FINANCE (NO. 2) BILL

Public Bill Committee, 8 May 2014.

(Except clauses 1, 5 to 7, 11, 72 to 74 and 112, schedule 1, and certain new clauses and new schedules) - Clause 35 - Community amateur sports clubs

Martin Caton (Labour, Gower)

I remind the Committee that with this we are discussing clause stand part.

Nicky Morgan (Conservative, Loughborough)

It is a pleasure to serve under your chairmanship this morning, Mr Caton.

We were discussing corporate gift aid and community amateur sports clubs. The changes made by the clause will extend charitable donations relief to companies that give money to community amateur sports clubs. The new relief will encourage and reward more donations to help CASCs to provide the benefit of sport to their local communities. The Government are committed to maintaining and building on our sporting legacy following the success of the London 2012 Olympic and Paralympic games. CASCs are a vital building block in securing the legacy.

CASCs are community-based member sports clubs that are registered by Her Majesty’s Revenue and Customs. Their role is to increase and sustain sports participation while promoting volunteering, community building and social inclusion. I welcome the comments made by the hon. Member for Gateshead on the importance of community amateur sports clubs and the role they play. The role of a CASC is to encourage wide participation, in particular by people who cannot afford to participate in sport without special help. CASCs can receive certain tax reliefs, including limited exemptions from corporation tax and 80% relief from business rates. More than 6,400 grass-roots amateur sports clubs have been registered as CASCs since the scheme’s introduction in 2002.

HMRC carried out a review of the qualifying conditions for the CASC scheme in 2011. It found that the original legislation was unclear and caused confusion for clubs. As a result, the Government decided last year to introduce new rules that clubs must comply with to be eligible for CASC status. The rules will be clearer and easier for volunteer-run clubs to understand and apply. The Finance Act 2013 included some of the new rules and provisions to make more detailed regulations to deliver the remaining new rules. A consultation on the detailed rules was held last summer. One of the proposals in the consultation was to introduce tax relief for companies that give money to CASCs. That would align the treatment of gifts of money to CASCs with the rules for donations to charities. Companies have been able to claim tax relief on gifts of money to charities under what is sometimes known as corporate gift aid for many years.

The hon. Member for Newcastle upon Tyne North asked why the measure relates only to gifts of money and does not extend the relief to gifts of land and shares to a CASC, as is the case for charities. There are clear differences between CASCs and charities, so it is right for the rules on tax relief to take account of the differences. For example, CASCs are subject to less regulation and scrutiny than charities are, and the lighter regulation is balanced by CASCs’ more limited access to tax reliefs.

Iain McKenzie (Labour, Inverclyde)

As the Opposition have highlighted, gifts can be in forms other than straight cash—for example, land may be offered to an amateur sports club. Also, some businesses may wish to support more than one amateur sports club and therefore to sponsor a facility such as an all-weather pitch and access to it. Would those businesses still be allowed to pick up the tax relief, bearing in mind that we are not talking about a straight cash transfer, but cash to facilitate access to such facilities for their sport?

Nicky Morgan (Conservative, Loughborough)

I thank the hon. Gentleman for his intervention. My understanding—I will be happy to return to this later if I am wrong—is that the relief is only on gifts of money. As I am explaining, there is a difference between charities and community amateur sports clubs. In return for lighter regulation of CASCs—I will come to the administrative burden that we do not want to impose on sports clubs—donors can get tax relief only on money, not on gifts of land or shares. I expect that a donor would be happy to give money towards building new pitches, for example, rather than donating the land on which the pitches were situated. If I have got that wrong, I will happily come back to the hon. Gentleman.

Community amateur sports clubs can, if they choose to do so, arrange their affairs so as to qualify as charities, but they would need to register as charities. Those that do so will get all the tax reliefs to which a charity is entitled. As the hon. Member for Newcastle upon Tyne North mentioned, the proposal to extend corporate gift aid to CASCs has been widely welcomed, including by the Association of Taxation Technicians. The Government announced in November that they would implement the proposal in this Finance Bill. Draft clauses were published for consultation in December and there were no substantive suggestions for change. Indeed, the Association of Taxation Technicians described the proposals as

“a proportionate response to the competing needs of sustaining sports participation whilst preventing those reliefs from being used in a way that the Government had never intended.”

Let me turn to the proposed changes. Subject to meeting certain conditions, companies will be able to claim tax relief on donations of their profits made to a CASC on or after 1 April 2014. The CASC will be exempt from corporation tax on such donations, provided that they are used by the CASC for wholly qualifying purposes, such as providing facilities for eligible sports and encouraging people to take part in them. To prevent abuse of the new relief, any donation that is not used for wholly qualifying purposes will result in the CASC being liable for corporation tax. This measure will enable trading company subsidiaries of CASCs—for example, a company that provides catering services for the club—to donate its profits to its parent CASC free of tax.

Subsidiary trading companies of a CASC could be vulnerable to abuse. That might happen where the company was under the control of the CASC’s officials without full scrutiny by the wider CASC’s members. To counteract that risk, the new rules include targeted and proportionate anti-abuse provisions to discourage manipulation of the subsidiary company.

The hon. Member for Newcastle upon Tyne North asked me to reassure volunteers, organisers and members of CASCs about the approach that the Treasury and HMRC are likely to take in enforcing the rules. I am happy to do so. HMRC will write to every CASC when the new rules are introduced to explain what they need to do. It will also publish clear guidance to explain the new rules. Anyone who needs additional help will be able to get it from HMRC. The national governing sports bodies will also provide support to their member clubs to help them to decide what to do. In addition, clubs will have 12 months to make any necessary changes.

Amendment 12 would require a review of the clause’s impact to be carried out within three months of Royal Assent. I will ask the hon. Lady to withdraw her amendment because, most importantly, the terms of the review would create a huge and unnecessary administrative burden on the clubs themselves. The information on corporate donations received in the past four years would have to be provided by those clubs, as no one else has that information: clubs and companies have not been required to provide such information to HMRC. Therefore, every club—most clubs are run completely by volunteers—would have go through their records for the past four years to extract information about donations. I am sure that Opposition Members would not want to put clubs through that exercise. We want to make it easier, not harder, for the hard-working and dedicated volunteers of CASCs to get on with their real work in their communities: providing facilities for, and promoting participation in, sport.

I appreciate the hon. Lady’s concern about the potential administrative burdens on clubs that need to make changes to remain within the CASC scheme once the new regulations are introduced. However, the alternative to this change in the rules was to enforce the old rules, which, as I have said, were unclear and would have meant some clubs leaving the scheme altogether. All CASCs will be able to remain as CASCs under the new rules, although some may have to make some changes to stay within the rules.

We do not know how many clubs will be affected by the new rules. HMRC does not collect detailed information about CASCs because that would create another unnecessary administrative burden on the clubs. Most clubs do not need to make a tax return every year and HMRC estimates that most CASCs will not need to do anything. They are CASCs under the old rules and they will continue to be so under the new rules.

It is not possible to say what the administrative cost of the change will be. Clubs that need to change will need to do different things depending on their individual circumstances. The costs will mainly be limited to reading the new guidance and confirming that the club meets the scheme’s rules in practice. For example, some clubs will need to ensure that they offer low-price memberships for those on low incomes.

I appreciate the concerns that the hon. Lady raised about rugby clubs and others that use extra income from trading activities to help to support their sporting activities. Such income helps to ensure that the clubs are accessible to the whole community, and I believe that should continue. We have therefore increased the trading exemption from £30,000 to £50,000 to allow a CASC to carry out the same amount of trading with non-members as charities. The purpose of the CASC scheme, however, is to promote and facilitate sport. If a club carries out extensive trading with non-members, it needs to assess whether its main purpose is to play sports or to generate income through trading. In the latter case, the club cannot be a CASC. The new rules, which I will come to shortly, strike a fair balance on that.

Clubs with high levels of trading—above £100,000 a year—will need to decide whether they wish to remain in the CASC scheme. Some may decide to follow the example of those CASCs that have already set up subsidiary trading companies. The measures will assist such clubs because the subsidiary companies will be able to claim tax relief on any profits they give to the CASC. We do not know how many more clubs will opt for CASC status as a result of the changes. HMRC will be working with the Department for Culture, Media and Sport, Sport England and the respective sports bodies in the devolved nations, and the national governing bodies of various sports to promote the CASC scheme to the sports sector over the next few years. There is a great deal of potential out there and we want to encourage clubs to consider applying for CASC status.

Although the clause does not have any impact on national insurance contributions, as the hon. Lady mentioned on Tuesday, clubs with employees will be paying less in class 1 employer contributions this year. The employment allowance will reduce their bill by up to £2,000 and provide a welcome boost to clubs with employees. The amendment is unnecessary and would create a heavy and unwelcome administrative burden on clubs. I therefore ask the hon. Lady to withdraw it.

To answer the hon. Member for Inverclyde, there is no tax relief on sponsorship for companies that sponsor CASCs or charities. Companies may be able to get tax relief if the sponsorship is for advertising—that applies to both CASCs and charities. Companies can get tax relief on gifts of land to charities, but not to CASCs. That process can be quite complicated, because land valuations and legal transfers are needed. As I have mentioned, CASCs are lightly regulated and would experience an administrative burden if we expanded the donation scheme. That is why the scheme has been limited to money. I hope that answers his questions.

The Government are committed to promoting a healthy sports sector that provides everyone with the opportunity to enjoy the benefits of participating in sport. We are determined to continue building on the Olympic legacy by promoting grass-roots sports, and CASCs have a vital part to play in their local communities in helping us to realise that ambition. Fundraising and financial support are very important to CASCs. Even with the generous tax reliefs available to them, many clubs struggle to survive on their current funding, so any additional financial support they can receive from donations will be welcome. We hope the measures will provide CASCs with a new means of fundraising and encourage companies to donate more to their local CASCs.

Catherine McKinnell (Labour, Newcastle upon Tyne North)

I thank the Minister for her thorough response to the concerns we have raised. However, the amendment asks only for the potential impact of the changes to be monitored and kept under review. That is reasonable, given the impact the clause could have on CASCs, which are vital in so many communities. We will therefore be pressing the amendment to a vote and urge all hon. Members to support it.

Clause 36 - Changes in company ownership

Catherine McKinnell (Labour, Newcastle upon Tyne North)

We now come to some rather technical clauses. Clause 36 contains provisions on changes in company ownership. The Chancellor announced in the 2013 autumn statement that the Government would introduce measures to bring the UK loss relief rules on corporation tax more up to date with modern commercial practice. The clause therefore amends and supplements existing corporation tax provisions to ease the rules restricting the availability of relief for corporation tax trading losses when companies change ownership.

I will leave it to the Minister to outline the Government’s reasoning for bringing forward the clause, but I have one or two brief questions to put to him for clarification. The tax information and impact note highlights how these measures will benefit businesses, yet does not provide much more information than that. It states:

“Although there will be a negligible one-off cost of familiarisation, the measure will provide greater flexibility to make company ownership changes so will be welcomed. Overall, the impact of the measure on businesses and civil society organisations will be negligible.”

Will the Minister elaborate on the tax information and impact note and inform the Committee how many investment businesses, following ownership changes, would have avoided the loss relief restrictions had they previously been relaxed? It would be useful to get a greater understanding of how many investment businesses might benefit from the changes in the clause, based on previous trends.

On the proposed new section, which is designed to prevent abuse of the easement, it would be helpful if the Minister informed the Committee how many companies have previously been caught out by loss relief restrictions where a new holding company has been inserted on top of a group of companies. Clearly the provisions were originally intended as anti-avoidance measures. Indeed, the Government introduced three new clauses to last year’s Finance Bill to strengthen anti-avoidance measures on loss reliefs from company ownership changes. Considering that, and the fact that the tax gap rose last year to £35 billion, will the continuity rules, which will continue to apply to holding company shareholders throughout the transaction, be sufficient to prevent abuse, as the tax information and impact note so confidently claims?

David Gauke (Conservative, South West Hertfordshire)

It is a great pleasure to serve under your chairmanship this morning, Mr Caton.

Clause 36 makes changes to company losses anti-avoidance legislation, which potentially restricts a company’s ability to set brought-forward trading losses against future profits if the company changes ownership. There are two changes to the rules, both of which bring the legislation up to date with modern commercial practice. Let me first set out a little background to the clause. The rules that potentially restrict brought-forward losses being used after a company changes ownership have not seen significant amendment for many years. However, modern commercial practice involves more complex restructuring arrangements and increases in capital than were common in the mid-1990s. More flexibility in the rules was required to prevent genuine commercial arrangements from being caught by the legislation, and this clause is the result.

The changes that the clause makes are twofold. The first will allow a holding company to be added to the top of a group structure. Under current legislation, such a transaction would be treated as a change in company ownership and so potentially trigger the anti-avoidance rules. The second change will allow a company with investment business to increase its capital after a change of ownership by a much greater margin before the anti-avoidance rules are triggered. The changes will have effect for changes of ownership on or after 1 April 2014. This will affect any company changing ownership, especially those with investment business. As the tax information impact note makes clear, the cost to the Exchequer will be negligible.

The hon. Lady essentially raised two points. First, she asked about the number of businesses likely to be affected that were previously caught up by the legislation, despite having commercial arrangements that were not intended to be caught up by it. The view in the Treasury and HMRC is that we anticipate that this will be a relatively small number. I cannot give any more information than that at this stage. If it is possible for us to determine more precisely how many businesses were caught up, I will certainly write to the hon. Lady, setting out those details. At the moment, we are talking about a relatively small number.

Secondly, the hon. Lady asked whether the measure could open up an opportunity for avoidance and whether we were weakening anti-avoidance legislation. Let me reassure her that we are confident that there is no weakening of the intended scope of the change of company ownership rules in part 14 of the Corporation Tax Act 2010. The situations that the clause would deal with are commercial, but could be caught by the rules as they stand, which would be an unintended consequence of the rules.

Finally, let me correct a comment made by the hon. Lady. As far as the tax gap is concerned, the most recent numbers that are available show that it fell as a percentage of liabilities. I am sure that she would not want to give an impression to the contrary.

Catherine McKinnell (Labour, Newcastle upon Tyne North)

Just to clarify exactly what I said, the figure has increased to £35 billion. There was nothing inaccurate in my comment.

David Gauke (Conservative, South West Hertfordshire)

For the sake of completeness, I am grateful for the hon. Lady’s intervention. I think her point was that although there was a cash increase of £1 billion, the tax gap fell as a percentage of tax liabilities. I am glad that we have got that clarified and on the record.

Clause 37 - Transfer of deductions: research and development allowances

Catherine McKinnell (Labour, Newcastle upon Tyne North)

This clause is similar to the previous one; it relates to provisions introduced in the Finance Act 2013 for loss relief rules in respect of corporation tax. That Act introduced three new sections—29, 32 and 33—to the Corporation Tax Act 2010, which sought to close down various loopholes in the loss relief rules because, as Her Majesty’s Revenue and Customs’ technical note at the time made clear, HMRC had seen a marked increase in companies entering into arrangements to circumvent these rules.

The tax information and impact note accompanying clause 37 states:

“The anti- loss-buying rules had a more significant adverse impact on RDAs than intended. The rules catch situations where a company does preliminary capital work in the furtherance of research and development, but does not reach the point of trading, and then is sold on to trading groups. Before the rules introduced by FA 2013 the trading groups could claim the Research and Development Allowances under Part 6 Capital Allowances Act 2001 (CAA 2001).

Although these rules contain an avoidance motive test their introduction has caused uncertainty and risks undermining capital investment in research and development.”

The impact note goes on to suggest that representations were made by business following the introduction of the loss-buying rules in the Finance Act 2013.

The clause amends the definition of deductible amounts in section 730B of the Corporation Tax Act 2010 to exclude an expenditure of a trade to the extent that it arises from research and development allowances. Although the tax information and impact note suggests that the Exchequer impact of the changes will be negligible, it describes the predicted benefits to those companies that presumably have been inadvertently caught by the rules introduced in the Finance Act 2013, stating:

“For companies involved in pre-trading activity who make capital expenditure on research and development this will preserve the value of their investment on the sale or partial sale of the company.

For those who rely on the preliminary capital research and development work of unconnected companies this will enable them to benefit from the expenditure made on their behalf.”

The concern was raised that the changes were necessary because there had been significant uncertainty among taxpayers as to whether the rules restricted RDAs on a transfer of a company in circumstances where that company had undertaken preliminary research and development work but did not reach the point of trading.

In light of such concerns, will the Minister provide more detail on what representations on research and development the Government received from interested parties and businesses? Will she also describe the extent to which the Government believe the anti-avoidance loss-buying rules impacted on research and development? Have the Government made any assessment of the impact on jobs and economic growth—in general and in the R and D sector in particular—following what were clearly inadvertent effects? Indeed, will she confirm whether the Government were made aware of the potential adverse impacts on research and development before the changes were implemented last year?

Nicky Morgan (Conservative, Loughborough)

I thank the hon. Lady for those questions, which I will come to. The clause makes changes to ensure that tax allowances for certain capital expenditure on research and development are not denied by the Finance Act 2013 anti- loss-buying rules, reflecting the Government’s continuing commitment to making the UK a home for innovation and discovery through investment in R and D. Hon. Members may recall that in the previous Finance Act we extended the loss-buying rules to curb the sale of tax losses. The rules concentrated on expenditure made but not yet recognised for tax.

As the hon. Lady mentioned, there has been concern within industry that that change could have an unintended adverse impact on start-up R and D companies. Such companies tend to be capital-intensive and involved in activities that may not lead to the point of trading. Previously that was mitigated by the knowledge that large, existing trading concerns could benefit from the unclaimed R and D tax allowances, but changes to the anti-loss-buying rules could mean that the buyer would not benefit from certain key expenditure of the start-up. That would reduce the value of the new companies and thereby increase the risk for investors.

Although the rules in the Finance Act 2013 contained an avoidance motive test, the Government are keen to remove any uncertainty that could undermine capital investment in research and development. The changes made by the clause will allow a company with unclaimed research and development allowances to claim tax relief for the company’s capital investment after it has been acquired by new owners. The measures have effect for changes of ownership on or after 1 April 2014.

Research and development allowances give relief for certain capital expenditure on R and D projects, and would create a trading loss if the company failed to return a profit. The changes will mainly affect small, capital-intensive start-up companies involved in research and development, but other companies in similar circumstances could also benefit. As the hon. Lady has highlighted, and as is made clear in the tax information and impact note, the cost of the change is negligible, reflecting our confidence that there is no weakening of the intended scope of the loss-buying rules, but as she said, and as I have said before, the changes are intended to remove uncertainty about the impact of the rules.

