Finance Bill

My hon. Friend responds to my mention of instant gratification, but obviously it is in all our interests as a society to recognise that there is merit in assisting people to save for their retirement, so that they can avoid being reliant on benefits in their old age. As a result of the welcome increases in longevity, which have been a feature of our success as a society since the war, the average period of retirement is becoming longer and longer. Indeed, history recalls that when old-age pensions were first created 100 years ago, the life expectancy of those due to access them was a mere one year after they had been lucky enough to qualify. Clearly, by the time pension saving and old-age pensions became more widespread after the second world war, the time had gone up considerably to seven or eight years. It is now 20-odd years for men and—gratifyingly for females—even longer for women. That shows that there are issues about longevity in society and about how to adapt our pensions arrangements to recognise that we live in what is often referred to as ““an ageing society””. I believe that it is a great triumph of our organisation of society. Although it presents us with some difficult issues of policy and affordability, it should not be seen or ever portrayed as a problem; nor should the fact that these days many more pensioners reach retirement age and live longer be seen as representing some kind of burden on our society. After all, we all aspire—as I am sure you do, Mr Hoyle—to reaching retirement age and enjoying an extremely happy, long and hopefully prosperous retirement. That is what we are dealing with when we tackle the issue of pension tax relief. I was pointing out that pension tax relief is more generous than the relief in many other areas of saving. That is because there are great benefits in encouraging people to save for their own pension, despite the fact that they are putting money away to which they often cannot gain access for many years; and also because it is more effectively and efficiently done if it can be done collectively. That is why Government incentives, in the form of tax reliefs, have always featured in the system. This form of tax relief is often referred to as EET. This is not a stuttering, Steven Spielberg sci-fi film; it stands for exempt, exempt, taxed. That means that as savings are put away from income, they are exempt from tax. Any investment growth that comes from investment in those funds is also exempt from tax—that is the second E. The T, of course, is the thing that many people worry about—the fact that as these savings are taken as an income stream when retirement happens, taxation applies again at that stage. I doubt whether any Member on either side of the House would quibble with the very generous tax incentives put in place over many years by Governments of all hues, colours and sorts—whether they be coalitions or otherwise—to privilege such tax savings. However, as that has developed, certain features have brought about unforeseen consequences and have not proved to be in the best interests of fairness or equity. To establish the size of the issue and to put into perspective the amounts of money that we are dealing with under this clause, let me reveal—although I am sure that many Members will already know—that the gross annual cost of pension tax relief for the financial year 2008-09 was £28.4 billion, which at a full 2% of gross domestic product is a not insubstantial amount. Net of the tax on pension income—the T part of EET—and also of the national insurance contribution relief for employers, which are also granted by the Treasury, the figure was £18.9 billion. Therefore, the net cost of that tax relief for pension savings is close to £19 billion. Again, that is not an insubstantial amount of money or revenue forgone by the Treasury. Another feature of the net figure is how it has been growing in the past few years, having doubled since 1998-99. From being reasonably stable, it has gone up very quickly in a relatively short space of time when we think about life spans and the development of pensions policy in this area. That change has been accompanied by a change in the distribution of the beneficiaries of the tax relief, so there was a very strong case for taking action to put it on a more sustainable and fairer footing, and that is what we were doing with the tax law that clause 5 seeks to repeal by order. It is a feature of the system, which I am not sure could be avoided without putting huge restrictions on it, that tax relief for pension savings is granted at a marginal rate. By definition, that means that it is more valuable for higher rate taxpayers than for basic rate taxpayers. Analysis has shown that the relief was increasingly benefiting those on the very highest incomes rather than just those on higher rates. So, paradoxically, over time, the very reasonable and logical policy of granting tax exemptions on savings for pensions meant that the incentive to save for a pension was being provided, at a cost to all taxpayers, to those who needed it the least because they were the most well-off. That is the definition of ““regressive”” in terms of how tax relief might hit. The fact that the system was becoming even more distorted, benefiting those in the very top income brackets, was illustrated by a distributional analysis of the benefits, which revealed that higher rate taxpayers received 65% of the relief but constituted only 19% of pensions savers. The real distortions were at the very, very top, as those on the very highest incomes were benefiting even more disproportionately. Analysis shows that about 2% of savers currently receive a quarter—25%—of all the tax relief available. I hope that the Minister will agree that that is unjustifiable. It means that if a person is privileged enough to be in the top 2% of earners by income, they are entitled to an average of £20,000 of tax relief per year per person on their pension savings, whereas the average relief available for those who are on the basic rate of tax is just £1,000. The way in which the relief is granted, its connection to the income tax system—the fact that it is at the marginal rate—and the introduction of the 50p rate for income tax mean that if action were not taken, this massively and already grossly regressive relief would become even more distorted. That is why my right hon. Friend the shadow Chancellor, in the pre-Budget report 2009 and the Budget 2009, decided that action had to be taken to deal with the relief, which had become unsustainable and extremely unfair. It was therefore necessary to have a policy response at the medium and low-earning end of the income scale as well as a policy for the very high end. It is the policy for the very high end that is being repealed in clause 5, but I want to spend a tiny amount of time dealing with the policy at the low and medium end. The decision to create the national employment savings trust was an essential part of the rebalancing of pension tax reliefs to