ICAS response to 'strengthening the incentive to save' consulatation

The ICAS Pensions Committee calls on HM Treasury not to introduce a Taxed, Exempt, Exempt (TEE) model of pensions tax relief.

30 September 2015

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Key points

We would not support a change in approach to pensions tax relief which would involve a move from an Exempt, Exempt, Taxed (EET) model to a Taxed, Exempt, Exempt (TEE) model. A lack of awareness amongst the general public of the availability of tax reliefs is insufficient to provide any impetus to a change in approach of this magnitude.

Furthermore, transitional arrangements would be exceedingly complex, with people likely to find it harder to manage their tax affairs on retirement if they have a combination of retirement income which is taxed and income which is not taxed. The impact of the loss of tax relief on defined benefit (DB) schemes, which are open to future accrual and their sponsoring employers, is also a significant concern.

We believe that the EET model has the potential to provide an incentive for more saving, especially in an auto-enrolled environment; therefore we would prefer to see further efforts by Government to raise awareness of the availability of tax reliefs rather than a change in the model.

The EET model has another distinct advantage over the TEE model in that it helps preserve pension pots through acting as a break over cash withdrawal. This in turn helps people to save towards an adequate income in their retirement. We are concerned that introducing a TEE model alongside the recent pension freedoms could be detrimental to the Government’s aim of better retirement incomes for all.

We appreciate that there is a tension between the cost of pensions tax relief to the Exchequer and the pension reform agenda which is designed to encourage individuals to save more for retirement; in summary, the more people save the greater the cost of pensions tax relief. The way of addressing the tension between these two matters is to find the most effective way of targeting tax reliefs. This is in essence what the consultation is seeking to resolve but the consultation paper has not been developed in a way which reaches the heart of the matter either by offering a clear analysis of a number of options or by giving a sense of how far the Government is prepared to go in terms of lost tax revenue.

Now that major reforms to our pensions system have been implemented, we believe it is the appropriate time for the Government to consider setting up an independent pensions/retirement savings commission as a standing advisory body which seeks to achieve long-term stability for the UK pensions system and cross-party consensus.

As a general comment, the implications of any changes to the model for pensions tax reliefs arising from the implementation of Scottish Rate of Income Tax, from 1 April 2016, and the additional powers coming to the Scottish Parliament through the Scotland Bill 2015, should be considered as part of this consultation process or any similar consultation which takes place in the future. Tax reliefs are to remain reserved but their interaction with new devolved powers does add complexity to the taxation system and, potentially, to savings outcomes. For example, as things stand the amount of tax relief received by a Scottish taxpayer, or by a scheme on their behalf, would differ from a rest of the UK taxpayer’s position in the event of the rate of tax in Scotland diverging from the UK rate.

Any enquiries should be addressed to Christine Scott, Assistant Director, Charities and Pensions, at cscott@icas.com.


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  • Pensions

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