The hon. Lady asked about the impact on jobs and growth in research and development. The basis of the queries that industry raised with the Government was that it was unclear whether the rules would apply. I have set out why the Government think that the uncertainty should be removed, so that there is no doubt.

Industry bodies representing the oil and gas sector, among others, made representations. They had concerns about the impact of rules on small exploration companies. We have probably already debated in other Committees the Government’s support for the oil and gas sector, and concerns have also been raised with us about exploration, and the need for Government to support exploration in the oil, gas and other sectors. I have mentioned the intention of benefiting small, capital-intensive companies.

I cannot give the hon. Lady a definitive analysis of the impact on jobs and growth in research and development, because the point is to remove uncertainty about what might happen, and not about things that have happened—an impact that can be measured. It depends on individual cases.

Catherine McKinnell (Labour, Newcastle upon Tyne North)

To clarify the question, it related more to the last 12 months since the uncertainty was legislated for—unintentionally, of course—and the lost research and development growth and jobs, and whether there was any impact assessment of that in the past 12 months. That was obviously to get an understanding of the future projections that I assume the Treasury has made.

Nicky Morgan (Conservative, Loughborough)

As it is a question of what has happened in the past 12 months, it is difficult to say, as the hon. Lady will understand. Many representations are made; people say that things will affect jobs and growth, without being able to give the number of jobs. Oil and gas exploration in particular are important to the Government and the economy. We are removing an uncertainty that industry has highlighted. It is worth doing that, so that there will be no doubt that the rules will be available to small companies that have not yet made a profit. The clause will remove uncertainty for investors and an unnecessary risk for R and D start-ups by ensuring that tax relief for the investment in R and D is not lost just because a company is taken over.

Clause 38 - Tax treatment of financing costs and income

Catherine McKinnell (Labour, Newcastle upon Tyne North)

We now turn to the final clause of chapter 3 and the general provisions for corporation taxation. The clause relates to worldwide debt cap provisions; it is of particular relevance to multinational groups of companies, and was originally announced in the autumn statement in 2013. I shall not go into the detail of the clause—I will leave that to the Minister—but by way of background I shall put into context the couple of queries that I want to make on the Committee’s behalf.

The worldwide debt cap was first introduced in the Finance Act 2009 under the previous Labour Government, as part of a package of changes to the taxation of companies on their foreign profits. It limits the corporation tax deduction for interest and other finance expenses of the UK members of large groups of companies, so that such expenses cannot exceed those of the worldwide group.

Clause 38 will makes two key changes: the first protects revenue and puts beyond doubt the way in which the grouping rules apply, by making three clarifications; the second, according to the explanatory notes, makes a “minor change” to the power to make regulations relevant to the potential impact of the provisions on whole business securitisations.

I should be grateful if the Minister would elaborate on some of the comments made in the tax information and impact note, and in particular new paragraph (za), which relates to the tax treatment of financing costs and income interpretation, and explain whether that is intended to provide greater regulation for whole business securitisations, or to relax the rules around the worldwide debt cap in respect of such restructurings. The final line in the explanatory notes for the clause states that the new regulation-making powers will

“enable companies involved in whole business securitisations to remain bankruptcy remote”,

yet as far as I can see, the tax information and impact note makes no reference to that. It would be helpful to the Committee if the Minister could clarify that point.

Concerns have also been expressed about the first measure being introduced “due to perceived abuse”. If the first measure, which clarifies the grouping rules, is indeed in response to perceived abuse and, in the Government’s words, to “protect revenue”, why is it not expected to have any Exchequer impact? The tax information and impact note suggests that the projected impact is not just negligible, but nil. If there is perceived abuse, the measures are surely intended to prevent it, meaning increased revenue to the Exchequer from closing down potential opportunities for abuse. If the abuse is only perceived, as opposed to actual abuse, will the Minister explain why the measure is necessary and give a helpful introduction to the legislation?

David Gauke (Conservative, South West Hertfordshire)

Clause 38 makes two changes to the rules for the tax treatment of financing costs and income, commonly referred to, as we have heard, as the debt cap. The first change puts beyond doubt the way in which the grouping rules apply. The second change amends the powers to make regulations designed to make whole business securitisations easier.

The debt cap rules were introduced in 2010 to limit the tax deduction for the finance expenses of the UK members of multinational groups of companies, so that UK companies do not avoid tax by paying excessive amounts of interest. The rules used to identify the members of the group to which the provisions apply were based on the grouping rules already used elsewhere in tax legislation. Some groups have claimed that the rules do not have their intended effect, which happens when a group of companies includes structures that are not companies and that do not have ordinary share capital in the way that a company would. The amendment is designed to put it beyond doubt that entities that do not have ordinary share capital, and their subsidiaries, can be members of a group for the purposes of the debt cap rules. The second change addresses concerns that can arise when the debt cap rules are applied to whole business securitisations.

The changes made to the grouping rules by clause 38 will ensure that the definition of a group for debt cap purposes can deal correctly with an entity that does not have ordinary share capital. The limit to relief for interest and other finance expenses applies to companies that are 75% subsidiaries of the ultimate parent of the group. Some groups have argued that an entity without ordinary share capital, and its subsidiaries, cannot fall within that definition, so they are not caught by the debt cap rules. The amendment ensures that the entities do fall within the group and further makes it clear that they are included even when the different entities are held indirectly or controlled in other ways. The changes will take effect for accounting periods starting on or after 5 December 2013.

The debt cap rules include a regulation-making power that allows regulations to be made to help companies that raise finance by arrangements known as securitisations. The regulations would benefit companies involved in securitisations by allowing them to transfer tax liabilities arising from the debt cap legislation between companies. The change ensures that regulations, if required, would be simpler and more efficient for both business and HMRC than the regulations that can be made under the existing power.

As for whether the changes to the regulatory powers relax the rules, the answer is no. The changes are designed to allow regulations to be made where needed. The regulations will allow a company that is party to a whole business securitisation to pass on its tax obligations to another group company. The new paragraph (za) in the securitisation legislation is intended to enable simpler regulations.

As for why no extra revenue is included within the tax information and impact note, the measure is about revenue protection, not revenue raising as such, so the debt cap has a deterrent effect. The difficulty is that we do not have an effective debt cap. Existing revenue that is coming into the Exchequer is put at risk, and I am sure the Committee would not want to permit that. Through the clause, we are preventing a loophole from being exploited, rather than expecting additional revenue to come in as its consequence. With those points of clarification, I hope that the Committee will support the clause.

Clause 39 - Pension flexibility: drawdown

Martin Caton (Labour, Gower)

With this it will be convenient to consider the following:

New Clause 8—Pension flexibility: Treasury analysis—

‘(1) The Chancellor of the Exchequer shall, within six months of this Act receiving Royal Assent, publish and lay before the House of Commons any analysis prepared by the Treasury prior to the publication of Budget 2014 relating to the impact of changes made by sections 39 to 43 of this Act to Schedules 28 and 29 to the Finance Act 2004.

(2) The information published under subsection (1) must include—

(a) any assessment made of the impact of the provision for independent face to face guidance on the 2004 Act;

(b) the distributional impact, by income decile of the population, of changes made by sections 39 to 43 of this Act;

(c) a behavioural analysis; and

(d) the financial risk assessment.’.

Clause 40 stand part.

Cathy Jamieson (Labour, Kilmarnock and Loudoun)

It is a pleasure, Mr Caton, to be yet again in the exciting environment of the Finance Bill Committee—[Hon. Members: “Hear, hear.”] Everyone is now awake and ready for our debate ahead.

We are coming on to very important clauses. Of course, every clause in the Bill is important, but there are quite a few aspects of its pensions clauses that we want to explore in detail. We cannot predict what will be in the Queen’s Speech, but we expect further pensions legislation. Clauses 39 to 42 introduce a number of transitional measures that will be effective immediately. If pension scheme rules allow, they will give pension savers more flexibility in how they access their defined contribution schemes and savings.

The changes in the Bill follow on from measures affecting the pension regime in recent years, most notably the triple lock, changes to public sector pension schemes, the auto-enrolment scheme for workplace pensions and the introduction of a new flat-rate pension. I mention that because I will want to probe the consistency of approach in the Government’s proposals.

It is worth having something on record about the current pensions regime under which savers are entitled to take up to 25% of their pension tax-free. For the remainder there are four main options. Those aged 60 and over with overall pension savings of less than £18,000 can take that in a lump sum, which is known as trivial commutation. People can also draw down a set annual sum for their pension up to a maximum yearly allowance of up to 120% of an equivalent annuity, which is known as the cap drawdown. Wealthier savers have no set limit on the amount they can draw down from their pot each year but, to qualify, they must have a guaranteed annual income in excess of £20,000 in retirement—that is the flexible drawdown.

The majority of savers—some 75%, it is estimated—purchase an annuity, which is an insurance product through which a fixed sum of money is paid to someone each year, typically for the rest of their life. The Opposition have consistently called for reform of the annuities market because we believe that the cost of savers not shopping around could be as much as £1 billion. Clauses 39 and 40 increase the amounts that savers can access through trivial commutation, cap drawdown and flexible drawdown.

Clause 39 allows those in defined contribution pension schemes to withdraw more money from their pensions annually and reduces the income threshold at which wealthier savers can have unlimited access to their pension pots. For schemes that allow members to take their pension via a drawdown, from 27 March 2014, the cap drawdown limit has been increased from 120% of the amount of an equivalent annuity to 150%.

Sheila Gilmore (Labour, Edinburgh East)

Before my hon. Friend moves to the detail of the provisions, may I ask whether she shares my concern that these clauses have become necessary because of the sudden introduction of changes that have not been consulted on, researched or trailed? They are necessary because of an outcry from some people that they would find themselves on a cliff edge and denied a better deal.

Cathy Jamieson (Labour, Kilmarnock and Loudoun)

My hon. Friend makes a good point. Constituents have contacted me about that issue because they worry about the so-called cliff edge. When the overall announcement about pensions was made in the Budget, some organisations suggested that they were “perplexed” at how the announcement had been made. We are now in a scenario in which we have to move on and look at the detail in front of us, but I share my hon. Friend’s concerns.

Clause 39 also reduces the amount of guaranteed annual income that savers must have to draw down their pensions flexibly from the current minimum of £20,000 to £12,000.

The Minister might well say that he is not surprised about the nature of new clause 8, because we are once again asking the Government,

“within six months of this Act receiving Royal Assent”,

to

“publish and lay before the House any analysis prepared by the Treasury, prior to the publication of Budget 2014 relating to the impact of changes made by sections 39 to 43 of this Act”

and the relevant schedules.

We are also asking for the information published as a result to include

“any assessment made of the impact of the provisions for independent face to face guidance on the 2004 Act.”

We will come back to discuss that in due course. We are also asking that the information includes

“the distributional impact, by income decile of the population, of the changes made by sections 39 to 43…a behavioural analysis; and the financial risk assessment.”

Our reasons for asking for that are partly the points raised by my hon. Friend the Member for Edinburgh East. Given how the proposal was introduced, there was concern that not all the information would be available. It is reasonable to ask the Government to do what they can to put such information into the public domain so that additional scrutiny can take place before further legislation is considered.

Clause 40 will allow people over 60 with total pension savings of £30,000 or less to take all out all those savings as one or more lump sums. That is an increase from the current trivial commutation threshold of £18,000. In addition, the clause amends the Registered Pension Schemes (Authorised Payments) Regulations 2009 to increase the amount that can be paid out in small lump sums, irrespective of the overall value of an individual’s pension savings, to £10,000, which is an increase from the current limit of £2,000. It also increases from two to three the number of small lump sum payments that an individual can receive from registered pension schemes other than occupational pension schemes or public service pension schemes.

It may seem to those of us who follow such things in detail, who have some knowledge and information, and the opportunity to find out more about the world of pensions and what the Bill proposes, that these proposals are all well and good. However, we are worried that there is still some way to go to ensure that those people receive the further advice, guidance and information that will enable them to make the best use of the provisions.

We have made it clear that we are not in principle against the idea of increased flexibility for people in retirement and reform of the pensions market, as long as people get a better deal. However, we put to the Minister the real concern that the benefits of greater flexibility might be lost if they are not accompanied by measures and safeguards that will enable savers to make informed decisions about how they choose to save or invest for the future. That has been characterised as us not trusting people with their own money, but that is unfair. It is not enough simply to say, “There you are; on you go.” The Government have a duty to give people information and proper advice so that they can decide what is the best thing for them, rather than putting themselves and their long-term financial security at risk.

Charlie Elphicke (Conservative, Dover)

The hon. Lady talks about Labour Members being characterised as not trusting people with their money, but that view is held because it was what a senior Labour adviser said on “Newsnight”.

Cathy Jamieson (Labour, Kilmarnock and Loudoun)

With all respect to whatever anyone has said on “Newsnight”, I am saying that we have concerns because if people do not access the correct advice, they might make decisions that will not benefit them in the long term. We have consistently called for reform to the annuities market and a cap on pension fund charges—certainly while I have been a Member—but our concern is that we have not seen reforms to the private pensions market to stop people feeling that they have been ripped off. We want a system in which people can have confidence and that they trust.

Ian Mearns (Labour, Gateshead)

It is not the case that any Labour Member does not trust people to manage their own money, but when money is concerned, the sharks are always circling. The problem is that many sensible people have been caught up by con merchants posing as financial advisers or those who look after people’s assets—[ Interruption. ] From my perspective, such ready access to funds can only lead to a greater number of circling sharks in the highly infested waters of financial management.

Cathy Jamieson (Labour, Kilmarnock and Loudoun)

There seemed to be some hilarity among Government Members while my hon. Friend was making his valid and valuable point, but I cannot comment on what was going on. Financial advisers in my constituency—I am sure that members of the Committee have encountered the same situation—have warned about people who should not even be describing themselves as financial advisers. None the less, because of a lack of proper regulation, such people might try to give advice to or to prey on people who have lump sums. Such a thing happened in my area following major redundancies after Diageo pulled out of the town that I represent. There is no reason to believe that the people who tried to prey on those individuals affected, some of whom had significant sums, would not do the same in other circumstances.

Mark Garnier (Conservative, Wyre Forest)

The hon. Lady makes a fair point because there are individuals who will try to prey on vulnerable people, but that is more a question of regulation. The Government have brought about a profound reform of the regulatory system to ensure that that does not happen. Her argument is rather like saying that we should close down shops because shoplifters are about.

Cathy Jamieson (Labour, Kilmarnock and Loudoun)

I thought that the hon. Gentleman was about to make a valid point, so it was unfortunate that he ended his intervention as he did. I absolutely appreciate that work has been done to tighten regulation, but many people’s experience is that no matter how much regulation is tightened, there will always be individuals who try to get around it. We will support the Government when we think that they are doing the right thing not only to ensure that people get a better deal, but to give them appropriate protections.

Ian Mearns (Labour, Gateshead)

Since I heard the announcement about access to pension pots, I have never thought that thousands of people would rush out and buy a Lamborghini. However, with access to a pension pot of that nature, people might be tempted to spend, say, 15% or 20% of it on a home improvement. There is nothing wrong with that, but perhaps the thinking behind this measure is the Chancellor’s desire for a pension pot-driven mini-boom in the economy.

Cathy Jamieson (Labour, Kilmarnock and Loudoun)

My hon. Friend again makes a good point. It was unfortunate that some of the debate was couched in the terms of people going out to buy a Lamborghini or something else. The majority of people might be accessing their pension pots for home improvements, for example, that they wanted but could not afford, or to provide something for their family or whatever else. However, if they do not get the right advice on long-term financial planning—I will come to that in more detail—they could make the wrong decisions.

Chris Evans (Labour, Islwyn)

My hon. Friend makes a distinct point. The basis of the argument is not about trusting people with their money; the real issue is good, sound financial advice. I worked as a financial adviser in the past and I know that many investment products over the years have seen people lose their life savings owing to rum advice from poor advisers. If the Government push on with this proposal, does she agree that there needs to be even stricter regulation on the advice given to people?

Cathy Jamieson (Labour, Kilmarnock and Loudoun)

I recognise my hon. Friend’s experience in this area. That is exactly why I think advice is so crucial. I will talk later about tests that we feel these measures ought to be judged against.

Charlie Elphicke (Conservative, Dover)

The home improvement example raises an important point. Home improvement is rational not only to improve the home, but as an investment to increase its value. How far does the hon. Lady want regulation to go? Does she want people to take advice before making a home improvement? Most people would regard that as manifestly absurd.

Cathy Jamieson (Labour, Kilmarnock and Loudoun)

I am genuinely sorry that some of the valid points we are making about access to, and the availability of, advice are seemingly being trivialised. I am sure that the hon. Gentleman pays regular attention and knows to the penny what his position will be in retirement, but many people simply do not do that. One concern is that if people without proper advice make the wrong decisions too early on in the process, they could put themselves and their families at a disadvantage later on. It is in no sense unrealistic for us to ask the Government to take that into account and for that to be part of the process.

Ian Mearns (Labour, Gateshead)

An interesting point can be raised about investing money in home improvements, as it all depends on people’s situations. I saw some statistics from the National Housing Federation only last week that showed that, of those who were forced into negative equity after the 2007-08 crash, only 0.8% in the south-east of England are still in negative equity, whereas the figure in the north-east is 56%. Is that an investment?

Cathy Jamieson (Labour, Kilmarnock and Loudoun)

My hon. Friend makes another valuable point.

Let me come to our three tests. First, there is the advice test. We want to ensure that there is robust advice for people who are providing for their retirement, and that measures are in place to deal with mis-selling, which my hon. Friend mentioned earlier. We all agree that the comment about buying a Lamborghini was perhaps made in jest and not all that helpful, but let us put that to one side and say that we need to ensure that robust advice is available.

Charlie Elphicke (Conservative, Dover)

Will the hon. Lady give way?

Cathy Jamieson (Labour, Kilmarnock and Loudoun)

I will, but I want to move on to other issues and I am conscious of the time.

Charlie Elphicke (Conservative, Dover)

Just so that the Committee understands, does the hon. Lady believe that if I, as a pensioner, want to spend that money on a home improvement or a car, I should take advice—yes or no?

Cathy Jamieson (Labour, Kilmarnock and Loudoun)

As I tried to explain earlier, perhaps the hon. Gentleman knows exactly to the penny how much he is going to have in retirement and what he wants to do with it. However, there will be people who will not have had the benefit of his experience and for whom it would be best to take proper advice. I do not think there is anything wrong in suggesting that advice ought to be available. At the end of the day, people may choose not to listen to advice, but they should be able to access it.

