Conservatives’ pension tax-cut plan
The Conservative Party has recently made statements through its Shadow Chancellor, George Osborne, indicating that a future Conservative government would abolish stamp duty on shares. That would have the effect of boosting pension funds and effectively removing a tax that particularly affects savers. The following is an excerpt from the BBC News report that covered the speech:
"Of all the damaging things Gordon Brown has done to the economy, the single most destructive has been the attack on personal pensions," Mr Osborne said.
Repairing that damage "has got to be a top priority", he said.
"Sadly, simply reversing the pensions tax he imposed in 1998 wouldn't work, as many final salary schemes have closed.
"We need to look at new ways of repairing the damage and that is why I am particularly keen to look at stamp duty on shares."
From that it seems clear that the taxing of savers is an issue likely to get further up the political agenda at last. You’ll know I have long been very protective of the so-called EET system we have operated for our pension savings in this country. (I wrote one of my earliest BeeLines on it EET phone home if you remember.) EET stands for Exempt, Exempt, Taxed. It’s a way of describing how pension savings have worked and how they’re fundamentally different to other types of savings.
Let me explain. If you put money into a pension in the UK you get to put it in before tax is applied to it; the investment in your pension is, in effect, made from your pre-tax earnings. While the money is invested it is meant to grow in a tax-free environment and it is this issue that has changed in recent years and the Shadow Chancellor is suggesting should be restored. The pension, once in payment, is taxed (apart from any tax-free lump sum); that’s the deal. So pension savings are exempt from tax on the way in (the first E), exempt from tax while invested (the second E), but taxed in receipt (the T); and we say they are EET. Now, that’s the way things were in the good old days, but the middle E has taken a bit of a bashing lately so our pensions are more correctly described as being E(E-ish)T I suppose.
If you were describing an ISA in the same kind of way you’d say it was TEE. That is, you put taxed money into an ISA, but its investment return is free of tax and the output is not taxed either. A bog-standard building society savings account would be described as being TTE. You put taxed money in, and the interest you gain is taxed, but there is no tax levied on the resulting savings.
The worry with the way pension savings have been going lately has been that we were in serious danger of dropping from EET to ETT, which wouldn’t be so good really. Mind you some people worry that if we ever get compelled to save in a pension we’d end up with a TTT system; like there’d be no need to give people a tax incentive to save if they were forced into it anyway would there? But don’t start me off on that, with any luck it’ll never happen. The good news is that political people are now talking about abolishing taxes to improve the lot of pension savers. As you’ll probably gather that’s something I support.
5 September 2006
BBC News report "Tory party hints at tax cut plan" - 27 August 2006.
Any research and analysis has been provided by us for our own purposes and the results of it are being made available only incidentally.