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Pensions tax relief: time for a TEE-brake

CII Thinkpiece no.120

The current tax treatment of pension saving - known as Exempt, Exempt, Taxed (EET) - has many attractive features and we should be cautious of radically overhauling it without good reason.

  • An alternative, ISA-like TEE (Tax-Exempt-Exempt) tax treatment would suffer from some drawbacks compared to EET (Exempt-Exempt-Tax).
  • There are other areas of pension tax treatment that are better prospects for reform. The ability to take a 25% tax-free lump sum and the exemption of employer pension contributions from National Insurance contributions are genuinely large subsidies to pension saving compared to a pure EET benchmark. If the government is looking to reduce or redirect existing subsidies, it should start by looking at these.
  • The recent Treasury consultation provided no indication which groups they feel it is important to 'strengthen the incentive to save'. In the absence of this, it is difficult to know whether some of the policies suggested - such as a single flat-rate of income tax relief, which would strengthen incentives for some but weaken them for others - would have the desired effect.
  • If the government is looking to redirect subsidies, it would help promote better policymaking if they were clear about which groups they think need to be encouraged to save more and design policies based on robust evidence of what works.

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