Richard Fuller (Conservative, Bedford)

I am a little confused about the hon. Lady’s position. We know that advice is available and that people may take it, but is she suggesting that they should be required to take it? Is she not concerned that it might be slightly condescending towards people to say that, because they are retired, they must need to take advice?

Cathy Jamieson (Labour, Kilmarnock and Loudoun)

Once again, I am genuinely disappointed that a Government Member is suggesting that it is condescending when we simply argue for proper advice to be available to try to ensure that people are not ripped off and mis-sold. I do not think it is condescending to say that advice should be available

Teresa Pearce (Labour, Erith and Thamesmead)

Would it not be fair to say that the Opposition agree with the following statement:

“In expanding the range of choices available there is a corresponding need to help consumers navigate those choices”?

Those are the Government’s words and, for once, I agree with them.

Cathy Jamieson (Labour, Kilmarnock and Loudoun)

I thank my hon. Friend because I will come on to some of the words in the Red Book, so that makes a neat link.

I have already mentioned what the advice test ought to be, and we also think that there should be a fairness test. The new system has to be fair to those on low and middle incomes, which means that they should still be able to access products that give them the certainty in retirement that they want. The billions we spend in pensions tax relief must not benefit just those at the very top, which is why we have already called for a restriction on pensions tax relief for people earning more than £150,000.

There is also a cost test. The Government must ensure that this policy does not result in extra costs to the state, either through social care or pensioners falling back on means-tested benefits such as housing benefit. I find it difficult to understand why the Government are reluctant to look at the situation in the round and to think about how people live their lives and will have to plan for the future.

Chris Evans (Labour, Islwyn)

What is going to happen with this market is what happens with every market. Now that there is an opportunity, companies will come together and create new investment vehicles. As someone who worked in the industry, I know that such vehicles can be extremely complicated. They can often be very risky, involving investment in the stock market that can go up as well as down, so annuities will still have a role to play as a low-risk investment. There will be more need for good advice. Perhaps I may be so bold as to answer the question from the hon. Member for Dover: if someone does not need advice, they do not have to take it, but good advice has to be available—

Kwasi Kwarteng (Spelthorne) (Con) It still is.

Chris Evans (Labour, Islwyn)

Perhaps I can continue. In a market in which there have been a number of shady deals, equity release will become more of a player, so good advice must be available. Unfortunately, there are sharks in that market, although that is not the case for everybody.

Cathy Jamieson (Labour, Kilmarnock and Loudoun)

Once again my hon. Friend shows the benefit of his previous work in this area. He gets to the nub of the issue. People do not need to take advice, but it must be available and it must be robust. We should remember that many workers who retire have been in low-income jobs all their working lives and have very modest pension pots, so we need to ensure that they get the best deal.

Let me finish on a point about the cost test. I said that I felt the Government should ensure that the policy does not result in extra costs to the state, which is why the Treasury should publish the analysis of the risks it considered when costing the policy, which the Office for Budget Responsibility described as “highly uncertain”.

Mark Garnier (Conservative, Wyre Forest)

I apologise for harking back to a couple of sentences ago, but the high-quality advice has got better under this Government with the delivery of the retail distribution review. All independent financial advisers are required to have a level 4 qualification, as opposed to level 3, as was previously the case.

Cathy Jamieson (Labour, Kilmarnock and Loudoun)

I think that I acknowledged earlier the work that has been done in that context, but many of us—certainly Labour Members—are aware that that in itself does not fully stop those who will try to circumvent the regulation. People who are not regulated providers will try, in one way or another, to move in when people have money available. We have to be conscious of that and ensure that we do not inadvertently create further loopholes.

Duncan Hames (Liberal Democrat, Chippenham)

It is relevant that the hon. Lady mentioned that many of these pension pots are very small. Would she apply the requirement to take advice when considering purchasing replacement products, or would that apply simply to taking funds out of these pension pots? A constituent who recently came to my surgery was on a modest NHS pension, but also had a very small pension pot that, until now, she had not been able to access, despite being a cancer patient. For her it was a simple question of whether she wanted an appalling annuity rate from which she would never get value. She was not looking at purchasing a complicated product; she just wanted to get hold of her own money while she still was in a position to spend it.

Cathy Jamieson (Labour, Kilmarnock and Loudoun)

The hon. Gentleman makes a valid point. There are circumstances in which individuals will be able to assess and then make decisions, presumably with guidance, if not advice, in the context of regulated scenarios. Again, I find it quite odd that Government Members seem to be suggesting that we are trying to put onerous requirements on individuals. I want to robust advice that people can trust to be available.

I shall now move on and ask some questions, because it is important to probe what the Government intend to do. Once we are sitting on the other side of the Committee following the election, the circumstances may well be different—[Interruption.] It is up to the Government to answer not only our questions, but those that professional organisations are raising.

Charlie Elphicke (Conservative, Dover)

Will the hon. Lady give way?

Cathy Jamieson (Labour, Kilmarnock and Loudoun)

I think I have been pretty generous in giving way. I could go on for some considerable time on this.

Mark Garnier (Conservative, Wyre Forest)

Please do.

Cathy Jamieson (Labour, Kilmarnock and Loudoun)

I assume that the beady eyes of the Whips would be on me if I tried to go on too long.

Let me bring this back to the Red Book. The Red Book says that

“from April 2015, all individuals with defined contribution pension pots are offered free and impartial face-to-face guidance at the point of retirement”.

The budget for that is just £20 million: £10 million each for 2015-16 and for 2016-17.

Advice is significantly more expensive than guidance. The Association of Professional Financial Advisers estimates that the average flat fee charged by an adviser for annuities advice is £681. The Association of British Insurers estimates that 500,000 members of defined contribution pension schemes retire each year, which means that a full advice service would cost £340.5 million a year. Therefore, we clearly see that the £10 million annual budget is a small percentage of that. The Treasury’s estimates are based on an expected cost of £70-100 per individual, which equates to at least £35 million a year.

I want to probe the Government with some general questions and some questions specifically related to the guidance. The Government recently introduced auto-enrolment for workplace pension schemes. Does the Minister think that there is any contradiction between encouraging people to invest in pension schemes throughout their working lives and the incentives that may encourage them to take money out of those schemes as soon as they retire? Will the Minister explain what financial analysis the Government have conducted on the impact of these clauses? The new clause would require such analysis in the future, but if he can answer that question now, perhaps we will not need to press it to a vote.

Does the Minister have anything to say on the comments made by the Minister with responsibility for pensions, the Minister of State, Department for Work and Pensions, the hon. Member for Thornbury and Yate (Steve Webb)? I do not want to go back to the Lamborghini issue, but does he have any comments on long-term planning as opposed to a quick fix? What was the Government’s thinking on that? The Minister with responsibility for pensions suggested that everything would be okay because people would be covered by their state pensions.

Will the Minister also confirm whether the Government have conducted any consultation on how and where savers will invest the money that they take out of their pension pots? That is important given the concerns expressed by many of my hon. Friends. What—if any—impact does he think that the changes in these clauses will have on the household savings ratio, which the OBR has projected will fall from 5% in 2013 to just under 3% at the end of the forecast period?

I will pose several questions now so that the Minister will have plenty of time for inspiration to arrive before he responds. Will he explain why the proposed guidance will be available only at retirement age and not at, for example, age 55 when many people will have access to their pensions under the increased flexibility? Professional associations have raised that with me.

In the Budget speech, the Chancellor said:

“We are going to introduce a new guarantee, enforced by law, that everyone who retires on these defined contribution schemes will be offered free, impartial, face-to-face advice on how to get the most from the choices they will now have.”—[Official Report, 19 March 2014; Vol. 577, c. 793.]

The Committee will see why we have spent so much time looking at what that statement means in practice, because advice and guidance are very different. The Chancellor used the term “advice”, but the Red Book refers to “free and impartial…guidance”. I would like to hear the Minister’s explanation of why the Budget speech referred to advice and the Red Book says guidance. Which will it be, and why is that? I am sure the Minister appreciates from a legal standpoint the fundamental difference between advice and guidance. In the Treasury Committee, one of my hon. Friends pointed out that advice is regulated and, as we have heard this morning, it carries significantly greater consumer weight than guidance does.

Was the use of the word “advice” in the Budget speech an oversight? Was it just one of those unfortunate things that happen and may lead to confusion? Will the Minister also inform us who should provide the guidance? If the guidance is given by pension providers, how will the Government ensure that the advice is impartial and in the interests of the saver? Will he also confirm that the Government intend everyone, regardless of where they live, to have access to face-to-face guidance? That is what has been said and I would like to hear that commitment again. I want to know how that will be offered in practice.

On cost, will the Minister confirm how the £20 million allocated to providing free and impartial guidance will be spent? According to the tax impact and information note, the measures in this year’s Bill will enable up to 400,000 people to draw down their pensions. Will the Minister explain why no money has been put aside for that free and impartial guidance in this financial year? Will the Minister say more about the difference in value between advice at an estimated cost of £681 per individual and guidance, set by the Treasury at £70 to £100 per individual? What is expected in return for that money paid?

The cost of guidance has been estimated at between £35 million and £50 million annually. That is significantly above the £10 million per year that the Red Book outlines. Will the Minister tell us how that gap is to be met? If it is raised by, for example, a levy on the pension providers, will not the cost inevitably be passed on to the customers? Will the Minister explain why there is no budget for advice beyond 2016-17? Are the Government looking only a couple of years ahead, or is there a specific reason why they have decided not to include it beyond that date?

I understand that the Minister with responsibility for pensions told the Work and Pensions Committee that the provision of guidance will lead people to take more formal advice. I want to probe the Minister’s thinking on that. We have had a lot of discussion about whether people should have advice or should be required to take advice, how they will do so and how it will be provided. Does the Minister think that the provision of the guidance is simply a stepping stone that would encourage the individuals involved then to seek formal advice? We need to understand the Government’s thinking on that.

We also need to understand the costings, because the changes could potentially lead to individuals incurring expense at a later stage. I have left the Minister with a number of questions to answer. We have probed a number of the issues, and I will want to come back to points raised by other clauses.

I want to end with a point raised by the Low Incomes Tax Reform Group in its briefing on this set of clauses. It says it welcomes the extension of the limits for trivial commutation of small pots, which we have already mentioned. It has pointed out that it is concerned that there is an anomaly for the rest of this tax year, and that those at the bottom of the income distribution, with only small pots, will be constricted by “two shackles”, as it puts it. The first is that, with one or two minor exceptions, they must wait until they are aged 60 to effect a commutation, and the other is that, within the £30,000 limit, they must complete all commutations that they ever wish to take within a 12-month period. By waiting until April 2015, they will be able to exercise their choice at age 55, and at any time that suits them, perhaps making full withdrawal now from one fund and then, five years later, from another one.

The LITRG also asks whether it is unnecessarily onerous to continue with the restrictions for the rest of this tax year, at the inconvenience of those whose financial plans or circumstances would lead them to operate under the existing rules. Has the Minister considered those points, and the LITRG’s specific request to amend some of the rules to bring them into line with those for larger pension schemes? I have probably given the Minister enough food for thought just before lunch.

Charlie Elphicke (Conservative, Dover)

It is a pleasure to serve under your chairmanship, Mr Caton, and I will keep my remarks pithy, as is the wont of Government Back Benchers.

I welcome the clause and the intended reforms. Back in 2004, I wrote a paper entitled, “Ending Pensioner Poverty” for the Centre for Policy Studies, and I advocated an increase in the retirement age, a flat pension and the scrapping of the annuity requirement. I have a long been a troubadour for the kind of reforms that, a decade on, the Government are rightly making. It is a massive, important reform.

I simply note the remarks of Paul Johnson, of the Institute for Fiscal Studies, who said:

“There are clearly advantages to this liberalisation. It will allow people freedom to manage, and make choices over, their own affairs. It will likely increase the incentive to save in a pension. And some of the biggest worries that have traditionally held governments back from such a move are becoming less salient. In future fewer people are expected to be falling back onto means tested benefits in retirement, and so the incentives created by means testing to reduce income or assets in order to qualify for benefits are, for many, less salient than they were.”

That is the key issue. It is all about increasing pension saving. We saw the pensions tax, which destroyed confidence in savings for pensions, and pensions means-testing, which was massively corrosive to the savings culture that we had built up. We had such a great pensions system and so much damage was done.

The reform will, I hope, reignite the culture of saving for retirement, which was so hard won over such a long time and so quickly lost. The hon. Member for Kilmarnock and Loudoun spoke about advice. I asked whether someone should take advice on the money required for home improvement or to buy a car. The Opposition were not clear on whether seeking that advice should be voluntary or compulsory. I got the impression from the Opposition that it should be compulsory. No one would realistically argue that advice should be compulsorily taken on whether someone should spend money on home improvement or to buy a car. With respect to the Opposition, they muddled two things.

Cathy Jamieson (Labour, Kilmarnock and Loudoun)

Does the hon. Gentleman accept that when the Chancellor uses the word “advice” in a speech, and the Red Book refers to “guidance”, that does look a bit like a muddle?

Charlie Elphicke (Conservative, Dover)

No, I would not accept that at all. The Red Book says on page 44, at 1.160:

“The government recognises that under the new system it will be important that people are equipped to make the decisions that best suit their personal circumstances. The Budget therefore announces that the government will introduce a new guarantee that everyone who retires with a defined contribution pension will be offered free and impartial face-to-face guidance on their choices at the point of retirement.”

To my mind, that means the availability of that advice, free, face to face, if people need it. I believe that the Opposition are slightly mistaken. One gets the impression that they are concerned about people being mis-sold products; that is a matter of product regulation and product marketing. It is not a matter of the person deciding whether they want to take their pension and spend it, and how that pension is spent. It is about the products they then buy and how those products are regulated and marketed. There is a big gulf between the Opposition’s real concern and the reality. Their concern is not about pensions and pension draw-down, but product regulation, which is a separate issue.

(Except clauses 1, 5 to 7, 11, 72 to 74 and 112, schedule 1, and certain new clauses and schedules) - Clause 39 - Pension flexibility: drawdown

Gary Streeter (Conservative, South West Devon)

I remind the Committee that with this we are considering the following:

New Clause 8—Pension flexibility: Treasury analysis—

‘(1) The Chancellor of the Exchequer shall, within six months of this Act receiving Royal Assent, publish and lay before the House of Commons any analysis prepared by the Treasury prior to the publication of Budget 2014 relating to the impact of changes made by sections 39 to 43 of this Act to Schedules 28 and 29 to the Finance Act 2004.

(2) The information published under subsection (1) must include—

(a) any assessment made of the impact of the provision for independent face to face guidance on the 2004 Act;

(b) the distributional impact, by income decile of the population, of changes made by sections 39 to 43 of this Act;

(c) a behavioural analysis; and

(d) the financial risk assessment.’.

Clause 40 stand part.

Chris Evans (Labour, Islwyn)

It is a pleasure to serve under your chairmanship, Mr Streeter. I should like to follow the remarks of the hon. Member for Dover, who expressed a common-sense view of the changes to annuities. [ Interruption. ] I used to sell these things and I can no longer pronounce the word. We are at a time of transition when the retirement income landscape is facing a massive upheaval. We should not forget the many tens of thousands of people who want to retire and most will need to switch on a regular income. Fixed-term—

Catherine McKinnell (Labour, Newcastle upon Tyne North)

Annuities.

Chris Evans (Labour, Islwyn)

They are one way of making the transition into retirement while waiting for the dust to settle. Under the current pension system, retirees typically exchange their entire pension savings for a lifetime—help me out again—[Hon. Members: “Annuity”]—that pays out a guaranteed income every year for the rest of their lives. This removes all the risk, in that they know exactly what they will get, year in, year out, but with annuity rates halving in 15 years, pensioners have been getting a raw deal. That is why we should support the Government’s move to allow more people to have control over their pension pot.

One thing I will say—I did some research into this during the recess—is that the industry has already moved to one-year annuities. They are intended as an interim measure for retirees who want to wait for new rules to kick in. With such major changes on the way, a short-term solution could work well if they need a reliable income now or if they want to bridge the gap between semi and full retirement without committing to a lifetime annuity or exposing their pension to an investment risk.

However, drawdown rules can make that more complicated, not least because if people do not take the 25% tax-free lump sum to which they are entitled at the start of the contract, they simply lose it. This is where I depart from the hon. Member for Dover. To me, comprehensive financial planning and advice is crucial. The costs may be prohibitive on a product that lasts for only one year—that is already beginning now. Another drawback is that the time scale leaves no opportunity for a return on investment, so people may be better off leaving their pension as it is until next April. If they will be getting a lifetime annuity in a year’s time anyway, there is a risk that annuity rates will be even smaller than they are now.

It could be six weeks by the time someone got their funds transferred to the new provider and benefits commenced, and by then they would have only about 10 months until the new rules came into play. Some people have predicted that the pension revolution will sound the death knell for annuities, but over the two or three years, new and more flexible products will come on to the market. There will be new vehicles. I fully support what has been said. If someone wants to draw down their pension pot for a house repair or to pay off their mortgage, that is their prerogative. It is their money and they can do what they want with it. It has already been pointed out that 353,000 annuities were sold last year and they offered a fixed income which is diminishing each and every year. Yes, there should be new entrants to the market and this is one way of doing it.

I am deeply concerned about what the Minister of State, Department for Work and Pensions, the hon. Member for Thornbury and Yate (Steve Webb) said when he appeared before the Select Committee on Work and Pensions on 29 April. He said that it was 15 minutes’ worth of guidance, to which £20 million was being committed over the next two years. It is only 15 minutes’ worth. When I had a customer in front of me, it took me two hours to work through their needs. When giving someone independent financial advice, it is not just their pensions that have to be looked at, but their investments, their income and what is the right product for them. It is not possible to do that in 15 minutes.

Equally, when the Pensions Minister appeared before that Committee, he said it was not independent financial advice. That concerns me. The hon. Member for Dover asked whether what was proposed was voluntary or compulsory. Personally, I think it should be voluntary. He also made a succinct point about product mis-selling. This is the major outcome of the change; we have to be careful about mis-selling. I cannot speak from experience anymore because I have not worked in the banking industry for 10 years, but the pressure for sales moves some people to make—to be kind—unwise choices when advising clients, such as suggesting bonds for them that were unacceptable. I remember an extreme case where someone said to a client who was coming up to retirement at 65 with £50,000 of life savings, “I’m going to put you in a savings account; I’m going to put you in a bond.” The client asked what a bond was. At that time we were just at the lip of the dotcom bubble, so we had a bond and were investing heavily in internet start-ups. That bond unfortunately did not return. The financial adviser said to the gentleman, who did not understand what a bond was, “It’s just a savings account without a card to draw out money.” That worries me.

