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Dividend Tax Credit

Volume 404: debated on Thursday 8 May 2003

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What estimate he has made of the effect on pensions of the removal of dividend tax credit. [111883]

Payable tax credits were withdrawn on dividends paid to pension funds as part of a package of reforms that included cuts in corporation tax and the abolition of advance corporation tax. These changes were designed to improve the climate for long-term investment in the United Kingdom. In the long run, this should benefit all investors, including pension funds and those saving for retirement.

Will the Paymaster General now accept that, although the removal of dividend tax credits in the afterglow of the 1997 general election victory might have seemed like a clever wheeze and a clever stealth tax at the time, many pensioners in my constituency and elsewhere are suffering hugely in the cold light of today because of this irresponsible raid on pension funds?

As the right hon. Gentleman knows, the abolition of the dividend tax credit was part of a wider corporation tax reform to remove a distortion in the market—a distortion that the then Chancellor of the Exchequer, now Lord Lamont, described as having a "damaging economic effect" when the Tories themselves reduced the tax credit. Furthermore, in an article published on 24 November 2002, when asked whether the Conservatives would reintroduce the tax credit, the hon. Member for Havant (Mr. Willetts) said:

"Actually, I don't think we'll be doing that. Helping pensions funds doesn't mean going back to the same system we had before. you know."
Precisely. The Government are helping pension funds and pensioners through their Green Paper on pension reform, their support through the tax system and their simplification of the tax system, and by providing a stable economic framework of low interest rates and low inflation, allowing the economy—and, therefore, future investment—to do well.

Does my right hon. Friend agree that the message for those who are in work is that they must save more for their pensions? In that way, they will have a better future once they have retired. Has she made any assessment of the effects that the removal of the money released by the abolition of the dividend tax credit from public spending would have on public services?

My hon. Friend raises an important point. This is precisely why the Government have introduced proposals on the simplification of tax payments and support to those saving for retirement. The Green Paper looks at ways to give greater choices, more flexibility and secure savings, so that people can plan for the long term. The money released in the way that my hon. Friend described was used to cut corporation tax and to help to introduce reforms in the corporate tax system to enable our businesses to become more competitive and to tackle the productivity gap. That is why this country has, according to the Organisation for Economic Co-operation and Development, one of the best environments for companies in the European Union.

The Minister seems to hold the almost incredible belief that removing £5 billion a year from pension funds has no negative effect on those funds. Does she know anyone who shares that view, other than the late Robert Maxwell?

As the right hon. Gentleman knows—or as I thought he knew—the effects on pension funds and on the stock market are varied. To try to attribute those effects to changes in the tax system—changes that were beneficial to our companies, and which his party pursued when in government—is absolutely ridiculous. He needs to address the question of why the hon. Member for Havant, the Conservative spokesperson on social security, now says that he does not think that the Conservatives will be returning to the tax credits. There are better ways of helping pensions and pension funds than going back to the old system. It is the right hon. Gentleman who lives in the past; this Government are placing the economy in a competitive system to benefit citizens now and in the future.

What analysis did my right hon. Friend make before taking decisions on the future of pensions, based on the comparison of £4 billion taken out of pensions in an unregulated pension market by the previous Government? When looking at how money is used in the pensions services, is it not better to consider a proper, regulated market with properly managed funds in a strong, stable economy in which people can make proper decisions about their futures?

I entirely agree with the points that my hon. Friend makes, and I remind her that the right hon. Member for Hitchin and Harpenden (Mr. Lilley) was a member of the Government who presided over mis-selling and the cheating of millions of people in this country of their pension rights. This Government enabled that mis-selling to be put right and put in place the financial services structure to protect pensioners in the future.