ensure that they could effectively stretch further down the income distribution. Members will recall that the creation of what is now known as NEST was the outcome of a great deal of work across party lines from 2004 to design a system of pension savings that would deal with the obvious market failure in the private sector of the ability to allow low and medium earners to save in a worthwhile way in a low-cost savings vehicle. NEST was first brought into the structure of pension savings as a result of the work of the Turner commission. The commission sat for two years and produced huge reports. Anyone who wishes to inform themselves about the policy issues surrounding the thorny problems of increased longevity and the ageing of our society, and their implications for our policy approach as an advanced, sophisticated and modern welfare state, should read the evidence and pronouncements of the Turner commission. It is the best available analysis and narrative of those complex issues. It led to two pieces of pension legislation: the Pensions Acts of 2007 and 2008. They put in place a structure that will create automatic enrolment for people, a compulsory employer contribution and—importantly for the subject of pensions tax relief and to this debate—a Government contribution alongside the money that individuals put into the NEST or any other pension structure through which a company chooses to make provision for its workers. This is an essential part of rebalancing the pensions tax reliefs and the extremely regressive skew that I have identified as a feature of the present system. Automatic enrolment in the scheme is due to begin in 2012, but that is subject to a review that was announced by the new Government. Given the approach to low-cost pension saving, the fact of automatic enrolment, and the creation of a low-cost vehicle that makes saving worth while and does not eat into the savings of people on modest or low incomes through commission and costs, I hope that Members on both sides of the House will still agree that this should go forward. A great deal of work went into creating that consensus, and it is important, given that pension policy has to be developed over many years, that we maintain it across party divides, however much fun they might be at whatever time of the day or night. It is important that we keep the big picture in mind and begin to develop a coherent approach to pension savings. My firm belief is that the creation of the low-cost vehicle, the NEST, will go ahead, and I hope that this landmark reform will ensure that, from 2012 onwards, up to 10 million people will get the chance to save into a pension with a guaranteed employer contribution and Government tax relief available for the first time ever. By definition, that will begin to reduce some of the skewed and regressive distribution of pension tax relief that is a feature of our system at the moment. The measure will also begin to build a robust savings vehicle, which will finally guarantee the end of the current market failure that locks those on moderate earnings out of viable opportunities to save in a pension. It will also ensure that access to appropriate tax relief can be more evenly spread. There remains an issue, however, over the distorted distribution of pension tax relief towards those at the very top of the income scale. That is what section 23 and schedule 2 to the Finance Act 2010 were designed to deal with. Those provisions were specifically targeted at those on the highest incomes who had done so well in the good years. We felt it right that those people should contribute most to the fiscal consolidation that we all knew had to happen in the aftermath of the credit crunch. This was a progressive measure that began to address the distortions that had developed in the system. It also explicitly and deliberately targeted the very richest to bear most of the burden of the redistribution of pension saving tax relief. That gives the lie to the propaganda and constant refrain from Government Members that the Labour Government had no plans for a fiscal consolidation. The measure was an important part of our plan to halve the deficit over the lifetime of this Parliament. Clause 5 creates the power to repeal by order all the paving legislation put in place by the policy approach that I have described. Page 36 of the Red Book hints at the new Government's intention to deal with this matter. It says:"““The Government will continue with plans it inherited to raise revenues from restricting pensions tax relief.””" So that much we can certainly welcome, and even agree on. The Red Book continues:"““The Government is committed to protecting the public finances by introducing reforms that raise no less revenue than existing plans.””" That amount, as I have already explained, is £3.6 billion by 2012-13. The yield is likely to be maintained at that level or even go higher in the future. From the scoring that we did in government, it had a slow start in the first year—£0.2 billion—while the system was put into place, and went up to £3.5 billion and would remain at that kind of level, but get gradually higher in the future. The Red Book does not feature any scorecard implications, I assume because the Government have said that they will be replacing our yield like for like. They have not predicted what the yield for its replacement policy, whatever that might be, will amount to. One would have thought that it would be at least maintained at £3.6 billion and probably go higher over time. The sum of £3.6 billion is a significant amount of money to get in by 2012-13. The Red Book goes on to hint at, but gives no firm details of, the approach that might be in the Government's mind as a replacement for the scheme for which we legislated. That approach, according to paragraph 1.118 on page 36 of the Red Book, is to guarantee the same yield by substantial reductions in the annual allowance. The ballpark area that it mentions for those reductions is between £30,000 and £45,000. That is a significant reduction from the current allowance, which is £225,000. No mention is made of the lifetime allowance. The Minister will be aware that there is the annual allowance but also the lifetime allowance for pension savings. I would be extremely interested in any observations that she may have on the Government's attitude to the lifetime allowance. Is it to be kept the same, increased, or perhaps indexed in a different way to the one that we established? The lifetime allowance is certainly an important part of any debate about these matters, yet the Government have gone all coy about it. They have mentioned a potential range for huge reductions in the annual allowance, but they have not been forthcoming about their plans to replace the high-income excess relief charges, which we legislated for in paragraph 23 of schedule 2 to the Finance Act 2010. The Government are not at all forthcoming about the lifetime allowance, which is why the amendment is trying to get a bit more information out of them.