The hon. Member for Wyre Forest said that financial advice is now better than it has ever been in this country, and I absolutely agree. I know that people sometimes think that I am on the left, but when the Government have done well, I will commend them. [Interruption.] I can see the hon. Member for Spelthorne smiling—I think that that is the first time I have ever said anything complimentary about the Government. [Hon. Members: “Sit down.”] I should stop now.

The rules that have been introduced are shoring things up, but I really want to see far cheaper and more accessible advice. I also want to see some solidness when it comes to financial advice. We have seen so many changes in the past 20 years. We have gone from tied agents, who would sell only the products of their bank, to independent financial advisers, who can charge a fee to show various products. I would like to see some sternness.

When the Minister responds, he must address the possibility that there could—I stress: “could”—be mis-selling of the complicated products that will come into the markets. I will not condemn the industry; it is fast-moving, as it was when I was there. The industry must provide products, and there is an opportunity for that. Products will be more complicated than ever before, just as—I will stray outside the content of the Bill—pensions are rather complicated; as someone who worked in the industry, I feel out of the loop even now, all these years later.

The changes that have been made to benefit 9 million people who were entitled only to a state pension are to be welcomed, and they have been required for many years. However, I am concerned about the mis-selling that has occurred and is still perpetrated in the financial industry. It is not everyone—I do not want people thinking that—because there are some excellent financial advisers out there, and I hope that the people to whom I gave financial advice thought that about me, but that is for them to decide. Nevertheless, I would like those two issues addressed.

The provision of £20 million for 15 minutes of retirement advice for everyone should be commended, but I would like to see that advice given on the whole system.

James Duddridge (Conservative, Rochford and Southend East)

I am listening carefully to the hon. Gentleman, who speaks with great experience. Has he considered the use of the internet as part of the initial fact-finding process? There will always be a need for face-to-face advice, but would internet-based fact finding reduce the amount of time taken, improve consistency and provide an audit trail to guard against potential mis-selling or poor advice?

Chris Evans (Labour, Islwyn)

That is an excellent idea, and it would also save money, although it is for the Minister to respond on rolling out such a scheme, rather than me. Nevertheless, the hon. Gentleman has a point that is worth investigating. I hope the Minister will look at that idea.

We have had our issues with legal aid, but I genuinely believe that we should look at whether the old legal aid system, whereby people were allowed half an hour of free advice, might be a model worth following. I do not know how much that would cost, but it is something to look at.

How will the Minister ensure that products are not mis-sold to pensioners? We have seen a lot of such abuse over the years. Yes, it has been cut out, but we do not want to see a repeat of the behaviour of Equitable Life, Barlow Clowes and other companies, so I hope the Minister will address that.

Sheila Gilmore (Labour, Edinburgh East)

It is a pleasure to serve under your chairmanship, Mr Streeter. It is also a pleasure to respond to some of the mood music on this issue. When major changes were made to pensions in the 1980s and the state earnings-related pension scheme was effectively ripped apart, I suspect that many of the same things were said about how wonderful it was to give people freedom of choice and how people would not be constrained by having to contribute to something given to them by the nanny state. I am sure that was greatly applauded by the Government of the day. The problem for many of us, even at the time, was that we saw the downsides.

I well remember that my secretary at the time was keen to stop contributing to SERPS because of the cost and because she had teenage children and things were difficult. She was only in her mid-30s, so retirement seemed a long time away. She was not necessarily able to make huge savings, so her choice was to leave SERPS and take out some form of private pension. Many of the people who did that did not sustain or keep up their private pension for long, and some were clearly mis-sold pensions.

It has taken a long time to claw back from that position and ask, “What do we do next?” I say that before people feel too sure that this proposal is absolutely fantastic. It is seductive to say that we are giving people a chance and all these free choices and, if they do not buy into it, patronisingly to assume that they cannot think for themselves. There is a strong public interest in pensions. That is why, unless we decide that we will somehow back off altogether, we give tax relief to pension contributions. We want to encourage people to make savings in that format, which has been the case for many years. There is a clear public interest in what happens to money thus saved.

The other public interest is in where people are left when they retire. There are many reasons why people who retired in the past 10 years, or who may retire in the next 10 years, have had pension difficulties, and we all have our own pet theory of what is to blame. There are a load of reasons, and I suspect they are all right.

We have to be careful when making changes. One of my worries—this is why we are considering these clauses—is that the decision to make the change seems to have been arrived at in a fair degree of haste. The last Labour Government did a lot of work on pensions. There were many reports and a real attempt made to achieve consensus on pension policy. In some ways, those things have been continued by the current Government. The framework for auto-enrolment, for example, was set by the last Government and has been continued by this Government, which is a good thing. Decisions needed to be taken on things such as the rise in pension age. We might disagree on the speed of that rise, but the concepts behind it were considered by the work under the previous Government, who took many of the first steps.

The previous Government’s changes to the state second pension and the much maligned pension credit have created the basis for the single-tier pension because all that expenditure is now in place. If we were not already spending a considerable amount on pension credits, and if we did not already have people who have a state second pension, whether derived from the original SERPS or from subsequent schemes, it would be much more difficult for a Government to walk in and say, “We are going to create a single-tier pension.” The previous Government’s plan was to move towards that, albeit in a slightly different way. Nevertheless, a lot of the thinking on pensions was substantially shared, and there was a real feeling that there had to be a settlement for a generation.

We wanted to be in a position where people could have a certain degree of security. That sounds attractive, but in the Budget—we are picking up the pieces in a Finance Bill—the Government are saying, “We’ll just basically change all that without looking at the implications.” The measure might not cause problems in future, but we have yet to see any real modelling to suggest that that will be the case. We do not know whether people drawing down far more money in cash will have implications for those individuals and for all of us as a society, in terms of the costs that must be met.

We have a social care time bomb. For many people, the costs of social care are a big issue. Capital in the form of pensions is not taken into account, but capital in other forms might and probably will be under current rules. What are the implications for people’s future well-being, their families and the cost of our care system? Those are important issues. How many people might still be dependent on means-testing?

It is easy to say, “We’re going to have a single-tier pension and that solves the problem,” but I served on the Pensions Bill Committee and the Work and Pensions Committee and have looked at the proposal in more detail, and things are not as clear-cut as is sometimes suggested. Not everybody will get the full amount of the single-tier pension immediately. Those who have reached pension age are not covered—that includes women over the age of 60 or 61 and men over 65. They are likely to live for another 20 to 30 years and are exactly the kind of people who will be involved in those decisions. They will not be beneficiaries of the single-tier pension because they are not covered by it, but they have probably not made their final decisions on what to do with their pension funds. Those people are approaching the age at which, under the current rules, they have to think about taking an annuity. That large population of people over pension age are involved, but they are not protected by the single-tier pension. We must not forget that.

Some people will retire under the single-tier pension but will not get the full amount. According to the Department for Work and Pensions impact assessment, the number of people who will get the full amount, but still be entitled to means-tested benefits of some kind—housing benefit or council tax assistance, for example—is quite high. That is clear in the impact assessment. It is not as if, in one bound, we are free of that problem and everything will be wonderful. Perhaps I am a pessimist; perhaps I am absolutely wrong and the changes will make no difference. However, not doing the work before making the changes is dangerous and has put us in this position.

This measure flies in the face of other provisions. The Work and Pensions Committee has had considerable discussions with the Pensions Minister about the possibility of improving defined contribution schemes and creating something between defined benefit pensions and defined contribution pensions, but that allows for a form of collective risk-sharing that enables people to get a better deal—the Minister has called it “defined ambition”. However, that seems to be put in jeopardy by these proposals. If there is no clarity about the sorts of funds there will be and whether they will be retained for a long time, how can we have such collective defined contribution schemes?

That was supposed to be the direction. In fact, we were promised legislation on precisely that. I know that because the Work and Pensions Committee was told to put some time aside to carry out pre-legislative scrutiny on a pensions Bill along those lines, to deal with things such as defined ambition schemes, which the Minister was keen on. We were asked to do that at the back end of last year, but the whole thing went into the long grass. If a view has been taken that that was the wrong thing to do and we should be moving in a different direction, that is all very well. However, if we do so on the back of a Budget proposal that is not fully fleshed out and has not been modelled, risk assessed or looked at alongside other options, we may well find ourselves in a difficult position in future.

Experience, sadly, tells us that however we control the schemes that go forward—and we certainly must control a lot of them—the variety of schemes that can be introduced and the way they tend to be sold means that a number of different products will almost certainly come forward that people will be tempted into. I do not think it is in any way patronising to say that people need extremely good advice, and I do not think it is enough to put guidance on the internet for people to look up. Of course they can do so, but there are lot of other implications to look at.

Henry Smith (Conservative, Crawley)

Does the hon. Lady acknowledge that greater choice already exists in markets in other sensible countries, such as Australia and Denmark, and that we are talking not about some highly experimental new system but about something that will extend choice for UK pensioners as well?

Sheila Gilmore (Labour, Edinburgh East)

It exists in some countries, but I would not say that it is entirely problem-free. In Australia, for example, there is a compulsory superannuation scheme—it is not an opt-out scheme like auto-enrolment in this country—which has been in existence for considerably longer. Anybody who has been auto-enrolled in the past couple of years has not built up much at all; it will take some time for that to happen. In that wider context, the earnings-related superannuation scheme, which people join when they are really quite young, gives people a much firmer underpinning base than the contributory state pension. It has been running for some time, and it is compulsory, so people cannot decide that they will not be part of it. What I am saying is that if that was the right change to make, the decision would come after a lot of work had been done.

Chris Evans (Labour, Islwyn)

I am sorry to harp on about Australia, but we can learn a lesson from it. When the scheme was introduced there, there was a drive to pay off mortgages, which left a lot of people with a shortage in their pension pot because while they were in their house, they did not have a regular income to live on. Does my hon. Friend agree that we can learn lessons from Australia to ensure that we are not left with a situation in which people have a large amount of money in their properties, but no regular income?

Sheila Gilmore (Labour, Edinburgh East)

That is certainly one factor to look at. Many of the people who may be affected are among the generation who were suckered into endowment schemes that were supposed to pay off their mortgages in full. However, many of them found that, when they got to retirement, the endowment policy did not pay off their mortgage, so the idea of another lump sum that they could use to pay off their mortgage may seem extremely attractive. There is a problem, however, when it comes to how they will make their income last for 20 or 30 years. The cost of living for those in their 80s or even older is higher, because they have higher heating costs, and they often have health issues and need care. The care that we supply as a society is relatively limited, so people have to be in a position to purchase care from their own resources. That must all be looked at very carefully.

It is not good to make pensions policy, which is a long-term issue. on the strength of saying, “Oh, isn’t it a good idea that people can draw down much more money than they could before?” As soon as the policy was announced, a lot of people started saying, “What about us? What about those of us who cannot wait till next year and might be on the point of having to make a decision now? We would rather be able to have some of that freedom now.” The outcry was not surprising, and it is partly why we have these provisions in the Bill with an even greater hurry than for the provisions to be implemented in 2015.

For some people, the mood music may be, “This is marvellous. We are trusting people with their own money. It will all be fine.” Again, that is not a good way to make long-term policy. We must get our assessment right. We must review what is happening very quickly, rather than leaving it for 10, 20 or 30 years.

Many of the people affected by some of the worst pensions mis-selling and who got caught up in things like Equitable Life thought they were quite canny and able to cope. Some of those people are my constituents, who thought that they were safe and secure. The problem with financial advice remains, although the recent changes have had lots of advantages, one being that people are clear that the advice they are getting is not simply paid for through concealed commission. However, a lot of people will not pay for the financial advice on offer, however well trained people are, because it is an extra expense. It is also an overt expense, because although people were paying for such advice before, they did not realise that because they were paying through commission. Are we sure that people will always get the full advice that they need? Everyone has said that the guidance that has been proposed is clearly not financial advice, so we must be clear about what we are offering people and at what cost.

Chris Williamson (Labour, Derby North)

It is a pleasure to serve under your chairmanship again, Mr Streeter, and to follow my hon. Friends the Members for Islwyn, for Edinburgh East and for Kilmarnock and Loudoun. Unlike my hon. Friend the Member for Islwyn, however, I will not be complimentary about the Government in any way, shape or form.

The Government really have a job on their hands to convince a sceptical public about the true motivation behind their pension proposals. I say that because it is clear that the Conservative party has form on short-changing pensioners. My hon. Friend the Member for Edinburgh East referred to that when she talked about how the state earnings-related pension scheme was decimated as a consequence of the previous Conservative Government’s Social Security Act 1986.

Alec Shelbrooke (Elmet and Rothwell) (Con) rose—

Chris Williamson (Labour, Derby North)

I give way to the hon. Gentleman.

Gary Streeter (Conservative, South West Devon)

Order. Before the hon. Gentleman gives way, may I say that we are debating clauses 39 and 40, and we do not want a review of the history of pension politics in this country? Alec Shelbrooke wishes to intervene, I believe on clause 39.

Alec Shelbrooke (Conservative, Elmet and Rothwell)

Thank you for your advice, Mr Streeter. I am sure the hon. Gentleman will welcome the fact that current pension policy has led to an above-inflation rise for pensioners, which is not something I recall happening previously, without wanting to look into pension history.

Chris Williamson (Labour, Derby North)

I acknowledge that there has been some improvement on pensioner poverty since the 1990s, but the public will be sceptical because the Conservative Government’s policies and legislation created the opportunity for spivs and fraudsters to dupe people into giving up their occupational pensions. As we all know—my hon. Friend the Member for Edinburgh East referred to this—that led to the pensions mis-selling scandal. The hon. Member for Dover expressed his concern about pensioner poverty, but the truth is that, from 1979 and through the 1980s, pensioner poverty significantly increased, and there is ample evidence of that in many academic works, although I acknowledge that the situation started to improve in the 1990s. The situation is detailed in the Smith Institute report “From the Poor Law to welfare to work” by David Coats, with Nick Johnson and Paul Hackett, which is clear that there was a “significant rise” in pensioner poverty “in the 1980s” and that then followed

“falls in pensioner poverty from the early 1990s”.

It is clear that policies that previous Conservative Governments introduced resulted in real problems for many pensioners, which is why the public will be sceptical about the proposal before us today and why it is important that the Minister answers the questions asked by my hon. Friend the Member for Kilmarnock and Loudoun.

Chris Heaton-Harris (Conservative, Daventry)

I just wanted to check that the hon. Gentleman was not accusing all financial advisers of being spivs or fraudsters. If he was, I think he owes the hon. Member for Islwyn an apology.

Chris Williamson (Labour, Derby North)

The hon. Gentleman had his tongue firmly in his cheek while making that intervention. I was clear that I was not saying that about all financial advisers, or that my hon. Friend the Member for Islwyn was anything approaching a spiv or a fraudster. It cannot be disputed, however, that the Social Security Act 1986 made available opportunities for spivs and fraudsters, and many thousands—if not hundreds of thousands, or perhaps millions—of people who opted out of their occupational pension schemes were mis-sold pensions and got a less good deal.

My hon. Friend the Member for Islwyn made a point about the advice that will be available when he said that the Minister of State, Department for Work and Pensions, the hon. Member for Thornbury and Yate, said in evidence to the Select Committee that the only 15 minutes’ advice would be available. That is clearly not very long to plan for the rest of one’s life; my hon. Friend, who has experience in these matters, said that at least two hours would be required to give such advice.

There are also questions about whether what is on offer is advice or guidance, and what the difference is. The Chancellor said in his Budget speech that “face-to-face advice” would be available, yet page 44 of the Red Book is clear that

“free and impartial face-to-face guidance”

will be made available. The Minister owes us an explanation of what that will be. Will it be advice or guidance? What is the difference, and why is there a discrepancy between what the Chancellor said and what appears in the Red Book? The Minister is chuckling, but this is no laughing matter for many people planning their future incomes. He owes it to future pensioners to treat their situation seriously and with respect.

Duncan Hames (Liberal Democrat, Chippenham)

The hon. Gentleman talks about advice and people making serious decisions about their long-term futures. In that case, will he consider the merits of some de minimis value criteria? Surely he would not wish to place administrative burdens or expensive requirements that would not represent value for money on someone with a very small pension pot that cannot make a large difference to their future.

Chris Williamson (Labour, Derby North)

It is not for me to say what should or should not be done; I am merely asking questions of the Government. The Government are coming forward with the proposals. In the fullness of time—from next May when, hopefully, we are in government—we will put forward our own proposals and answer for them in the House. However, we are here today to scrutinise what this Government—the Government whom the hon. Gentleman supports—are doing. It is incumbent on the Minister to explain whether it will be advice or guidance, and what the difference is. What form will that advice take? Will somebody be entitled to face-to-face advice if they live in a remote part of the Highlands of Scotland or Cornwall?

Ian Mearns (Labour, Gateshead)

Or in the desolate north.

Chris Williamson (Labour, Derby North)

Or, indeed, in the desolate north, as it was pejoratively described by a prominent Conservative politician.

Alec Shelbrooke rose—

Chris Williamson (Labour, Derby North)

I shall give way to the hon. Gentleman, but I do not want to take too much time because I know that others wish to speak.

Alec Shelbrooke (Conservative, Elmet and Rothwell)

In that spirit of generosity, I shall help out the hon. Gentleman. According to the definition in the dictionary, guidance is help and advice.

Chris Williamson (Labour, Derby North)

I am sure that the Minister will be grateful for that helpful explanation, but we are still to hear from him whether those words mean one and the same thing, or whether there is a difference. It is significant that the Chancellor chose to use one word while the Red Book included a different one. The important point, however, is whether people, irrespective of where they live, will be entitled to that face-to-face guidance or advice—whichever it is, and whether they are the same thing—so will the Minister address that point?

Who will benefit from this proposal? New clause 8 would help us to tease that out. It is important that we know who will benefit because, if we go back to the time of the Social Security Act 1986, it certainly was not people who opted out of their occupational pension schemes and took up personal pension plans but lost out as a consequence. We do not want a repetition of the mistake made by the Conservative Government of the 1980s.

Can we be certain of whether this proposal will end up costing more or less? We have heard Ministers saying that they are perfectly relaxed, but this illustrates how out of touch they are. They talk about people buying a Lamborghini, but in reality most pension pots are nowhere near sufficient to buy even half or a quarter of a Lamborghini. People might be able to buy a Lamborghini door, but not the full monty.

We have heard that people will be able to fall back on the state pension scheme, but are we going to have the situation whereby millions of pensioners will be living in poverty if they spend their pension pots unwisely? What protection is there to help people to make the right choices? Is the Minister certain that, in the long run, this will not end up costing the taxpayer more as a consequence of more people falling on hard times, because their pension pot has run out and they have to resort to means-tested pensions instead? These are important questions and people deserve to know the answers. Until they do, the public will remain sceptical about the Government’s intentions.

