Tatton has taken us, Sir John. I promise not to go any further down it.

My point is simply that we must give more attention to tax reliefs for the majority of people who have pensions and for those who should be incentivised to contribute to pensions. Perhaps it is unreasonable of us to expect the Government to do that in this exercise, which is largely about simplification and codification of the existing rules. However, I hope that they will return to pensions tax reliefs in future Finance Bills and make proposals that have more relevance to the majority of our constituents, rather than a very small group.

Howard Flight (Conservative, Arundel and South Downs)

May I add my welcome to you this morning, Sir John?

I want to make a few points in addition to the main points raised by my hon. Friend the Member for Tatton. First, I am pleased that the retained benefits rule has gone. I had endless stick from my constituents about the rule, which affected people who had been in the armed services or whose career finished at, say, the age of 50, and then took another job and received another pension. They were constrained in what they could enjoy from that pension, and in a world in which more and more people will have two, if not more, careers, that could cause unfairness. It is not explicit in the Bill that the rule will go, so I was pleased to hear the Financial Secretary confirm that it will.

My second point concerns the £1.5 million cap, which is rising to £1.8 million. The sums for those with final salary schemes and those with money purchase schemes are very different, and the Committee will need to look at that in detail because there is scope for unfairness in treatment between the two, depending on annuity rates.

In previous debates on the Bill, I have tried to achieve legislation that is not retrospective and is fair rather than unfair. That principle is right, whatever anyone's means, but when we come to the transitional arrangements, I am mindful that when the Conservative Government introduced the principle of the pension cap in 1989, it grandfathered the situation for those with pension arrangements prior to that and the new cap was not retrospective. As we come to that part of the Bill dealing with transitional arrangements, it is an important principle that that should remain so until people retire if they stay in their pension schemes. It would be an extremely retrospective step if the legislation ended up damaging people's rights.

My hon. Friend the Member for Tatton has already commented on annuities and I look forward to making a contribution when we come to that. One of my primary objectives since arriving in this place has been to get rid of an out-of-date, patronising requirement that has become an increasing cause of concern to people as they approach the age at which that will have an impact on them. We have a lot to deal with, but,

echoing my hon. Friend, there are some improvements in the new structure and the industry broadly welcomes that.

Ruth Kelly (Labour, Bolton West)

I welcome the hon. Member for Tatton, and I am sorry that I forgot to welcome him on his first outing on the Bill. I look forward to working with him during this debate. He was right to say that we had a very constructive debate on the Child Trust Funds Bill.

I am pleased to hear the welcome that Opposition Members have given to our proposals and the recognition that we have listened to representations on the Bill. I am also pleased at the recognition of the hon. Member for Yeovil that this is a much more generous system for the vast majority of pensioners than the one that it replaces, particularly in respect of the tax-free lump sum. Many more people will be able to benefit from a 25 per cent. tax-free lump sum. I remember many debates in the House and many Treasury questions suggesting that we had a secret plan to remove the tax-free lump sum. I feel vindicated, to say the least, that we have provided a much more generous element for the vast majority of pensioners.

David Laws (Liberal Democrat, Yeovil)

Can the Financial Secretary tell us broadly how much of the additional expenditure on these measures will be a consequence of the greater generosity of the tax-free lump sum and how much will relate to some of the other small changes in the Bill?

Ruth Kelly (Labour, Bolton West)

We have not provided a breakdown of the costs. As the hon. Gentleman is well aware, the published figures speak for themselves. A fair proportion of the costs is related to the increase in the tax-free lump sum, but there are elements related to the opportunity to take flexible retirement for the first time as well. The measure will provide a huge relaxation of the rules for the vast majority of pensioners.

Geoff Pearson, head of Sainsbury's pension scheme, said that the Treasury's proposals are much more radical than anyone on his side of the industry could ever have hoped for. He said that sometimes the industry must congratulate politicians and civil servants and that now is that time. Given the response by the industry to the proposals, I was slightly disappointed to hear the suggestion that the measures are not a true simplification of the schemes. In no sense are we replacing the current eight or nine regimes with six new regimes; the simplified regime introduces one set of rules for tax-privileged pension savings.

Pension schemes that wish to benefit from the new regime must be registered. Non-registered schemes will be allowed to continue, but they will not benefit from the tax relief and tax-free investment afforded to registered pension schemes, hence the need for various definitions in the legislation. It is a radical simplification that will benefit millions of pensioners. I am delighted that the Opposition parties have welcomed the clause and I look forward to a constructive debate.

Question put and agreed to.

Clause 139 ordered to stand part of the Bill.

John Butterfill (Conservative, Bournemouth West)

Perhaps I may be permitted to say a couple of words from the Chair. In my capacity as chairman of two pension schemes, I, too, welcome the simplification.Clause 140 Meaning of ''pension scheme''

Clause 140 - Meaning of ''pension scheme''

George Osborne (Conservative, Tatton)

I beg to move amendment No. 198, in

clause 140, page 130, line 10, at end insert

', except a personal pension scheme or an arrangement comprising a number of personal pension schemes,'.

[R] Relevant registered interest declared.

John Butterfill (Conservative, Bournemouth West)

With this it will be convenient to discuss amendment No. 199, in

clause 266, page 218, line 25, at end insert—

'personal pension scheme Section 1 of the Pension Schemes

Act 1993.'.

George Osborne (Conservative, Tatton)

These are not huge amendments. The clause is the first of three that deal with definitions. In this case, it is the definition of a pension scheme and in the subsequent two clauses the definition of a member and of a pension arrangement. Clause 140(5) defines an occupational pension scheme.

One criticism of this legislation and of the Pensions Bill—if one takes them as a package—is that the Government have not settled on an agreed set of terms. If one compares the Department for Work and Pensions legislation with the Treasury legislation, one sees conflicting use of terms such as personal, occupational, defined benefit, defined contribution, money purchase and final salary. To people in the street, the abundance of terms, some of which mean very similar things, is very confusing. The complication is one thing that deters people from dipping their toe into the pension pool.

Subsection (5) could mean that a definition of an occupational pension scheme would cover a group personal pension scheme. My amendments are designed to make the distinction between an occupational pension and a personal pension clear and unambiguous. I take the definition of a personal pension scheme used in the Pensions Scheme Act 1993. An expert pensions lawyer who examined the measure and felt that there was scope for confusion suggested the amendment to me. I did not mention in my introduction that Opposition spokespersons are hugely dependent on the help of experts, and not just representative organisations, but specific individuals who give up their time not for party political reasons but because they want to make legislation better. The amendments are an attempt to make a clear and unambiguous distinction between occupational and personal pension schemes.

Ruth Kelly (Labour, Bolton West)

I understand that the hon. Gentleman is in a unique position in the House in being able to draw on the synergies, or otherwise, between the Pensions Bill and the tax simplification proposals, as he is taking both through Committee. However, I suggest to him

that the amendments introduce an unnecessary complication to the tax simplification definitions in the clause.

The purpose of bringing in a single, unified tax regime for pension schemes is, as far as possible, to get away from distinctions between occupational and personal pension schemes, yet the amendments would perpetuate that distinction. For the Department for Work and Pensions, the distinction between occupational and personal pension schemes is absolutely fundamental. It underlines their regulatory regime. For the Inland Revenue, however, the distinction between the two is largely academic, but the Revenue does need a definition of occupational pension schemes, principally so that those schemes can be checked against certain types of payment between schemes and sponsoring employers.

The term ''sponsoring employer'' can have meaning only in the context of a scheme established by or for the employees of that employer, hence the need for a definition. There is little point in borrowing a definition from the definition of personal pension scheme used by the DWP, simply to say that an occupational scheme under tax law is not a personal pension scheme under pensions law. Certain schemes that, for DWP purposes, are personal pension schemes may be in the tax definition of occupational pension schemes. That definition is not the same as that of the DWP, because it serves a different purpose.

Howard Flight (Conservative, Arundel and South Downs)

The Financial Secretary will be aware that as large numbers of businesses have frozen or closed their final salary schemes, they have typically moved to group personal pension schemes. Those are employer-sponsored schemes, but they give everyone their own little pot within the scheme. Our presumption had been that, where the rules relating to occupational schemes bite tax-wise in this Bill, they are not intended to bite in relation to group personal pension schemes. Therefore, the distinction is important.

Ruth Kelly (Labour, Bolton West)

There is a distinction. However, there are different purposes behind the definitions of each Department. A group personal pension may be established by a financial institution, and so, for DWP purposes, may be a personal pension scheme, but that scheme is for the benefit of employees of a sponsoring employer. Therefore, it falls in the tax definition of an occupational pension scheme. They are used for different purposes and have slightly different definitions.

Quentin Davies (Conservative, Grantham and Stamford)

What the Financial Secretary is saying is that, for what appear to be perfectly good reasons, different Departments use the same terms of art with different meanings. Surely that is extremely confusing to the public. Would it not be a good day's work if there could be agreement between her Department and the Department for Work and Pensions that a new set of terms be used so that when one term is used in the context of pensions—by whichever Department, in

whichever context—it has the same meaning in all cases? Would that not be in the interests of open and fair government?

Ruth Kelly (Labour, Bolton West)

I understand and am sympathetic to the point that the hon. Gentleman makes, but with the utmost respect, it is rather pedantic. The issue is not merely of terminology but of what is appropriate to the legislation, whether it serves its purpose well and whether it is clearly understood by those who use it. In this case, I argue that that is the result.

In any case, the reference in the amendment to an arrangement comprising a number of personal pension schemes does not fit with the definition of ''arrangement'' used in clause 142. There an arrangement is made under a pension scheme, so an arrangement cannot comprise a number of different schemes. The amendment is technically deficient. I would suggest that the Committee should not get too hung up on the terminology but accept that the underlying rationale for the definitions is appropriate. I therefore urge the Committee to reject the amendment, but perhaps the hon. Member for Tatton will consider withdrawing it.

George Osborne (Conservative, Tatton)

I do not agree with the Financial Secretary that the point is pedantic and technical, or that no one should care what the terms are, provided that people understand them. In the outside world, people who do not understand the ins and outs of Whitehall will see the Pensions Bill and the Finance Bill as part of the same package. They will land on the doorsteps of pension schemes at roughly the same time and they represent a step change—to use that awful phrase—in how schemes are to manage their business and their tax affairs.

If there is confusion about the use of terminology in both pieces of legislation, it will be confusing in the marketplace. It will be confusing to people who struggle to understand pensions anyway—a notoriously complex area. If the Government were seriously interested in simplification, as my hon. Friend the Member for Grantham and Stamford (Mr. Davies) pointed out, the Financial Secretary and the Minister for Pensions could have sat down and agreed a set of terms and applied them equally to both pieces of legislation. The difference does suggest somewhat that the Bills were drafted in complete isolation from each other.

The provisions lack the sense of joined-up government and are confusing. I suspect that what really happened was that the Inland Revenue drafted its part of the Finance Bill without telling the DWP what it was up to. The DWP was in constant negotiation with the Treasury about its Bill so it was probably a one-way process. The Department for Work and Pensions has become virtually a wholly owned subsidiary of the Treasury. Of all Departments, it has seen more and more of its powers taken away and made part of the Chancellor's empire, and for that reason one would have thought that the two Departments could have sorted out their terms.

The point that I make is not pedantic—it goes to the heart of broadening the understanding of pensions among the public and genuinely simplifying the complexity of pensions for people. I am disappointed that the Government have not come up with a consistent set of terms, but I take the Financial Secretary's word for it that my amendment is technically deficient, so I shall not press it to a Division. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 140 ordered to stand part of the Bill.

Clause 141 - Meaning of ''member''

John Butterfill (Conservative, Bournemouth West)

With this it will be convenient to discuss the following amendments:

No. 201, in

clause 177, page 151, line 28, leave out 'an active' and insert 'a'.

No. 202, in

clause 186, page 159, line 19, leave out 'pensioner'.

No. 203, in

clause 266, page 216, leave out line 1.

No. 204, in

clause 266, page 218, leave out lines 23 and 24.

No. 205, in

schedule 32, page 451, line 33, leave out 'pensioner'.

No. 206, in

schedule 32, page 451, line 36, leave out 'pensioner'.

New clause 15—Meaning of ''member''—

'In this Part ''member'' in relation to a pension scheme means a person who has:

(a) accrued rights under the pension scheme; or

(b) rights under the pension scheme which are attributable (directly or indirectly) to pension credits;

and such a person is a member whether or not there are presently arrangements made under the pension scheme for the accrual of benefits to or in respect of that person and whether or not the person is entitled to the present payment of benefits under the pension scheme.'.

George Osborne (Conservative, Tatton)

This is a complicated set of amendments designed to achieve a fairly simple purpose. Clause 141 is the next of the definitional clauses. It states that ''member'' can mean either

''active member, pensioner member, deferred member or pension credit member''.

Our first objection is on the ground of simplification—we are going to be the champions of simplification in this Committee. If we are trying to simplify the Bill, surely we should avoid additional definitions wherever possible. We are not clear that it is necessary to establish four different definitions of a member.

Our second objection is that the provision is unclear. For example, what is the status of a member in service who has reached the normal retirement date under a scheme and so ceased to accrue benefits? The third objection is that there could be a member who is, at the

same time, an active member, a pensioner member and a deferred member. Surely that is bound to lead to confusion.

We attempted to amend the clause, but we decided that the simplest solution was to come up with a new clause to replace it—new clause 15. I am confident that the Government will accept the new clause because it suggests a far simpler definition of ''member'': someone who has

''accrued rights under the pension scheme''

''rights . . . which are attributable (directly or indirectly) to pension credits''.

The person is a member whether or not they are currently accruing benefits or receiving them. We do not make a distinction between those two things. We recommend the new clause to the Committee as a small victory for simplification.

Ruth Kelly (Labour, Bolton West)

I understand that the hon. Gentleman is attempting to enter fully into the spirit of pension simplification and I applaud him for that, but there is always a danger of over-simplifying and I fear that the changes that he proposes would do just that. His proposed definition of ''member'' covers people with accrued rights and rights attributable to pension credits, but it is not clear whether that definition extends to people who have just joined the scheme, or to those who have rights transferred from another scheme.

More important, the hon. Gentleman's alternative definition does away with the distinction in clause 141 between an active member and a pensioner member. I agree that in most places there is no need to make that distinction, but there is at least one circumstance in which the distinction is important. Paragraph 10 of schedule 32 contains a rule that permits the substantial augmentation of pensions payable to scheme members without any testing against the lifetime allowance, provided that there are at least 50 pensioner members and that they all benefit from the augmentation. The effect is to constrain the awarding of big pension increases when it comes to small numbers of wealthy retired members.

Amendments Nos. 205 and 206 would remove the word ''pensioner'' from the provision in schedule 32. That could undermine the rule, since one member of the scheme could receive a very generous increase in his pension, while a further 49 members, who were not yet receiving any pension, would gain no benefit at all. Moreover, the one member would avoid any tax charge that might arise from exceeding the lifetime allowance. Although the amendments are an admirable attempt to take simplification a step further, they are flawed.

George Osborne (Conservative, Tatton)

Can the Financial Secretary confirm that, because of the flexibility—it is one of the things that we welcome—for people to take part of their benefits, and because of the removal of the requirement to retire, someone could be an active member, a pensioner member and a deferred member at the same time?

Ruth Kelly (Labour, Bolton West)

The hon. Gentleman makes an interesting point, but most people can be in only one category at a time. Active membership takes precedence over pensioner or deferred membership, so relief is allowed for an active member making contributions to a registered scheme even if that person has started to take benefits. However, a member who is a pension credit member will generally belong to one of the other categories as well. They will be someone with rights under a pension sharing on divorce order who may have started to take benefits and who may also have other pension arrangements. The rules around pension credits are designed to reflect that, but that is a particular situation and not one that has general application. I therefore suggest that the hon. Gentleman do not press his amendments to a Division.

George Osborne (Conservative, Tatton)

I am not wholly convinced by what the Financial Secretary says. Her principal argument against the amendments seems to be that the different definitions do not really count, except in respect of one small part of a schedule, in which there is a power to augment pensions. The Government could have redrafted the schedule, rather than put in the Bill four different definitions of a member, not least because, as the Financial Secretary confirmed, it is possible for someone to be a member in all four senses of the word, even if active membership takes precedence.

Surely, the provision will be confusing. Pension fund members may ask whether they are an active member, a pensioner member or a deferred member. Perhaps they receive pension credits as well. My hon. Friends and I were attempting to help the Government to simplify pensions law.

Rob Marris (Labour, Wolverhampton South West)

If the hon. Gentleman carefully reads new clause 15, he will see that it includes two main parts—paragraphs (a) and (b)—and four possibilities follow on from them. I work out that there are 12 possible definitions of a member in the new clause. Therefore, I suggest to him that it is not in fact a simplification.

George Osborne (Conservative, Tatton)

I am delighted that the hon. Gentleman is in the Committee. I thought that he would be out watching Venus passing in front of the sun, but he decided to turn up here instead. We have served together on other Committees, and I know that he has a legal eye for such things.

Obviously, I do not accept the hon. Gentleman's argument. New clause 15 says that a person is a member whether or not they accrue or receive benefits. It simply defines someone who has accrued rights under a pension scheme. I agree that it includes a separate category for pension credits, which is a particular subset with which we need to deal, but it reduces the definitions from four to two—it halves the number of categories. However, the Financial

Secretary has not yet entered into the spirit of simplification, and I shall not lead my large army over the hill and press for a Division on the matter.

Question put and agreed to.

Clause 141 ordered to stand part of the Bill.

Clause 142 - Meaning of ''arrangement''

George Osborne (Conservative, Tatton)

I beg to move amendment No. 207, in

clause 142, page 131, line 6, leave out

'cash balance benefits or other'.

John Butterfill (Conservative, Bournemouth West)

With this it will be convenient to discuss the following amendments:

No. 208, in

clause 142, page 131, line 8, leave out subsection (3).

No. 209, in

clause 142, page 131, line 14, leave out '(whether' and insert 'where'.

No. 210, in

clause 142, page 131, line 16, leave out 'or any other factor)'.

No. 211, in

clause 142, page 131, line 17, leave out subsection (5).

No. 212, in

clause 142, page 131, line 26, leave out from second 'benefits' to end of line 28.

No. 213, in

clause 142, page 131, line 30, leave out 'all of'.

No. 214, in

clause 142, page 131, line 31, leave out from 'circumstances' to end of line 35 and insert

'money purchase benefits or defined benefits'.

No. 271, in

clause 171, page 148, line 35, leave out

'other than a cash balance arrangement'.

No. 272, in

clause 171, page 148, line 40, leave out subsection (8).

No. 278, in

clause 171, page 148, line 31, leave out subsection (6).

No. 287, in

clause 142, page 131, line 36, leave out subsection (9) and insert—

'(9) Where an arrangement may provide both money purchase benefits and defined benefits to or in respect of a member, the arrangement is to be treated as two separate arrangements for the purposes of this Part.'.

No. 288, in

clause 266, page 216, leave out lines 19 and 20.

George Osborne (Conservative, Tatton)

The amendments are another genuine attempt at simplification of pensions taxation. Clause 142, which defines the meaning of ''arrangement,'' is the last of the definition clauses before we get to the chapter on registration. Instead of the two types of pension arrangement that are currently defined, the clause establishes four: defined benefits, money purchase, hybrid and cash balance. Cash balance is a new concept in legislation and certainly one that caught the industry by surprise.

Would not it be simpler just to have two arrangements: defined benefits and money purchase? That is the view of almost everyone in the industry with whom I have discussed the matter. The National Association of Pension Funds states that

''it seems an unnecessary complication in this already difficult document to isolate conditions for the arrangements described as cash balance, and we are not convinced that the cash balance provisions work consistently.''

My amendments are designed to remove the cash balance definition. I can see a problem, because one reading of the definition of cash balance appears to encompass everything that would come under the definition of a money purchase scheme. On the other hand, the definition of money purchase benefits includes nothing that would be included in the definition of a money purchase scheme. Perhaps we should remove the definition of money purchase benefits from the clause, and rename the cash balance benefits as money purchase benefits—I hope that hon. Members follow me.

The clause seems to say that a cash balance is an arrangement determined otherwise than wholly by reference to the payments made by a member. What pension scheme is made wholly by reference to payments made by a member? What scheme does not pay, for example, the expenses of experts such as fund managers? If a scheme pays expenses, an amount must be available that is not calculated wholly by reference to the payments made. There are also investment returns, which play a crucial part in determining how much money is available in a pot. The amount in that case is not determined wholly by reference to the payments made.

