Finance Bill

We had an interesting debate on those matters earlier, when my hon. Friend the Member for Wolverhampton, South-West (Rob Marris) referred to debates on past Finance Bills. In an intervention, I mentioned SIPPs. At the time, public debate and Members made it clear that there was concern that the SIPPs changes could have undesirable effects and the concerns were dealt with then. However, there was no discussion of the term assurance issue during the Finance Bill; it was never raised by Opposition Members and nor was it a subject of public debate. Technical discussions as to whether the changes posed a material risk concluded that they were not, and that the benefits of simplification outweighed the risk. It was not a mistake; it was a judgment that simplification benefits were more important than a risk that, at the time, was judged not to be material. That was the position for the next two years and during the run-up to A-day. However, by September 2006 it became clear that although the products were completely within the law—they were not the means of tax avoidance—a substantial re-badging of the term assurance market was taking place. Many life companies did not sell the products as pension term assurance, which would have been a confusing label as they had nothing to do with pensions; they were about death benefit. The policies were often marketed as term assurance with tax relief—term assurance with the benefit of pension tax relief. In many cases, they were not marketed as pension tax relief. I was asked for some figures. Before A-day the number of contracts sold that could be described as pension tax relief—term assurance linked to pensions—was in the low thousands; the number was negligible. In the fourth quarter of 2005, the number of mortgage-related term assurance contracts sold was 238,154. From the beginning of 2006, when almost no policies were being sold, the number rose to 58,046 products—from almost nothing to 20 per cent. of the term assurance market—whereas the number of mortgage-related term assurance products fell from about 238,000 to 190,161. What happened was perfectly understandable and, in retrospect, predictable: a substantial, tax-driven switch from mortgage-related term assurance to a term assurance that qualified for pension tax relief, but was often not marketed as such because it had no pension income. To my mind, and that of several Members, including perhaps the hon. Member for Fareham, that was not what we intended; our intention was not that pension tax relief should be used to sell what was, in essence, a non-pension product. Last autumn, it was put to me that costs anticipated as negligible to the Exchequer were set to rise from about £25 million last year to about £160 million a year in five years’ time—as the hon. Member for Fareham pointed out. Over a five-year period there would be a cost to the Exchequer of slightly more than £500 million. That is £500 million of taxpayers’ money being spent on tax relief actions that people had previously taken without tax relief for, in essence, the same product—a non-pensions-related death benefit that some years before we, as a country, had decided not to tax-advantage. All our consultation documents made it clear that was not our intention and that was why we decided to act in the pre-Budget report. The report made a clear statement that there was a substantial risk to the taxpayer, that the practice was outside our intentions and that the right thing was to address it with immediate effect. That is what we did. However, we did not say that there was necessarily an end to any link between pensions and term assurance. With the pensions industry, we wanted to find out whether we could establish an ongoing, meaningful link between term assurance policies and saving for a pension, which would not have disproportionate costs and would not mean that a large proportion of the tax relief was going to a death benefit rather than to pension saving. We consulted the ABI, the Association of Independent Financial Advisers, the Society of Pension Consultants and the Investment and Life Assurance Group. The area is complex and we looked at several options: a test at the point of sale, to confirm that the policyholder was also a member of a relevant pension scheme; a cap on the total sum assured; a test at the point of claim; and ongoing sampling of policies by HMRC to check for fraud. Some in the industry, including the ABI, considered that some of the options might be workable, but after our consultation we found it impossible to set out a way forward that would be both commercially viable and consistent with our intentions and principles. The problem was that the checks needed to make sure that term assurance, which is a high-volume low-margin product, was genuinely pension-related were disproportionate to the administrative costs that the industry could bear. A cap could work only if it was so high that there would be a death benefit rather than a pension income benefit. We would then have been forced to concede the sum of £500 million over five years. The people selling those products would have been willing for us to make that decision, but we felt that we could not do so because we could not justify expenditure of £500 million on what was largely a deadweight cost. That is why we decided to bring tax relief back into line with our intentions and to make it clear that we could not see a way forward that was consistent with our principles. Some in the industry agreed with our approach. An expert at AEGON Scottish Equitable said:"““Although we understand the ABI’s position, we do not think””—" its proposals are—"““a workable solution for providers or for customers. At the very least, it will introduce a need for additional resource from providers, which will be met ultimately in adjusted costs for customers. Ultimately, it could mean providers withdrawing from the market.””" It was on that basis that we decided that we could not proceed. The hon. Member for South-West Hertfordshire (Mr. Gauke) asked about losers—an issue also taken up in an intervention by the hon. Member for Ludlow (Mr. Dunne). The fact is that before A-day, the market barely existed: it was negligible. The market then grew very rapidly. Everyone who took advantage of it during that period is grandfathered—we are not withdrawing tax relief from anyone who took out products up to the time of the pre-Budget report, or, indeed, for a period afterwards when transitional arrangements applied. Our tax changes take us back to the position ex ante. There are no losers, though people who might have benefited from the more lax regime in future will not do so now because we have gone back to the status quo. As I have explained, I think that the right decision was taken.