Mike Kane (Labour, Wythenshawe and Sale East)

It is a pleasure to serve under your chairmanship, Mr Streeter. It is also a pleasure to follow my hon. Friend the Member for Derby North—or, as he is known on these Benches, the Member for the constituency of blue touch paper, thanks to the way he fires up the Opposition.

I never thought I would agree with Charles Moore from The Daily Telegraph, but he said the other week that the primary purpose of pension provisions for the long term was not to be deflected. So everyone being entitled to complete flexibility in respect of their pension provision is not an argument that is universally popular on the right. He makes the point that we live in an age of short-termism and that there will be meritorious pressures on that pension provision, whether people are paying university fees, trying to get their children on the housing ladder or, increasingly—as many hon. Members from all parties are seeing with their constituents—paying for long-term care for our elderly parents. Those are real pressures. I hate to make this party political, but people will be using their pension provision for the cost of living crisis, which is faced by many throughout the land.

What choice is this? It is a choice for certain people who are well-off and can draw down some of the pot, but it is not a choice for all people. The argument boils down to subsidiarity: it is about whether people want or need this power or will treat it with respect. Government Members would argue that every day of the week, but we only have to read what Michael Ward said in The HR Director, which was that the pension pot chasers are already on the move, making cold calls and telling people they can draw down their pension today. With the cost of living crisis and the pressures people face, that will be tempting.

I am terribly concerned that we are setting up another predatory capitalist industry in this country. I have campaigned for a couple of years against the payday lenders and their usurious rates of interest. They borrow on LIBOR at 5% and from Barclays at between 10% and 20% and pass that on to their customers at usurious rates of 5,000%.

It is a real concern that in four, five or 10 years’ time, the adverts that saturate TV will not feature old Wonga puppets looking for payday lenders—the Financial Conduct Authority yesterday and the Association of Chartered Certified Accountants have again criticised the practice of going after vulnerable repeat customers—but will be about people pulling down their pension to have the perfect life, the perfect opportunity or the thing they could never afford in another place. People, particularly low and middle income earners, are not immune to the market pressures that will come about because of this change in the Budget.

David Gauke (Conservative, South West Hertfordshire)

It is a great pleasure to serve under your chairmanship, Mr Streeter. I welcome you back to the Chair.

Clauses 39 and 40 give pension savers much greater choice and flexibility over how and when they access their savings. Let me set out a little bit of background. When this Government took office, we inherited a series of tax rules imposing tax up to 82% on older pension savers. We acted immediately to reduce these disproportionate and unfair charges. We removed a raft of other tax rules restricting the choices available to pension savers over the age of 75, while also giving draw-down pensioners with guaranteed retirement income of at least £20,000 a year full access to their pension savings. These steps have been important and successful, but given the changing shape and nature of retirement, it is time to go further. That is why, on Budget day, the Government announced a set of radical reforms, which will allow people more choice over how they access their defined contribution savings.

The hon. Member for Derby North said it was a big job for the Government to try to persuade people to support these measures. I am tempted to remind him that, in the course of some 48 hours, his party went from ignoring the changes to opposing them, back to supporting them—[Interruption.] Well, there was certainly quite a lot of muttering coming from Labour about its dislike of the policies.

Catherine McKinnell (Labour, Newcastle upon Tyne North)

Rubbish.

David Gauke (Conservative, South West Hertfordshire)

I am delighted that we have the full-hearted support of the Labour party on this point.

Chris Williamson (Labour, Derby North)

I do not want to detain the Committee for too long, but does the Minister accept that people have long memories and will recall the mis-selling scandal that was a consequence of the Social Security Act 1986, which was delivered by the Conservative party? Does he not see that there will be a degree of scepticism? It does not matter whether there is scepticism from Labour Members; he needs to convince the general public. Several of my constituents have told me that they are nervous about the Government’s proposals. What will he do to reassure them?

David Gauke (Conservative, South West Hertfordshire)

The hon. Gentleman says we have to convince the public, but I have seen no evidence to suggest that the public are anything other than supportive of the policies.

Mark Garnier (Conservative, Wyre Forest)

The Treasury Committee will publish its report on the Budget in due course and it would be wrong of me to pre-empt it, but from all the witnesses who came in front of us in public session who were looking at pension reforms, it was obvious that it was not just a few or some who were in favour of the flexibility; it was every single witness, be it in written or oral evidence. There is overwhelming support; indeed, I suspect this is one of the most popular policies that the Government have come up with for some time.

David Gauke (Conservative, South West Hertfordshire)

My hon. Friend is right. I have been involved in one or two Budgets, and it is not always the case that Budget measures get the warm and overwhelming support that this set of policies has received in recent weeks. The hon. Member for Derby North may take a different view about where the public are on these measures, but I encourage him to campaign in Derby North against the policies with all the energy he can find—which is considerable, in particular, given his diet.

Chris Evans (Labour, Islwyn)

To help the Minister, I do not think it is case of people being against this policy in particular—people are generally confused by pensions anyway. It is difficult enough to get someone in their 20s, 30s or 40s to even think about pensions, which is a problem that goes beyond this and previous Governments. People tend to think of pensions only when they are coming up to retirement age, so annuities, for example, are something that people hear of only when they are that age. The problem is trying to show people that there are alternatives. How we do that is a challenge for the Government.

David Gauke (Conservative, South West Hertfordshire)

I will turn in greater detail to the guidance and information that will be available. We are consulting on the detail of our longer-term proposals for pensions, and most of our debate today has been on such proposals, rather than strictly on the clauses before us. We want to ensure that individuals who are approaching retirement now can benefit from the wider range of options, which is why these clauses will help pension savers this year by giving them more choice and control over their pension wealth.

From 27 March 2014, clauses 39 and 40 will increase the capped draw-down withdrawal limit from 120% to 150% of an equivalent annuity, reduce the minimum income requirement for entering flexible draw down from £20,000 to £12,000, increase the amount of total pension wealth that can be taken as lump sums from £18,000 to £30,000, increase the amount of pension wealth that can be taken as a lump sum, regardless of total pension wealth, five times from £2,000 to £10,000, and increase the number of personal pension pots that can be paid out in that way from two to three. All income received by people taking advantage of the new, more flexible rules will be subject to tax at savers’ marginal tax rates, just like other pension income.

As a result of the changes, an extra 85,000 people are expected to be able to access their pension wealth as a lump sum this tax year, if they so wish. Some 400,000 existing draw-down pensioners will be given the option of receiving significantly greater withdrawals from their pension funds. In the course of the debate, I would not want the Committee to miss out on the fact that that is what we are able to achieve this afternoon.

New clause 8 would require the Chancellor to publish any analysis on the impact

“of changes made by sections 39 to 43 of this Act to Schedules 28 and 29 to the Finance Act 2004.”

Only clauses 39 and 40 make changes to schedules 28 and 29 of the 2004 Act, so I will limit my comments to them. I am pleased to confirm that the Government published a tax information and impact note, “Increasing pension flexibility”, on Budget day, which covered the impact of the changes made by clauses 39 and 40. As the note sets out, the changes are likely to be of particular benefit to individuals with smaller pension wealth, including women. A number of consumer organisations have welcomed the changes and the flexibility they provide. For example, the Financial Services Consumer Panel said on the day of the Budget that it was “delighted” that the Government had taken action on the treatment of small pension pots.

I have already mentioned that the Government have published a consultation, “Freedom and Choice in Pensions”, on the broader measures announced in the Budget. The document sets out the rationale and relevant analysis behind the Government’s proposals and invites comments on the expected impacts. The consultation will inform the final shape of the Government’s proposals, including the guidance guarantee. The Government will set out further details in response to the consultation.

It is important that we ensure that consumers get good quality guidance that meets their needs and stimulates active and informed choices, as well as promoting consumer awareness of scams and helping to ensure that consumers are less vulnerable to mis-selling. That is one of the areas we are consulting on. The Government will introduce a new guarantee that all individuals with a defined-contribution pension in the UK approaching retirement will be offered guidance at the point of retirement. That guidance will be impartial and of consistently good quality. Those providing guidance will be barred from using that as a way of selling products. The guidance will cover the individual’s range of options, to help them to make sound decisions and equip them to take action, whether that is seeking further advice or purchasing a product. It is free to the consumer and is offered face to face. The FCA will work with the Pensions Regulator, consumer groups and other bodies to develop a robust set of standards and monitoring arrangements for that guidance.

Let me address some of the points raised in the debate. On funding and the £20 million, we have announced that guidance should be funded by pension providers and pension schemes. The £20 million is a development fund to help to get the guidance initiative up and running. It is not the entirety of what will happen, and we announced that in the Budget. On why there is no funding for advice after 2016—that is not part of these clauses, but it is important and is part of the consultation—the money is for setting up new systems, not for running them. We are consulting on all that.

On who should provide the guidance, that is part of the consultation. We asked for views on the best way to implement our requirements. That might be through rigorous standards for providers or through outsourcing, but we are looking at the options. As for why the guidance is only at retirement, that is subject to consultation. It is not finally decided, but we will look at the response to the consultation to ensure that we get the right answer.

Chris Evans (Labour, Islwyn)

A simple question has just come to mind. The Minister said that there is a ban on selling products, but that there will be direction or advice to others. How will that direction or advice work out in practice? Will there be a list of approved IFAs to refer to, or something along those lines? It would be helpful if he could clear that matter up.

David Gauke (Conservative, South West Hertfordshire)

Again, that is a point for the consultation. I should also say, without wanting to pre-empt the Queen’s Speech, that when the consultation is completed and we have reached conclusions on how to proceed, it may well be necessary, working on the basis that the measures will be adopted, to legislate for the guidance guarantee. The House will have a full opportunity to debate the details of that and set them out. I am not downplaying the importance of this matter; indeed, the Government identified it in preparing the measure and in the announcement that we have made. We have been straightforward from day one about the fact that we recognise the need to ensure that proper guidance is in place.

I should also make it clear that in all the documentation that we have produced and the Red Book, we have consistently referred to “guidance”. I know the point has been made that the Chancellor used the expression “advice” in his speech, but the important thing is to convey the fact that people who will benefit from the additional flexibility and freedom will be getting help. This Government are determined to ensure that they get the right amount of help.

To help the hon. Member for Derby South—

Chris Williamson (Labour, Derby North)

North.

David Gauke (Conservative, South West Hertfordshire)

I apologise; it is an important distinction. The hon. Member for Derby North was excited about the difference between advice and guidance, although he was not quite sure what it was. “Advice” has a particular technical meaning, involving the recommendation of a specific product, and it puts in place various rights and remedies enforced by the FCA. It is a more expensive process. We think it is right that there is guidance in place to point people in the right direction, so that they understand the options available. In some cases, they will want to take financial advice, but we are offering free, impartial financial guidance, which will give people the opportunity to assess what is right for them. It is absolutely right that we put that in place.

Nicholas Dakin (Labour, Scunthorpe)

If it is guidance rather than advice, does that mean that the remedies available are likely to be weaker?

David Gauke (Conservative, South West Hertfordshire)

The purpose is for guidance to give people an understanding of their situation and the options available for them. The point made by my hon. Friend the Member for Chippenham is that the nature of the decision will depend on the particular circumstances. In some cases, an individual will decide for themselves whether they want to go on and get financial advice, with all that that involves, or whether they are satisfied that the guidance gives them the information that they need to make a decision.

Cathy Jamieson (Labour, Kilmarnock and Loudoun)

I have been listening carefully to what the Minister has been saying. May I probe him further on face-to-face guidance? I think I heard him say that there would be face-to-face guidance, and that it would be free. Has the work done taken account of the different nature and geography of different parts of the country, and can we be assured that it will be face to face in absolutely every part of the country? Secondly, I think that he mentioned the possibility of outsourcing. Can he give us any assurance on how monitoring and evaluation will take place if the guidance is outsourced?

David Gauke (Conservative, South West Hertfordshire)

First, the three attributes of the guidance that we have been clear about since day one are that it will be free, impartial and face to face where people want that. I am happy to reiterate those points. In terms of the details of exactly how that will be delivered, I will come back to the point I made earlier. There is a consultation and all these points are ones that we wish to take into account. I am sure that Members on both sides of the Committee want to ensure that the appropriate guidance is provided to our constituents to enable them to make the right decisions. We will seek to achieve that.

James Duddridge (Conservative, Rochford and Southend East)

May I urge the Minister to look very seriously at the use of online, even when there is face to face at the end? There is no sense in having a full-time, qualified adviser or financial services professional spending two hours going through a fact-find, taking down people’s date of birth and how many pensions they have. It is simply a waste of Government money. That element, for most people, will be relatively easy to do online. I urge him to consider that and to use the financial services face-to-face time for real, value-added activity.

David Gauke (Conservative, South West Hertfordshire)

I am grateful to my hon. Friend who makes an important point. It is also worth highlighting the work that the FCA is undertaking to ensure that there are not unnecessary costs here so that financial advice can be provided. The area that he highlighted is an important part of that. He made a practical comment about how we can ensure that the support provided to the public can be as well targeted and cost-effective as possible.

Teresa Pearce (Labour, Erith and Thamesmead)

The Minister has clarified what he believes to be the difference between advice and guidance. Surely the ultimate difference is that one is heavily regulated and the other is not. The hon. Member for Rochford and Southend East talked about independent financial advisers going out to face-to-face meetings. But that is not what is on offer. I understand that what is on offer is guidance face to face, not advice. Is that correct?

David Gauke (Conservative, South West Hertfordshire)

I have been absolutely clear. What we are talking about here is guidance. We believe that that is the sensible approach. It may well follow that some people wish to seek advice, having received that guidance, but we think it is important that guidance is provided that will help people understand the retirement income market and the options available to them, thereby empowering them to make their own decisions.

Cathy Jamieson (Labour, Kilmarnock and Loudoun)

May I follow on from my hon. Friend’s point and the difference between something that is regulated and something that is not? Just for the avoidance of doubt, are we therefore to understand that the guidance will be in the unregulated end of the market and will not be provided by qualified financial advisers?

David Gauke (Conservative, South West Hertfordshire)

The question of who will provide the advice is a matter for the consultation. The hon. Lady will be well aware that the Financial Services and Markets Act 2012 lists, or has provision for an order to list, what constitutes a regulated activity. Included in that list is the provision of investment advice. For these purposes, the provision of investment advice includes making recommendations as to specific products. What we are talking about here is not a system whereby there is a scheme that will come along and make recommendations about specific products, so it is not investment advice for the purposes of the Financial Services and Markets Act. It is about setting out the options that are available, the nature of the retirement market and placing individuals in a position to know what their options are. The support that is available has been very clear since the Budget.

Let me pick up some of the points that were raised in the debate. The hon. Member for Kilmarnock and Loudoun asked whether there is a contradiction between auto-enrolment and the pension flexibility measure. The answer is no. Auto-enrolment is designed to harness inertia and to support and encourage new and increased pension saving. The FCA found that the annuity market was not working for consumers, which is why we have introduced choice and flexibility. As more people save through auto-enrolment, it is important that they can make choices that best suit their circumstances.

On costings, the hon. Lady raised concerns about fiscal risks. In truth, the impact is difficult to predict, but the Government do not expect it to be significant in the context of steps taken to improve the sustainability of pension spending, including single tier, and the changes to the state pension age and public service provisions.

On the interaction with social care and whether people will be forced to take their pension to pay for the cost of care, the current rules on eligibility for social care funding were not written to account for such pension flexibility. The Government are committed to considering new financial services products when reviewing and developing new guidance and regulations on charging for care. It is not our intention that someone’s eligibility for social care support should be affected simply because they purchased certain flexible pension products as an alternative to annuities, and we will ensure that the appropriate updates are in place for the start of the new flexibilities in April 2015.

The hon. Member for Islwyn asked whether annuity rates will fall. Annuities will remain the right product for many people. The new flexibility will help consumers to get a better deal when choosing retirement income products in a much more competitive market. Many may choose to buy an annuity later in life, allowing them to benefit from higher rates at a time that suits them.

Duncan Hames (Liberal Democrat, Chippenham)

Does the Minister think that the greater flexibility for savers, including the freedom to choose not to take out an annuity or as much of an annuity, may incentivise the providers of such products to be more competitive in the terms they offer?

David Gauke (Conservative, South West Hertfordshire)

My hon. Friend raises a good point. Providing greater choice and flexibility is likely to have a beneficial effect on the market, encourage greater innovation and provide the type of products that our constituents want. The current restrictions force people into particular products that do not necessarily suit them, which stifles innovation.

The hon. Member for Edinburgh East argued that the single tier does not solve all the problems, but it will provide pensioners with much greater certainty on the state support they can expect. The Government are also introducing class 3A national insurance, which will allow people to top up their basic state pension.

Sheila Gilmore (Labour, Edinburgh East)

I am sure the Minister is aware that the provision for those additional contributions is restricted to a very small age group. I have a constituent who has had to leave work due to ill health, but she will not reach pension age until about 2022. She has been told that she is not eligible for the additional contributions, which also do not apply to people who, as I said before, are already well into retirement.

David Gauke (Conservative, South West Hertfordshire)

To be fair, many people who are already retired will have taken an annuity, so this additional flexibility is not necessarily relevant to them. For some of the people about whom the hon. Lady is concerned, class 3A gives them an opportunity to top up their pension. She also raised defined ambition, which is also about creating choice and flexibility. Last year, the Government published a consultation on their defined ambition proposals, which are designed to give providers more choice about the types of pension that they can offer their employees. The Government are considering the responses to the consultation. We expect that allowing greater flexibility will lead to product innovation, which will result in greater choice and certainty for individuals.

The changes introduced by clauses 39 and 40 are precursors to the more radical reforms that we will introduce in April. We have spent much of our time this afternoon debating those measures, but let us not forget that these clauses are, in their own right, a significant step towards the creation of a tax system that recognises that people should be able to determine what to do with their money and that those who have earned it in the first place are best placed to make decisions about it. As I have said, a significant number of people will benefit from the additional flexibility provided by these clauses. I hope that clauses 39 and 40 will stand part of the Bill, and that new clause 8 will not be pressed to a Division.

Mike Kane rose—

David Gauke (Conservative, South West Hertfordshire)

But first I will give way to the hon. Gentleman.

Mike Kane (Labour, Wythenshawe and Sale East)

The Minister says that the clauses give people the ultimate flexibility about what they do with their pension pot. In his opinion, would it be appropriate for them to draw it down to pay off their usurious payday loan?