My amendments are designed to get rid of cash balance altogether, and leave it to the Government to ensure that the money purchase definition covers what we all recognise as money purchase arrangements. This is a complicated concept to convey to the Committee. At the moment, no schemes would come under the definition of money purchase benefits, and all money purchase schemes would come under the definition of cash balance benefits. If the Financial Secretary has understood what I am saying, perhaps she will comment on that.

There are other problems with the definitions in the clause. I shall highlight for the Financial Secretary those problems that have been raised with me by the industry. First, is a scheme that pays out only for death in service, and which is funded by the employer, covered under the definition of defined benefit arrangements? There are schemes offered by employers that pay out sums only on death; they do not pay out pensions. Secondly, if insured lump sum death benefits are provided under a money purchase scheme—whether paid for by an employer or an employee—are the death benefits defined benefits?

Thirdly, the definition of a hybrid arrangement does not seem to apply to alternative hybrids where there are separate sections within the same pension scheme, in which members may participate concurrently. As someone from the industry said to me, the Government seem to be stuck in a time warp. They have the rather old-fashioned idea that a hybrid

consists of a money purchase scheme with a defined benefit guarantee—for example, it will not be less than x 80ths of a final salary. These days, however, popular hybrids include schemes where the employer provides a certain defined benefit element, and there is a money purchase element on top. It is not clear where those increasingly popular schemes sit in the definitions. The NAPF raised that with me.

What about money purchase schemes that buy an annuity for a scheme member shortly before retirement? Will they become defined benefit schemes? If part of a member's benefits is vested under the scheme, is the part being vested treated as a separate arrangement?

I am not the only one who wants answers to those questions. They have been raised by all the representative organisations—the Association of Consulting Actuaries, the Association of British Insurers, the NAPF and the Chartered Institute of Taxation. If those organisations, which spend their lives looking at pensions legislation, are struggling with the definitions, and if they almost universally object to a cash balance arrangement, or believe that it is unnecessary, that illustrates a problem with the clause.

A broader point that is worth making concerns the problem with the significant shift from a system of discretionary approval with practice notes—we shall discuss that when we come to the next few clauses—to a legislative set of definitions that cannot be clarified when the Bill is enacted because they will be written into law. In other words, it will not be the Inland Revenue that decides through its current discretionary system exactly what arrangements best suit a scheme and how it will treat that scheme, and instead the matter will be argued over in the courts. The arguments and questions that I have raised with the Financial Secretary today are precisely the sort over which there will be a number of court actions in the years to come.

That is perhaps inevitable when moving from a system of discretionary approval, but it makes it all the more essential that, as we pass the legislation, we are clear about the definitions that we are putting in the Bill and reduce the scope for confusion. If the Financial Secretary does not agree with me, will she at least go away and think about that? I have spoken to quite a lot of organisations and to quite a lot of pensions tax lawyers and all have raised queries about the definition of a cash balance benefit. Surely it is worth the Inland Revenue thinking about that and deciding whether it is strictly necessary that it has its own special category in the clause.

Ruth Kelly (Labour, Bolton West)

There are two basic types of arrangement: money purchase arrangements, which are also known as defined contribution or DC arrangements, and defined benefits or DB arrangements. Two further sorts of arrangement are defined in the clause: cash balance arrangements, which are a particular type of money purchase arrangement, and hybrid arrangements, which are

arrangements under which someone may receive benefits of one type or another depending on the circumstances. Those arrangements exist in the current regime. We do not want to limit the freedom of members, employers or providers by dictating that particular arrangements should exist in future, nor do we want to restrict people's freedom to move between different types of arrangement. Although there will be a single tax regime, the legislation must recognise that different arrangements operate in different ways, so it is necessary in some places to provide rules appropriate to the way in which the particular arrangement works.

The hon. Member for Tatton directed his comments at the concept of the cash balance arrangement, which he proposes to remove altogether from the legislation.

Michael Jack (Conservative, Fylde)

Given that in her opening comments the Financial Secretary dealt with a number of existing formulations of what is a pension and then said that in future she wanted to maintain a regime of flexibility and interoperability, can she explain by what mechanism future adjudications will be determined as to which category a new pension product might fall into or when there is a difficulty with an existing product? My hon. Friend referred to the possibility of court proceedings, but I am sure that the Treasury would not want that as the sole determinant of what definition a scheme falls into.

Ruth Kelly (Labour, Bolton West)

In general, the Inland Revenue will decide into which category an arrangement falls. However, there will be a right of appeal under the arrangements. As I understand it, there will be a right of appeal to the Commissioners in the ordinary way, as now, and people can appeal if they feel that the Inland Revenue has operated inappropriately. That right of appeal is in fact being extended in the Bill.

I shall return to the point about the cash balance, to which the hon. Member for Tatton directed the majority of his remarks. There are very good reasons why the concept of a cash balance arrangement must be retained. We referred to the arrangement in the consultation document—it was raised by secondees from the pension industry to the Revenue. Under a cash balance arrangement, the individual is promised a capital sum at retirement to be used for the provision of benefits. It is similar to standard money purchase arrangements where the benefits are calculated by reference to an amount or pot that becomes available for the provision of benefits to the individual. In a cash balance arrangement, however, the amount is promised to an individual rather than depending entirely on the level of contributions and the investment performance of the fund. There is an element that is similar to DB arrangements.

In a cash balance arrangement, the promised pot grows by a fixed, ascertainable amount each year. At its simplest, it may promise the individual that on retirement a fixed sum, say £10,000, will be put into the pot for each year of service. It would be inappropriate to treat cash balance arrangements in the same way as

money purchase arrangements for all purposes. For instance, for annual allowance purposes, the individual's annual pension savings in a standard money purchase arrangement are measured by reference to the contributions made; in a cash balance arrangement there may be no annual contributions whatever. The promise may be fulfilled in the scheme providing a promised pension pot in the final year. We must measure the growth in the promised pot and not the contributions.

Wherever possible, cash balance arrangements are dealt with in the same way as other money purchase arrangements, but for fairness and to reflect the different level on which cash balance arrangements operate in certain areas, it is necessary to have different treatment.

In similar areas such as the transitional provisions and the unauthorised borrowing provisions, it will be necessary to distinguish between cash balance arrangements and other money purchase arrangements, both of which we will address when debating the pension simplification proposals. In order to make the necessary distinctions, we must have a definition of the cash balance arrangement, and that is what the clause provides.

The hon. Gentleman raised several other points, which I will try to address. He will forgive me and perhaps give me a reminder if I fail to respond to all of them. Insured lump sum death benefits provided under a money purchase scheme will be treated as defined benefits, as long as they are themselves defined benefits—that is, the sum on death is a designated amount. In this case, the arrangement is likely to fall within subsection (9). The retirement benefits are money purchase benefits and the death benefits are defined benefits, so they will be treated as two separate arrangements.

The legislation caters for modern hybrids, dealing with the situation in which there are separate sections within the same pension scheme in which members may participate concurrently. For example, where on retirement both money purchase and defined benefits will be paid, under subsection (9) they will be treated as separate arrangements.

The points that the hon. Gentleman made sometimes touched on how pensions are treated between different arrangements. I am happy to discuss further with him, perhaps through correspondence, particular areas of the legislation where he feels that the definition is not sufficiently clear. However, we feel confident that it is clear enough for people to understand how their pension arrangements should be treated.

George Osborne (Conservative, Tatton)

I am not convinced about the need to provide a separate definition of cash balance benefits. I am merely trying to simplify the legislation. If the category becomes redundant and sits there in the legislation, so be it—we have just wasted a few more trees by printing it.

I am not convinced by what the Financial Secretary said. She said that the idea was recommended to the Treasury by secondees from the industry during the consultation. They were clearly not the people in the

industry who spoke to me. One of the striking things when I prepared for the Committee, as one does, meeting various representative organisations and speaking to individuals who offered to help with the drafting of amendments and so on, is that every single one of them asked why there is need for a separate definition of cash balance benefits. They asked whether that would not simply complicate matters and make them more confusing, and nothing that the Financial Secretary said has cleared that up. I suppose we shall just see whether it becomes a widely used definition.

The Financial Secretary covered some of my specific questions such as the one concerning death-in-service benefits. She assured me that modern hybrid arrangements would be covered. She was very proud of subsection (9), which is one of the most complicated and convoluted subsections in the Bill. It says:

''Where not all the benefits that may be provided under an arrangement to or in respect of the member are of the same one of those varieties of benefits, the arrangement is to be treated for the purposes of this Part as being two or three separate arrangements one of which relates to each of the two or three varieties of benefits that may be so provided.''

I forgot to mention earlier that amendment No. 287 would radically simplify that subsection and is a model of how such things should be done. It is very straightforward: everyone can understand it and read it. I am so confident of its simplicity—even though the Financial Secretary will not accept it here and now—that I am sure that the matter will arise again on Report.

John Burnett (Liberal Democrat, Torridge and West Devon)

The hon. Gentleman has alluded to amendment No. 287. Presumably, its drafting is slightly defective, because there could be more than two arrangements.

George Osborne (Conservative, Tatton)

It was drafted in the hope that the Government would accept my other amendment. If they had accepted the entire package, it would be correct. One always approaches Committees in the spirit of optimism that everything one proposes will be accepted. I am not going to press the matter to a Division. We may wish to return to it on Report, and the Government should give further consideration to it. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 142 ordered to stand part of the Bill.

Clause 143 - Registration of pension schemes

George Osborne (Conservative, Tatton)

I beg to move amendment No. 290, in

clause 143, page 132, line 26, at end insert

'and, if the Inland Revenue's decision is not to register the pension scheme, the reasons why the pension scheme has not been registered.'.

John Butterfill (Conservative, Bournemouth West)

With this it will be convenient to discuss amendment No. 291, in

clause 147, page 134, line 39, at end add

'and the reasons why the registration of the pension scheme has been withdrawn.'.

George Osborne (Conservative, Tatton)

There are a number of specific amendments to the clause that I shall speak to, but I think that my hon. Friend the Member for Arundel and South Downs is keen to catch your eye to have a stand part discussion on the clause, Sir John.

Clause 143 and the following six clauses establish a new regime by which pension schemes register with the Inland Revenue rather than receiving specific approval as is currently the case. The explanatory notes—for once—explained what is going on well when they described it as a process now, check later procedure. It is meant to be quicker and more streamlined, which we welcome. We accept that the existing approval processes are fairly cumbersome. However, the changes carry risks for pension schemes and their members, including a risk that the Inland Revenue will not register a scheme, or will even de-register it—as we will deal with later—and that schemes will be subject to punitive taxation.

Although the current system is cumbersome, one of its advantages is that it ensures that no one can think that they have set up a pension scheme and find out later that it does not have the approval of the Inland Revenue. They need the approval as the first step. Under the new system, a scheme will write to the Inland Revenue and give the information that is required, which is explained in the consultation document, such as their name and address and the accounting year end. They also have to sign a statutory declaration.

Although I may have got the process wrong, and the Financial Secretary may correct me if I have, I understand that once the registration has been sent to the Revenue, unless it is obviously wrong, an acknowledgement of the registration will be returned. I have learned from the process of postal voting that there is a big difference in the law between issuing something and receiving it. Once the acknowledgement is issued, tax relief will be allowable on the pension contributions that are made after that date. In other words, someone could send their registration, receive the acknowledgement, happily set up a scheme and start running it and start receiving contributions that the members think are tax-relieved, but suddenly, because the checking process comes later, the Inland Revenue might write to them saying, ''We have now undertaken checks and decided that we cannot register your scheme. We have processed it, but on checking it we have found that it does not meet our criteria, or there have been mistakes.'' As I understand it, the contributions that the scheme will have received to that date will not have attracted tax relief. That will come as a shock to members.

Of course, bad people will try to exploit the system by setting up sham schemes. One of the risks of the legislation and this process is that it will make it somewhat easier to set up sham schemes. However, I am talking about genuine misunderstandings, omissions or mistakes, perhaps made by the scheme administrator, which have potentially damaging consequences for the member. Although subsection (5) makes it clear that the onus is on the Inland

Revenue to register a scheme, unless there are reasons for it to do otherwise, it says that the Inland Revenue can reject the registration if

''any information contained in the application is incorrect''.

That is a broad brush with which to reject registration, and it could have damaging consequences.

Amendment No. 290 would mean that where the Inland Revenue decided not to accept a registration, it would at least have to explain its reasons. One would hope that it would do that and that that would be good practice, but it is worth writing it into the Bill, not least for reasons of natural justice, so people know why a registration has been rejected, and because it allows them to make a meaningful appeal knowing the grounds on which the Inland Revenue made its decision. Amendment No. 291 would place the same requirement on the Inland Revenue when it de-registers a scheme.

Finally, referring to a point that I made earlier, could the Financial Secretary say something about the process now, check later process, including how long it will take? How long will that shadow hang over a scheme before a person receives confirmation that it has been duly checked and everything is bona fide? Will the process take many months if the Inland Revenue is overwhelmed with applications, or will it be done fairly quickly? Elsewhere in these clauses there is a requirement on the individual to do things within 30 days—for example, to lodge appeals. Are we talking about a similar time scale that the Inland Revenue applies to itself in order to make it clear that, once it has received the registration form, it will make the checks as quickly as possible—within 30 days, for example? That way, schemes need not fear that their tax-relieved contributions will turn out not to attract tax relief.

John Burnett (Liberal Democrat, Torridge and West Devon)

I support both the amendments, and amendment No. 289. As the hon. Gentleman rightly said, it is in the interests of natural justice that taxpayers be given proper reasons for any failure of the Inland Revenue to register. That is only fair and reasonable.

There is a slightly esoteric matter on which the Financial Secretary may be able to calm nerves. As she knows, if registration is denied, tax relief on contributions already made will also be denied. However, I hope that she will confirm that, if registration is subsequently permitted after amendments and further clarification, all contributions made that are within the limits allowable by the Inland Revenue will qualify for tax relief.

Amendment No. 289 is entirely sensible, and I hope that the Financial Secretary will assure the Committee that no further application need be made in respect of schemes referred to in subsection (9).

Rob Marris (Labour, Wolverhampton South West)

Prima facie, the amendments seem attractive, and I will be interested to hear my hon. Friend's response.

Ruth Kelly (Labour, Bolton West)

I understand the reasons behind the amendment. Of course, the scheme that has been refused registered status, or has had its registered status withdrawn, will want to know why; but before I address the amendments specifically, I should say that I am quite pleased that hon. Members seem generally to welcome the process now, check later approach, which will, of course, be much simpler for pension schemes than the current arrangement.

The hon. Member for Tatton asked how the process would work. The Revenue will ask for straightforward details, such as the scheme's name and contact details and the address of the administrator. The scheme will also be asked for a description of its legal structure—for example, it will be asked whether it is a trust—and an indication of how many members it is likely to have. Finally, it will be asked to say whether the members of the scheme will have any role in running it. That will be important for the Revenue's risk assessment strategy.

The Revenue expects to be able to process applications quickly—generally within one working day of receipt. It will reject an application only if something is wrong with it. The amendments are superfluous.

George Osborne (Conservative, Tatton)

The Financial Secretary says that it will take one working day to check the information. My concern is that a scheme may send information that seems on the surface to be accurate, but the Inland Revenue may say, ''We need to investigate these people a little bit further,'' and take a month or two to do that. During that process, the scheme attracts tax-relieved contributions. At the end of the process, having checked the scheme, the Inland Revenue may decide that it cannot register it. What then happens to the contributions that the scheme had thought were tax-relieved?

Ruth Kelly (Labour, Bolton West)

This touches on the thrust of the amendments. The Inland Revenue would de-register a scheme only in extreme circumstances. If the Revenue spotted a trivial or obvious error, it would be able to check that straight away and perhaps phone up or email the person who had made the application. The onus is on the person who made the application to get it right.

John Burnett (Liberal Democrat, Torridge and West Devon)

I am surprised about the one-day turnaround. Trustees of pension funds will be cautious, and they will send in trust deeds and goodness knows what else to the Inland Revenue. It will take the Revenue a long time—a lot longer than one day—to go through the documents before it responds and gives its views.

Ruth Kelly (Labour, Bolton West)

Such documents would be superfluous to the application. The application form is completely straightforward, and should be easy to check by the Inland Revenue straight away. If an application is rejected, the Revenue will notify the scheme administrator of the fact in writing in accordance with subsection (6). The administrator will then have the opportunity to make a fresh application. The Revenue expects to reject only a small percentage of applications on the basis of incorrect information.

De-registration is a sanction that would be used only in the most serious of cases. The circumstances under which a scheme can be de-registered are set out in clause 148. Examples include failure to pay a substantial amount of tax due, and a significant failure to provide information that is required by the Inland Revenue. Clearly, we could not allow schemes to remain with the tax advantage regime if they were flouting the rules. Removing such a scheme from the regime does not mean that it cannot continue, but from the date of de-registration it must no longer be entitled to the tax advantages that come with registered status.

The situation that the hon. Member for Tatton envisages will not occur in the operation of the scheme. In most cases, the Revenue will explain its decision to reject an application as a natural extension of communicating with the scheme's administrator. In other words, the Revenue would give a reason as a matter of course so we are not talking about information that the Revenue would wish to withhold from the scheme administrator. If the Revenue did not give reasons, or gave inadequate reasons, that would invite an appeal from the scheme administrator, so there is an in-built incentive for the Revenue to explain its decisions, and the amendments are superfluous to the legislation.

John Burnett (Liberal Democrat, Torridge and West Devon)

Yes, there is an appeal system, which is clearly set out in clause 146, but that just means loss of time and greater expense. Only a few bodies are nominated as persons by whom registered pension schemes may be established, and given that they are largely—I hope, entirely—responsible people, it would be sensible to have a free flow of information from them to the Revenue and vice versa. It is in the interests of speed and of lessening bureaucracy and legal proceedings to avoid an appeal and have co-operation. Perhaps the clause should enshrine that.

Ruth Kelly (Labour, Bolton West)

I completely accept and sympathise with the hon. Gentleman's underlying argument. Co-operation is in the best interests not only of the Inland Revenue but of the scheme administrators. My argument is that the in-built incentives to avoid an appeal are so strong that to enshrine in legislation the fact that the Revenue must explain its decision to the scheme administrator is a step too far—it is superfluous. The Revenue will have a quick turnaround time, the application form will be straightforward, and it will of course explain its decision if it has to reject an application.

Rob Marris (Labour, Wolverhampton South West)

I say this as someone who is still a member of the Law Society and who practised law as a solicitor, although not in this area, before I entered this place. I recall that in certain circumstances of administrative law a public body cannot be appealed against or taken to judicial review if it does not give reasons for its decisions, but should it voluntarily give reasons, it is liable to judicial review—ergo, there is on

occasion an incentive for a public body not to give reasons. That is my concern and, I suspect, a concern of the hon. Member for Tatton.

Ruth Kelly (Labour, Bolton West)

That concern has not been expressed by the Inland Revenue, which intends to give explanations as a matter of routine. It has made it absolutely clear, and I give a commitment in this Committee, that it intends to explain the reasons for refusal. I hope that I have put to rest my hon. Friend's fears. The amendments are superfluous, and I ask that they be withdrawn.

George Osborne (Conservative, Tatton)

I am in two minds about the hon. Member for Wolverhampton, South-West (Rob Marris). On the one hand, he sits in a key Tory marginal, which we must take back if I am to sit on the other side of the Committee. On the other hand, he has always caused trouble for Ministers in the various Committees on which I have served with him, so I would not want him to lose his seat.

Rob Marris (Labour, Wolverhampton South West)

On a point of order, Sir John. The hon. Gentleman suggested that I always cause trouble. I strongly object to the use of the word ''always,'' and I urge him to reconsider it or produce some evidence.

George Osborne (Conservative, Tatton)

I remember the Employment Bill Committee, in which the hon. Gentleman regularly took the Minister to task on various matters. That was helpful to my side of the Committee, and I did not object to it. Naturally, I think that he performs a good, constructive role. Other Labour Back-Bench Members may wish to follow his example.

Turning to the substance of the amendments, I am glad that we have had this debate. The Financial Secretary has given a verbal commitment that the Inland Revenue will, as a matter of routine—that was the phrase she used—provide explanations if it decides not to register a scheme. We shall see whether it turns around applications in one day. I can already envisage the written questions about the average time taken to process a registered scheme application, and since this will all take place in 2006, I shall be the one providing the answer. I am grateful that she saddled me with that commitment.

John Burnett (Liberal Democrat, Torridge and West Devon)

Would the hon. Gentleman be happy to hear some form of reassurance from the Financial Secretary about the points on tax relief that he and I raised?

