Simplification is the key - Centre for Policy Studies

pool of underlying pension assets (roughly £2 trillion 154 ). Note that this applies equally to
an EET tax regime.
Figure 15: The cost of tax relief: comparing different contribution limits and real
rates of equity return, in a TEE world with EET in run-off
Tax relief, £m
£14,000
£12,000
Today’s contribution allowance
and 3.5% equity return
£10,000
£8,000
£35,000 limit;
3.5% equity return
c.£5.5bn
c.£1.5bn
£6,000
£4,000
Today’s contribution allowance
and 2% equity return
£2,000
£35,000 limit; 2% equity return
£0
2008 2013 2018 2023 2028 2033 2038 2043 2048 2053 2058 2063
One of the Guiding Principles behind this paper is that any proposals should not rely on
costs being deferred, in keeping with generational fairness. One could argue that moving
from EET to TEE does defer a cost (the loss of income tax on pensions in payment being a
“cost”), but this is more than offset by the saving in upfront tax relief. Furthermore, this saving
is more immediate (and would therefore be, presumably, of great interest to the Treasury).
11.3 ISA saving could substitute for pension savings
The proposal for the £45,000 combined ISA and pension savings annual limit is premised
upon retaining the different tax treatments (TEE and EET, respectively) and approximate
tax relief cost “breakeven”. However, given the popularity of ISAs, and dislike of pensions
(particularly amongst basic rate taxpayers), following ISA auto-enrolment it is quite likely
that ISA savings will increase at the expense of pension products. The cost of tax relief
would then fall, there being no upfront tax relief on ISA savings, to the Treasury’s benefit.
If, for example, 25% of all employee (i.e. not employer) contributions to funded
occupational schemes and personal pension saving were to divert to ISAs, there would
154 The size of the asset pool is quite static around £2 trillion in a 2% return scenario; if a 3.5% real return is
assumed, it rises to about £2.5 trillion in the long term.
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