David Gauke (Conservative, South West Hertfordshire)

It is for individuals to decide what they do with their assets. That principle is deeply felt by both parties of the coalition Government, and I hope that the Opposition will share our approach and support the clauses.

Cathy Jamieson (Labour, Kilmarnock and Loudoun)

I will be brief, because we have had a fairly extensive debate. As the Minister correctly pointed out, we have been discussing the clauses, which stand in their own right and which we will not oppose. It was right for us to have a wider debate to probe questions that we will have to discuss at a future date. It is important for us to understand where the Government are coming from so that we can take a view on the clauses.

It was appropriate to try to tease out some of the concerns that have been raised about language, such as the difference between advice and guidance, and the Minister has been helpful in explaining that. A great deal is still out to consultation, and I have no doubt that further proposals will be advanced. Opposition Members’ comments have been made in the spirit of ensuring that people have the opportunity to access advice and information if they need it, to enable them to make the correct decisions and not to put themselves at a disadvantage. We were also anxious to ensure that there are no loopholes or opportunities for less scrupulous parts of the market—I hesitate to use the word “spivs” again, because it has been much used today—to move in and make money inappropriately by mis-selling to people who do not have all the information at their fingertips.

I am concerned to ensure that the commitment to provide face-to-face guidance is delivered, notwithstanding what the hon. Member for Rochford and Southend East has said about online. Some people will be comfortable to go online to gather information or to give information about themselves in order to receive detailed information on options, but many would prefer to sit face to face, particularly when they are discussing something that is personal to them and they do not feel confident about using internet sources. I look forward to hearing more from the Minister about how that will work in practice and about outsourcing, or who will provide that guidance, because that is critical.

On new clause 8, it is important for us to press the Government on the work that was done before the announcement was made. When the time comes, we will therefore press it to a vote.

Clause 41 - Transitional provision for new standard lifetime allowance for 2014-15 etc

Gary Streeter (Conservative, South West Devon)

With this it will be convenient to consider schedule 4.

Cathy Jamieson (Labour, Kilmarnock and Loudoun)

We are moving on to a couple of clauses making technical provisions. I suspect that we may not have so much debate on clauses 41 and, possibly, 42 as we had on the previous two clauses. I will try to move fairly speedily through my points.

The clause offers transitional protection to wealthy savers who are concerned that they may be affected by the reduction in the lifetime allowance to £1.25 million, which was announced in the autumn statement 2012. It introduces a transitional protection regime, known as IP2014 that will protect any UK tax-relieved pension savings that an individual has built up at 5 April 2014, up to an overall limit of £1.5 million. Individual protection was available from 6 April 2014, and must be applied for by 5 April 2017. It is open to those who do not have primary protection. Those with IP2014, unlike those with 2014 fixed protection—FP2014, as it is known—may continue to place savings in pension schemes. If, however, they exceed the limit, they will be subject to the lifetime allowance charge when they take their benefits.

In the autumn statement 2012, the Government announced that they will reduce the lifetime allowance from £1.5 million to £1.25 million from the 2014-15 tax year onwards. In essence, that means that those who have accrued pensions in excess of £1.25 million will now be subject to the lifetime allowance charge. Pension benefits in excess of that are subject to the lifetime charge. The rate of the lifetime allowance charge is 25% if the excess is taken as a pension, or 55% if it is taken as a lump sum.

Going back to the original introduction of the lifetime allowance in April 2006, at £1.5 million, those with pots exceeding that amount before 2006 could apply for that primary protection, or enhanced protection. The intention behind that was to ensure that those whose pots already exceeded the lifetime allowance before its introduction would not incur unfair charges. Following a period of growth, the lifetime allowance was decreased to £1.5 million in 2012, and it is now being decreased again. In order to protect those who have exceeded it in the interim, the Government have introduced the transitional measures. Last year’s Finance Bill introduced the FP2014 scheme, which ensured that the lifetime allowance for certain pots remained at £1.5 million, subject to certain conditions.

We have no objection in principle to what is being done with HMRC’s tax-raising powers. We note, however, that the introduction of the clause will have cost implications for pension providers, mostly through providing checks and evaluations to those who wish to apply for IP2014. We also note the cost implication for HMRC, which is estimated at £1 million.

I have a couple of questions for the Minister about the clause. According to the tax impact and information note accompanying the measure, although an assessment has been made of its impact on small and medium-sized enterprises:

“It would not be appropriate for the measure to apply differently according to the size of the firm within which the affected workers operate.”

Does the Minister have any comment to make on that statement?

The tax impact and information note also provides the estimate that the implementation of the measure will cost HMRC £1 million. The Minister might argue that that is not a huge amount in the global scheme of things, but I would again argue that we are talking about HMRC’s resource and staffing budgets, and any implications for HMRC arising from the measure. Finally, looking ahead, will he confirm whether he has any plans further to reduce the lifetime allowance at any point?

David Gauke (Conservative, South West Hertfordshire)

Clause 41 and schedule 4 provide a new transitional protection regime from the lifetime allowance charge, known as individual protection. Its introduction, alongside the previously announced fixed protection, is intended to give individuals greater flexibility in how they choose to protect pension savings built up before 6 April 2014 from the lifetime allowance charge.

To ensure that the pension tax relief system is fair, affordable and sustainable the Government have reduced the lifetime allowance from £1.5 million to £1.25 million, and the annual allowance from £50,000 to £40,000, from the 2014-15 tax year onwards. The changes were legislated for in the Finance Act 2013 and will restrict the cost of pension tax relief by about £1 billion a year.

Around 98% of pension savers nearing retirement have pension pots below £1.25 million and so will be unaffected by the change. To prevent pension savers who have built up pension savings above or near £1.25 million from being subject to retrospective tax charges, we originally introduced fixed protection. That gives individuals a protected lifetime allowance of £1.5 million, although there are restrictions on future savings. Following informal discussions with interested parties on whether a further protection regime should be offered, we announced in last year’s Budget that an individual protection regime would also be offered.

A consultation document on individual protection was published on 10 June 2013. Nearly all respondents welcomed the flexibility provided by the further protection regime. A summary of the consultation responses and updated draft legislation were published alongside the autumn statement.

Cathy Jamieson (Labour, Kilmarnock and Loudoun)

I understand that some changes were made as a result of the consultation. Will the Minister say whether account was taken of a point raised by the Association of Taxation Technicians about the time scale for notifying HMRC of an intention to rely on IP2014? It suggested that there should be some inflexibility on that. It also suggested a publicity campaign to raise awareness among people who need to make such notifications to HMRC.

David Gauke (Conservative, South West Hertfordshire)

HMRC has published comprehensive guidance on both individual and fixed protection, and the Government have issued a number of alerts to highlight the new protection regimes, which have received comprehensive coverage in national newspapers. Messages have recently been published on the HMRC website and websites of intermediaries, and a full communications strategy will be implemented in August when the application form becomes available. HMRC has worked with the pension industry and pension advisers to help to raise awareness of the new protection regime. About 50,000 individuals applied for fixed protection before 6 April this year. I hope that provides some reassurance to the hon. Lady on that point.

The clause and schedule set out the detail of how individual protection will work. Individuals with pension savings greater than £1.25 million on 5 April 2014 will be able to apply for individual protection provided that they do not have existing primary protection. Individual protection will give them a protected lifetime allowance equal to the value of their pension savings on 5 April 2014, subject to an overall maximum of £1.5 million. Unlike fixed protection, there are no restrictions on future pension savings. Individuals with individual protection can therefore continue to save into their pension scheme, if they wish, with tax relief on those savings. However, as their lifetime allowance will be the value of their savings on 5 April 2014, if the value of the savings increases after that, a lifetime allowance charge will be due on the excess when they take their benefits. Individual protection will particularly benefit those who do not want to opt out of their pension scheme, for example, because they receive a valuable employer contribution. It is estimated that some 120,000 individuals will have pension savings above £1.25 million in April 2014 and may be eligible to apply for individual protection.

I was asked about the impact on SMEs and why they are treated the same as large firms. The entire pension industry is treated the same as it is difficult to legislate for different firms. As for whether pension providers will face a cost, the costs are to provide valuations and change guidance, which is much the same as for all other protection regimes when such a change is made. As for HMRC’s implementation costs for a new IT database to monitor compliance and provide certificates, if the hon. Lady wants a lengthy debate on HMRC and its resources, I would be more than happy to oblige, given its ever-increasing yield and improved customer service. I suspect, however, that were I to go on for too long, I would displease you, Mr Streeter, so I shall avoid doing so.

On whether there are further plans to reduce the lifetime allowance, which is the sort of question that the hon. Lady would ask, I would say that the Government have no plans to do that. All tax measures are kept under review, but we have no plans to return to that matter.

Following those clarifications, I shall conclude by saying that the clause ensures that individuals have a choice about how they protect existing pension savings. It follows extensive consultation and supports the steps taken by the Government to ensure that the pension tax regime is affordable and fair. I therefore hope that clause 41 and schedule 4 will meet with the approval of the Committee.

Clause 42 - Taxable specific income: effect on pension input amount for non-UK schemes

Cathy Jamieson (Labour, Kilmarnock and Loudoun)

I will be extremely brief on this clause, which is technical and removes an anomaly resulting from the employment income tax legislation’s interaction with the treatment of employer contributions to relevant non-UK schemes, which could have led to another measure in clause 49—on employment-related securities—creating unintended tax and national insurance liabilities for internationally mobile employees. Subsections (2) and (3) will ensure that when assessing the annual allowance charge any taxable specific income is treated the same as other employment income that is taxable. On that basis, we do not oppose the clause.

David Gauke (Conservative, South West Hertfordshire)

I thank the hon. Lady for her support. She has said all that needs to be said.

Clause 43 - Pension schemes

Gary Streeter (Conservative, South West Devon)

With this it will be convenient to discuss the following:

Government amendments 6 to 10.

That schedule 5 be the Fifth schedule to the Bill.

David Gauke (Conservative, South West Hertfordshire)

Clause 43 and schedule 5 make further changes to tackle the growing threat of pension liberation fraud, in which individuals are encouraged to access their pension savings before reaching the age of 55. The measure supports the Government’s objective of fairness in the tax system by maintaining the integrity of pension tax relief. The changes will give HMRC the powers that it needs to identify and tackle pension schemes that are being used as, or are intended to be used as, liberation vehicles. The measure also provides changes supporting future regulatory action by the Pensions Regulator in the relevant area.

Over the past few years there has been a growing threat to individuals’ hard-earned pension savings: a number of unscrupulous companies have been encouraging individuals to take money from their pension fund early. Such firms charge high fees and often do not tell the individual of the tax consequences of taking their pension early, resulting in the individual being left with little or no pension savings for their retirement. It is commonly known as pension liberation.

The Government are committed to tackling pension liberation to ensure that individuals who save in a pension scheme have their pension funds available to them when they retire, so that they can make the right choices about providing for their retirement.

Ian Mearns (Labour, Gateshead)

Everything that the Minister has just said rehearses the points that the Opposition made earlier in the debate and bears out our concerns. There are unscrupulous people out there who are willing to take advantage of people with the ability to access their own funds.

David Gauke (Conservative, South West Hertfordshire)

I have two points to make in response to the hon. Gentleman. First, if we are going to return to the earlier debate, I made it clear that the Government have initiated a process and are consulting in order to ensure that the appropriate guidance is provided to the people affected. That is the sensible response.

Secondly, I fully acknowledge the hon. Gentleman’s point that there are unscrupulous people out there who will try to persuade people to act unwisely if—to use the phrase he used—they have access to their own funds. That is true, but it is not an argument for saying that people should not have that access, and I am sure that he does not want to make that argument. The Government are always determined to deal with those who will act unscrupulously in a way that is to the detriment of the public. The measures before us are an example of our determination to do that.

Let me set out the changes made by the clause in more detail. They will give HMRC new powers to help to detect and prevent pension liberation schemes from being registered for tax relief. In addition, they will make it easier for HMRC to de-register such schemes. Another aspect of the changes supports future regulatory action by the Pensions Regulator in order to protect members’ interests. The Pensions Regulator will typically decide to intervene because the trustees are suspected of involvement in pension liberation. As part of the intervention, independent trustees or scheme administrators may be appointed at the instigation of the regulator. The changes ensure that the independent trustees or scheme administrators will not be made liable to pay certain tax charges for the pension scheme relating to events that occurred before they were appointed. Instead, the person liable to pay such charges will be the last scheme administrator to act before the regulator intervened.

To ensure that schedule 5 works fairly and as intended, we have tabled a number of amendments. Amendment 9 will give the former scheme administrator a right of appeal against liability to pay the tax charges being imposed on them. It will also ensure that, after the regulator’s intervention has ended and a new scheme administrator is appointed, all outstanding tax liabilities of the scheme will become due from the new administrator.

Amendments 6 to 8 and 10 make a number of improvements to the drafting of paragraphs 19 and 21 of the schedule. Currently, the risk of becoming liable for tax charges incurred as a result of the liberation activities of the previous scheme administrator is discouraging professional firms from agreeing to act as independent trustees. The changes will remove this obstacle to the Pensions Regulator taking effective regulatory action.

The clause and schedule will help to protect vulnerable people who have saved money for their retirement, and will protect individuals from pension liberation. They also support the Government’s efforts to tackle abuse across the tax system. I therefore hope that the clause and the schedule, as amended, will meet with the approval of the Committee.

Cathy Jamieson (Labour, Kilmarnock and Loudoun)

Clause 43 is important, and I welcome what the Minister has said about it so far. As has been outlined, schedule 5 enhances HMRC’s powers in the battle against so-called pension liberation. There has been an extensive trade in pension transfers to suspect pension providers, which exploit pension loopholes and, in many cases, pension holders.

The matter was first brought to my attention by constituents who had fallen prey to people trying to persuade them to unlock—as it was described to them—their pensions; and by my hon. Friend the Member for Motherwell and Wishaw (Mr Roy), who, along with the Daily Record, exposed in 2012 how many former Ravenscraig workers were being approached by unscrupulous sources trying to get them to unlock their pensions and put themselves in a difficult situation.

The practice was also happening in my own constituency, as I mentioned earlier, when there were changes to the Diageo work force. People were being approached with the promise of access to their pensions, but without any proper information as to what the tax consequences would be. In some instances, when people discovered that they had been scammed, they turned to properly regulated independent financial advisers to try to sort out the problems that they had got themselves into. The attempt to shut down such arrangements is therefore welcome.

Clause 43 seeks to shut down another liberation device, which creates a tax-free payment by artificially creating a surplus within a registered pension scheme through a member surrendering their pension rights. That is not an authorised pension payment and is liable to income tax charges of up to 70%.

Under the new powers, HMRC will be able to enter the business premises of a scheme administrator to inspect documents relating to the pension scheme and to impose a series of penalties on scheme administrators and individuals for failure to present information, or if the information is inaccurate. Again, that is welcome, and independent financial advisers to whom I have spoken feel that that is necessary.

It is unfortunate that people have fallen prey to unscrupulous firms and advisers who claim to be able to give savers early access to their pensions. They do so by registering a new pension scheme and encouraging the individual to transfer some or all of their benefits to that scheme, without telling the individual that such unauthorised payments incur a punitive tax charge, often of more than half the unauthorised payment.

Schemes are often sold without any mention of the possible tax liability. In some extreme cases that I have been made aware of, false claims were made that the liberated sum was tax free. However, the saver is exposed to a combination of taxation up to 55%; commission to the advisers who facilitated the unauthorised payment, which is usually about 35%; and hefty administrative costs.

That particular trade, if I could call it that, often preys on people who are vulnerable or who, for whatever reason, require immediate access to funds. Often, the amounts are below the new trivial commutation lump sum limit of £30,000. People who were preyed upon were often those whose financial circumstances made it difficult or impossible to raise funds in a more conventional manner, and people who had not got proper professional advice. The points made by my hon. Friend the Member for Birmingham, Ladywood earlier in the debate are indeed pertinent.

We welcome the clampdown on pension liberation schemes. The repercussions of being caught using unauthorised payments are severe. It can potentially wipe out an individual’s entire pension savings. Given that, as we discussed earlier, some individuals who are caught out are victims of unscrupulous firms and advisers, it seems that some measure of individual intent be taken into account when choosing what penalty to apply.

I want to bring the Government’s attention to the recommendations. It has been suggested that there ought to be some discrimination between determined tax evaders and the innocent victims of exploitation. Has the Minister considered the measures outlined by the Low Incomes Tax Reform Group to ensure that individual victims of unscrupulous pension providers and advisers are protected? Is he aware of arrangements, which were also highlighted, that allow savers who have chosen a retirement date of 60 to transfer their pension rights into the new schemes, which allow them to access 25% tax-free at age 55, before extracting a substantial fee? I know the Minister will be concerned about that. Does he agree that, although technically permissible, such arrangements should be proscribed where it is clear that they are being established solely to access the 25% tax-free and, more pertinently, to extract substantial fees for the adviser?

David Gauke (Conservative, South West Hertfordshire)

I thank the hon. Lady for her support for the measures. The matter is important, as she has highlighted. The Government are doing a great deal to warn individuals about pension liberation. The Pensions Regulator produced the Scorpion campaign to warn pension scheme members of the risks of seeking to liberate their pension, and it provides useful guidance to trustees and pension scheme administrators to help them spot pension liberation vehicles. TPR has also acted to secure and protect money already transferred to pension liberation vehicles, including through court action and appointing independent trustees.

HMRC has published warnings and factsheets detailing the tax consequences of being involved in pension liberation. The National Crime Agency has acted to take down or disrupt websites used to facilitate pension liberation and fraud; the National Fraud Intelligence Bureau and Action Fraud have facilitated collating and disseminating intelligence of suspected pension liberation vehicles; the City of London police has conducted raids and made arrests; and we urge people to recognise the dangers of entering into pension liberation schemes and to read the guidance issued by HMRC, the Pensions Regulator and the Financial Conduct Authority, which sets out various warning signs to look out for. So the Committee can see that across government there has been a real determination in this area.

HMRC has an active programme to tackle all attempted misuse or abuse of the pension tax rules. As part of that, HMRC will continue to work to identify promoters and schemes that seek to abuse the pension tax rules. The vast majority of pension funds abide by their legal obligations, but HMRC will not hesitate to act where rules are not adhered to, and it will pursue the promoters of liberation schemes for all penalties due under the legislation. It is far more important that individuals recognise the dangers of entering into such schemes and do not put their retirement savings at risk in the first place. We want to ensure that individuals with pension savings are protected, so that those savings are available to provide benefits for them later in their life. Where an individual thinks they may have received a liberation payment, it is essential that they contact HMRC as soon as possible to ensure that the correct tax is paid.