George Osborne (Conservative, Tatton)

I do have a concern about tax relief. However, if schemes were to be processed in one day, as the Financial Secretary assures us would be the case, the problem would not arise. It will become an issue of relevance in the way that I described if it takes several weeks or months to register a scheme.

John Burnett (Liberal Democrat, Torridge and West Devon)

The point is that if registration is denied and subsequently granted—I believe the Financial Secretary is nodding—tax relief would be available ab initio. Am I wrong about that?

George Osborne (Conservative, Tatton)

Sorry, that was the hon. Gentleman's second point. I do not know the answer; perhaps the Financial Secretary can provide it. I suspect that the

decision by the tribunal would be that tax relief should be granted from the receipt of the application. I am getting used to giving answers.

Given the assurances that I have had from the Financial Secretary, I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

George Osborne (Conservative, Tatton)

I beg to move amendment No. 289, in

clause 143, page 132, line 38, at end add

'and no application need be made to the Inland Revenue under this Part'.

My Liberal Democrat friend spoke to my amendment before I moved it. It is designed to clarify something that I am sure the Financial Secretary will be able to clarify in her response. Part 1 of schedule 34 states that any current approved pension will, on 6 April 2006, become a registered pension scheme unless it chooses not to. That seems sensible. The amendment would just make it clear that schemes do not have to make an application to the Inland Revenue for that to happen and that it will happen automatically. I am sure that that is so and I look forward to the Financial Secretary confirming that, because there has been some confusion in the industry about whether schemes will have to apply.

Perhaps the Financial Secretary could also deal with the point about what schemes must do if existing scheme rules do not meet the requirements of the new regime. I understand that there is a catch-all power in the legislation for scheme rules to be amended, but what does an existing scheme need to do as it approaches A-day to ensure that it is in order with the new regime? Does it need to make any application to the Inland Revenue? The amendment would sort that out.

Another point about the registration process, which will be of particular interest to current schemes and also to future schemes, is that the December 2003 consultation paper said that a facility of electronic registration would be developed. That is welcome. I have become an even greater fan of e-government since a constituent and friend became the new e-envoy. One of his jobs will be to allow the registration process to take place over the internet. However, there is an ominous sentence in the consultation document, which states:

''Making e-business the mandatory method for registering [and subsequently amending and reporting scheme details and information] could lead to a step change in delivery. Views would be welcomed on this approach.''

It is one thing to make e-registration possible but another to make it the mandatory means of registering a scheme. It will be easy for large schemes, but there are many small schemes and people may not be totally familiar with the technology and may prefer to continue to use a paper-based process. Perhaps the Financial Secretary will say something about the views that she has received in the past six months on that proposal in the consultation document.

John Burnett (Liberal Democrat, Torridge and West Devon)

I jumped the gun because I thought that amendment No. 289 was grouped with the previous amendments. I will not repeat what I was going to say, but look forward to hearing reassuring words from the Financial Secretary.

Ruth Kelly (Labour, Bolton West)

The amendment is unnecessary. Nothing in clause 143 states that making an application is the only route by which a pension scheme becomes registered.

The application arrangements set out in the clause are primarily for use by new schemes that are established after the simplified regime takes effect. There are separate transitional arrangements in schedule 34 under which existing schemes, if approved for tax purposes by the Inland Revenue, are admitted into the new regime. Paragraph 1 of that schedule states that any such scheme will

''be treated as becoming a registered . . . scheme''

from 6 April 2006. Therefore, it would be superfluous to say that those schemes do not need to make an application under this part of the legislation because that is already clear from schedule 34.

The Inland Revenue will use the time between now and 6 April 2006 to ensure that the pensions industry knows about the transitional arrangements. We expect that the vast majority of existing schemes will wish to remain within a tax-advantaged environment and they will not need to do anything, although they will need to be aware that entry into the new regime brings new responsibilities—for example, to apply the lifetime allowance test when certain events occur.

The Revenue will publish guidance and work closely with the industry to ensure that the right messages are conveyed to scheme administrators and, more widely, to scheme members and employers.

The hon. Member for Tatton raised the issue of whether electronic registration should be mandatory. He is correct that we consulted on that. Responses were, as one might expect, mixed. Although most of the respondents were in favour of the change, there were concerns about the cost of transition to a fully electronic system, so I inform the Committee that we do not propose to make e-filing mandatory, although I recognise the case made by the hon. Gentleman and his friend the e-envoy, that such a move could bring a step change in the efficiency of the process. At this moment, there is not sufficient support to make that step. On the grounds that the amendment is superfluous, I ask him to withdraw it.

George Osborne (Conservative, Tatton)

It was not I who said that such a move would make a step change in delivery, nor my friend the e-envoy. It was the Government's consultation document that made that point.

My experience of e-government was when I tried to make a passport application online. I went through loads of processes and various pages and at the end it said ''press print'', and out came an application form that I could have got from the post office. I then had to send it in the post with my photographs and so on.

It is good to hear the groundbreaking news from the Financial Secretary that the Government are not going to make e-registration mandatory. I hear what she says

on my amendment about working with the industry to ensure that people are aware of the changes, and, as she put it, that the registration process will happen automatically unless they opt out of it. The issue of amending scheme rules to make them consistent with the new regime is something that we can come back to at a later stage. Although there is a general Inland Revenue power to change scheme rules in the legislation, I cannot remember where it is. Once I do, we can have that debate at greater length.

Given what the Financial Secretary has said, and the huge U-turn on e-registration, I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

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

Howard Flight (Conservative, Arundel and South Downs)

You, Sir John, and the Committee will be aware that the tax approval regime that registration replaces has been the policing force by which what pension funds can invest in has been effectively controlled. In the regime that is coming to an end, there are some areas that one might object to—for example the fact that money purchase pension schemes can never invest in venture capital—but the implication of the new registration regime is that there will be no limits at all on what any sort of pension fund can invest in. As I broadly support market economies, I am attracted to that, but I am also mindful of the vulnerability of some.

The Financial Secretary said that the Revenue wants to know where people might be managing their own money purchase pension scheme. Clearly it is a situation where people could be preyed on and persuaded to invest in inappropriate investments or indeed to have the weighting of their investments wrong. Through all the discussion and consultation preceding the reforms, the Government have said nothing at all, as far as I am aware, on the fundamental issue of whether we are going to move to an investment free-for-all for all forms of pension fund or whether it is their intention to introduce some regulation that will impinge on whether the Revenue agrees to register a fund. If so, they should make that absolutely clear. If not, and we are going to have a free-for-all in two years, that should be made absolutely clear. I would like to hear from the Minister what the Government's policy is on this.

I offer one minor word of caution. In the main, I have always felt that the investment rules for ISAs and PEPs have been sensible: they are extremely broad and do not prevent people from investing in things that they might want to invest in, but they have also had the advantage of protecting them from being exploited and from their own mistakes. However, while I am in favour of getting rid of constraints and regulations, if we are to move to a complete free-for-all we should be aware that that opens the door to problems in the future, with people turning around and saying, ''I was sold a pup and I should not have invested in that,'' or, ''It was mis-sold to me,'' and so forth.

I raise this issue now to make the point that the change from tax approval to registration effectively ends the old system of policing, and I would like to know what the Government's proposals are—if they have any—for the investment regime for pension funds in the future.

Ruth Kelly (Labour, Bolton West)

I believe that we will come on to debate the set of investment rules that will apply to pension schemes and how they will operate, although I am at a loss at the moment to remember under which clause that will take place, but given that the hon. Gentleman has raised this matter under the registration of pension schemes, perhaps I should say a few words on it now.

John Butterfill (Conservative, Bournemouth West)

Order. I have some sympathy with the hon. Lady in that I am not entirely clear myself as to why the nature of the investments should be considered when we are looking at the requirements for registration. However, perhaps she is prepared to say something general.

Howard Flight (Conservative, Arundel and South Downs)

I am more than happy for this to be talked about later, but the important point is that the investment regulations were a function of tax approval, and we are getting rid of tax approval and moving to registration. Under the old arrangements, things could be enforced: if people did not stick by what had been approved, their schemes were unapproved, with all the penalties. We are now moving to this new registration arrangement for which there is no policing, other than up front.

If there are to be rules about what can and cannot be invested in, with this clause getting rid of what was the policeman, it prompts the question of what will be the policeman of the future. Most of the industry understands that there will not be any rules. I am not sure what the Minister is referring to, but I have not been able to find anything other than what are some very minor references in comparison with the sort of regime that was provided by the Revenue under the approval system.

Ruth Kelly (Labour, Bolton West)

The hon. Gentleman is making points that arise more properly under clause 160. However, as he has made some general points, I will respond in general terms now.

I understand that the hon. Gentleman welcomes the general simplified approach to taxation arrangements and pensions, and the one set of investment rules that will now apply throughout all tax-privileged pensions. The general rule is that all commercial investments will be allowed, but there are certain restrictions; loans to sponsoring employers will be subject to restrictions, for example, and there are other restrictions, too.

The hon. Gentleman is right that the policing mechanisms have changed, although I propose to return to that when we debate this matter more fully. We have a process now, check later system. That should speed up the process enormously for scheme administrators and introduce huge simplicity to the arrangements. We have set out in detail the investment rules that will apply and how they will be policed through the audit system. However, with your

permission, Sir John, the precise mechanisms of how that will operate would be better debated later on in our proceedings.

Question put and agreed to.

Clause 143 ordered to stand part of the Bill.

Clauses 144 to 146 ordered to stand part of the Bill.

Clause 147 - De-registration

George Osborne (Conservative, Tatton)

Before we nod through the process of de-registration, we should just get the Government to explain one or two things. After all, we are talking about a draconian power to de-register a scheme, not least because there is an immediate 40 per cent. tax charge on the value of the fund once de-registration takes place.

I have one specific question and then I will make a broader point. As I understand it, under the current system if a scheme loses approval it also loses the last six years of tax privilege. Is that the same in this proposal? Would the six years of tax privilege be lost? That is not spelled out.

On the broader point, a 40 per cent. tax charge on a scheme will obviously have a huge impact on members. What if those members are the innocent victims of fraud or incompetence by the scheme administrators and trustees? They will have had the value of their fund dramatically reduced by the Inland Revenue. Indeed, they will probably already, by definition, have been the victims of huge unauthorised payments of 25 per cent. or more coming out of what they thought was their pension fund. What will be

done to protect members in such cases? How does the de-registration process work with the parts of the Pensions Bill that are concerned with the pensions regulator, who can step in and freeze a pension scheme and start administering it on behalf of members? How does the process relate to the role of the pension protection fund? When would a scheme be de-registered but not referred to the pensions regulator? Those are confusing issues. Indeed, if the pensions regulator is trying to save a scheme and to resuscitate it, it will not helped by the fact that on day one the Inland Revenue has grabbed 40 per cent. of the scheme's value. Perhaps the Financial Secretary will say something about those questions.

The grounds for de-registering are in the next clause, but if you allow me, Sir John, I will touch on the matter now, because it is part of the same point. Most of the grounds for it are serious, but there is also a power to de-register a scheme where information is required, the scheme fails to provide it and that failure is ''significant''. One of the definitions of ''significant'' relates simply to the quantity of information provided, not its quality. In other words, it might not relate to substantive information that a scheme failed to provide, but a large amount of information. Will the Minister clarify that the Inland Revenue will make a quality judgment on that, and that if it is significant information that the scheme is failing to provide and it has had lots of warnings, that is when de-registration kicks in?

The principal point that I wanted to know about was the way in which the rights of members will be protected where, through no fault of their own, fraud has occurred or huge unauthorised payments have taken place, and they see the value of their scheme disappear.

It being twenty-five minutes past Eleven o'clock, The Chairman adjourned the Committee without Question put, pursuant to the Standing Order.

Adjourned till this day at half-past Two o'clock.

Standing Committee A

Finance Bill

John McWilliam (Labour, Blaydon)

Order. Gentleman may remove jackets—I have taken mine off. I apologise for the heat in this Room; it is quite appalling, but there is nothing that we can do about it. The only air-conditioned Room in the Committee Corridor is the one that the Appeal Court judges sit in.Clause 147 De-registration

Clause 147 - De-registration

Ruth Kelly (Labour, Bolton West)

I am delighted to welcome you to the chair for this afternoon's proceedings, Mr. McWilliam.

We have been debating the new registration process and in particular the provisions for de-registration and how they might be applied. The new registration process provides pension schemes with a more straightforward way of entering the tax advantage regime, but unfortunately there will always be a small number of schemes that do not play by the rules. The Inland Revenue can use a range of sanctions against such schemes. The ultimate sanction, for the most serious offenders, is to withdraw the scheme's registered status and so deny it access to the various tax exemptions. Under existing legislation, the Revenue already has the discretion to withdraw a scheme's tax approval, and this clause merely provides the equivalent power in the new regime.

The power would be used only where there was a flagrant disregard for the responsibilities that come with a pension scheme's tax-privileged treatment. The Government allow generous tax relief for pension schemes on the strict understanding that a scheme's funds are used only for certain purposes. If a scheme consistently or blatantly uses funds for other purposes, or fails to tell the Revenue what is happening to the funds, it is right that the Revenue should be able to apply the ultimate sanction of withdrawing tax-favoured status, subject of course to an appeal right.

The hon. Member for Tatton (Mr. Osborne) asked how the Revenue intends to apply the terms ''significant failure'', ''materially incorrect'' and ''substantial amount''. I freely admit that those phrases are not defined in the Bill. It would be difficult

to do so and would make the rules more complex. However, I can tell members of the Committee that the Revenue intends to issue guidance on the interpretation of those terms. Of course, it will only be guidance. Ultimately, it will be for the commissioners or the courts to decide whether the Revenue is interpreting the terms correctly. If the scheme administrator thinks that the Revenue is interpreting the terms too restrictively, an appeal can be made against de-registration and the commissioners will consider whether the decision to re-register is reasonable.

Members were interested to know at what point a scheme loses tax relief if it is de-registered. The Revenue's notification will state the date from which de-registration is effective. Any contributions, investment growth or authorised lump sum payments made before that date will benefit from full tax relief, but any occurring on or after that date will be subject to tax. There is no six-year clawback, as there is under the current regime.

The hon. Member for Tatton was also interested in the relationship between the Revenue's power to reclaim tax relief and de-register a scheme, and the pensions regulator and the pension protection fund. He quite rightly expressed a concern for the interests of otherwise innocent members of a pension scheme. However, de-registration would never be an automatic process. The clause merely states that the Revenue ''may withdraw'' a scheme's registration, and clause 148 sets out the circumstances in which that step may be taken. Before making a decision on de-registration, the Revenue would always take into account the circumstances of a scheme and its members. That is what happens under the current regime: the Revenue exercises its discretion before withdrawing a scheme's tax approval. The courts expect the Revenue to exercise its discretion in a way that does not cause undue damage to the interests of the members. That onus on the Revenue will continue under the new regime.

The Revenue expects to work closely with both the pensions regulator and the pension protection fund, subject to the statutory restriction on disclosure of confidential tax information. The Revenue already enjoys a good working relationship with the Occupational Pensions Regulatory Authority, which I am confident will continue when OPRA is succeeded by the pensions regulator. I think that I have covered all the points that have been raised.

Rob Marris (Labour, Wolverhampton South West)

Subsection (2) talks about the Inland Revenue notifying a scheme administrator. In a situation where there is a crooked scheme administrator, the scheme administrator might be notified but we would not then move on, under subsection (3), to notify the trustees and members. That is a possible lacuna. Will the Minister make a few remarks about that?

Ruth Kelly (Labour, Bolton West)

The relationship between the Revenue and the scheme administrators is primarily based on trust. The pension trustees are there to ensure that the scheme is operated in the interests of its members. If

the normal notification process did not work, I would expect the Revenue to take steps to ensure that the normal processes were followed. In this particular case we are talking about de-registration and the point from which tax relief is disallowed. It would be disallowed from the point of de-registration, hence from the point at which it was notified to the scheme administrator.

Rob Marris (Labour, Wolverhampton South West)

In a situation with a crooked administrator, the Revenue might notify that body of de-registration and, therefore, of withdrawal of the tax exemption, but because the administrator had been notified under subsection (2), the members and the trustees would not be notified under subsection (3), as that subsection kicks in only when there is no administrator.

I am concerned about a crooked administrator who receives that notification. The exemption would be withdrawn, but the members and trustees would not be automatically notified by the Revenue because a valid notice would have been served on an administrator, albeit a crooked one.

John McWilliam (Labour, Blaydon)

Order. Can I ask Members to speak up, please? We want to leave the doors open so that the Room will remain as comfortable as possible, but obviously there is more background noise than normal.

Ruth Kelly (Labour, Bolton West)

Clearly, the scheme administrator has certain responsibilities that it is up to it to discharge. My hon. Friend rightly highlights provisions in the Bill for notifying other responsible members where there is no administrator. However, we are relying on the general framework of law to operate, and the scheme administrator has to discharge its responsibilities. For those reasons, I suggest to hon. Members that they support the clause.

Question put and agreed to.

Clause 147 ordered to stand part of the Bill.

Clauses 148 and 149 ordered to stand part of the Bill.

Clause 150 - Payments by registered pension schemes

Ruth Kelly (Labour, Bolton West)

I beg to move amendment No. 297, in

clause 150, page 136, line 31, after second 'to' insert 'or in respect of'.

The amendment introduces a minor clarification. The clause introduces a rule on the payments that a registered pension scheme may make under the new simplified regime. It also introduces the rules for the borrowing that registered schemes may enter into. There will be a single, clear set of payment and borrowing rules that schemes must follow in order to stay within the parameters of the regime and obtain maximum tax relief for themselves, their members and sponsoring employers. They are called authorised payments, and they entirely meet the Government's

intention to provide generous, up-front relief for pension saving and to ensure that tax relief funds provide income for life in retirement.

To provide fairness and Exchequer protection and to encourage the use of tax relief funds for their intended purpose of providing an income for life in retirement, the regime provides for certain tax consequences to apply where payments are made which fall outside the authorised payments rule. They are called unauthorised payments, and we will come on to them in more detail after clause 161. In the context of the generous tax relief that will be available under the new regime, it is right that sanctions should apply where the rules are not complied with.

Unauthorised member payments not only cover payments that a scheme is not authorised to make, but treat as an unauthorised payment certain other transactions set out in clauses 161 to 163, which I shall turn to shortly. We need to ensure that not only are direct payments to a member treated as unauthorised member payments, but where such a payment or transaction can be undertaken in respect of a member that is caught by the unauthorised payment rules.

Clause 161 creates a tax charge when a member assigns his pension rights to someone else. We also want that to apply when the dependant of a member assigns a dependant's pension. The amendment enables the unauthorised payment charge in such circumstances, and I commend it to the Committee.

Amendment agreed to.

Clause 150, as amended, ordered to stand part of the Bill.

Clause 151 - Meaning of payment etc.

Ruth Kelly (Labour, Bolton West)

I beg to move amendment No. 298, in

clause 151, page 137, line 31, at end insert

'(or who was connected with a member at the date of the member's death)'.

John McWilliam (Labour, Blaydon)

With this it will be convenient to discuss the following:

Government amendments No. 299 and 317 to 322.

Ruth Kelly (Labour, Bolton West)

Our aim is to provide clear rules showing what payments a pension scheme may make which accord with our purpose of giving tax relief. Those are called authorised payments. We also want to identify clearly which payments do not accord with that purpose—unauthorised payments. The rules on unauthorised payments that are made by direct payment ensure that the effect of those clauses continue after the death of the member to which the payments relate. The amendments ensure that similar rules apply to the clauses that deem unauthorised payments to apply to transactions other than direct payment.

As part of the pension rules, we need to make it clear what constitutes a payment. Clause 151 provides that definition and makes it clear that it includes a payment

of money, and money's worth. The clause also provides that assets held by those connected with members are deemed as being held by that member. The clause is an integral part of the new, clear framework and rules that will guide registered schemes through what they may or may not pay out.

Clause 161 ensures that where rights under registered pension schemes are assigned, the scheme is treated as having made an unauthorised payment at the time of the assignment. Amendments Nos. 317 and 318 clarify that position where it is the member's personal representative who assigns the benefits from a pension scheme. In such circumstances, the amendments ensure that the assignment by the personal representative is treated as being in respect of a member and so will be an unauthorised payment for the purposes of clause 150.

