Look out for the benefits brought by 'e' numbers
This sort of thing keeps happening to me. After about 10 minutes Iíd worked out that I was probably the only person around the table who didnít have a clue what we were talking about. When this happens to you, I find you tend to have two basic choices. You either just sit there nodding and exchanging knowing glances with others - laugh at the same points that they do, raise your eyebrows in unison with them too, that kind of thing.
Or you just come clean and admit youíre struggling a bit, and ask if someone would mind filling you in on what the hell theyíre all talking about. I usually take the latter approach these days - I canít be bothered to keep up the pretence that I know everything about pensions jargon any more. Itís just too tiring.
The downside of this approach, of course, is that everyone thinks youíre a bit thick, but the upside is you get to understand whatís 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. So that's 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 - it's 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. On the other hand, 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 thereís no tax on the money when you take it out).
Anyway, Iíve worked out a rule for all this shorthand. Basically, the more Es you get in your three letter mixture of Es and Ts, 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 Ts you get, the worse the deal. So, TTT wouldnít be too attractive, and thatís what bothers me about compulsion in pensions. The thing is, if we are ever compelled to save for our retirement 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 wouldnít get my vote. Iíd be dead against it, in fact.
What Iím more interested in, now Iím getting the hang of the jargon, is an idea that came up at a conference I was at the other night. One of the guys there suggested that the Government could make pensions much more attractive to people by offering a lower rate of tax on annuity payments, 10% say. Now thatís more like it. EEE all round. I like the sound of that.
First published in Bloomberg Money, July 2003