I do not want to be drawn into individual cases without knowing all the details. None the less, this matter is important. I am pleased that we have the support of all members of the Committee and I hope that the clause and schedule, as amended, can stand part of the Bill.

Schedule 5 - Pension Schemes

Clause 44 - Glasgow Grand Prix

Gary Streeter (Conservative, South West Devon)

With this it will be convenient to discuss the following:

Amendment 13, in clause 45, line 6, at end insert—

‘( ) The Chancellor of the Exchequer shall carry out reviews of the effects of the operation of the provision made by or under this Clause.

( ) The first review must be completed before the end of the period of five years beginning with the date on which section 45 of this Act, so far as it inserts this section, comes into force.

( ) Subsequent reviews must be completed before the end of the period of five years beginning with the date on which the previous review was completed.

( ) A report of each review must be laid before both Houses of Parliament.

( ) A report of each review must be made available to the Treasury Select Committee.’.

Clause 45 stand part.

Catherine McKinnell (Labour, Newcastle upon Tyne North)

And now for something completely different, in the words of Monty Python.

Gary Streeter (Conservative, South West Devon)

Order. The same Bill, I hope.

Catherine McKinnell (Labour, Newcastle upon Tyne North)

Clauses 44 and 45, and amendment 13 relate to provisions for tax exemptions for non-UK resident competitors at major sporting events. Those provisions have made regular appearances in successive Finance Bills in recent years.

The provisions in clause 44 follow on from those considered in previous Finance Bills by providing for exemptions for the Sainsbury’s Glasgow grand prix event at Hampden Park in Glasgow. It is an IAAF diamond league fixture that takes place just two weeks before the Commonwealth games. The provisions in clause 45 introduce powers to make such provisions outside of primary legislation such as a future Finance Bill.

The issue was debated at length at the Committee stage of the 2012 Finance Bill. That lively discussion focused on the exemption from UK taxation of the income of non-resident footballers and team officials in relation to the UEFA champion’s league final. The issue stems from the landmark case of 2004 against the tennis star, Andre Agassi, in which HMRC was successful. The 2004 ruling meant that, in practice, the number of days that a foreign athlete or sportsman or woman spends training or competing in Britain in a year is apportioned on the basis of the proportion of events that an athlete trains and competes around the world. HMRC then uses that figure to calculate the percentage of global income that is taxable. If that is not correct, I am sure that the Minister will set out the correct details in his response.

The current situation has led to growing concerns that the UK may be seen to be closed to sport, thereby deterring organisers from considering the UK as a location for their event, and prompting sportsmen and women to question whether participation in an event staged in the UK should be included in their schedule. We therefore find ourselves in the situation where tax exemptions for sporting events have been dealt with on an ad hoc basis in Finance Bill to Finance Bill. As a result, some athletes and professional sportsmen and women have benefited from exemptions from some sporting events, while others have not.

The Finance Act 2006 provided for both income tax and corporation tax exemptions at the 2012 London Olympic and Paralympic games. The Finance Act 2011 provided for income tax exemptions for the 2011 champion’s league final at Wembley, while the Finance Act 2012 made similar provisions for last year’s champion’s league final at Wembley if either team were foreign—of course. The Finance Act 2013 provided for income tax exemptions at last year’s London anniversary games, and at this year’s Glasgow Commonwealth games, which the then Economic Secretary, the right hon. Member for Bromsgrove (Sajid Javid), said would encourage

“world-class athletes to take part in each event”,

which the Government saw as a “key objective”.

As my hon. Friend the Member for Kilmarnock and Loudoun pointed out in last year’s Finance Bill Committee, those piece-by-piece provisions have been fluid and have changed from event to event. She said that that had created either a real or a perceived unfairness and that, of most concern, it had led to uncertainty for participants in events, organisers, officials, fans and spectators who want to compete in or watch major sporting events in the UK. Clause 44 continues the event-by-event approach by providing for an income tax exemption for non-UK resident accredited competitors at the Glasgow grand prix athletics event in respect of any income arising from the event.

Returning to a similar debate in last year’s Committee, the then Economic Secretary, whom have I have already quoted, stated that the main driving factor behind the exemptions was to secure elite international events that otherwise would not be possible, saying:

“The Government’s policy is that such tax exemptions are provided when they are a requirement of the bidding process to host an international sporting event at the highest level of world sport. That is why, for example, exemptions were provided for the Olympic games in 2012 and the champions league final in 2013 at Wembley stadium.”––[Official Report, Finance Public Bill Committee, 16 May 2013; c. 160.]

I am sure the Minister this afternoon will confirm that securing another diamond league grand prix in Glasgow shortly before the city hosts the Commonwealth games was contingent upon the exemptions provided for in clause 44.

As I have outlined, successive Ministers have made clear—and have been supported by the Opposition—that, aside from meeting bidding requirements, these exemptions are necessary to attract world-class sportsmen and women to compete in events in the UK. According to an article in The Scotsman last week, Usain Bolt will “almost certainly” be taking part in the Sainsbury’s Glasgow grand prix at Hampden park. That event is taking place just two weeks before the Glasgow Commonwealth games, in which the article reports it is “95% certain” that Usain Bolt will also compete. The article cites

“dispensation from taxes and all that sort of thing”.

The consequence of provisions in clause 44 is one of the main reasons why the organisers are so confident that the Olympic champion will be there. Perhaps the Minister can comment further on the speculation and enlighten the Committee on any information he might have about Usain Bolt competing in the games. It would be useful if the Minister could share any inside knowledge.

Clause 45 and our amendment 13 address this piecemeal legislation relating to sporting events and the fact that the issue recurs at every Finance Bill. It was announced at Budget 2014 that a power would be introduced to allow provisions to be made for income tax and corporation tax exemptions for major sporting events, using secondary legislation instead. According to the explanatory notes the clause introduces a new power to allow the Government to make provision “by Treasury regulations” for income tax and corporation tax for major sporting events, thereby unfortunately removing the need to debate these issues every year in the Finance Bill Committee. The clause provides that regulations made under this power must be approved by resolution of the House of Commons. The Government have said:

“This will allow for more flexibility whilst retaining parliamentary scrutiny of any proposed exemption or provision.”

Perhaps most interestingly, the background note sets out the criteria by which the Government plan to grant certain exemptions for sporting events, while no similar details are provided in any other document—to the best of my knowledge, although I am happy for the Minister to correct me. That suggests that exemptions will be granted only if the event is

“world-class, internationally mobile, and where exemption by the host country is a requirement of a bid to host the event”.

Although Ministers have made clear before that such provisions are often demanded as a condition of the event being held in the UK—the previous Labour Government agreed to make similar provisions ahead of the London Olympic and Paralympic games—I do that the definitions set out in the explanatory notes warrant further clarification. It would seem that a number of world-class sporting events held in the UK would be eligible under these guidelines, for which the Government have previously rejected tax exemptions.

For example, the IAAF diamond league series is widely seen as the highest level of athletic competition outside of international championships. There are 14 diamond league meetings being held across the world this year, two of which are taking place in the UK, at Glasgow and Birmingham, with Glasgow of course receiving the tax exemptions. In view of the criteria, surely the Sainsbury’s Birmingham grand prix is equally internationally mobile—it could be taken elsewhere in the world. Indeed, it is certainly a world-class event and, now that the Government have granted tax exemptions for the other two UK-based diamond league events, the precedent is there to grant a similar exemption.

Ian Mearns (Labour, Gateshead)

I know some detail about the bidding for diamond league events such as the event in Birmingham that my hon. Friend has mentioned. Gateshead stadium has hosted diamond league events in the past and the UK faces hot competition in attracting such events, which are intensely important to the world athletics circuit. Unfortunately, that stiff competition means that, unless we have exemptions, there is a real danger that such events will go to other European cities.

Catherine McKinnell (Labour, Newcastle upon Tyne North)

My hon. Friend raises an important point. As a fellow north-eastern MP, I know that not only are these important sporting events, but that the areas that win the bid to host them see major economic consequences. There appears to be a lack of clarity and, therefore, either real or perceived fairness in the way the exemptions are granted.

Charlie Elphicke (Conservative, Dover)

The hon. Member for Gateshead made a powerful point. In our debates in the Finance Bill Committee in 2012, I had doubts about these exemptions; however, having thought about it, I think the ferocity of the international competition for these events means that a strong case can be made for them. People will come here and spend money, and some of that spending will result in extra tax revenue for the UK. There is a serious issue: we are in an international, competitive marketplace and we need to do everything we can to grow our economy.

Catherine McKinnell (Labour, Newcastle upon Tyne North)

I thank the hon. Gentleman for his intervention; I will be interested to hear the Minister’s response.

This issue was put to the then Economic Secretary—now the Secretary of State for Culture, Media and Sport—who suggested that the Government’s policy for tax exemptions was in part to build on the Olympic legacy and to support athletic competitions that include para-athletic events. With specific reference to the Birmingham grand prix, he said:

“The London anniversary games and the Glasgow Commonwealth games 2014 are both exceptionally placed to build on the Olympics’ legacy. For example, both events will not only be multi-sport, but will include para-athletic events, which is not usually the case for the diamond league. It is in order to keep promoting the legacy of the Olympics that we have provided special treatment here and not for a similar event in Birmingham.”—[Official Report, Finance Public Bill Committee, 16 May 2013; c. 160.]

In the light of the Government’s decision to grant exemptions for another British diamond league grand prix and the fact that events such as the Birmingham diamond league grand prix now seemingly meet the criteria for future exemptions as outlined in the explanatory notes, will the Minister today restate the Government’s position? Are they still of the view that the London anniversary games and the Glasgow grand prix warrant special circumstances as they build on the Olympic legacy and include para-athletic events? If so, should the eligibility criteria for future exemptions not make that clearer?

Can the Minister say what other future sporting events he envisages becoming eligible for tax exemptions for non-resident competitors as a result of this clause? Do the Government plan to extend the number and range of events that are eligible for such exemptions beyond football, athletics and the Olympic and Commonwealth games?

There is a great deal of uncertainty surrounding this deal, so amendment 13 would commit the Government to review these questions and, more importantly, decisions that they will take over the next five years on tax exemptions to ensure effectiveness. As we set out, since the Olympic and Paralympic games—but by no means ending with them—not only has the UK become an increasingly important destination for international sporting events, but the Treasury has found itself reacting on a case-by-case basis to tax decisions on such events, which are becoming a more regular feature on the UK sporting calendar. Amendment 13 would ensure that the Treasury never had to catch up with events because it would keep them constantly under review. To expand the debate outside the remit of the Committee—not that I underestimate the valuable contribution that all hon. Members make to the debate—amendment 13 also seeks the views of the Treasury Committee and its expertise as part of these five-yearly reviews.

Mike Kane (Labour, Wythenshawe and Sale East)

Does my hon. Friend agree that sport can bring regeneration to our regional economies? In the late 1990s, as a serving Manchester city councillor, I stood on the steps of the Manchester velodrome that we had built as a precursor to bidding for the 2002 Commonwealth games. It was built on a bleak, desolate, many-acre site to the east of the city that had been de-industrialised in the 1970s and 1980s due to structural economic change. The development was labelled as the greatest white elephant in Britain by some of the press, but if Manchester velodrome had been a country at the 2012 Olympic games, it would have come seventh in the medal table. The development led to the building of the City of Manchester stadium, the national taekwondo centre, the national squash centre and the national hockey centre, so my hon. Friend is putting forward an essential argument.

Gary Streeter (Conservative, South West Devon)

That was a very long intervention. Interventions should be brief.

Catherine McKinnell (Labour, Newcastle upon Tyne North)

My hon. Friend gives an example of the eminent contributions that Committee members make to the debate. He also pre-empts a point I am about to make, which my hon. Friend the Member for Kilmarnock and Loudoun raised in last year’s Finance Bill Committee. Two years ago, the Government cited a MasterCard study that estimated that, having lost out on hosting the 2010 UEFA champions league final in London, in part due to the UK’s tax law, when the 2011 UEFA champions league final was held at Wembley, it yielded £45 million for the London economy. That is clearly not to be glossed over. Indeed, in Manchester, Birmingham and many parts of the country, we have seen the huge value that such sporting events bring to various parts of our economy.

As a Newcastle MP, I could not help but cite figures from the local inward investment agency, NewcastleGatestead Initiative, which show that tourism’s contribution to the economy increased by £400 million, or 8%, between 2011 and 2012. A large part of that increase can be attributed to the Olympic football matches that were hosted at St James’ Park. We are looking forward to the prospect of hosting three matches in the 2015 rugby world cup which, by some estimates, could boost the north-east’s economy by more than £14 million, as about 50,000 overseas fans are expected to visit the region during the tournament.

What assessment has the Minister made of the economic benefits of sporting events to the national and local economies? Has any analysis been carried out of the economic benefits to Glasgow and the UK of staging the Commonwealth games and the Glasgow grand prix? Has any comparison been made between the effects of providing tax exemptions for such events and not doing so? Equally critically, do the Government have any plans to carry out such assessments when deciding whether to expand the number of events eligible for tax exemptions?

Those questions are the essence of amendment 13, which is a reasonable provision that would ensure that we have fully informed and timely reviews of UK tax policy that is consistent with the Government’s stated aims of continuing the London 2012 Olympic and Paralympic legacy, and making the UK one of the premier sporting locations across a multitude of sports, given the social and economic benefits that such events bring. I urge the Committee to support the amendment.

David Gauke (Conservative, South West Hertfordshire)

Clause 44 provides an income tax exemption for non-UK resident competitors on any income received as a result of their performance at the Glasgow grand prix 2014, or as a result of any activities in the UK between 5 July and 14 July 2014 to support or promote that athletics event. As we have heard, clause 45 introduces a new power that will allow the Government to give exemptions from income tax and corporation tax for specific sporting events held in the UK.

On clause 44, hon. Members will be aware that the Government introduced exemptions for some highly successful major sporting events in recent years, including the London 2012 Olympic and Paralympic games. The Government’s policy is to consider providing a tax exemption for internationally mobile events at the top level of world sport when that is a necessary condition of the bid, or in exceptional circumstances when there is an opportunity to prolong the legacy of the London 2012 Olympic and Paralympic games. The Government will therefore provide an income tax exemption for non-UK resident competitors at the Glasgow grand prix 2014 on an exceptional basis.

The changes made by clause 44 will provide an income tax exemption for non-UK resident competitors that will apply to appearance fees, prize money and endorsement income related to a performance at, or to support and promote, the Glasgow grand prix between 5 July and 14 July 2014. The exemption will not be for UK residents, nor will it be for non-competitors such as officials, sponsors or coaching staff. The Glasgow grand prix will be a two-day athletics and para-athletics competition at Hampden Park stadium. The cost of providing the exemption will be negligible and is likely to be offset by the economic benefits of raising the profile of the games.

As we heard from the hon. Member for Newcastle upon Tyne North, the Government have introduced exemptions for highly successful major sporting events in recent years, and debates on such exemptions are often the highlight of Finance Bill Committees. The bad news is that clause 45 means that it will no longer be necessary to use the annual Finance Bill to make exemptions or other provision. Instead, the Government will make future exemptions through statutory instruments. Hon. Members will be pleased to hear, however, that there will still be opportunity for debate, as such regulations will be subject to the affirmative procedure. They should contact their Whip to express their interest in participating in such debates.

The way in which the Government consider whether to grant exemptions will not be changing, just the process. The Government will still consider whether an event is world class and internationally mobile, and whether the exemptions are part of the conditions of a bid to host the event. The Government will also consider exemptions when, as for the London anniversary games, an event is exceptionally well placed to prolong the legacy of the highly successful 2012 Olympics and Paralympics.

As we heard from the hon. Lady, the Opposition have tabled an amendment to clause 45 that would require the Government to undertake regular five-yearly reviews of the effects of that clause. Although I commend hon. Members for their zeal in seeking to establish the effectiveness of Government policy, I cannot support the amendment. The Government review all tax policy in the appropriate place and at the appropriate time. Requiring reviews to be published for specific periods is inefficient and arbitrary. The Government might use the power only once in the next five years, for example, so undertaking to publish reviews to such a schedule would not be proportionate. Furthermore, the Government have already set out their view of the clause’s effect in the tax information and impact note, which was published by HMRC in “Overview of Tax Legislation and Rates.” Similar assessments will be published on later policy changes as and when they occur.

Catherine McKinnell (Labour, Newcastle upon Tyne North)

I apologise for interrupting the Minister’s flow, and I appreciate that he believes that the Government do not need any help in formulating good policy. Perhaps he is about to explain this, but there is a lack of certainty in the existing guidelines and explanatory notes setting out the criteria. Why was the competition in Glasgow granted an exemption when the competition in Birmingham was not? How will things work under the new rules and guidelines?

David Gauke (Conservative, South West Hertfordshire)

I hope that I can reassure the hon. Lady by turning to those questions immediately. First, there is no change in policy. We will continue to consider exemptions for those events that meet the criteria which, as I have already stated, include whether an exemption is a necessary condition of a bid to host an internationally mobile event at the top level of world sport, or the exceptional circumstances that an event is an opportunity to prolong the legacy of the London 2012 Olympic and Paralympic games.

Specifically on diamond league events—and on why the Glasgow event is covered, but a similar event in Birmingham was not—the Glasgow grand prix will help to support the 2014 Glasgow Commonwealth games in maximising the legacy of the London 2012 Olympic and Paralympic games and spreading that legacy to Scotland. The situation needs to be put in that context. We therefore think it is wholly appropriate to support that athletic and para-athletic event. Unlike the Glasgow grand prix, and the London anniversary games, the Birmingham event does not have a para-athletic element, so it does not meet the Government’s policy criteria.

It is worth pointing out that there are 14 diamond league events each year, two of which are hosted in the UK. They will be hosted in the UK in the future whether or not the exemption is provided. The Glasgow event is connected with the Commonwealth games, which we see as a way of continuing the Olympic and Paralympic legacy, which is why the exemption has been granted in that case.

Catherine McKinnell (Labour, Newcastle upon Tyne North)

I appreciate the Minister’s explanation, but he has not really explained the new guidelines—if they can be called that—or the explanatory notes setting out the criteria. They do not necessarily include the criteria to which he refers as the basis for the decision in the Glasgow case. There still seems to be uncertainty about what will happen in the future, and it is important to establish as much certainty as possible at this stage.

David Gauke (Conservative, South West Hertfordshire)

I think that I am being clear, but I will have another go. The policy criteria for tax exemptions fall into two categories: first, when an exemption is a necessary condition of a bid to host an internationally mobile event at the top level of world sport; and, secondly, the exceptional circumstances of an opportunity to prolong the legacy of the London 2012 Olympic and Paralympic games. We believe that the Glasgow grand prix falls into the second category, especially given the connection with the Commonwealth games and the fact that it is an athletic and para-athletic event. There has been no change in policy.