Clause 162 is the second of three clauses that provide for unauthorised payments to arise in specific circumstances. It sets out the specific circumstances in which unauthorised payments are deemed to arise. It deals with cases where the assets of a pension scheme are used to provide a benefit to the member, their family or their household. The new regime will provide a much freer choice for tax-favoured pension schemes over what sort of investment they make. We believe that schemes should as far as possible be left to decide, in light of market developments, their own investment strategy and choice of investment assets. The new simplified regime significantly reduces the current number of restrictions and the investments that can be held by pension schemes.

In the new simplified regime, a registered pension scheme may, if it wishes, invest in an asset that may be used to provide a benefit to a member of the family or household. However, if a benefit is provided in that way, clause 162 deems an unauthorised payment from the scheme to arise, which will attract an income tax charge. The clause provides for the amount of an unauthorised payment of this type to be valued for tax purposes in the same way as amounts under the existing benefit-in-kind tax legislation, which applies when an employee obtains a non-monetary benefit from their employer.

Clause 163 deals with a case where value passes out of the scheme without an actual physical payment being made. One way of doing that is through value-shifting arrangements. There are many ways in which value shifting might occur. To pick a simple one, a scheme might alter the terms of a lease, which increases the value of the member's asset and reduces that of the scheme. Clauses 161 to 163 apply to transactions carried out by registered pension schemes with members of that scheme and with those connected with members.

The amendments are designed to ensure that the clauses continue to apply to transactions undertaken with those connected with members after the death of the member. The new pension regime sets out detailed rules on what payments a registered pension scheme may make to dependants after the death of a member. It provides generous rules to enable members to provide for their dependants in a tax-efficient manner.

The benefits include tax-free lump sums, to be paid out if the member had not begun to receive benefits, and allow the continuation of tax benefits to be paid if the member had begun to receive them. However, the rules are designed to prevent registered pension schemes from being used purely as a method of passing tax relief funds to dependants, so they do not allow any tax-free payments to be made if the member was over 75 when he or she died.

The amendments are designed to ensure that those who are connected to members do not receive benefits from pension schemes after the death of the member in ways not intended by the pension rules, and they therefore protect the integrity of the rules. They narrow the rules on unauthorised payments made by cash payments and ensure that the rules related to transactions that pass value by means other than direct payment also work after the death of a member. The amendments will not affect the legitimate and generous benefits due to dependants. They are designed to ensure that the rules are not abused by unauthorised payments being made. I commend them to the Committee.

Amendment agreed to.

Amendment made: No. 299, in

clause 151, page 137, line 34, after 'employer' insert

'(or who was connected with a member at the date of the member's death)'.—[Ruth Kelly.]

Clause 151, as amended, ordered to stand part of the Bill.

Clause 152 - Meaning of ''loan''

George Osborne (Conservative, Tatton)

I beg to move amendment No. 292, in

clause 152, page 138, line 16, at end insert 'except in prescribed circumstances'.

John McWilliam (Labour, Blaydon)

With this it will be convenient to discuss amendment No. 270, in

clause 160, page 142, line 29, at end add 'except in prescribed circumstances'.

George Osborne (Conservative, Tatton)

The amendments deal with the clause that sets out the definition of a loan and the circumstances under which an unauthorised payment is made. They seek to avoid something that we think may occur. Under subsection (4), if a member or employer of a scheme is liable to make payments to the scheme but does not, the debt is considered as a loan. Subsections (4) and (5) raise the possibility that a payment due from either a sponsoring employer or a member to a registered pension scheme that simply is not paid by the time that it falls due will be treated as a loan. Clause 168 would then kick in, making it an unauthorised loan with all the consequences that would follow from that. When we discussed clause 150, the Financial Secretary spelled out some of the various sanctions and surcharges that could be applied.

Obviously, such powers should be in place, but it does not make sense for them to be applied if the sponsoring employer simply fails by accident to pay amounts due—even though a person at arm's length would expect them to be paid promptly—and the pension scheme cannot recover the funds by the due date. We need some device, some carve-out, to avoid the unnecessary consequences of what is basically a failure by the sponsoring employer, not by the registered pension scheme. Similar comments apply to amendment No. 270 to clause 160, which deals with scheme administration payments.

Ruth Kelly (Labour, Bolton West)

Under the new regime, registered pension schemes will be allowed to make certain loans, but other loans will be regarded as unauthorised payments and therefore subject to tax charges. For example, we recognise that pension schemes can provide a valuable source of business finance to sponsoring employers, so registered pension schemes will continue to be allowed to make such loans, but loans to scheme members do not have the same business purpose and so will not be allowed. Clause 152 sets out the rules for determining what is and what is not to be regarded as a loan for the purposes of applying the rules on loans.

First, the clause establishes that the transactions whereby schemes purchase certain financial instruments that are publicly available or that are listed on the stock exchange will be allowed and will not come within the rules on loans. Secondly, the clause brings certain other transactions within the rules on loans. Those are guarantees provided by the pension scheme over loans made by third parties to the member or sponsoring employer and debts owed to the schemes by a member or sponsoring employer where the debt is not paid on the normal date for payment. The clause provides clarity for schemes on the treatment of certain payment and other transactions that they may wish to make.

Subsection (4) prevents members or sponsoring employers deferring the payment of debt to pension schemes on non-commercial terms. It does that by treating debts that are outstanding for long periods as loans that are subject to the restrictions on loans set out in the Bill. The subsection will treat such debt as a loan only if it is not repaid on normal commercial terms and will take into account the circumstances of the debtor. The subsection ensures that the schemes collect debts on normal commercial terms from members and sponsoring employers. It ensures that the funds in those schemes, which have been built up with generous tax reliefs, are protected from non-commercial transactions.

Amendment No. 292 seeks to include a regulation-making power, which would mean that, in certain circumstances, the provisions of subsection (4) would not apply. That might mean that certain debts would be left outstanding for unspecified periods, providing what is, in effect, an interest-free loan for the employer or member concerned. Having that rule in place is an important protection for members. I do not believe

that a regulation-making power to amend the commercial nature of the subsection would be appropriate. I urge the hon. Gentleman to withdraw the amendment.

Amendment No. 270 proposes a similar change to clause 160. It seeks to provide a power to prescribe circumstances whereby a registered pension scheme may make a loan to a member. Unlike loans to sponsoring employers, there are no commercial reasons why loans should be made to members. Sponsoring employers are closely linked to their pension schemes and there has for many years been provision for commercial loans to be made by pension schemes. We have had no representations from industry to extend the provisions to loans to members, as there is not, generally, the same business relationship. Loans to members involve an unnecessary financial risk for pension schemes. Many schemes are controlled or influenced by members and may make loans that will not be prudent investments.

Together, clauses 152 and 160 provide clarity for schemes on the type of loans that they can make and the treatment of them. I therefore urge the hon. Gentleman to withdraw his amendment and, if he does not do so, I urge the Committee to reject it.

George Osborne (Conservative, Tatton)

The important point there was that the Financial Secretary said that the circumstances would be taken into account. Opposition spokesmen frequently complain about the Government taking on regulatory powers—I have just done so on the Floor of the House— but here was an Opposition amendment that would have given the Government regulatory powers.

The reason is that we wanted to avoid a situation where unnecessary consequences flow from what is, fundamentally, a failure by a sponsoring employer, and not a registered pension scheme. We did not think that the clause was sufficiently flexible to allow that. The Financial Secretary said that all sorts of horrible things might happen. One assumes that the regulations drafted by the Inland Revenue will be sensible enough to ensure that it is rarely restricted. Nevertheless, if the hon. Lady is satisfied, and has not had strong representations from the industry, I am happy to beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 152 ordered to stand part of the Bill.

Clause 153 ordered to stand part of the Bill.

Clause 154 - Authorised member payments

George Osborne (Conservative, Tatton)

I beg to move amendment No. 293, in

clause 154, page 138, line 39, leave out 'and'.

John McWilliam (Labour, Blaydon)

With this it will be convenient to discuss the following:

Amendment No. 294, in

clause 154, page 138, line 39, at end insert—

'(ea) payments made to settle a dispute, other than payments made in bad faith; and'.

George Osborne (Conservative, Tatton)

We are getting into the meat of the Bill. The issue of authorised member payments is just a foretaste of the debates that we will have on the forthcoming clauses. The amendments—I am talking more about No. 294 than No. 293, which is consequential—are to clause 154, which sets out the authorised payments that a scheme can make to a member. They are all sensible and people would not disagree with them. They include, for example, pensions, lump sums, recognised transfers, scheme administration payments—I may say something about that shortly—payments pursuing a pension sharing order such as divorce, and so on. The Inland Revenue provides itself with a general regulatory get-out provision in paragraph (f) under which

''payments of a description prescribed by regulations made by the Board of Inland Revenue.''

It would be interesting to know what the Revenue is cooking up for that.

My amendments would introduce a new category of payments to settle a bona fide dispute in good faith so that they would not be treated as unauthorised payments. That is a sensible let-out provision whereby an attempt to settle a dispute amicably and in good faith should be allowed to happen. The Financial Secretary may say that under the regulatory powers that the Inland Revenue is taking on itself regulations may be considered to allow bona fide payments to be made. If she says that, I will be happy to withdraw my amendment, although, in general and notwithstanding my earlier amendment, we prefer to see provisions in the Bill rather than in regulations. However, we do not want attempts to avoid costly litigation to fall foul of the restriction on authorised member payments.

Ruth Kelly (Labour, Bolton West)

I do not think that amendments Nos. 293 and 294 are appropriate or that pension schemes should use their money to pay amounts to members to settle disputes. There are no plans for the Inland Revenue to use its own regulations to enable it to do that.

The purpose of providing tax relief to registered pension schemes, employers and members is to encourage pension saving to provide individuals with an income for life after retirement or an income for dependants after the death of an individual. The new rules must ensure that payment schemes fit that purpose, and the clause provides a list of the payments that a registered pension scheme is authorised to make to or in respective of members. They include pensions, certain lump sums and transfers to other schemes. The various items on the list are defined in subsequent provisions.

The hon. Gentleman seeks to insert a new category of authorised payment to settle a dispute other than payments made in bad faith. However, his amendment does not describe what ''dispute'' means and would cover any dispute. In addition, the amendment imposes no limit on the amount of the payment; it must simply not have been made in bad faith. Our legal advice is that that would be a difficult hurdle and that the Revenue might have some difficulty in

demonstrating in particular cases that the test was satisfied. Quite large payments could be made for relatively minor disputes.

Schemes will have disputes with their members, and it is right that they should make payments to members if compensation is due to them. There is nothing in the Bill to prevent that. However, if members receive benefits from a pension scheme, it is right that they should be taxed on them, unless they are one of the specific tax-free lump sums that registered schemes offer as part of the general tax reliefs given. Amounts paid to settle disputes are also benefits being paid out of tax relief to funds and it is right that they should be taxed, as with other benefits. Similar treatment arises under the current regime when such payments are also taxed as unauthorised payments unless they fall within the types of benefit specifically allowed. The new regime merely continues the previous treatment.

It is completely fair to say that schemes are doing nothing wrong in making such payments, so the charge applies to schemes that are making unauthorised payments. The scheme sanction charge is not specifically applied to payments by clause 230. I therefore urge the Committee to reject the amendment, or perhaps the hon. Gentleman will considering withdrawing it.

George Osborne (Conservative, Tatton)

Thank you, Mr. McWilliam.

Mr. Howard Flight (Arundel and South Downs) (Con) rose—

John McWilliam (Labour, Blaydon)

Order. The hon. Member for Arundel and South Downs (Mr. Flight) is attempting to catch my eye. If the hon. Member for Tatton says the wrong words, the hon. Member for Arundel and South Downs will not be able to catch my eye. If the hon. Member for Tatton is going to give way to his hon. Friend, I will be delighted.

George Osborne (Conservative, Tatton)

Before I withdraw my amendments, it would be interesting—

John McWilliam (Labour, Blaydon)

Order. The hon. Gentleman nearly did it. Under Standing Orders, the utterance of the words ''withdraw the amendments'', with a clear indication that that is the intention, would force me to put the question immediately. I was raising a point of order with him, pointing out a pitfall that he was liable to fall into if he were not careful. However, I will give him the opportunity to let the hon. Member for Arundel and South Downs in.

Mr. Osborne rose—

Mr. Flight rose—

Steve Pound (Labour, Ealing North)

The hon. Member for Tatton showed such promise.

George Osborne (Conservative, Tatton)

The hon. Gentleman should take off his jacket.

I think that it is important that other members of the Committee have the chance to make a point before we decide how to deal with the amendments.

Howard Flight (Conservative, Arundel and South Downs)

I thank you for your assistance and welcome you this afternoon, Mr. McWilliam.

An example occurred to me. I seem to recollect a major legal argument between the Unilever pension fund and its fund managers that was eventually settled with a payment to the pension scheme, but such a dispute might have been settled with a payment by the pension scheme. My point is simple. There are obviously territories of payments to members and territories of dispute payments to non-members. It would clearly be nonsense if the trustees of a pension scheme ended up making a dispute payment to non-members in trying to do their best to manage the pension scheme assets, for which they were then disqualified. I am seeking comfort that such a situation could not give rise to a problem if nothing were done about the points that we have raised.

Rob Marris (Labour, Wolverhampton South West)

I suggest that the hon. Gentleman reads the title. It says, ''Authorised member payments''.

Howard Flight (Conservative, Arundel and South Downs)

The issue in my mind was that the transaction could be viewed as a payment on behalf of the members because it was on behalf of members' interests. I genuinely seek clarity about whether there is an issue that needs to be addressed.

Rob Marris (Labour, Wolverhampton South West)

I suggest that the hon. Gentleman reads the clause. It says payments

''in respect of a member'',

not some group action to which the hon. Gentleman has referred.

Howard Flight (Conservative, Arundel and South Downs)

I thank, as ever, the learned and hon. Gentleman for his assistance, and I think that he has put my mind at rest.

John McWilliam (Labour, Blaydon)

Order. It is not Wimbledon week, but that felt like 30-love to me.

George Osborne (Conservative, Tatton)

I am happy to pack up and go home. I would much rather be sitting in the park or in my garden. It is clear that I am not required at all. However, there is one task that only I can perform, so I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 154 ordered to stand part of the Bill.

Clause 155 - Pension rules

George Osborne (Conservative, Tatton)

I beg to move amendment No. 284, in

clause 155, page 139, leave out lines 22 to 26 and insert—

'No payment of pension other than—

(a) a scheme pension,

(b) a lifetime annuity, or

(c) unsecured pension, if the member has not reached age 80, or

(d) alternatively secured pension, if the member has reached age 80'.

John McWilliam (Labour, Blaydon)

With this it will be convenient to discuss the following amendments:

No. 285, in

clause 155, page 139, leave out lines 34 to 41.

No. 286, in

clause 155, page 139, line 42, leave out

and insert

'6'.

No. 221, in

clause 157, page 141, line 1, leave out from beginning to end of line 5 and insert—

'No payment of pension other than

(a) a scheme pension,

(b) a lifetime annuity, or

(c) unsecured pension, if the dependant has not reached age 80, or

(d) alternatively secured pension, if the dependant has reached age 80'.

No. 222, in

clause 157, page 141, leave out lines 13 to 20.

No. 223, in

clause 157, page 141, line 21, leave out

and insert

'5'.

No. 229, in

schedule 28, page 423, line 2, leave out '75' and insert '80'.

No. 230, in

schedule 28, page 423, line 9, leave out '75' and insert '80'.

No. 231, in

schedule 28, page 423, line 13, leave out '75' and insert '80'.

No. 232, in

schedule 28, page 423, line 24, leave out '75' and insert '80'.

No. 233, in

schedule 28, page 423, line 41, leave out '75' and insert '80'.

No. 234, in

schedule 28, page 423, line 43, leave out '75' and insert '80'.

No. 235, in

schedule 28, page 425, line 3, leave out '75' and insert '80'.

No. 236, in

schedule 28, page 425, line 6, leave out '75' and insert '80'.

No. 237, in

schedule 28, page 425, line 11, leave out '75' and insert '80'.

No. 238, in

schedule 28, page 428, line 4, leave out '75' and insert '80'.

No. 239, in

schedule 28, page 428, line 11, leave out '75' and insert '80'.

No. 240, in

schedule 28, page 428, line 15, leave out '75' and insert '80'.

No. 241, in

schedule 28, page 428, line 34, leave out '75' and insert '80'.

No. 295, in

schedule 28, page 428, line 36, leave out '75' and insert '80'.

No. 242, in

schedule 28, page 429, line 46, leave out '75' and insert '80'.

No. 243, in

schedule 29, page 431, line 1, leave out '75' and insert '80'.

No. 245, in

schedule 29, page 433, line 19, leave out '75' and insert '80'.

No. 296, in

schedule 29, page 434, line 27, leave out '75' and insert '80'.

No. 244, in

schedule 29, page 433, line 4, leave out '75' and insert '80'.

No. 246, in

schedule 29, page 435, line 35, leave out '75' and insert '80'.

No. 247, in

schedule 29, page 436, line 15, leave out '75' and insert '80'.

No. 248, in

schedule 29, page 436, line 36, leave out '75' and insert '80'.

No. 249, in

schedule 29, page 437, line 4, leave out '75' and insert '80'.

No. 250, in

schedule 29, page 437, line 29, leave out '75' and insert '80'.

No. 251, in

schedule 29, page 438, line 6, leave out '75' and insert '80'.

No. 253, in

schedule 29, page 438, line 27, leave out '75' and insert '80'.

No. 254, in

schedule 29, page 438, line 34, leave out '75' and insert '80'.

No. 255, in

schedule 29, page 439, line 3, leave out '75' and insert '80'.

No. 256, in

schedule 29, page 439, line 12, leave out '75' and insert '80'.

No. 257, in

schedule 29, page 439, line 31, leave out '75' and insert '80'.

No. 258, in

schedule 29, page 440, line 24, leave out '75' and insert '80'.

No. 259, in

schedule 29, page 440, line 29, leave out '75' and insert '80'.

No. 260, in

schedule 29, page 450, line 3, leave out '75' and insert '80'.

No. 261, in

schedule 32, page 450, line 5, leave out '75' and insert '80'.

No. 262, in

schedule 32, page 450, line 25, leave out '75' and insert '80'.

No. 227, in

clause 177, page 151, line 36, leave out '75' and insert '80'.

No. 228, in

clause 205, page 172, line 27, leave out '75' and insert '80'.

No. 263, in

schedule 32, page 453, line 4, leave out '75' and insert '80'.

No. 264, in

schedule 34, page 474, line 24, leave out '7' and insert '6'.

No. 266, in

schedule 34, page 482, line 17, leave out '75' and insert '80'.

George Osborne (Conservative, Tatton)

Clause 155 is one of the most important clauses in this area of the Bill. It sets out the pension rules and the terms under which payments can be made to members. The Government have set out seven rules. My amendments try to achieve two things. The first is relatively straightforward: to advance the cause of simplification, to pick up on a theme from this morning's sitting. We are trying to achieve that by merging pension rules 4 and 6 into a simple rule about the kind of pension payments that are allowable to members or dependants—there are links with amendments that affect the payment of pensions to dependants. In our view, it is more elegant to have one rule about the payment of pensions, rather than two.

The only reason for having a separate pension rule 6 is to draw a distinction between an unsecured pension, which is available only up to a specified age of 75—we will come to that—and an alternatively secured pension, which is available only after the specified age. Our amendments would simplify matters and merge

the two pension rules, which we think can be dealt with at the same time. We want to help the Financial Secretary to simplify things.

The much larger purpose of the amendments—this is a much more substantial point—is to raise the age at which people can no longer draw down an unsecured pension from 75 to 80. This is the first of three attempts that we are going to make to deal with the annuity issue. I can see hon. Members getting excited about that. The other two attempts will be made when we deal with the next two groups of amendments, one of which deals with alternatively secured pensions. The other is a catch-all group that would remove the requirement to purchase an annuity altogether.

Opposition Members, the industry and more generally the public are disappointed that the Government have not taken the opportunity of these pension provisions to remove the outdated rule that prevents responsible people who have saved for their retirement and provided themselves with a pension from continuing to draw down sensibly from a pension fund and to invest the funds. There have been many attempts in this House in recent years—the Financial Secretary has rebutted most of them—to change the rules, Mr. McWilliam. Your fellow Chairman, my hon. Friend the Member for Bournemouth, West (Sir John Butterfill), introduced a private Member's Bill to try to achieve that, and my hon. Friend the Member for Grantham and Stamford (Mr. Davies), who is taking part in a Select Committee this afternoon, tried to achieve it in 1999. That is the broader point about the requirement to buy an annuity.

