Finance Bill

That is slightly curious. If it was not the Government’s intention to introduce tax relief for pension term assurance, why on earth did they include it in the Finance Act 2004? The Government put the measure forward three years ago, in that Finance Act, but are now seeking to reverse it. If it was not their intention to have that provision, why did they include it in the first place? That is the problem that the Economic Secretary has to think about. The reality is that the measure was well understood by the industry. Perhaps the Economic Secretary will tell us why the Government included the provision in the Finance Act 2004, because the Committee would be interested to hear that. I would happily give way to enable him to give that explanation. [Interruption.] The Economic Secretary says that he will give an explanation in his speech. Well, we have heard that before. If we go back to the Committee Hansard for the 2004 Finance Bill, it is interesting to note that there was no discussion whatsoever on the introduction of pension term assurance. According to my reading of Hansard, that clause seemed to pass through without comment. The then Financial Secretary to the Treasury did not give the merest warning that abuse could lead to the scheme being closed down; that is in stark contrast to the warning that she gave about alternatively secured pensions. The Government introduced the tax relief back in 2004, and when one talks to people involved in the industry, one finds that their view is that the Government should have been aware of the impact of the relief on the life assurance market. As the Association of British Insurers said:"““Even before this change was made, the insurance industry told the government of the positive effect this could have on the term assurance market.””" It was an opportunity for that market to rejuvenate itself. That should have come as no surprise to the Treasury. Indeed, some people were so concerned that the change would lead to a large-scale re-broking of business that they started to lobby the Treasury. I once again point out what Vanessa Owen of Liverpool Victoria said:"““When I first read the proposed death benefit rules back in 2004, I wondered if boards of directors across the country would be turning pale at the risk of churning to in-force books. But after much lobbying, it became clear the rules were not going to change before A-day””." There appears to have been plenty of discussion and debate before A-day, and what happened should have come as no surprise. Indeed, when I spoke to a group of industry experts in January this year, I specifically asked them whether the take-up of pension term assurance should have come as a surprise to the Treasury, and they emphatically said no; the Treasury should have been aware of the scale of interest. The effect of the A-day change was to encourage people to think again about life assurance, as they could pay their premiums net of the basic rate of tax, if they were basic rate taxpayers, or net of the higher rate of tax, if they were higher rate taxpayers. When consumers went to see their financial adviser or someone at the bank, the person giving them financial advice would have been remiss if they had failed to point out that they could take out pension term assurance at a lower cost than normal life assurance, because of the generous tax relief introduced by the Government in their Finance Act 2004. It is worth considering one insurer and the rates that it was offering. According to an article in The Times, a male non-smoker buying £300,000 of level-term cover from Legal & General would pay £27.25 a month in cover. If he chose pension term assurance, he would pay £25.25 a month in cover if he was a basic rate taxpayer, but if he was a higher rate taxpayer, he would pay only £19.39. I suspect that the hon. Member for Wolverhampton, South-West (Rob Marris) is thinking about the difference between £27.25 and £25.25 and saying to himself, ““That does not sound like the basic rate reduction,”” and indeed it is not. There is recognition in the industry that the cost of pension term assurance cover was higher than the cost of basic cover, if we exclude tax relief. There were significant caveats about pension term assurance cover. As Richard Eagling, the editor of Investment, Life & Pensions Moneyfacts says:"““Although price is not the only differentiating factor to be considered when choosing between the two, the cost savings cannot be ignored, and for those clients who have no existing cover in place, the case for PTA is compelling.””" Consumers were warned that the policy might not be for them, as an article in The Sunday Telegraph said:"““For a start, only basic life insurance is available with these PTA packages. The tax-breaks do not apply to extras that are often added on to conventional term assurance products, such as critical illness cover which pays out if you suffer a serious illness that leaves you unable to work. Family income benefit is not covered either—this product pays out an annual income on death rather than a lump sum.””" So there were caveats in respect of the sale of such policies; it was not a straightforward slam dunk, as it were, to sell the policy to clients. There was a proper process that had to be gone through. Certainly, the increased affordability of term assurance would enable people who had previously found life cover prohibitive to take greater personal responsibility for their family, but as I said earlier, it also gave those with existing life cover the chance to see whether their cover could be re-broked. Again, Vanessa Owen made some perceptive comments about what happened in the industry at the time. She said:"““What we did find was that, although not a storm, life protection volumes started to pick up from all channels. Consumers were interested in the tax relief message which was clearly stimulating demand although, judging by our average premium levels, it was not wealthier clients who were buying but people on more modest means.""In other words, it was not just the wealthy who were taking advantage of another opportunity to claw back higher-rate tax relief but also regular policyholders looking to take out life cover at a competitive rate.””" What about churning—the re-broking of in-force life protection? Vanessa Owen said of the in-force life protection book:"““It has remained largely intact, with rebroking activity at a minimal level””," so it appears from her evidence that people on low and moderate incomes were taking the opportunity to put in place cover that they may have considered too expensive before. The interest in pension term assurance should have been apparent at the time. It certainly seemed to attract new customers. Has the Minister asked his officials to conduct any research into who purchased the products, and did the research that the Government conducted reflect Miss Owen’s perception of the change of business in the market? If so many businesses were thinking of taking advantage of the introduction of pension term assurance—clearly, the Liverpool Victoria thought about it—why was that not obvious to the Treasury? Plenty of people seem to have told the Treasury. Why did not the Treasury realise sooner what the take-up rate would be, or was it so naive that it did not think it would happen after all, or so incompetent that it did not think of taking action prior to A-day? It is worth noting the cost of the Government’s failure to take action. According to the regulatory impact assessment, the estimate for lost tax revenues if the clause is not reversed would be £160 million, out of a total estimated cost of £250 million for A-day reforms. What was the Government’s original estimate of the amount of tax relief that would be claimed as a consequence of introducing pension term assurance? Presumably, in their calculation of the £250 million, they would have produced an estimate back in 2003-04. It would be interesting to understand the difference, from the Minister’s perspective, between the original estimate and the current revised estimate, as set out in the regulatory impact assessment. If the Minister knows, I should be grateful if he would enlighten me and the Committee about the difference between the estimate at the time that the A-day reforms were consulted on and the £160 million cost referred to in the regulatory impact assessment.