The hon. Lady asked about the economic benefits to Glasgow of hosting the event. No assessment has been made of the economic benefits, but it is worth drawing a parallel with the London anniversary games, the direct economic impact on London of which was £15.2 million. To be fair, that was a three-day event while the Glasgow grand prix will be two-day event for which fewer tickets are available, but I hope that that gives a helpful indication.

The hon. Lady wonders whether Usain Bolt will compete, but I cannot answer that question. I also doubt that I will receive inspiration on that point. However, I suspect that Usain Bolt is following these events closely, and I have no doubt that as soon he receives a copy of the Official Report of this debate, he will contact the hon. Lady directly to reassure her about whether he will attend.

The hon. Lady raised a number of queries about the policy, as it was appropriate for her to do, given her role. I thank her for her broad welcome for the Government’s approach to offering exemptions in such circumstances so that, for highly mobile individuals who have choices about where they locate, we have a competitive tax system that ensures that they will come to the UK. I am glad that she has taken that approach. She could have categorised the measures as a tax cut for millionaires, and she would probably have been right. None the less, I was delighted that the Opposition were supportive of the proposals, because it is important that we have a competitive tax system that attracts jobs and investment to the UK, which is exactly what we are doing. I hope that the Committee will support clauses 44 and 45 and that I have persuaded her to withdraw amendment 13.

Gary Streeter (Conservative, South West Devon)

In a moment, the hon. Member for Newcastle upon Tyne North will indicate whether she wishes to move amendment 13 but, in the meantime, we must reach a decision on clause 44.

Clause 45 - Major sporting events: power to provide for rax exemptions

Clause 46 - Share incentive plans: increases in maximum annual awards etc

Shabana Mahmood (Labour, Birmingham, Ladywood)

It is a pleasure, Mr Streeter, to serve under your chairmanship again this afternoon. I was beginning to despair that I might not have an opportunity to contribute to the Committee today, but I am happy to find that I will get to have my say.

In essence, clause 46 does three things. It increases the maximum value of free shares that can be awarded annually to an employee from £3,000 to £3,600 by amending schedule 2 of the Income Tax (Earnings and Pensions) Act 2003. It increases the maximum value of partnership shares that an employee can purchase annually from £1,500 to £1,800, although the value still cannot be more than 10% of an employees’ salary. Both those changes come into effect from 2014. Share incentive plans were introduced in July 2000 to give tax and national insurance contributions advantages to employees when they buy or are given shares in the company they work for.

Companies can offer one, or a combination, of four types of shares. The first type is free shares. An employer can award up to £3,000 of free shares in any tax year. The clause increases that amount to £3,600. An employer can choose to link the award of shares to its employees’ performance. The second type is partnership shares. Employees can buy partnership shares using their gross pay, but there are limits on how much can be spent. The clause increases that limit from £1,500 to £1,800. The third type is matching shares, where employees can buy partnership shares that will be matched by their employer, giving them up to two free shares for every partnership share they buy. The fourth type is dividend shares. As a shareholder, employees may be paid dividends on their shares. If dividends are received on free, partnership or matching shares, employers may allow employees to use those dividends to buy more shares. Employees can use up to £1,500 of plan dividends in that way in any tax year.

The impact of the clause on the Exchequer is a cost of £5 million in 2014-15, and the same amount in each year until 2018-19. Share incentive plans were introduced in 2000 as all-employee share ownership plans, which were the successor to the approved profit-sharing scheme, which ran from 1978 to 2002. They were rebranded in 2001 as SIPs, and very little detail had changed until the announcement in the autumn statement. We support the principle of encouraging saving through tax-advantaged schemes, but we want to ensure that this aspect of the tax system is having the desired effect and that take-up levels are good and spread out across different types of business and employee and across the economy, both by sector and by region.

The Quoted Companies Alliance welcomed the changes made under the clause. It made the point, which it has been vigorously pursuing, that the limits should rise in line with inflation. It would be helpful if the Minister indicated whether the Government have received additional representations of that kind. Are the Government reviewing the linking of limit rises to inflation or thinking of doing that at a later point?

This feature of the tax system is there because Governments of different party political persuasion have wanted to encourage employees to behave sensibly and responsibly by saving for their futures. It would be helpful if the Minister indicated whether the level of take-up is sufficiently high to justify Government incentivisation and intervention in this aspect of the tax system. This is one of the first changes to SIPs in a very long time, so is he sure that the change will, in and of itself, increase take-up? Is there sufficient knowledge of these schemes to ensure that they are as successful and taken up as much as possible?

David Gauke (Conservative, South West Hertfordshire)

The clause, as we heard, increases the limits on the value of shares that employees can obtain under share incentive plans. SIPs are all-employee share schemes under which employees can purchase shares or have shares awarded to them, with favourable tax treatment.

The clause increases, from 6 April 2014, the maximum value of SIP free shares that can be awarded annually to an employee from £3,000 to £3,600, and the maximum value of SIP partnership shares that an employee can purchase annually from £1,500 to £1,800. By helping employees to acquire a stake in the company they work for, SIPs have an important role in encouraging the work force to identify with the fortunes of the enterprise and to share in its success.

As a separate matter, we have also increased through secondary legislation the limits on the maximum amount employees can save under tax-advantaged save-as-you-earn share option schemes. These increases to the limits under the all-employee SIP and SAYE underline the Government’s commitment to the schemes, which are popular with employees and employers alike.

To answer the hon. Lady’s questions on take-up, in 2011-12 the number of companies with tax-advantaged employee schemes increased by 3%, to 9,260. Clearly, this measure should support that and a significant increase in the limit may further encourage take-up.

On whether the limits should be indexed and rise annually in the same way that ISA limits increase—we received a representation on that—it is worth saying that there are differences between SIP and SAYE employee share arrangements, which are available only to employees of certain companies, and ISAs, which are general purpose broad-based mainstream savings accounts used by millions of savers. Different considerations must be taken into account when setting limits for these schemes, including the need to ensure a fair distribution of tax advantages and helping people achieve flexibility in the way that they save and invest.

The increases in the SIP and SAYE limits that we have announced are significant and exceed a simple indexation of last year’s limits. Although we continue to keep the limits under review, it is preferable to make ad hoc increases when we judge that they are affordable and when the time is right, rather than tying ourselves to a particular formula for annual increases.

The clause makes the scheme more generous and it has been widely welcomed. I hope that the clause meets with the approval of the Committee.

Clause 47 - Share incentive plans: power to adjust maximum annual awards etc

Shabana Mahmood (Labour, Birmingham, Ladywood)

I beg to move amendment 14, in clause 47, page 43, line 35, at end insert—

(a) The Chancellor of the Exchequer shall, within six months of this Act receiving Royal Assent, undertake a review of the impact of changes made by this section to the Income Tax (Earning and Pensions) Act 2003 (share incentive plans) on—

(i) the uptake of Share Incentive Plans;

(ii) changes made to the maximum value of Share Incentive Plans that can be awarded to an employee;

(iii) changes made to the maximum amount of an employee’s salary that can be used to purchase Share Incentive Plans;

(iv) the types of business using Share Incentive Plans.’.

Gary Streeter (Conservative, South West Devon)

With this it will be convenient to discuss clause stand part.

Shabana Mahmood (Labour, Birmingham, Ladywood)

The clause amends schedule 2 of the Income Tax (Earnings and Pensions) Act 2003, to allow future changes to share incentive plan annual limits to be made by Treasury order. The order-making power would apply to the maximum value of SIP free shares that can be awarded to an employee and the maximum amount of an employee’s salary that can be used to purchase SIP partnership shares, both of which we have just discussed in relation to clause 46, under which those limits have been increased.

I hope that I will make myself popular with the Committee by saying that amendment 14 is intended as a probing amendment, designed to continue the debate that we have just had on clause 46.

The amendment is designed to press the Government and to ensure that we will be able to assess the impact of the changes that are being made. Of course, we support the principle, but I am sure that all Members agree that that principle should be effective in practice. I should like to press the Minister on take-up levels and the types of businesses, and therefore employees, that are using the tax-advantaged schemes.

We have already had lengthy discussions during the debate on clause 3 about the savings ratio being revised downward and the inability of many people to save anything at all, and we have discussed pension savings today, which are clearly important. We want to ensure that the measures before us encourage saving and that the people who need to be aware of it are aware of it, and use it in the way envisaged by successive Governments.

Does the Minister know how much money companies will have to spend on human resources to ensure that they cover all aspects of clauses 46 and 47? Could the resource implications for companies prevent the proper take-up of such schemes, or prevent some types of business or sector from using them at all? Are there cold spots in terms of sectors and take-up? If so, does the Minister plan to review and reconsider any issues relating to such sectors with take-up cold spots?

We also discussed the shares for rights scheme earlier in Committee. Getting information on it has been difficult, so we want to continue to press the Government on the measure. The scheme is a long-standing feature of the tax system, and we support it, but we should look into its impact so that we can ensure that any increases to the limits will better enable employees to save, invest, and contribute to their own futures, alongside their gaining a real stake in the companies they work for.

David Gauke (Conservative, South West Hertfordshire)

Clause 47 alters the mechanism for future increases to the limits on the value of shares that employees can obtain under share incentive plans. As I set out during discussion of the previous clause, SIPs are all-employee share schemes under which employees can purchase shares, or have shares awarded, with favourable tax treatment.

The clause amends the legislation to allow future increases in SIP limits to be made by Treasury order, without the need for a provision in the Finance Bill. That will align the process between SIPs and save as you earn share option schemes. The change will come into force on Royal Assent.

The hon. Lady said that she hopes to be popular with the Committee by making it clear that amendment 14 is just a probing amendment. I am grateful for that and can reassure her that she is already popular, and I am sure that she has all her Back Benchers behind her on this occasion.

The amendment would require the Chancellor of the Exchequer to review the impact of the changes set out in clause 47 on the uptake of SIPs, the maximum value of free shares that can be awarded, the maximum value of partnership shares that can be purchased by plan members, and the types of businesses offering SIPs. The Government believe that such a review is unnecessary.

HMRC already publishes significant data on SIPs on an annual basis, including the number of companies offering the scheme, the number of employees who have purchased or been awarded shares, and the average value of those shares. Detailed data on the use of the schemes are also published by representative groups in the industry. All of that will provide sufficient information to allow the detailed assessment of the impact of the change. The measure is expected to have a negligible effect on businesses.

The clause makes worthwhile improvements to SIPs. In addition, HMRC will continue to publish data on SIPs as part of the annual share scheme reporting cycle, so processes are already in place to allow the policy’s impact to be assessed. I therefore hope that the clause will be agreed to and that amendment 14 is, indeed, probing.

Shabana Mahmood (Labour, Birmingham, Ladywood)

One always likes to be popular. I am grateful to the Minister for his comments and, further to his clarification, I am happy to beg to ask leave to withdraw the amendment.

Clause 48 - Employee share schemes

Gary Streeter (Conservative, South West Devon)

With this it will be convenient to consider schedule 6.

Shabana Mahmood (Labour, Birmingham, Ladywood)

We have just discussed the increases in the SIP and SAYE scheme limits, which were announced in the autumn statement. In addition, the clause gives effect to several changes to the rules for employee share arrangements that were recommended by the Office of Tax Simplification.

In July 2011, the Minister asked the OTS to review the four schemes to identify when they are complex and place unnecessary administrative burdens on their users, and to suggest ways they could be simplified. The OTS report was published on 6 March 2012 and, in June 2012, the Government launched a consultation containing 16 proposals for changes to the rules of all four types of scheme. In December 2012, the Government confirmed that they intended to proceed with the three OTS proposals that are found in clause 48.

In May 2013, HMRC published details of its proposed arrangement for the self-certification of SIP and SAYE schemes and company share option plans, and digital filing of forms and returns for employment-related securities, or ERS. The main changes include the introduction of self-certification by businesses for three of the tax advantaged employee share schemes—SIP, SAYE and CSOP—to replace the need for approval from HMRC, which was previously required. Secondly, there are changes including online filing for all employee share scheme returns and information, including for enterprise management incentives—EMIs—and non-tax advantaged arrangements providing ERS. Thirdly, there are a number of technical changes to the SIP, SAYE and CSOP rules that are designed to clarify legislation, including the modification of the so-called purpose test that must be met by the schemes.

The changes aim to simplify the employee share scheme rules when they might create undue complexities or unnecessary administrative burdens for scheme users, so we are broadly supportive of the proposals in the Bill. The changes came into effect on 6 April 2014.

There has been helpful commentary on the changes, especially from the Quoted Companies Alliance. It broadly welcomed the changes, although it noted some points of concern, especially the decision not to grandfather previously approved schemes under the new regime. The alliance says that having to revisit schemes to see if they comply will place an unnecessary burden on businesses, so will the Minister tell the Committee what discussions he has had with the QCA and other stakeholders about such matters?

Is the Minister confident that, in the absence of a distinction in legislation between serious default and other breaches, companies that operate schemes without full-time HMRC share scheme managers will not find themselves facing substantial penalties for inadvertent but ultimately minor mistakes? A number of commentators have made that point. While broadly welcoming the changes, they have asked whether the Government have considered how best to assist smaller businesses without an in-house tax team, and unrepresented taxpayers, to understand the changes and their new obligations. Will the Minister outline the Government’s views on those matters?

The QCA and one or two other organisations have been somewhat critical of the new purpose tests saying that they will be no more helpful than the previous tests. What is the Minister’s response? Is he confident that the tests will represent a simplification?

Will the Minister also confirm whether, under the new system, if a company misses the deadline for self-certification, it will not mean that all the grants, for example of SAYE options, in the previous tax year no longer qualify for preferential tax treatment? That might go too far and could lead to uncertainty and hardship for employees potentially through no fault of their own.

David Gauke (Conservative, South West Hertfordshire)

Clause 48 introduces schedule 6, which gives effect to recommendations of the Office of Tax Simplification on employee share schemes. The Government asked the OTS in 2011, as we have heard, to review employee share schemes and identify ways in which existing tax provisions and processes might be simplified. Last year, we brought in a substantial package of changes to give effect to many of the OTS’s recommendations on tax-advantaged schemes. We have now produced a second tranche to address further OTS recommendations on which we needed to undertake preparatory work and consultation before we could put detailed proposals before Parliament. This is just one of the Bill’s provisions that implements OTS recommendations, and I pay tribute to that organisation for enabling us to take forward a major programme of tax simplification for employee share schemes in this year’s and last year’s Finance Bills.

Schedule 6 makes several changes that I shall run through fairly quickly. It removes the current requirement that a share incentive plan, save-as-you-earn option scheme or company share option plan must be approved by HMRC to qualify for favourable tax treatment, and replaces that with a process of self-certification of schemes by businesses. It introduces online filing for the information and returns on employment-related securities that companies are required to submit to HMRC and applies that to enterprise management incentives and non-tax-advantaged schemes and arrangements, as well as SIPs, SAYE option schemes and CSOPs.

The changes replace processes that the OTS told us were outdated and time consuming for businesses with up-to-date digital arrangements. Other changes under the measure clarify or simplify various technical rules governing the operation of such schemes. There are new, more specific purpose tests for SIP, SAYE and CSOP, and significant changes in areas such as requirements in relation to the provision of information by companies to scheme participants, variations of share capital, company events that are subject to overseas legislation and the exchange of options. HMRC has consulted extensively with businesses and leading professionals to make the new arrangements simple and user-friendly, and I am grateful to all those who have helped us to develop a system fit for the 21st century.

The hon. Member for Birmingham, Ladywood asked whether the system should have grandfathered existing schemes already approved by HMRC instead of requiring them to self-certify. The Government’s view is that once the new system has come into operation, all schemes should be treated on the same basis, meaning that all schemes—new and existing alike—need to self-certify. Published guidance will make it clear that if a scheme received formal approval prior to 6 April 2014, HMRC accepts that the scheme met the legislative requirements on the date of approval. That will be sufficient evidence that the scheme is suitable for the company to self-certify, assuming that there have been no significant changes to the scheme or how it has operated since approval was granted.

The hon. Lady asked whether HMRC’s ability to impose penalties may result in innocent mistakes by companies being penalised, as well as raising a concern about whether these are the right powers. We believe that the new arrangements strike a reasonable balance. Clearly HMRC must have adequate powers to impose penalties when companies fail to comply with the new rules. It will be publishing guidance on how it expects the new penalties regime to work, which will include examples of the sorts of errors and omissions that might be considered serious and those that might be seen as less serious. HMRC aims to publish detailed guidance on the new rules by the time the Bill receives Royal Assent to provide information for companies and advisers on all aspects of the new arrangements. HMRC will undertake an informal process of consultation on the guidance to help make it as useful and comprehensive as possible.

Shabana Mahmood (Labour, Birmingham, Ladywood)

What timetable on the consultation and publication of the guidance is the Minister hoping for?

David Gauke (Conservative, South West Hertfordshire)

The aim is to publish detailed guidance on the new rules by the time the Bill receives Royal Assent, which will be in July. HMRC will be undertaking an informal process of consultation on the guidance but, as I said, the aim is to publish it by the time the Bill receives Royal Assent.

On the purpose test and whether it is narrow, the old purpose test broadly required that the scheme should not contain provisions that were not essentially or reasonably incidental to the purpose of providing shares or share options. The OTS told us that the test should be simplified and that the legislation should be more specific about what should not be included in a scheme. The new purpose test precludes schemes from providing benefits other than in accordance with the terms of the legislation and specifically bans the provision of cash in place of shares or share options. The new approach provides a straightforward and workable test that strikes a reasonable balance and should counter the most obvious types of abuse that might arise.

I turn to safeguards for members of existing approved schemes, if their employer fails to self-certify. In the case of SAYE, SIP and CSOP schemes approved by HMRC before 6 April 2014, companies must notify and self-certify them by 6 July 2015 if they wish the schemes to remain tax-advantaged from 2014-15 and in following years. If schemes are not properly registered by that date, they will no longer be tax-advantaged. In such cases, legislation will protect the interests of participants in the all-employee SIP and SAYE schemes in relation to shares awarded or options granted prior to 6 April 2014. However, there is no comparable protection for participants in discretionary CSOP schemes on options granted prior to 6 April 2014 in cases when the 6 July 2015 deadline for self-certification is missed.

With those points of clarification, I hope that the Committee will accept the clause and schedule. I hope that they demonstrate the Government’s support for simplifying the tax system and ensuring that it is sensible and encourages businesses to award shares to employees.