We are discussing the cut-off age of 75. Surely there is no logical case for keeping the age at 75. As I understand it, the age of 75 was first identified in the 1988 legislation that established the upper and lower limits of retirement. It established that people could retire at 50, but by 75 they had to take on a compulsory annuity. In legislation in 1995, there was a substantial change: the compulsory annuitisation requirement was removed. By the way, there was always the possibility of taking a lump sump, which we will discuss later. The requirement of compulsory annuitisation in the 1988 legislation was removed in the 1995 legislation and people could draw down their income until they reached the age of 75. So, the age of 75 was a feature of legislation introduced by previous Conservative Governments.

However, two big things have changed. First, life expectancy has continued to increase—I assume that that is something that we all welcome—over the past 16 years. It has increased quite a lot, even on the Government's figures. It is always heartening to read about increasing life expectancy. The graph on page 20 of the Government's December 2002 consultation document does not provide an absolutely accurate scale on the left-hand side. However, it shows that a man aged 50 in 1991 could expect to live a further 26 years. By 2001, that increased to 28 years, and the prediction is that by 2011 it will increase to 30 years. The document does not have a table for life expectancy of women. I understand that the life expectancies of men and women are converging.

John McWilliam (Labour, Blaydon)

Order. Although the hon. Gentleman is cheering me enormously at my age, he really must relate his comments to the 75 mark, as 74, 76 or any number either side of 75 does not really matter.

George Osborne (Conservative, Tatton)

Thank you for your guidance, Mr. McWilliam. My point is that, when the age of 75 was introduced in legislation, life expectancy was lower than it is now. Therefore, there is a strong case for raising the age from 75 to 80, which is what our amendments seek to achieve. Of course, that was precisely the argument used by the Government in their consultation paper and in legislation for raising the minimum retirement age by five years, from 50 to 55. Indeed, the consultation document states:

''At the moment the tax rules permit pension schemes to allow early retirement for people as young as 50. This age was set when life expectancies were much shorter''.

It then provides the chart.

If the Government raised the minimum retirement age by five years because life expectancies changed, why do they not raise the age at which one is required to buy an annuity by five years, from 75 to 80? Based on their logic, I would have thought that that was absolute, plain common sense. One can understand why 75 was chosen in 1988. I was not involved in the decision, as I was taking my A-levels at the time.

Steve Pound (Labour, Ealing North)

There is not much evidence of it.

John McWilliam (Labour, Blaydon)

Order. I was chairing the Finance Bill Committee.

George Osborne (Conservative, Tatton)

In 1988, a man aged 50 could expect to live another 25 years. Now, a man aged 50 can expect to live a further 30 years. The logic of keeping the number at 75 defeats me.

The Government are reducing choice and flexibility by reducing the period during which people can draw down income with an unsecured pension. If the legislation goes through unamended, the potential draw-down period will decrease from 25 years to 20 years. Legislation that is supposed to increase choice and flexibility will actually achieve precisely the opposite.

Rob Marris (Labour, Wolverhampton South West)

Will the hon. Gentleman explain to me, because I do not know, what would happen in the current situation if someone drawing down their pension dies aged 74—or, under his amendment, aged 79? What would happen to the pension pot and to the tax?

George Osborne (Conservative, Tatton)

Either the pension, or a lump sum with a 35 per cent. tax charge, will be passed to the dependant, or something like that will happen. I shall leave it to the Financial Secretary to answer that question. Frankly, as it is all a long way off for me, I do not have to focus on such matters. I believe that my answer is right, but the Financial Secretary can correct me if it is wrong.

Based on the logic of the Government's argument, they should use the legislation to increase the mark, if not to abolish the requirement to buy annuities. I grant that the alternatively secured pension is a chink—

[Interruption.] It effectively does that, as my hon. Friend the Member for Arundel and South Downs says, but the requirement either to choose an alternatively secured pension or an annuity at the age of 75 is a little anachronistic, even according to the Government's own logic. At the least, they should be increasing the age to 80, which would have a similar effect to the introduction of the 75-age mark in 1988. A similar number of people would be affected. A lot of people would be taken out of the requirement to buy an annuity or an alternatively secured pension because they would die between the ages of 75 to 80. Fixing the 75-age mark in 1988 had a similar result.

Owing to the logic of the Government's argument set out in their consultation documents, I am extremely confident that the Financial Secretary is about to accept my amendments.

Ruth Kelly (Labour, Bolton West)

When looking at the amendments, I rather suspected that this might turn out to be a rehash of the debate that we have had so many times across the Floor of the House about the requirement to annuitise at the age of 75. I shall deal with some of the points that the hon. Gentleman raised. He is right to say that life expectancy has risen. That was not, however, the reason that we increased the minimum pension age to 55. We did that because we wanted to encourage active ageing. We wanted people to be part of the labour force for longer and to give them more opportunity to use their skills and talents, in this place as elsewhere.

John McWilliam (Labour, Blaydon)

Order. As someone who is actively ageing, I hope the Financial Secretary is not having a go.

Ruth Kelly (Labour, Bolton West)

I certainly aspire to be in your position in future, Mr. McWilliam. We ought to give such opportunities to people much more widely. Far too many people are currently forced out of the labour market unduly early. We want to give them opportunities to use their creative talents to contribute to the economy, to fulfil themselves and to save more in the process, so that they can better fund their retirement when they choose to retire.

George Osborne (Conservative, Tatton)

The Financial Secretary is talking all this guff about giving people the chance to work longer and so on. It is a mandatory requirement, which we shall come on to. She says that it has nothing to do with life expectancy, but the Government's consultation document says that the age of 50

''was set when life expectancies were much shorter.''

It then includes a great big chart about life expectancy. Therefore, life expectancy is the argument used by the Government for the minimum pension age. Why is it not the argument used for raising the top end of the pension range from 75 to 80?

John McWilliam (Labour, Blaydon)

Order. The phrase, ''all this guff'' is not of itself unparliamentary, but it is certainly ungentlemanly.

Ruth Kelly (Labour, Bolton West)

Of course, if life expectancy had fallen, we would not be in a position to advance our argument. The fact is that people are living longer and we want them to be able to use their talents and skills in the work force to contribute to the economy and to develop themselves in the process. It is only right that they should have the opportunity to do that and, while doing that, to save better to fund their retirement in future. However, the argument about the age at which they are to annuitise their income and secure an income for the rest of their lives is a completely different one. Out of every £100 that goes into someone's pension fund, £30 is Government money in the form of tax relief, designed to enable people to secure an income for the rest of their lives. We give that money for no other reason than to ensure that people are able to support themselves in retirement. We expect people, by a certain age, to avail themselves of the opportunity of an annuity.

Howard Flight (Conservative, Arundel and South Downs)

First, with the greatest respect, it is not Government money that she refers to. It is people's own money, and it is a question of whether they are allowed to keep it or not. Secondly, the age of 75 was knowingly set as being at or around life expectancy at the time. There is a sound argument for saying that, if it has risen by five years and the same principle is retained, whatever the opinion about that, the age at which people are compelled to buy an annuity should be 80, which is today's equivalent of 75. It is a valid proposition to update that aspect without sacrificing the Government's beloved but mistaken principle that an annuity must be bought.

Ruth Kelly (Labour, Bolton West)

The hon. Gentleman should have contained himself for a moment longer because I did not even begin to address the point about the age of 75 and whether it was a reasonable assumption in today's climate. I was arguing that the minimum pension age may have been increased because of longer life expectancy, but the rationale driving the reform was that we wanted people to have the opportunity of actively using their skills and talents in the work force for longer. Part of the process of active ageing is to encourage and to enable people to stay in the work force for longer. Pensioners benefit not only from £30 from the Exchequer for every £100 in their pension pot, but from the tax-free environment, so it is arguable that the benefit is significantly greater than that sum. We could have a long debate on whether that is Exchequer money or individuals' money, but we are not here to discuss the semantics of that point.

The hon. Member for Tatton argued that there was no logical reason for keeping the age at 75. I suggest that there is. In preparation for this afternoon's debate, I spent some time over lunch revisiting the February 2002 consultation document, ''Modernising Annuities'' to refresh my memory about the concept of mortality drag, which I know will be of interest to hon. Members. Rather than rehearsing all the arguments about mortality drag, perhaps I could merely refer hon. Members to that document, which contains a useful box explaining precisely what that is.

The essence of the argument is that, while annuity rates increase as people age and some pensioners believe that it is in their interests to wait for a higher annuity rate when they have a shorter time to live—insurance companies provide higher annuity rates for older pensioners—it becomes more difficult for them to obtain a similar investment growth on their investments to that offered by an annuity. In the early years of retirement, it is possible to achieve higher rates from investment funds, but in the later years of retirement it becomes increasingly difficult. Deciding where the cut-off comes is not a precise science, but the consensus today is that it is around the age of 75, just as when the matter was considered previously.

We certainly considered the matter in some depth when preparing the consultation document, ''Modernising Annuities''. Good financial advice today would still advise people to take an annuity at or around the age of 75. That makes good commercial sense.

Rob Marris (Labour, Wolverhampton South West)

Does the Minister share my surprise that the Opposition's amendment seems to be more or less to force men to buy an annuity on the day before they drop dead at the age of 80?

Ruth Kelly (Labour, Bolton West)

My hon. Friend makes his own point.

If the intention is to pass capital on to heirs because people die before they are forced to buy an annuity, this is not the place for that debate. We had that debate, which is altogether different, on the Floor of the House. I have argued several times that that reform could cost the Exchequer hundreds of millions of pounds. I am sure that we shall return to the matter, but there is no provision for people who do not believe in the pooling of risk to take an alternatively secured pension after the age of 75, although I suggest that good financial advice would be that people take out an annuity by that age. For those reasons, the amendments are inconsistent with Government policy.

David Laws (Liberal Democrat, Yeovil)

Since the Financial Secretary has said that longevity is not a factor in setting the annuity rate at age 75, can she clarify what changes in economic circumstances or retirement age would change her view about the age that has been set?

Ruth Kelly (Labour, Bolton West)

Clearly, if the impact of mortality drag were to change significantly and good financial advice were to suggest that 75 was no longer a reasonable assumption, that would be the time to reopen the debate. At the moment, that is not the case. There has not been a fundamental change. Good financial advice still suggests that people should buy an annuity at around the age of 75. It is the efficient way to secure oneself a decent income in retirement. Given the amount of Exchequer support for pensions, that is what we expect the money to be used for.

The hon. Member for Tatton made a point about the simplification of the rules. The two rules, however, provide for completely different situations. One provides for unsecured income up to the age of 75, the other provides for an alternatively secured pension after the age of 75. I am advised that, as they cover

different circumstances, the rules could not be merged satisfactorily. If he provides evidence to the contrary, I will be willing to listen. However, on grounds of principle, I urge hon. Members to reject his amendments.

George Osborne (Conservative, Tatton)

I am afraid that I am not entirely convinced by the Financial Secretary's arguments. She did not address a couple of my points. It had to be pointed out to her that the Government used life expectancy as a reason to raise the minimum retirement age. I know that she talks about people having a more active working life in their older age, but what the Government are talking about is a mandatory increase in retirement age by five years. They base their argument for that on life expectancy. It defeats me why the same logic does not apply to the 75 mark.

Nor did the Financial Secretary respond to my point about the constriction of choice. Under the proposals, the period in which people can draw down unsecured income will be cut from 25 years to 20 years. That is a restriction of choice in what is supposed to be a package of reforms that increases choice and flexibility.

Much of the Financial Secretary's argument rested on the fact that good financial advice suggests that one should buy an annuity. That may be the case, and people are perfectly entitled to take good financial advice or not to do so. Other people may disagree with that advice. Other advisers may say, ''Go on drawing down the income, or investing it in the way that you have''.

Howard Flight (Conservative, Arundel and South Downs)

It seems strange that the Financial Secretary takes no notice of the fact that all the surveys that have been done show an overwhelming wish by those approaching 75 not to be forced to buy an annuity. Indeed, if they are doing a draw-down, they are likely to be capable of looking after their affairs satisfactorily.

George Osborne (Conservative, Tatton)

My hon. Friend makes a crucial point, which is that we are talking about people who have been responsible enough to provide for their old age, have a pension and manage their affairs successfully throughout their life. They are not about to spend the whole lot, run out of money and fall back on the Exchequer. Indeed, in previous legislation, devices were used to protect the interests of the Exchequer by, for example, requiring people to take out an annuity that covered at least the minimum pensioner income.

I am not convinced by what the Financial Secretary said. I think that the provision is a hangover from the past. It is a shame that she has not used the opportunity, if not to abolish the compulsory annuitisation requirement, at least to increase the age at which it kicks in from 75 to 80. Therefore, with your permission, Mr. McWilliam, I will press the amendment to a Division.

Question put, That the amendment be made:—

The Committee divided: Ayes 5, Noes 14.

George Osborne (Conservative, Tatton)

I beg to move amendment No. 332, in

clause 155, page 139, line 45, leave out '70%' and insert '100%'.

John McWilliam (Labour, Blaydon)

With this it will be convenient to discuss amendment No. 334, in

clause 157, page 141, line 24, leave out '70%' and insert '100%'.

George Osborne (Conservative, Tatton)

We now come to two amendments to the new concept of an alternatively secured pension. It is a fairly innocuous name for a pretty radical departure from everything that the Government and the Financial Secretary have ever said about the requirement for people over 75 to buy an annuity.

The concept of an alternatively secured pension appeared out of the blue in the second consultation paper in December 2003. It appeared without its own heading or section, and it just said in passing that

''some religious groups have principled objections to the pooling of mortality risk and need to be accommodated by the new rules. The Government, therefore, proposes to allow pension income to be delivered after age 75 through Alternatively Secured Income (ASI).''

In other words, despite the debate that we have just had in Committee, the Government are actually scrapping the requirement to buy an annuity and going a long way towards what my hon. Friend the Member for Arundel and South Downs has been calling for over many years. We have trooped through the Division Lobbies on Fridays, turned up to support private Members' Bills—

Richard Bacon (Conservative, South Norfolk)

And defeated the Government.

George Osborne (Conservative, Tatton)

My hon. Friend reminds me that on occasion we have defeated the Government—on a Friday. That is not quite the same achievement as defeating a government on a Monday to Thursday, but it is still good when it happens. We have done all those things and tabled amendments in Committee sittings for private Members' Bills all to achieve something that the Government are now implementing, although they do not go far enough, hence my amendments.

The Government say that they are introducing the measure to respond to the genuine concerns of certain religious organisations, principally the Christian

Brethren, who have deeply held beliefs preventing them from participating in insurance products because they involve the pooling of mortality risk. For those who are interested, the Brethren have held that view since 1828. They take their guidance from Corinthians, where we are told:

''Ye are not your own for ye are bought with a price.''

Apparently, the Brethren have interpreted that as, ''You cannot have an annuity.'' The Book of Timothy says:

''if any provide not for his own, and specially for those of his own house, he hath denied the faith, and is worse than an infidel.''

Obviously, the Christian Brethren have a bit of a disincentive to take out annuities.

Over the past couple of days, I read the Hansard reports of our debates on the subject, and it is clear from them and from what the Financial Secretary says that she takes a personal interest in the subject and has worked hard to find a solution to the Brethren's problem; she deserves credit for introducing the proposal. The Christian Brethren are extremely grateful. They sent a letter to my hon. Friend the Member for Arundel and South Downs, which says:

''We would like to thank you, on behalf of the Brethren, for your constant support in our appeal to Ministers to obtain a pension provision that would accord with our beliefs.

As a result of many representations over the last six years, Ministerial direction has been given to the Inland Revenue which has resulted in''

the relevant clauses. The letter continues:

''This scheme suits our conscience, and although we will then need to find a provider of the scheme, we are grateful for the provision in the Bill.

If it is opportune, and you so wished, any thanks that could be voiced to the Minister during discussion of these sections would be appreciated.''

We have fulfilled our duty to the Brethren by passing on our thanks. It is important to put that on the record.

The irony is that the Government's previous objections to helping the Christian Brethren drove the Brethren and those who supported them to find ever more complex and ingenious solutions to their problem and to getting round the objections of the Inland Revenue. In one recent piece of legislation, we came up with the idea of a retirement failsafe fund, in which people could invest their pensions, and which would be certain to provide an income at least equivalent to the minimum retirement income. That was put into a Bill promoted by my right hon. Friend the Member for Skipton and Ripon (Mr. Curry).

What was striking to those who followed what was happening was that the Government suddenly swept all that aside and said, ''There is a simple solution to this: we will introduce the alternatively secured pension,'' because that is what it is. By the way, it is not secured in any real sense of the word—that is a bit of a misnomer. It is unsecured income, as is income that one draws down before the age of 75. People will be able to draw down their income from the pension fund; the principal restriction, however, is that they must draw no more than 70 per cent. of what could be generated by an annuity bought for someone of the same age and sex.

The amendment would change the 70 per cent. to 100 per cent., so that someone on an alternatively secured income with the deeply held beliefs that we have discussed could draw down what would be available to them if they went out and purchased an annuity.

Of course, there is an important check; the Inland Revenue is concerned that people would dissipate their funds, so under the Bill there will be an annual check of how much is left in the pot. That will be recalculated annually. Given that, under the amendment, one could draw down a limit of 100 per cent. of what one could draw down under an equivalent annuity, and given that there will be an annual review, it would not be possible for people to fritter away their fund and fall back on the state. That is the thrust of the amendment.

The Government say—probably because of the 70 per cent. restriction—that alternatively secured income is likely to be an inferior choice for those who do not have a principled objection to the pooling of mortality risk. I think that they are wrong about that, and so does the industry; it could turn out to be an extremely popular alternative, and not because we are all about to become members of the Christian Brethren or because we all have a principled objection to the pooling of mortality risk. It is worth pointing out—as if it needs to be pointed out—that there is not a requirement in the legislation to be a member of one of these religious groups that have such an objection. It is just there as an option for everyone. The Government are not reintroducing the Test Acts.

This could be a very popular alternative to having an annuity, because of what happens when someone with an alternatively secured pension dies. If that person has a dependant, such as a spouse, the money passes to them and can be used to buy an annuity, or take an unsecured pension if they are under the age of 75, or buy another alternatively secured pension if they are over 75. There is nothing spectacular in that. However, if that person has no dependant—their spouse might have died or they might never have had one—the alternatively secured pension can go to a nominated charity or to other scheme members. In other words, a tontine can be created. That is an old concept—something is divided between the remaining members.

Let me give an example of how that might work that has been suggested to me by several people in the pensions industry. I could set up the Osborne family pension scheme, the only members of which are me, my wife and my two children. That is an extremely complicated financial product for me to purchase at the moment, but I imagine that providers will make them readily available and design products that make it easy for people to set them up. I set up that scheme, and when I reach 75 I take out an alternatively secured pension. Sadly, I then die, and it passes to my wife, who also has an alternatively secured pension—not least because she is older than me, so she will definitely be over 75 by this point. She then dies. Under these rules, the remaining pension pot passes down to my children, who are the two other members of the pension scheme. They pay no tax; they do not pay any

inheritance tax on this. It forms part of their pension pot and lifetime allowance, but it is not part of their annual allowance, so it is included in the general rules of pensions. The other thing is that they cannot touch it until they are 55. However, for the first time we have the concept of pension funds passing down through successive generations.

I want to be the first to congratulate the Financial Secretary on living up to the good old Tory idea of wealth cascading down through the generations. [Hon. Members: ''Hear, hear.''] I see that she has widespread support for that on both sides of the Committee.

I am not making some obscure point; in Financial Adviser—a magazine that I know we all read avidly—there is a huge article about how this might be available to people and the benefits that it might provide. My first question is, does the Financial Secretary accept that people can have significant death benefits as a result of taking out alternatively secured pensions? Secondly, can she explain why she chose the figure of 70 per cent. for the restriction? I imagine that she will say that that is all to do with protecting the Exchequer's interests, but how and why did she come up with that figure? We have had little explanation from the Government about the alternatively secured pension, and why it exists, and why they chose 70 per cent. What about 100 per cent.? Surely, there is sufficient protection from the facts that they will only be equivalent to what people can buy as an annuity and that there is an annual check to ensure that they do not run out of money.

I could have asked my third question at another time. Why can people not have an alternatively secured pension before the age of 75? Why is it being restricted to after that age, given that there are significant death benefits?

Fourthly, why will the basis amount—which is the phrase that the Government use to indicate the equivalent to an annuity—now be calculated by the Financial Services Authority? Why have they moved away from existing Government Actuary's Department tables, which most people seem to think work well, and which did not fluctuate every day with the annuity market? What annuity rate will the FSA use? Will it be the best annuity rate available at any one time, because we know that insurance companies sometimes have special offers, or will it be the average annuity rate?

