“Strengthening the incentive to save: a consultation on pensions tax relief” is the title of a Treasury consultation paper with submissions closing on 30th September.
The current tax relief system for pensions is described as EET which means Exempt, Exempt Taxed.
Essentially there is tax relief on the contributions paid from earnings, a tax exempt build up of the pension fund value (well, mostly tax exempt) and then the income that is eventually paid as “pension” is taxable.
There are all sorts of complexities built into the current system by various governments over time and the thrust of the consultation is to simplify the tax system for pensions, make it fairer for all and to act as a real incentive for people to save.
It could be that the change to be announced in October is quite dramatic with EET being replaced by TEE.
So no tax relief on the contributions paid, tax exempt build up of the pension pot remaining as currently is the case and then the pension income becoming non-taxable.
In other words reversing the current model.
There are plenty of variations on the theme to consider including continuing to offer an incentive to save, perhaps by adding a flat rate incentive of £1 for every £2 saved.
Certainly it looks as if the abolition of higher rate income tax relief is on the cards as part of the “fairness” the government is seeking.
The cynic in me (and a degree of cynicism can be healthy) thinks that the decision has already been made.
HM Treasury and the Chancellor already know what they want to do and the wording of the consultation paper, if read carefully, seems heavily loaded towards making significant change.
No change it seems to me is not an option.
The world though will continue. We all need to save for retirement if we want the future we desire and relying on the State is not an option for most people, it denies choice about quality of life and the timing of retirement.
So regardless of how pension contributions will or will not be taxed we all need to continue to save for our futures and for the future of our families.
More TEE Chancellor?