Move to TEE inevitable: Association of Consulting Actuaries
David Fairs, chairman at the Association of Consulting Actuaries and a partner at KPMG, has said it is obvious the government will move to a taxed exempt exempt system of pensions tax relief.
A taxed, exempt, exempt (TEE) basis is used for Isas, while pensions are currently exempt, exempt, taxed.
Speaking at a Westminster Employment Forum seminar held in London today (5 November), Mr Fairs explained that from the Treasury’s perspective the amount of tax relief under an EET system would put a “real strain” on its finances.
“If you add that into the ACA suggestion that contributions should increase from 8 per cent to 16 per cent over time, you can see that the Treasury would have real financial difficulties.
“It seems obvious that the Treasury would therefore look to move towards a TEE system.”
He stated that by default it removes the tax free lump sum, saving some £4bn to £5bn per annum, plus it potentially opens up the opportunity to raise national insurance on employer contributions, raising another £14bn, as well as deferring the £20bn to £25bn of tax relief on contributions upfront.
Mr Fairs said that is all good news for the Treasury. “But you do need to recognise that if you removed the relief on national insurance contributions for employer contributions, then you remove a significant incentive that employers have to provide good schemes.”
Tim Middleton, technical consultant at the Pensions Management Institute, said that very serious thought needs to be given to the impact of such an overhaul.
“Moving to a TEE system would have significant implications and we need to think very carefully before we change and move into something which is not necessarily going to be in the best interests of society as a whole.”
He added he had heard a lot of people speak about the government taking a short term view on this.
Mr Fairs and Mr Middleton’s comments came after last month the Centre for Policy Studies stated the current “illogical” system of pension tax relief should be scrapped and replaced by a range of Isa products.
Michael Johnson, research fellow at the CPS, said the current tax system is incompatible with the abolition of the annuitisation requirement announced in the 2014 Budget and risked failing an entire generation.
This is because increasing numbers of people will not be taking their savings as income, shattering the link made by Lord Turner’s Pension Commission in 2005. Mr Johnson added that it would be cheaper to move to a TEE system than spending £52bn – more than the annual defence budget – on pension tax relief.
ruth.gillbe@ft.com