My fifth question for the Financial Secretary relates to the fact that the legislation allows for a 10-year guarantee for an alternatively secured pension. If a person takes out a 10-year ASP at 75, and unfortunately dies at 80, that pension will go on being paid to their widow or widower for five more years. How is the 70 per cent. figure then calculated? Is it 70 per cent. of the amount that the deceased would have got, or of the amount that the current beneficiary will get? Is the 70 per cent. figure applied to me as a man on my death, or to my wife who is still alive?

The sixth important point is that the Government say in the consultation paper that the calculation of the equivalent annuity rate when the person gets beyond 75 will be based on the annuity rate of a 75-year-old. In other words, when somebody is 85, they will still be required to take out 70 per cent. of the annuity available to a 75-year-old. That is grossly unfair, as has been pointed out by, for example, the Association of Consulting Actuaries. It says:

''We are unhappy with the conditions for determining the amount of the payments . . . the basis proposed is far too penal and discriminates unfairly against those who do not wish to buy an annuity on religious grounds.''

The ACA points out that a 75-year-old will get 70 per cent. of the maximum annuity available to them, but an 80-year-old will get only 55 per cent. of the maximum annuity, and an 85-year-old will get only 43 per cent., as the sum will still be being calculated on the basis of a 75-year-old's annuity. I am sure that the Financial Services Authority, or indeed the market, will respond to the demand for annuities from people of a greater age, but why is there a requirement to link the 70 per cent. only to the annuity available to a 75-year-old? That dramatically penalises people with alternatively secured pensions as they get older.

The Financial Secretary may not accept my suggestion that the issue will be widely taken up by the pensions industry, but she would be unwise not to, as I have anecdotal evidence of pensions advisers already advising people who are not members of the Christian Brethren on how to set up schemes. If her intention is to restrict this provision to people such as the Christian Brethren, having gone so far in helping them, it is completely unfair to penalise them and members of other religious groups as they get older and into their 80s and 90s and find that the alternatively secured pension becomes far less attractive. Increasing the amount to 100 per cent. would at least go some way towards dealing with that problem.

Rob Marris (Labour, Wolverhampton South West)

The hon. Gentleman speaks with his usual eloquence. He knows far more about pensions than I do, but I fear that he does not understand annuities. An annuity is a bit like a mortgage in reverse. The income generated by an annuity is in part interest generated on the capital sum invested and in part capital. Contrary to what he suggested, if the figure went up from 70 to 100 per cent., an individual could run through their capital on their alternatively secured pension and become a charge on the state. The reason why annuity rates are better than simply investing the money in the stock market, for example, is precisely because the provider of the annuity gets all the capital and pays the individual part of the capital and part of the interest generated on the capital as an annuity. Ergo, unless one has a very incompetent annuity provider, the annual sum paid out must be higher under an annuity than it would be if the money was simply invested.

If the amendment was accepted and the figure went up to 100 per cent., it would be, on the alternatively secured pension, a draw-down on capital as the years went by, if the person was drawing on the whole

100 per cent. rather than the 70 per cent., and they could, at least in theory, become a charge on the state, which is the very thing that the hon. Gentleman said could not happen.

Ruth Kelly (Labour, Bolton West)

We have had an interesting exchange of views so far. I am pleased that we have been able to accommodate the concerns of the Christian Brethren. Challenges have been put to the Government about our policy on compulsory annuitisation from our own side, from the Opposition Benches and from within the Government. I think that we have come to a sensible, workable compromise that allows people with strong principled objections to the pooling of risk to take advantage of pension tax relief in the system without providing an incentive for others to go down that route. I will attempt to explain why.

As the hon. Member for Tatton pointed out, the rules provide for the maximum amount that may be drawn each year, which is up to 70 per cent. of a comparable annuity. The rules ensure that the underlying pension fund assets are not depleted too quickly and that the member's pension fund may continue to provide an income throughout their retirement. The amendment would change the limit from 70 per cent. to 100 per cent.

That limit is one of the safeguards in the system to ensure that people who use this route have a relatively secure income. I will give an example of the impact of the amendment on the amount of income that may be available to a person who has taken the alternatively secured pension route. Where the maximum income at age 75 is 70 per cent. of the comparable annuity rate, and people take all of their fund into an alternatively secured pension at that age, 5 per cent. of the group could expect their maximum income to fall to a third of its initial value if they drew 70 per cent. of the comparable annuity each year. If the maximum annuity was increased to 100 per cent., as is suggested in the amendment, the proportion whose income would drop to a third would be 30 per cent. That is clearly a much more significant number.

As a Government, we have a responsibility not only to ensure that Exchequer funds are used wisely and that, as far as possible, people stay off means-tested benefits in retirement, but that people who have saved for retirement, have been cautious and have put money aside are then able to draw a decent income in retirement, without depleting their funds too early. We are talking about an extremely important safeguard in the system.

Howard Flight (Conservative, Arundel and South Downs)

I asked our own pensions adviser the same point that was raised by the hon. Member for Wolverhampton, South-West (Rob Marris) and to which the Minister has just referred. The answer that was put to me was that by moving to an annual review the issue would not arise, because it would be for the Revenue to determine how much one could safely draw down under the new scheme year by year. The basic annuity principle, which could be used to argue for the 70 per cent., can be corrected by the annual Revenue check.

Ruth Kelly (Labour, Bolton West)

The hon. Gentleman makes a reasonable point. However, as I was about to say, that is the second safeguard in the system. Not only do we require a maximum of 70 per cent. but we require that amount to be reviewed annually, to ensure that there is a sufficient income for life. He suggests replacing one with the other. We need both safeguards in the system to protect the security of people's income in retirement.

Perhaps we should consider for a minute why people choose to defer taking an annuity when good financial advice suggests that they should annuitise by the age of 75. Most people think about deferring the buying of an annuity. Before I come on to that, I would like to point out to Committee members that two thirds of all pensioners buy an annuity immediately on retirement, and the vast majority, 95 per cent., bought an annuity—I think—by the age of 70. Therefore, the category that we are talking about has a small number of people. Those who seek to defer buying an annuity till the latest possible moment are really trying to think of a way of using their pensions tax relief to support passing down the pension fund to subsequent generations. In other words, it is a tax-privileged form of the inheritance being passed from one generation to another. The hon. Member for Tatton suggests that somehow the alternatively secured pension can provide another route for that to happen. He gives the example of the Osborne pension fund, which has been set up for him, his wife and his dependants, and suggests that that may be an attractive vehicle for passing money down through the generations, to a large extent at the expense of the Exchequer.

Rob Marris (Labour, Wolverhampton South West)

Is the Financial Secretary aware that in Victorian times the tontine was a staple of detective stories? The question was who the last man—and it usually was a man—standing would be. People tended to get knocked off along the way so that someone could get the pot at the end of the rainbow.

Ruth Kelly (Labour, Bolton West)

My hon. Friend makes an excellent point. Even if the financial advice was 100 per cent. on this matter, there would be other factors to be taken into consideration before families chose to go down this route. I do not believe that the alternatively secured pension rules allow funds to be returned to non-dependants in a tax-favoured manner. If the member dies with a living dependant, the remaining funds must be used to provide the dependant's pension and, of course, the original person benefiting from the pension is likely to have drawn down some of that limit, subject to the £1.5 million lifetime allowance. If there is no dependant, the fund can be returned to the scheme for the benefit of other members or paid to a charity nominated by the member before his death. Otherwise the funds would be a windfall to the scheme and taxed as such, and could be taxed again on distribution.

I think that the hon. Member for Tatton was arguing that his dependants might benefit from the pension fund in the future. The death of the last dependant is an extremely unpredictable event—one hopes that they will not die prematurely, as my hon.

Friend the Member for Wolverhampton, South-West suggests. The inherent risks in such a strategy make it extremely unlikely that good financial advice would suggest following that route.

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 that are needed to preserve the integrity of the tax system.

George Osborne (Conservative, Tatton)

The Financial Secretary is defending her alternatively secured pension scheme, but is saying that what I suggest is not a good thing for people to choose. People will make their own judgments about that. Certainly, the industry is jumping all over the measure at the moment. I heard the threat at the end of her remarks: the Inland Revenue will keep this under review. It is a shame to take that tone, because the option may be a very popular one and we should not restrict it.

My hon. Friend the Member for Arundel and South Downs dealt with the point about the 100 per cent. There is the annual check. The Financial Secretary says that there are two checks. One check would work: the annual review to ensure that the person is not dissipating their fund. Of course, we are talking about a level of up to 100 per cent. People do not have to take 100 per cent. every year; they may take much less.

The Financial Secretary did not deal with my point about why the scheme has to be based on the annuity that a 75-year-old could buy—I do not blame her; she responded to many points. She might want to respond to that if she gets a chance. Even if she wants to restrict the scheme to people such as the Christian Brethren, that provision seems to make the scheme deeply unattractive to them, because the older they get, the poorer they will become. I am not sure that that is fair or necessary to protect their fund because, to put it bluntly, the older they get, the more likely they are to die.

Why is the Financial Services Authority given a new role? Why not use the existing GAD tables? Will the FSA use the best annuity rate available, or the average rate, or will it change every day, month or year?

Ruth Kelly (Labour, Bolton West)

I am happy to deal with both those points. I should have dealt with them earlier. Why is the annuity rate for a 75-year-old used for these purposes? It is to do with the impact of mortality drag. I urge the hon. Gentleman to read the section on that in the earlier consultation document. It is essential to fix the income at 75, or at least at some age, because of the impact of mortality drag. If the rate is increased with age and there is no mortality pulling, the income will fall and the funds will deplete. The annuity rate being fixed at a particular age is an essential part of the system.

The FSA provides continually updated comparative tables of annuity rates. Most of the rates are currently available in the market, freely accessible, well

understood and easy for individuals and providers to use. The regulations make it clear how to use the relevant annuity rate from those tables. The best rate in the tables will be used in these circumstances, which I am sure that the hon. Gentleman will think is right. I hope that I have reassured him on both those points.

George Osborne (Conservative, Tatton)

I asked another question about guaranteed alternatively secured pensions and whether the 70 per cent. is calculated against the annuity of the person who died or the one who survived.

Ruth Kelly (Labour, Bolton West)

It is the dependant's income.

George Osborne (Conservative, Tatton)

That is useful.

This has been a useful debate on a brand new concept from the Government. There is a difference between us as to how widely this provision will be taken up and how attractive an option it is, and so on, and there is a disagreement about what percentage of equivalent annuity people could take. I suspect that future Finance Bill Committees, on which all Committee members may be privileged enough to sit, will return to this subject time and again, but I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

George Osborne (Conservative, Tatton)

I beg to move amendment No. 333, in

clause 155, page 139, line 46, at end insert—

'Pension rule 7

Notwithstanding anything to the contrary in the above pension rules, unsecured pension may be paid to a member who has reached the age of 75 in respect of a money purchase arrangement except in prescribed circumstances.'.

John McWilliam (Labour, Blaydon)

With this it will be convenient to discuss the following amendments:

No. 335, in

clause 157, page 141, line 25, at end insert—

'Pension death benefit rule 6

Notwithstanding anything to the contrary in the above pension death benefit rules, dependant's unsecured pension may be paid to a dependant who has reached the age of 80 in respect of a money purchase arrangement except in prescribed circumstances.'.

No. 339, in

schedule 28, page 423, line 1, leave out

'and ends before the member reaches the age of 75'.

No. 340, in

schedule 28, page 423, line 9, after '75', insert

'or if the member has reached that age except in prescribed circumstances'.

No. 341, in

schedule 28, page 423, line 13, at beginning insert 'in prescribed circumstances and'.

No. 342, in

schedule 28, page 423, line 24, at beginning insert 'In prescribed circumstances'.

No. 343, in

schedule 28, page 423, line 41, after 'reaches', insert 'in prescribed circumstances'.

No. 344, in

schedule 28, page 428, line 3, leave out

'and ends before the member reaches the age of 75 or dies'.

No. 345, in

schedule 28, page 428, line 11, after '75', insert

'or if the member has reached that age except in prescribed circumstances'.

No. 346, in

schedule 28, page 428, line 15, at beginning insert 'in prescribed circumstances'.

No. 347, in

schedule 28, page 428, line 34, after 'reaches', insert 'in prescribed circumstances'.

No. 331, in

clause 270, page 220, line 34, at end insert

'except that with effect from the date on which this Act receives Royal Assent no member of any pension scheme described in sub-paragraphs (a) to (g) of paragraph 1(1) to Schedule 34 will be required to buy an annuity on reaching any age and such a member may instead elect for income withdrawal (and Chapter 3 and Schedules 28 and 29 will have effect accordingly in such cases with effect from 6 April 2004).'.

George Osborne (Conservative, Tatton)

This is my third attempt to deal with annuities today, and I have to confess that it is not particularly elegant, because we could not be bothered to draft lengthy amendments that would remove the requirement lock, stock and barrel, as my hon. Friend said, to get an annuity at 75, notwithstanding the debate that we have just had about alternatively secured incomes. It is inelegant because we simply included a catch-all new rule, saying:

''Notwithstanding anything to the contrary in the above,''

someone over 75 can have an unsecured pension. In other words, they do not have to buy an annuity.

As I was going through it late last night, I discovered a couple of inconsistencies, which were partly the result of our assuming, perhaps over-optimistically, that our point on age 80 would be accepted—it was not—and that we would manage to simplify the Bill by merging pension rules 4 and 6, which we failed to do.

With those apologies to the Committee, let me briefly run through the broad annuity argument. As I said, we have already heard it in a couple of forms today. It has been advanced not just by Opposition Members in a series of private Member's Bills but is also supported by, among others, the right hon. Member for Birkenhead (Mr. Field), who was appointed the day after the general election in 1997 to be the great pensions and welfare guru.

I sometimes think that the Labour party wants to forget that fact, but those of us who were watching TV at the time and had had our 10 Downing street passes rudely confiscated at about 3 in the morning saw that, along with the appointment of the new Cabinet, there was also the appointment of a Minister of State, the right hon. Member for Birkenhead. A great deal was made of it at the time. Actually, more was made of it than of any Cabinet appointment. Of course, he subsequently fell out of favour with the Government for telling them some blunt truths and, as the hon. Member for Yeovil (Mr. Laws) reminds us, he fell out of favour with the Chancellor. The right hon. Member for Birkenhead supports the removal of the requirement to buy an annuity.

I shall not detain the Committee with the basic argument, which we have already heard at length. Is not it time that the House of Commons and the Government recognised that people who have been

responsible enough to save for their pension during their lifetime should be trusted to choose the method of funding their retirement that suits them best?

Rob Marris (Labour, Wolverhampton South West)

Can the hon. Gentleman tell the Committee exactly how much that would cost in forgone tax revenue?

George Osborne (Conservative, Tatton)

I do not think that it would cost anything in forgone tax revenue. This goes to one of the points that I made earlier about the inelegance of the amendment, which I freely accept. In previous attempts, efforts were made to guarantee the position of the Exchequer by, for example, requiring people to take out an annuity that would cover the minimum pension income, so there would be no cost to the Exchequer. In the Bill, the Government have tried to move away from the blanket requirement to purchase one kind of annuity at age 75, not just with alternatively secured income but also with short-term and value-protected annuities, thereby undermining many of their arguments against removing the requirement for compulsory annuitisation.

The Government argue that the measure would benefit only a small number of better-off people; we heard some of that in the last debate. For a start, the number of people is growing all the time. The Government say that only one in 20 pensioners would benefit, but the number will rise as more and more people move into money purchase schemes. Moreover, even if the measure were to help only better-off pensioners, that is hardly a knock-down argument, provided that there is no cost to the Exchequer. Schedule 34, which we will debate later, is a lengthy schedule designed to protect people who have more than £1.5 million in their pension pot. The Government have consulted and gone to great lengths to help people who, by any definition, are the wealthiest in society.

The Government's second argument is that only annuities provide certainty of income. Of course, Equitable Life has destroyed that argument, as its annuity rates have been savagely cut. Then there is the risk of poor returns from annuities. It is worth reminding ourselves that a £100,000 pension pot that would have provided a £10,000 annuity in 1990 now provides an annuity closer to £4,500.

The Government's third argument is that removing some people from the annuity market will undermine the annuities available to the rest of the population. That is something that the Financial Secretary argues occasionally. It is a dubious, socialist argument at the best of times that everyone must be in the pot to help everyone else, but some of the provisions introduced by the Bill will undermine that, including the alternatively secured pension—we disagree on how much take-up there will be of that—short-term annuities, value-protected annuities and so on.

The fourth argument is that pensions are not designed to allow people to pass funds down through generations because that is not why tax relief is provided. Again, that is undermined by what the Government are starting to do and by alternatively secured pensions and value-protected annuities.

The Government have presented an ideological brick wall to any relaxation of the rule about compulsory annuities, and that wall is now cracking with the alternatively secured pension, short-term annuities and value-protected annuities. To paraphrase the late, great Ronald Reagan, it is time to tear down that wall.

Ruth Kelly (Labour, Bolton West)

We have again heard a speech about whether there should be a requirement to take an annuity at the age of 75; I have heard the argument many times. When I first heard it made relatively persuasively by the Opposition and the Retirement Income Reform Campaign, I was persuaded that there was a case to consider and I considered it in great depth. I listened to their representations favourably but decided that it was impossible to accommodate them without severe detriment to 95 per cent. of the population.

The argument is not about whether it is possible to accommodate wealthy people in their retirement choices. It is about whether it is possible to accommodate them without doing damage to the 95 per cent. who remain in the previous system. Every proposal that I have heard from the Opposition and outside interests has been framed in such a way that the vast majority of the population would be forced, for the first time, to take out an index-linked annuity at age 65 to enable the top 5 per cent. of the population to have freedom for any surplus income that they may have available above the level which would see them float off means-tested benefits. Requiring the vast majority of the population to take out index-linked annuities at 65 would be a huge restriction on individual choice and would have untold consequences for the gilts market, which could not accommodate people being forced to take out index-linked gilts at 65.

Howard Flight (Conservative, Arundel and South Downs)

The Financial Secretary may not have taken on board the fact that one of the main reasons for our policy moving towards linking the basic state pension to earnings is so that it will reach the level of the minimum income when the obligation to buy an annuity could be abolished without the hassle that she has just described. If her colleagues were to join us in that commitment, the amount of the modest annuity commitment to ensure that pensions were at the minimum income level would become less and less each year.

Ruth Kelly (Labour, Bolton West)

We are certainly not in that position at present, and perhaps I should not spend too long discussing a policy that the hon. Gentleman's colleague has described as wildly opportunistic and uncosted. I can give him the reference if he chooses.

The second argument against the policy is that, given the amount of unused tax relief in the system, particularly for higher rate taxpayers, any additional incentive for higher rate taxpayers to pass their pension funds down through the generations could have significant behavioural effects and would mean

that more was saved in pensions than is currently the case. Inland Revenue estimates suggest that that could cost hundreds of millions of pounds.

The Opposition's proposals would not only be to the detriment of the vast majority of ordinary pensioners, but cost the Exchequer hundreds of millions of pounds. We have had a quick run through of the arguments. I do not think that now is the time to develop them further.

I urge the Committee to reject the amendments.

George Osborne (Conservative, Tatton)

We go through the boxing rounds: we make our case, and the Government reject it, but each time we get somewhere. We argued for several years for something to be done to help the Plymouth Brethren and time and again we were told that that was not possible. Out of the blue, the Government conceded on that point.

I think that the Government are slowly coming to terms with the fact that there needs to be much greater flexibility on annuities. I remain confident that, over time, we will win our case and persuade the Government—if not this one, a future Conservative one—about the issue. I would mention one of my amendments, but I cannot read what I have written. [Interruption.] Perhaps my hon. Friend the Member for Arundel and South Downs has an important intervention to make. [Laughter.]

John McWilliam (Labour, Blaydon)

Order. Just because the hon. Gentleman has learned to make sure that his eyes are going over his colleagues while he is speaking, does not mean that hon. Members should mock him.

Howard Flight (Conservative, Arundel and South Downs)

I thank my hon. Friend for his politeness. Amendment No. 331 is, in essence, a probing amendment. It relates to all that has been talked about. It is important because, when the Government produced their Green Paper, they promised that they would implement the changes this year. They will not be implemented until 2006.

The Government have included in their measures the new, alternatively secured pension. The purpose of the amendment—in which, I admit, the wording includes a slight contradiction about whether the relevant date is the date of Royal Assent, which it should be, and not the beginning of this year—is to propose that that arrangement be put into effect from the date of Royal Assent.

