What “fair pensions” might mean in the next five years.


Taxes 2

Jim Coney writing in the Times , explains his thinking on pensions tax-relief. He is right to point to the likelihood of major reform of the current system within the next 5 years.

If the Conservatives are going to adopt radical policies to bring about equality, and they need to if they are to properly turn around the impact of austerity. They could do worse than reversing the regressive system that awards 80% of the £40bn cost of pension tax relief to the wealthiest 20% of British society.


To do this, this Government will have to see through the lessons of the 2015 consultation.

The consensus view is that this can be achieved by taking away higher rate tax-relief on pension contributions.

But the Golden Key to fairness requires a lot more change than that. It requires us to accept that the current system of relief is fundamentally broken.  We have to accept that it needs to be replaced by a system where people trust the benefit to be tax-free.

I believe that pensions in payment should not only be NIC free, but free of income tax. Eventually we should have no caps on benefits – no AA, LTA or MPAA. We should arrive at a system where pension contributions are paid out of taxed earnings or treated as a benefit in kind.

I wrote a blog in February 2016 in which I explained the thinking behind this – you can read it here.

My contention , based on 36 years selling pensions to people is that up-front tax relief does not incentivise people who pay little or no tax, while for those paying a great deal of tax – it is the primary driver.


Continuing to offer basic rate tax relief to people who pay no or very little tax is a very inefficient way of targeting pensioner poverty

There are many better ways of getting ordinary people to save than offering them incentives they don’t value – like incentives they do value.

The ordinary saver is deeply mistrustful of a system where the output of their savings is taxable and all behavioural studies point in the same way. People trust the simplicity of the ISA taxation system, rather than the complexity of the pension taxation system.

Moving to TEE may take ten or even twenty years and a transitional system will be needed to cope with the implications to our pay- packet, I believe such a transitional system is already in place and is “oven ready”.

The scheme pays solution

I wrote a number of other blogs at the time arguing that the exempt exempt taxed system we have now, should be replaced by Taxed Exempt Exempt (TEE). This one explains the detail best.

Back then, the primary blocker for a move to TEE was the ease with which employers could simply by-pass issues for high-earners after the scrapping of higher rate relief – they could simply swap out employee contributions for contactual pension promises where the employer paid 100% (and employers were able to write contributions to pensions off against corporate taxes).

The Treasury was faced with Hobson’s choice; either it could remove the incentives for  employers on pension contributions – removing their deductibility and/or levying NI on them – or they could make them a benefit in kind; – this would mean they were taxable and maybe NICable, and employer payments would reduce take home.

The problem of moving from EET to TEE would be the massive tax change this would generate that would be felt in people’s pay packets – especially those in receipt of generously funded DB pensions.

The solution the Treasury was talking about then was “scheme pays” and at that time, hardly anyone knew about it. Issues around the Annual Allowance, especially for NHS clinicians , have made “scheme pays” a generally understood concept.

High earners already recognise that substantial DB awards are taxable under the annual allowance – this extends the principle, hugely reducing the cost of tax-relief to the wealthy and creating the kind of savings that could properly solve the problems of long-term care.

There are a number of ways that “scheme pays” could be implemented, but they all amount to the same thing. Scheme pays is a tax on the growth of a pension and has the same impact as a management charge, whether it is taken out of the contribution or from a recurring management fee, it is effectively a clawback of tax forsaken.

As such it would be a transitional arrangement , helping to wean the saver off tax relief at source. One example of this weaning off process was the gradual reduction of the MIRAS relief in the late eighties – and of LAPR before that.

But make no mistake, the purpose of moving to TEE would be seen as a removal of privileges on the rich and would be met with massive opposition by the powerful “wealth lobby”. Only a Government with a big majority and a wish to recognise the silent majority of voters, would countenance such a change.

Could TEE be a policy reality?

My understanding was that around Feb 2016, a Conservative Government with a lot smaller majority to the one enjoyed now, came within a couple of meetings of pressing the nuclear button and moving Britain to a TEE pension tax-relief system.

My understanding then was that “scheme pays” would be used to migrate from EET to TEE in short order. Nothing would be retrospective but the move would be brutal to prevent the “save now while perks last” behaviours.

A miss is as good as a mile, but the Treasury’s shelves are high and  they’re deep and the Treasury officials who worked on tax-relief four years ago, are by and large still in post.

Be careful what you wish for?

In a recent meeting with our major pension trade association,  I was told that the trade association was cautious of pushing for reform to sort the net pay anomaly.  Presumably it felt equally nervous about scrapping the taper.

I am sure there is reason here

I was told by an ex Treasury mandarin in the DWP that we would only see reforms of the net pay problem as part of a wholesale review of tax – she hinted at the kind of radical reform I had heard about elsewhere.

The threat of moving beyond an abolition of higher rate relief to a full-blooded TEE system is to high earners and particularly to high earners accruing big pension awards.

It is not hard to work out why such a policy would require a substantial majority. Back-bench dissent would be considerable.

But if we are ever to reform pension taxation properly, it needs a radical solution, not more tinkering. The problem with radical solutions, is that they need the sharp intake of breath – to put them forward.

The question remains, whether this Government will have the guts to implement such a solution. If they have, I suggest they have a means of making pensions fairer – and the money to solve the long-term care problem that besets the elderly and their families – in later years.

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About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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2 Responses to What “fair pensions” might mean in the next five years.

  1. Ros Altmann says:

    Dear Henry, I’m so sorry but I cannot agree with your suggestion of turning pensions incentives around to a TEE system. If we do that, I believe it will be the death of pensions. Making them tax-exempt at, say, age 60, would mean people taking all their money out straight away and having none left for their 80s and 90s. The fear of a new Government coming in and taxing their funds would be enough to see most people taking the tax free cash as soon as they can. The idea may have short-term appeal, but the upfront incentive paid by today’s taxpayers would be wasted in the long-term and leave a massive problem for future Governments who’d have to find ways of supporting poorer and poorer future pensioners. The taxation ‘brake’ of the EET system is the right behvavioural incentive.

  2. henry tapper says:

    I have filled the blog out Ros.

    To your point, I think that tax-free pensions could be a reality and the Government could stipulate that the total tax-exemption only applies where the money is drawn in stages (as an AgeWage).

    This may go against the idea of pension freedom but if pension freedom = “cash + no pension”, then we are already there, very few DC pots are being used for a wage for life.

    We’ll have to differ on your final point, I suspect that I am in a tiny minority in disagreeing with you!

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