EET phone home
This sort of thing keeps happening to me. After about ten minutes I’d worked out that I was probably the only person around the table who didn’t have a clue what we were talking about. What I find is, when this happens to you, you’ve got two basic choices really. You either just sit there nodding and exchanging knowing glances with others, and laugh at the same points that they do and raise your eyebrows in unison with them too, that kind of thing. Or you just come clean and admit you’re struggling a bit, and ask if someone would mind filling you in on what the hell they’re all talking about. I usually take the latter approach these days - I can’t be bothered to keep up the pretence that I know everything about pensions jargon any more - it’s just too tiring.
The downside of this approach, of course, is that everyone thinks you’re a bit thick, but the upside is you get to understand what’s going down and you can then get in on the conversation too. Anyway, EET turns out to be nothing more than a kind of shorthand way of describing the fact that contributions towards pensions are exempt from liability to tax and that the growth of the pension fund is similarly exempt (well, exempt-ish these days, anyway), but that the resulting annuity is taxed. (Exempt, Exempt, Taxed. Geddit?)
TEE, on the other hand, describes things like PEPs and ISAs where the money invested comes from taxed income, but the fund grows in a tax-exempt environment and the ensuing benefit is exempt of tax liability too. (Taxed, Exempt, Exempt - easy when you get the hang of it.)
When you get used to it, this kind of shorthand jargon is infectious. During the rest of the meeting I pointed out that the tax-free cash sum we get from pensions is EEE, which has got to be as good as it gets, whereas normal building society savings, for example, are only a lowly TTE (the money you put in is from taxed income, the interest you earn is taxed, but there’s no tax on the money when you take it out.)
Anyway, I’ve worked out a rule for all this shorthand. Basically, the more “E’s” you get in your three letter mixture of “E’s” and “T’s”, the better the deal from the tax guys. Also, the nearer they are to the front, the better. For instance, EET is better than TEE (or in plain English, pensions are better than ISAs, say) because you get tax-relief up-front and effectively invest more than you actually pay in.
On the other hand, the more “T’s” you get, the worse the deal. So, TTT wouldn’t be too attractive, and that’s what bothers me about compulsion. The thing is, if we are ever compelled to save for our pensions in the UK in the way some people seem to think we ought to be, then why would the Government need to incentivise us to put money into pensions too? Tax-relief is given at the moment to encourage people to put pension savings aside in our voluntary pensions system. If we ever look likely to end up with pension compulsion and the removal of the tax-incentives, and end up with a TTT system on offer, it wouldn’t get my vote. I’d be dead against it, in fact.
What I’m more interested in, now I’m getting the hang of the jargon, is an idea that came up at an AIFA conference I was at the other night. One of the guys there suggested that Government could make pensions much more attractive to people by offering a lower rate of tax on annuity payments, 10% say. Now that’s more like it. EEE, I like the sound of that.
22 May 2003
The information provided is based on Scottish Life’s current understanding of the relevant legislation and regulations and may be subject to alteration as a result of changes in legislation or practice.