Peers face the axe in Lords reform want £500,000 payoffs

Downing Street wants to clear out the sitting peers and turn the second chamber into an elected body.

But just weeks after MPs sparked outrage by seeking an above-inflation pay deal, the Lords are demanding compensation of up to £500,000 for losing what they expected would be a place for life.

The rebellion is being driven by peers who gave up the salary, expenses and gold-plated pension of an MP to join the Upper House.

But critics of the demands say it would be "outrageous" if the payoffs went through at the taxpayer's expense.

MPs voted last year to end 1,000 years of parliamentary history by introducing an elected second chamber – and plans for the reforms are being drawn up in the Lord Chancellor's department.

Worried peers have contacted HM Revenue and Customs to discover what their financial rights are – only to be told that because they were not salaried, they would not be automatically entitled to a payoff unless the Government made special provision.

To get round the Revenue ban, they have seized on legislation introduced by the former Liberal leader Lord Steel.

His House of Lords Bill includes provision for lords to be granted "permanent leave of absence" – which would pave the way for big handouts by enabling life peers to claim for "termination of employment".

Hereditary peers would not be able to claim as they were never appointed to their position in the first place.

One peer said that a lump sum of £500,000 would represent fair compensation.

He pointed out that peers can currently claim up to £48,000 a year tax-free in expenses and attendance allowances.

Given that they were expected to remain in the chamber for life, he said that a payment representing ten years' income would be fair.

Others have pointed out that they gave up a £60,000 salary, generous allowances and a healthy pension pot as an MP to vacate their seats as part of Tony Blair's plan to replace them with younger rising stars.

There are currently 646 life peers – plus a rump of 92 hereditary lords – so the cost to the Government could run into millions of pounds.

Lord Trefgarne, a Conservative – who as a hereditary peer would not receive any money – is so outraged by the prospect of payments he has tabled an amendment to the Bill that would deny "any payment, salary or pension to those taking permanent leave of absence".

Last night, another peer said: "The severance issue is the main talk in the Lords' tea room. When the bulk of the hereditary peers were removed by Tony Blair in 1999, they didn't get anything.

"Now these life peers, many of whom were already rich men when they were appointed by Blair, think they deserve a golden handshake. But they have been ordered to keep quiet by the Government to avoid a row."

Liberal Democrat peer Lord Oakeshott said: "It would be outrageous if peers – most of whom rarely show their face in the Lords, let alone take part in debates or votes – get a payoff."