The amendment also refers to the changes that we have talked about, which do not look like they will be included in the Bill. Certainly the Government's own alternatively secured pension will be included. We feel that the Government have a moral obligation to act because they said in the Green Paper that they would do something about the annuity issue. This is what they have done. The proposals in the Green Paper are relatively close to the proposals in the Bill, but suddenly it will be two years later. Many people are extremely upset that they will not be able to do what they want to do following the enactment of the Bill.

John McWilliam (Labour, Blaydon)

Order. That was a bit long for an intervention.

George Osborne (Conservative, Tatton)

It was, however, very helpful. It would be good to hear what the Financial Secretary has to say in response, but she is looking blankly at me. Therefore, we need to make the point that we do not believe in compulsory annuitisation, even with the concession of the alternatively secured pension. We wish to push our amendment to a division.

Question put, That the amendment be made:—

The Committee divided: Ayes 3, Noes 14.

Ruth Kelly (Labour, Bolton West)

I beg to move amendment No. 300, in

clause 155, page 140, line 7, after 'person' insert 'first'.

John McWilliam (Labour, Blaydon)

With this it will be convenient to discuss the following:

Government amendment No. 301.

Amendment No. 217, in

schedule 28, page 421, line 25, after 'that', insert

', except to the extent permitted under this Act, the Pensions Act 1995 or otherwise'.

Government amendments Nos. 302 and 303.

Amendment No. 218, in

schedule 28, page 421, line 33, after 'payable', insert

'or be reduced where the provisions of the registered scheme so provide or, in any event'.

Government amendment No. 304.

Amendment No. 219, in

schedule 28, page 422, line 4, at end add

'or that the reduced rate applies from the date the member starts to receive a pension from the state'.

Government amendment No. 305.

Amendment No. 268, in

schedule 28, page 426, line 43, after 'that', insert

'except to the extent permitted under this Act, the Pensions Act 1995 or otherwise,'.

Government amendments Nos. 306 to 308.

Government amendments Nos. 326 and 327.

Government amendments Nos. 362 to 366.

Ruth Kelly (Labour, Bolton West)

The amendments relate to the definition of a scheme pension, one of the key elements of which is that it will provide a stable, predictable stream of income for the member's life and, after that, for their dependants. The general rule is that scheme pensions must be payable until the member's death and may not

be reduced or stopped, except in limited circumstances specified in the Bill. The amendments seek to extend those circumstances.

The purpose of amendments Nos. 217 and 268 is to allow the scheme pension of a member or a dependant to be reduced or stopped where it is permitted under the Pensions Act 1995, or otherwise. The Act applies to occupational pension schemes and would, for example, permit a set-off against a member's pension to discharge an obligation due to the scheme arising from a member's fraud against the scheme. However, because the Act is relevant only to occupational schemes, different rules for occupational and personal pension schemes could be created, whereas the aim of simplification is, as far as possible, to bring the rules for these schemes into line. Furthermore, the amendment allows for reductions in scheme pensions permitted by the 1995 Act, or otherwise. I am sure that in this context the words ''or otherwise'' could allow pensions to be reduced or stopped in almost any circumstances, which is precisely what the scheme rules aim to prevent. A scheme pension should provide the member with a predictable stream of income.

Amendment No. 218 and Government amendments Nos. 300 to 304 would allow pensions that were previously paid on ill-health grounds to be reduced or stopped where the scheme rules provide. I have listened to representations from pension bodies saying that the condition in the Bill that would allow schemes to stop such pensions is too restrictive. The Government amendments address those problems and will allow schemes to stop the payment of such pensions until the member reaches the minimum pension age, where they have recovered sufficiently to the extent that they would no longer meet the scheme's terms of providing that pension.

Although I accept the purpose of amendment No. 218, it would unnecessarily complicate the scheme pension rules by providing two conditions for stopping ill-health pensions: first, where the scheme rules permit, and secondly, where the member provides medical evidence. It is not necessary to provide the second condition. Schemes may include it in their rules, if they wish to do so. The Government amendments, however, address the concerns of pension bodies and provide a single condition that will allow for ill-health pensions to be stopped or reduced. They also clarify that the entitlement to a pension paid early on grounds of ill health which is stopped because the member recovers occurs when the member first starts to draw the pension and not when the pension starts for the second time.

Amendments Nos. 218 and 219 and Government amendments Nos. 301 to 308, 326 and 327 are all designed to allow pension schemes to pay additional amounts as scheme pensions until the member reaches state pension age, at which point the scheme may reduce the amount of pension paid. Such pensions are known as bridging pensions, and schemes provide that facility under the current regime. It allows the pensioner's income to remain broadly the same throughout the retirement. We do not want to prevent

schemes from continuing that practice under the new simplified regime. The amendments also apply that facility to a dependant's scheme pension.

I accept the purpose of amendments Nos. 218 and 219, but the amendments go too far because they would allow a scheme pension to be reduced by any amount when the member starts to receive their state pension. The idea behind schemes paying the additional pension until state pension age is that the pensioner's income remains broadly constant throughout the period. I can see no reason, therefore, for providing for the pension to be reduced by any amount.

The Government amendments allow bridging pensions to be paid but will ensure that the amount by which the scheme pension is reduced is limited to the amount of the state pension. Government amendments Nos. 362 to 366 are required as a consequence of allowing bridging pensions. The amount of the tax-free lump sum the member is entitled to draw is based on the valuation of their scheme pension. Allowing pensions to be reduced at state pension age creates an opportunity for the rules to be manipulated to increase the amount of the tax-free pension commencement lump sum that may be drawn. That is clearly not the intention of the provision. Amendments Nos. 362 to 366 provide that where the main or sole purpose for a scheme providing a bridging pension is to create or augment the tax-free lump sum, the lump sum will be treated as an unauthorised payment.

I agree with the intention of some of the amendments tabled by the hon. Member for Tatton, but I have explained that the points raised are better addressed by Government amendments. I therefore hope that the hon. Gentleman accepts the case that has been made.

George Osborne (Conservative, Tatton)

I welcome the Government amendments because they mainly replicate the amendments in this group that I had tabled. Sometimes in opposition one has to be satisfied with moral victories in Committee—sometimes one actually gets one's way—and it is very rare that the Government accept the wording of the amendments that we draft. That has happened to me only once or twice, but quite often we table amendments, and the Government either beforehand—I do not know the process—or when they draft their response to our amendments, realise that we are making a lot of sense.

As the Financial Secretary said, my amendments would achieve the same purpose as the Government amendments. Amendment No. 219 would allow bridging pensions to continue. As the hon. Lady explained, such pensions reduce once someone reaches the state retirement age and receives a state pension. They were originally prevented in legislation, and she did not make it clear whether that was a mistake or a deliberate policy decision that has now been changed having listened to the industry. We shall see about that. Nevertheless, I am glad the Government have seen sense and tabled their amendments, not least

because there would have been a massive impact on the pension schemes that offered bridging pensions and their funding.

Amendment No. 218 would allow some schemes to provide for ill-health pensions that are suspended or reduced when income is earned, which would have been prohibited by the Bill if the Government's amendments were not made.

The Financial Secretary might talk about ill health when she concludes this part of the debate. Ill health as defined by the Government in schedule 28 is effectively an inability to do one's own job—the ''member's occupation'', as described in paragraph 1. However, some schemes are even more restrictive and allow an ill-health pension to be suspended because a person is capable of any remunerative employment, rather than of continuing with their old employment. Have the Government examined that? Are they aware that as a result they will cut across the bows of some existing pension schemes? Have they consulted those schemes and what will be the impact on them?

My amendments Nos. 217 and 268 state that a person may be suspended in a range of circumstances including defrauding an employer, as covered in the Pensions Act 1995. My amendments refer to that excellent Act for the avoidance of any doubt. The Financial Secretary has anticipated the main thrust of my amendments, borrowing the doctrines of pre-emptive action and stealing Tory policies from the Prime Minister, and I am therefore happy not to do anything.

Amendment agreed to.

Clause 155, as amended, ordered to stand part of the Bill.

Clause 157 ordered to stand part of the Bill.

Schedule 28 - Registered pension schemes: authorised pensions—supplementary

George Osborne (Conservative, Tatton)

I beg to move amendment No. 216, in

schedule 28, page 421, line 14, leave out subparagraph (1).

John McWilliam (Labour, Blaydon)

With this it will be convenient to discuss amendment No. 267, in

schedule 28, page 426, line 31, leave out subparagraph (1).

George Osborne (Conservative, Tatton)

The amendment is designed to remove a strange requirement that schemes with fewer than 50 members must purchase annuities to secure their pensions. First, it is strange because it is not in any of the consultation documents, and I do not think that views from the industry have been sought on what will be a very significant change to the way in which smaller pension schemes do business. Why has the requirement for schemes with fewer than 50 members to secure pensions by purchasing annuities appeared?

Secondly, it is a strange requirement because there is no explanation for the new policy in the explanatory notes; there is simply a statement of fact. There is no

attempt in the notes or in any Government consultation document to explain why the requirement is in the Bill. I have not heard a word from the Government about the problem that they seek to address. Is it about member protection and therefore an issue for the Department for Work and Pensions? This morning the Financial Secretary relied on the distinction between the role of that Department and the Inland Revenue. We know from debating the Pensions Bill that member protection is a function of the DWP.

I do not know whether the issue is one of member protection; that was my guess. Why the magic number of 50 members? There are perfectly well managed schemes with fewer than 50 members and desperately underfunded schemes with more than 50 members, so where does the figure come from? I have a hazy recollection of tabling a written question to the Financial Secretary before the recess, asking how many schemes have 50 or fewer members, because we have no information on which to base the change that we are being asked to make in Committee.

Thirdly, the requirement is strange because it could lead to some odd situations. What happens when a scheme suddenly gets its 50th member? Presumably, 49 of the pensions are secured as annuities, and the 50th is not. What happens if a member dies and the scheme suddenly falls below 50 members? Presumably all the pensions suddenly have to be secured. That situation will be fairly common. A new company might set up and start a new scheme. Over time, the company would grow, get more than 50 employees, and cross the threshold. Equally, there are schemes gradually withering on the vine as members die off, and they will fall below 50. That will not be unusual. How many schemes are affected by the measure?

Will the annuities with which the pensions are to be secured be bought in the member's name, or in the trustees' name as a scheme investment? As I understand it, buying out pensions in payment prejudices the statutory priority of a scheme winding up. What are the consequences of that? What will be the burden on the schemes? There has been no consultation; the Treasury did not float the idea in its two fairly comprehensive consultation documents. Buying annuities can be expensive, and it may not be convenient for a scheme suddenly to dispose of all its assets. What will the impact be? Until we are surer that the Government have thought the matter through, I will be tempted to press the amendment to a Division.

Howard Flight (Conservative, Arundel and South Downs)

In looking at pension fund problems, I have perceived that a pension fund that may be solvent—according to the assessment of the actuary—on an ongoing portfolio basis may not be able to meet its commitments if it is obliged to buy annuities over the year. There is an important financial point: generally, there is a large difference between the funding required to annuitise all commitments and that required by the ups and downs of markets on an ongoing basis.

What struck me about this extraordinary requirement was that it will do immense damage to many smaller final salary schemes. If they are obliged

to fulfil the requirement, their members will be locked into a much lower pension than they might have had on the basis of an ongoing portfolio.

Ruth Kelly (Labour, Bolton West)

I note the points made by the hon. Members for Tatton and for Arundel and South Downs, and also the strength of feeling on the subject. Let me deal with some of the lesser issues before I come to the substance.

The amendments would remove the requirement for small schemes to secure a scheme pension, or a dependant's scheme pension, through an insurance company. A scheme pension should be secure for the life of the member. That might not be achieved if the scheme is small, as the small number of members means that the scheme runs an increased risk of a significant number of members living longer than expected.

The cost of annuitising pension benefits for pension schemes with less than 50 members, as opposed to paying benefits directly from the scheme, will vary from case to case. Relevant factors will be the level to which scheme benefits are funded and the relative ages and benefit entitlements of the scheme members. The amendments suggest that the proposed new requirement will impose an additional cost on pension schemes with fewer than 50 members, but it is far from clear that that will necessarily be the case.

When an insurance company provides the scheme pension, it will be necessary for the entire purchase price to be paid from the scheme to the insurance company, either as a one-off sum or in a series of payments. However, where the scheme itself is paying the pension, cash injections may be required from the employer to ensure that the pension is payable for the lifetime of the member. So in the long run, the insurance company route may cost no more—or may indeed be cheaper—than the in-house pension route. The relative costs of a scheme pension provided by an insurance company and an in-house pension would depend on the exact circumstances of each small pension scheme.

Where benefits are fully funded, buying out the promise through an insurance company should require little, if any, additional cost and will cap the employer's liability while providing security for the members. However, where benefits are not fully funded and the scheme membership is homogeneous, providing a scheme pension through an insurance company might have a cost—but then so would paying the scheme pension in-house.

Generous tax relief is available for pensions saving, and it is right that pension funds are used for the intended purpose of providing a pension for the life of the member. The concern that small schemes may be unable to provide this guarantee is addressed by the requirement for them to insure members' pensions.

The requirement also prevents collusion between the scheme and the member to allow the member to draw an inflated tax-free lump sum by promising a high pension with no intention of actually funding for that. The amendments could therefore reduce

significantly the security of some scheme pensions. I will come back to the point about whether this is the right measure in which to provide that security.

The hon. Member for Tatton asks, why 50? It is not possible to say precisely what size of scheme would provide a large-enough pool for funds to be protected if, for example, all the members lived longer than expected. That might depend on a range of factors, such as the gender of the members or the type of occupation. However, we can say that it is very unlikely that a scheme with fewer than 50 members would be of sufficient size adequately to pool the mortality risk of the members. Therefore, there is a real security and protection issue for members.

George Osborne (Conservative, Tatton)

What evidence does the Financial Secretary have for what she has just said about these small schemes being unable to secure the pensions of their members? Does she have many examples of smaller schemes failing to provide the pensions required? Are there small schemes in which everyone suddenly lives to the age of 110? What is the evidence base? One of the points that I made is that there does not seem to have been any consultation, and there is no information on this or any facts on which we can base these judgments.

Ruth Kelly (Labour, Bolton West)

Clearly, there is a judgment to be made. Although 50 is a relatively arbitrary figure, we believe that it is very unlikely that a scheme with fewer members would have sufficient numbers to be able to pool that longevity risk. If the figure is above that, schemes still may not be able to pool it, but the likelihood that they will be able to do so is greater.

The hon. Gentleman asked about when the membership of a scheme drops from 50 to 49. He wondered whether the scheme would have to buy an annuity for the remaining members and so forth, and he pointed out potential anomalies. I assure him that if the number of members were to fall from 50 to 49 we are satisfied that there would be adequate mortality cross-subsidy to ensure that the pensions of the remaining members could be paid. If, when a scheme pension first began to provide benefits, the number of members was 50 or more, we would be happy for the scheme to continue to provide benefits payable by the scheme administrator or an insurance company even where the number of members subsequently fell below 50.

The hon. Gentleman also asked how many pension schemes approved by the Inland Revenue have fewer than 50 members. I answered that in a reply to a parliamentary question this week, which he can refer to later. Although we do not have precise figures held centrally, the 11th survey of the Government Actuary, which covered occupational pension schemes with two or more members, suggests that between 86,000 and 98,000 pension schemes approved by the Inland Revenue might have fewer than 50 members.

I turn to more substantive points, and I hope that I can alleviate some of the concerns that have been raised. I understand that there is an argument that the

Department for Work and Pensions should have some role through its requirement to ensure the protection of scheme members. I also recognise that the DWP is in the process of making changes to its rules on scheme funding requirements and that, together with the pension protection fund, it should protect the pension funds of some small schemes. However, we are not yet in a position to know exactly what those protections should be.

I will, however, give a commitment to the Committee that once that has been fully decided and those rules are in the public domain, we will examine this again to see whether there is any overlap of regulation, and whether this is the appropriate way to ensure that members of smaller schemes are protected against longevity risk. In the meantime, I suggest that the provision remains in the Bill. We will be in close liaison with the DWP to ensure an appropriate degree of harmony between the different proposals. On that basis, I suggest that the hon. Gentleman consider withdrawing his amendment.

George Osborne (Conservative, Tatton)

The problem that we on this side of the Committee face is that we are not in a position to judge whether such protection is a good or a bad thing, or whether it is necessary. As I said earlier, I sat on the Standing Committee on the Pensions Bill for week after week, and there was no particular focus on small schemes; that Bill was almost entirely about member protection. There was no debate about schemes with 50 or fewer members; indeed, many of the schemes that we talked about, such as Allied Steel and Wire, were very large.

We are not in a position to judge whether the provision is necessary because the Treasury has not consulted on it. It has produced no evidence, and it has only a rough idea of how many schemes will be affected with a margin of about 15 per cent. either side. There is no paper that says, ''Here is the problem. This number of schemes with fewer than 50 members have gone belly up, so we need to provide this protection.''

We do not know the views of the industry on this issue beyond its responses to the Finance Bill at the time of its publication. Its only response has been like mine: what is the point of the provision and why is it being introduced? Industry, and smaller schemes in particular, has not had the chance to see the evidence. Those smaller schemes will probably be the last people to know about it because they will not follow the changes to pensions legislation and the taxation of pensions as closely as some of the big schemes. This may hit them out of the blue. They may not even be aware of it because they will not have hauled through the Finance Bill clause by clause—and if they do read the explanatory notes, they will be none the wiser.

What the Financial Secretary said does not give me much confidence. She said that the DWP is working on the problem at the same time and coming up with a parallel scheme. She said that she hopes that there will not be much overlap, but if there is things will be changed, and the Treasury will be in close liaison with that Department. One would have thought that the

poor old DWP might have been consulted in advance. The almighty Treasury is once again taking over one of its remaining functions. All those Work and Pensions officials who say, ''At least we get to work on member protection—that's one piece of our territory that the Treasury haven't trampled all over,'' will suddenly find that the Chancellor's tentacles have extended.

The fact that the Financial Secretary assures us that the Treasury will consult the DWP is not a great reassurance. One would have thought that the Government would consult internally before introducing legislation. Of all the arguments that the Financial Secretary has advanced today, this was the area about which she seemed least confident. She said that she thought it was a good idea to keep the provision in the Bill, and if we do not need it, we can take it out. Perhaps there is an alternative approach. Let us decide over the next few months whether it is necessary, and then put it in the Bill. It could be included in the next Finance Bill, after we have decided that it is necessary and consulted on it, the Treasury has issued one of its nice consultation documents, which has had lots of responses, and the Secretary of State for Work and Pensions has received a letter from the Chancellor about it. That is how legislation should be put together.

We will have to vote against the provision, not because we think that it is bad, but because we are not in a position to judge whether it is good. There is time to make such changes later. Perhaps there will be more provisions on pensions in next year's Finance Bill, or in the intervening 12 months. A better approach is to remove the measure from the current Bill, consult properly, involve the DWP, develop a joined-up approach and, if it is necessary, introduce it next year. That is the way that a good Government should proceed. I shall have to press my amendment to a Division.

Question put, That the amendment be made:—

The Committee divided: Ayes 4, Noes 14.

George Osborne (Conservative, Tatton)

I beg to move amendment No. 338, in

schedule 28, page 422, line 25, after 'changes', insert

'over that year or such other period not to exceed the lifetime of the policy'.

I put my hands up and say that this may not be the best way to draft the amendment, but we did not have the resources that are available to the Government to get it absolutely right. [Hon. Members: ''Shame.''] I do not know why the hon. Member for Ealing, North is scorning me. He has his own legislation, which we are all waiting for him to introduce in the House. If he needs help in drafting his Tony Martin Bill, I am sure that we can lend him some advisers.

Steve Pound (Labour, Ealing North)

This is one of the rare, and possibly unique, occasions when such chuntering as there was from the socialist Benches did not originate with me. It is possible that my old university colleague, who is sitting opposite me, is paying me back for impersonating him at a union general meeting in the summer of 1979.

Richard Bacon (Conservative, South Norfolk)

On a point of order, Mr. McWilliam. I was preparing for my A-levels in 1979, so the hon. Gentleman cannot be right about that.

John McWilliam (Labour, Blaydon)

Are we being ageist again? We should be dealing with the amendment, and nothing else.

George Osborne (Conservative, Tatton)

I concede that the amendment is a rough and ready job that probably needs the help of a parliamentary draftsman to deal with our concern that variable with-profits annuities will be prohibited by the legislation. Paragraphs 3(3), (4) and (5) of schedule 28 define annuities as level annuities, which are annuities that do not vary from year to year, increasing annuities, which increase from year to year, or annuities that are linked to the retail prices index or to

the market value of freely marketable assets. The schedule seems to exclude with-profits annuities of the kind that are widely marketed these days.

Someone sent me a package that one can get from the Pru. I should say that the Pru did not send it to me. I am not speaking for it or for any other life insurance company. The package is about its with-profits annuity, which is a popular product with some people. Perhaps my reading of the legislation is wrong, but it appears that the Bill will prohibit such annuities. Is that the case? If so, why? What is the problem with with-profits annuities? If they are to be banned, has the industry been consulted? What will be the impact on companies that run such products and on the people who already have them? I wanted to draw out those points with the amendment, and I would be interested to hear what the Financial Secretary has to say about them.

Ruth Kelly (Labour, Bolton West)

I hope that I can reassure the Committee that it is not the Government's intention to prohibit the sale or purchase of with-profits annuities. Our main concern is that the member must not be able to direct the investment or determine the value of the assets with which the annuity is linked. With-profits funds, which are based on movements of the investment markets and actuaries' calculations, can be said to move by reference to an index of freely marketable assets, although a time delay may be involved. Provided that the variation is not at the member's direction and is by reference to market conditions, we would accept that such an annuity would fall within the definition of a relevant linked annuity. I hope that I have reassured the hon. Gentleman on that point and convinced him that the amendment is not needed.

George Osborne (Conservative, Tatton)

That is reassuring. It was certainly worth tabling the amendment for that clear and unambiguous answer from the Financial Secretary.

Harry Cohen (Labour, Leyton and Wanstead)

I am interested in the way that the amendment is worded. The Financial Secretary said that there will not be a ban on selling with-profits annuities, but surely the real problem in recent years has been the exceptionally low payout on such annuities. I am amazed that the Opposition did not raise that issue. The Government should consider it as well, because it should have been made clear to people who are tied into such low-paying annuities what they were likely to get; otherwise, such sales really amount to mis-selling. Surely, the Opposition should be raising that issue.

John McWilliam (Labour, Blaydon)

Order. The hon. Gentleman may or may not have a point, but it does not relate to the amendment.

George Osborne (Conservative, Tatton)

I take the hon. Gentleman's point. By the way, it is one of the arguments against annuities in general. We have had lengthy debates during which he could have caught your eye, Mr. McWilliam, and made that point. We were trying to establish whether the Government were getting rid of, or making illegal,

with-profits annuities. The Financial Secretary reassured me that that is not the case. On that basis, I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

George Osborne (Conservative, Tatton)

I beg to move amendment No. 224, in

schedule 28, page 426, line 21, after 'impairment', insert ', or

(c) has reached that age and is continuing in full-time education which commenced before the child reached that age.'.

The amendment is to do with people in full-time education. It is a bit more than a probing amendment. It would amend the meaning of a dependant to include those in full-time education beyond the age of 23, with the important caveat that the education began before the age of 23. As I understand it, that is current Inland Revenue practice. In other words, the child remains a dependant as long as they are in continuous full-time education. That is reflected in many schemes.

Why are the Government changing the definition of a dependant? What will be the impact on young adults? How many people are we talking about? These days, people seem to spend longer and longer at university and college—although once the Government's new tuition fees come in they will probably leave earlier. At the moment, however, people stay in full-time education longer and longer. What impact will the change have on them and on schemes that currently define dependants as children of members, including young adults beyond the age of 23 in full-time education? Why have the Government suddenly made this change?

Ruth Kelly (Labour, Bolton West)

The age of 23 is used because it is simple, certain and clear. The intention behind pension simplification is simplicity. The hon. Gentleman's proposal would merely add unnecessary complication to the rules. It could create problems for schemes. People would need to decide how to define full-time education and whether a child had started full-time education before the age of 23. It would create anomalies between children who started full-time education after they were 23 and those who started before they were 23, and between children who were in full-time education and those who were in part-time education, perhaps because they needed to work to support their parents.

It is possible to make a fairly plausible case that the rules should change, but it is equally plausible—it is also straightforward, clear and provides certainty—to argue that there should be a clear cut-off age of 23. I therefore urge the hon. Gentleman to withdraw the amendment.

George Osborne (Conservative, Tatton)

I am not adding complexity to the scheme of things. The definition already exists in current Inland Revenue rules. I have been told that it is currently within those rules that people over the age of 23 in full-time education can be classed as dependants. The Government are removing a current right and are changing an arrangement that works satisfactorily, as far as I am aware. It is not really good enough for the Financial Secretary to say, ''Well, we

don't want to make things too complicated.'' She must explain why the Government are removing something that currently exists. Have they consulted on the matter? I do not know whether she has anything to say.

Ruth Kelly (Labour, Bolton West)

I can certainly say that we have not received representations on this matter. Very few responses were received on this point. On the whole, people seemed to welcome the simplicity and certainty that having a cut-off age of 23 provides. As I said earlier, trying to amend the Bill in the way in which the hon. Gentleman suggests would add complexity to the administration of schemes. Therefore, I suggest that we stick with the current legislation.

George Osborne (Conservative, Tatton)

We are not sticking with the current legislation—we are changing it through the Bill. The Financial Secretary said that she has not received many representations, but that may be because people have not spotted the provision. It struck me that many organisations have basically gone on what was in the consultation paper and the Government's assurances that nothing new was being included, but a few things are new: one is this measure and another is schemes with 50 members or fewer.

I shall not press the amendment to a Division, but I want to put on the record that it is strange that the Government are withdrawing this right. I suppose that they are working on the assumption that when tuition fees come in very few people will be in full-time education beyond the age of 23, so it will not apply. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Amendments made: No. 305, in

schedule 28, page 426, line 43, after 'that' insert '(subject to sub-paragraph (3A))'.

No. 306, in

schedule 28, page 427, line 9, leave out '(except in excluded circumstances)'.

No. 307, in

schedule 28, page 427, line 10, at end insert—

'(3A) Neither of the following prevents the pension satisfying the condition in sub-paragraph (3)—

(a) a reduction in the rate of the pension which applies to all the dependants' scheme pensions being paid in respect of members of the pension scheme, or

(b) if the dependant becomes entitled to state retirement pension, a reduction in the rate of the pension which does not exceed the rate at which state retirement pension is payable (or, if the rate at which state retirement pension is payable is greater than the rate of the pension, the pension ceasing to be payable).

(3B) For the purposes of sub-paragraph (3A)(b) the following constitute ''state retirement pension''—

(a) retirement pension under SSCBA 1992 or SSCB(NI)A 1992, and

(b) graduated retirement benefit under NIA 1965 or NIA(NI) 1966.'.

No. 308, in

schedule 28, page 427, line 14, leave out sub-paragraph (5).—[Ruth Kelly.]

Ruth Kelly (Labour, Bolton West)

I beg to move amendment No. 309, in

schedule 28, page 427, line 32, leave out from first 'annuity''' to end of line 33 and insert

'and ''increasing annuity'' have the same meaning as in paragraph 3 and ''relevant linked annuity'' has the meaning that it would have in that paragraph if the reference to the member in sub-paragraph (6) were to the dependant.'.

John McWilliam (Labour, Blaydon)

With this it will be convenient to discuss Government amendment No. 310.

Ruth Kelly (Labour, Bolton West)

I have already spoken about clause 157 and the second part of schedule 28, which, as the Committee will recall, provide the rules that will apply to all dependants' pensions paid by registered pension schemes. These amendments introduce a minor change to the second part of the schedule to clarify the definition of a dependant's annuity and a dependant's short-term annuity.

The pension rules allow the payment of an annuity when the annual amount of that annuity varies by the market value of freely marketable assets. That term is defined in respect of a member's annuity as a relevant linked annuity and in that context requires that the member must not be able to determine the value of the assets to which the annuity rate is linked. The first amendment ensures that when the definition of a member's relevant linked annuity is applied to the dependant's annuity, it is the dependant, rather than the member, who is not able to determine the market value of the freely marketable assets.

The second amendment ensures that the amended definition of a dependant's relevant linked annuity also applies to the dependant's short-term annuity.

The amendments clarify the position regarding the dependant's annuity and ensure that the dependant may not determine the amount of the annual income from the annuity. I commend them to the Committee.

Amendment agreed to.

Amendment made: No. 310, in

schedule 28, page 428, line 8, leave out '3' and insert '17'.—[Ruth Kelly.]

Question proposed, That this schedule, as amended, be the Twenty-Eighth schedule to the Bill.

George Osborne (Conservative, Tatton)

The Association of British Insurers is opposed to short-term annuities and suggested some amendments, which we did not feel that we could table in our name, but it is right to raise its concerns with the Government.

Short-term annuities are a new development and the Government argue that they will provide additional flexibility for consumers who want to plan ahead for periods that they can foresee reasonably well. The ABI believes that the introduction of short-term annuities is unnecessary, would introduce further complexity and could leave consumers vulnerable to investment and interest rate risk and perhaps reduce the level that they are likely to achieve when they eventually purchase a lifetime annuity. The association also fears that there is a real risk of mis-selling of short-term annuities, not least because they are likely to appeal to consumers who perceive annuities to be poor value but do not have a pension pot that is large enough for income withdrawal.

Those points were put to us by the ABI, but we did not want to table them as amendments. However, this is probably the right place to raise the whole issue of short-term annuities with the Financial Secretary. Perhaps she could explain what is behind the Government's thinking and how they intend to address the ABI's concerns.

Ruth Kelly (Labour, Bolton West)

I am glad that the hon. Gentleman is taking the proposition of compulsory annuities at the age of 75 seriously and that he recognises the merits in that. That is what drives the ABI's concerns on that point. Originally, when we had that debate, representations were made to me about the high charges involved in income draw-down. Limited period annuities were presented as an alternative to income draw-down. They allow people who would otherwise wish to defer annuities to the age of 75, or before that, to take out a more temporary form of annuity and to reassess their financial needs at the end of that period. That provides them with additional flexibility. When they were originally proposed in the consultation document on annuities they were widely welcomed, including—I think—by the Opposition. They are a welcome innovation as an alternative to income draw-down and show that we are listening to the demands of people who are looking for greater flexibility in their retirement fund.

Question put and agreed to.

Schedule 28, as amended, agreed to.

Clause 156 - Lump sum rule

David Laws (Liberal Democrat, Yeovil)

The clause and its associated schedule introduce a simplification, codification and extension of the principle of the tax-free lump sum. As we debated this morning, not only are the Government consolidating it, but, as the Minister indicated, the measures are appreciably more generous than the previous ones. The Government have decided not only to simplify and to codify the manner in which the tax-free lump sum operates but to extend it. We have the opportunity to probe their intentions in that area before we get into the greater detail.

I wonder whether the Minister will put on record the answer to a number of questions about the tax-free lump sum, so that we can understand how the Government's policy is developing. First, will she clarify the purpose of, and justification for, the tax-free lump sum? As we discussed this morning, the previous Chancellor described the tax-free lump sum as an ''anomaly'' within the taxation of pensions. However, the Government have chosen not only to consolidate that anomaly but to extend it. Presumably, they have considered whether there are other ways that savings, both for pensions and for other items, could be tax-advantaged. They have chosen to extend the tax-free

lump sum. So that we have it on the record, can we be told the Government's thinking about the purpose and justification of the tax-free lump sum?

Secondly, there was speculation a few years ago about whether the Government would get rid of the tax-free lump sum altogether. The Minister pooh-poohed that this morning. Notwithstanding the tendency of Treasury Ministers to be careful about the things that they say and put on the record, can we take that as confirmation that the Government are committed permanently to keeping the tax-free lump sum?

Thirdly, will the Government clarify why they have made the tax-free lump sum arrangements more generous in the Bill? How much additional saving for pensions do the Government anticipate will result from that? Fourthly, will the Minister clarify the current cost estimates in respect of the tax-free lump sum and how much that will increase over time as a consequence of the Bill?

Ruth Kelly (Labour, Bolton West)

I am delighted that the hon. Gentleman has taken such an interest in the tax-free lump sum. We have decided to merge upwards for several reasons. The first is for pure simplification. We are increasing the permitted lump sum as part of a wider objective under tax-simplification proposals to merge occupational and personal pension regimes and to remove the distortions that are caused by having two different regimes. We did not want some people who currently benefit from a particular privilege to have it reduced under the simplified proposals. We decided in each case to level upwards, so that there would be practically no losers under the new regime compared with the number of winners. We are prepared to commit the Exchequer to financing that levelling-up of the legislation.

The second point, which is highly relevant, is that the tax-free lump sum is very popular. That is not a silly point. People save in pensions partly because they know that when they retire they will have access to a tax-free lump sum, perhaps to fund a more active early retirement before they use the rest of their income as an annuity. It is an attractive element of the overall pensions regime and encourages people to use the pensions vehicle rather than a different savings vehicle.

David Laws (Liberal Democrat, Yeovil)

I understand the Financial Secretary's argument, but does she accept that any double relief of taxation is going to be popular? She may be coming to that point and perhaps I am pre-empting her argument, but so far she has not produced a justification for that particular form of double-tax relief.

Ruth Kelly (Labour, Bolton West)

I thought that I did. I talked about committing, for every £100 saved in a pension fund, £30 in direct tax relief from the Exchequer, plus the permitted tax-free growth. As part of the bargain, we require people to buy a secured income for life at the end of that period. In order to ensure that sufficient money is saved, an additional, attractive element of pensions saving is that people are permitted to use up

to 25 per cent. of that in a liquid form immediately on retirement. That is one of the elements that increases pension saving.

It is virtually impossible to assess exactly what impact that has on pension saving, or how significant the boost to pension saving is. However, I am sure that if we were to abolish the tax-free lump sum, it would be severely detrimental to the overall savings environment. We do not that think that is an anomaly. We think that it is an important and attractive feature of the pensions regime. The hon. Gentleman is a braver politician than I if he is prepared to argue that that feature of the pensions regime should be abolished.

I said that it is impossible to separate out the costs. We have not published figures detailing how much of the additional cost of pension simplification arises from the more generous access to tax-free lump sums, but those in occupational schemes, who have not yet been able to benefit from the full 25 per cent. tax-free lump sums, will tend to benefit from our reforms. Many pensioners who do not have such a large pension pot will be able to avail themselves of the increased generosity of the Exchequer. I hope that the hon. Gentleman will welcome our proposals.

Question put and agreed to.

Clause 156 ordered to stand part of the Bill.

Clause 158 ordered to stand part of the Bill.

John McWilliam (Labour, Blaydon)

We now come to a large group of Government amendments. If we are going to have any problems with the schedule, I will break for half an hour, because I have had enough.

Jim Fitzpatrick (Labour, Poplar and Canning Town)

On a point of order, Mr. McWilliam. My apologies if you were not advised of this, but it is our understanding that the Committee has informally agreed to conclude its business today at 5.30 pm. I hope that we will deal with the first group of Government amendments in the next schedule and then conclude for the day.

John McWilliam (Labour, Blaydon)

That is fine, but I am just about at the end of my tether.Schedule 29 Registered pension schemes: authorised lump sums—supplementary

Schedule 29 - Registered pension schemes: authorised lump sums—supplementary

Ruth Kelly (Labour, Bolton West)

I beg to move amendment No. 311, in

schedule 29, page 430, line 37, leave out

'amount which is the individual's lifetime allowance in relation to the member'

and insert 'member's lifetime allowance'.

John McWilliam (Labour, Blaydon)

With this it will be convenient to discuss the following:

Government amendments Nos. 312 to 314, 324 and 325 and 328 to 330.

Ruth Kelly (Labour, Bolton West)

I hope that this set of amendments will not prove too controversial. They are intended to provide additional clarity and simplification. Some of the amendments concern clauses 207, 208 and 266, the main substance of which we shall come to later. The amendments merely introduce consistency of reference to the lifetime allowance throughout schedule 29. They provide clarity and consistency for taxpayers and pension schemes, and I commend them to the Committee.

Amendment agreed to.

George Osborne (Conservative, Tatton)

I beg to move amendment No. 220, in

schedule 29, page 430, line 41, leave out 'when' and insert

'on or after the day on which'.

John McWilliam (Labour, Blaydon)

With this it will be convenient to discuss the following amendments:

No. 225, in

schedule 29, page 433, line 21, after 'scheme', insert

'together with interest at a prescribed rate,'.

No. 226, in

schedule 29, page 434, line 14, leave out paragraph 7 and insert—

'7. (1) For the purposes of this Part a lump sum is a trivial commutation lump sum if—

(a) on the nominated date, the value of the member's pension rights does not exceed the commutation limit,

(b) it is paid when all or part of the amount which is the individual's lifetime allowance in relation to the member is available,

(c) it extinguishes the member's entitlement to benefits under the pension scheme, and

(d) it is paid when the member has reached the normal minimum pension age but has not reached the age of 80.

(2) The nominated date is any day after the member has reached the normal minimum pension age but has not reached the age of 80 nominated by the member or by the scheme administrator (provided the scheme administrator has given the member at least one month's written notice of the intention to nominate a date and the member has not objected in writing before that date).

(3) The commutation limit is 1 per cent. of the standard lifetime allowance on the nominated date.

(4) The value of the member's pension rights on the nominated date is the aggregate of—

(a) the value of the member's relevant crystallised pension rights on that date (calculated in accordance with paragraph 8), and

(b) the value of the member's uncrystallised rights on that date (calculated in accordance with paragraph 9).'.

George Osborne (Conservative, Tatton)

Although grouped, the amendments deal with different issues, which I will go through in turn. Amendment No. 220 is a typographical change to achieve what we believe the Government mean to achieve with pension commencement lump sums. That is to say that a pension commencement lump sum be payable not earlier than the normal minimum pension age being reached or, if earlier, on the ill-health condition being satisfied.

The use of ''when'' implies a precise timing at normal minimum pension age and no other time, which is clearly not intended. One of our tax lawyers picked up on that point, saying that it was better to have ''on or after'' than ''when''. Since those people

seem to make large sums of money arguing such points, I think I might save people some money if the Government amend the Bill.

Amendment No. 225 deals with the short service refund. It is normally paid when an individual has been a member of a scheme for less than two years. It is common for the member's contribution—less, if the scheme was contracted out, the cost of buying back his second state pension rights—to be repaid with interest net of tax. The amendment is designed to reflect that common practice and to avoid a tax charge because of the payment of interest.

Amendment No. 226 is more substantial and addresses trivial commutation. I wonder whether the Government will be the victims of unintended consequences. They seem to be introducing a new rule whereby an individual can commute trivial sums up to 1 per cent. of their lifetime allowance. It seems relatively simple for people to commute very small pensions. Some people have very small pensions that pay out, and that is not satisfactory for all concerned. However, the onus seems to be shifting from a decision by the scheme to commute trivial sums that it finds difficult and costly to administer to a decision by the member. Just because an individual has several other trivial sums that have been commuted over their lifetime, a scheme might find itself paying out only 50p a month.

The measure represents a shift, because there are schemes with very large numbers of individuals with very small sums. In the past, schemes have been able to commute those sums and save large sums on their administration. Under the proposed system, the 1 per cent. of the lifetime allowance may be exceeded and the individual may choose not to commute their trivial

sum. As I understand it, the decision is now for the member rather than the scheme. Schemes may not be able to contact members for their approval.

Most of the representative bodies to which I have spoken are greatly concerned because they think that the provision will have unintended consequences and lead to huge extra administrative costs for certain schemes.

I do not know whether the Financial Secretary has spotted it—there has apparently been little conversation between her Department and the Department for Work and Pensions—but there is a direct link to the calculation of the flat-rate levy for the pension protection fund. For example, if someone has a pension that only pays 50p a month, the scheme may have to pay £10 extra on the pension protection fund levy because that levy is calculated per member. Therefore, there could be a very substantial cost impact on schemes that consist of large numbers of trivial sums. The industry raised that point with us—it cropped up in almost every conversation I had—and it is worth bringing it to the Committee's attention.

My amendment is designed to deal with one final point. There seems to be an inconsistency regarding the age at which one can receive a trivial commuted sum. Although from 2010 pensions will be paid from the age of 55, trivially commuted sums will not be payable until the age of 60. Why is the age of 60 suddenly used? It is not used elsewhere in the Bill, and it seems strange that it has just appeared. When the Financial Secretary responds, perhaps she will deal with that point.

Debate adjourned.—[Jim Fitzpatrick.]

Adjourned accordingly at twenty-seven minutes past Five o'clock till Tuesday 15 June at half-past Nine o'clock.