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Inside Edge

The editor has asked me to write what I would do about pensions if I were the head of the Inland Revenue tax division.

We have far too many tax regimes applying to the various types of pensions that we have convinced ourselves we need. It should be obvious that we have no need for any more than one pension tax regime. Two would be far too many. To have eight as we do now is farcical.

That we have to have one tax regime is unfortunate but necessary. We get caught up in the Inland Revenue&#39s tax rules when we put money aside out of our incomes for the future because we are offered tax relief&#39 from the Government as an incentive for being so socially responsible.

The deal is that if we go along with being responsible in this way, our Government will only tax us once on the money we put aside. Because of this supposed generosity, we are collectively daft enough to give up many rights with regard to, what is after all, our own money.

While we are alive and living in the UK, we are required to pay tax on our earnings. When we put money aside for later in life, the Government guarantees we will only pay tax once on that money. It would not be very attractive to anybody if pension savings came from taxed income and then eventually generated another income in the future that was also subject to tax.

How can the Government guarantee that we will not be taxed twice? There are two ways. First, they could require you to save from taxed income and give you a promise that future Governments, 40 to 60 years hence, will not tax you on the annuity income produced by your savings. Only the stupid would be taken in by this.

The second, and obvious, way we can know we are only going to be taxed once, is if we are allowed to save from untaxed income. That is what we have now. It is not generous, it is just a common-sense way of the Government proving to us that they mean it when they say that we will not be taxed twice on the same money.

Given that the money we put into our pensions will eventually be taxed, I do not see why we should get so hung up about people putting too much aside. The concept of “too much” seems nonsensical when you think about it.

The reforms I would implement within days of assuming my role at the Inland Revenue are far too detailed to be discussed here but would be based on my understanding of the principles as outlined above. The one dodgy bit which crops up a lot in any discussion on this stuff, is the anachronistic concept of tax-free cash and the amazingly complex ways its existence has been interwoven throughout the fabric of our pension legislation. This deserves special mention.

Clearly, tax-free cash is a good idea from an individual&#39s point of view but it is not too hard to see why too much of it is a bad idea from the Revenue&#39s point of view. So if we are going to have it, it will obviously need to be limited. There are thousands of ways this can be done and we have good examples of most of them right here on the pension statute books today.

That, without putting too fine a point on it, is quite a big part of the problem. It needs some clear thinking applied to it. Here is an idea – why don&#39t we have a separate tax regime for the provision of tax-free cash only? It is where we started from way back in 1956. We could then have just one tax regime for pension benefits without getting too hung up about people getting too much tax-free cash.

The legislation putting all this in place would not necessarily be too difficult to cobble together if it adhered strictly to certain principles. Retrospection would be one of these. There is no point changing the future and leaving people with complicated pension pasts.

Another guiding principle should be fairness. We should decide to be fair to people when we put pension legislation in place. No one should be expected to lose out in the name of simplification. If this means some people gain because of my proposals, fine. It will only make pensions more popular.

People could stop worrying about pensions, sort their savings out and get on with their lives. For my part, job done, I would resign, turn the lights out for the last time, shut the door and go home feeling that I had done a good week&#39s work.

Steve Bee is head of pensions strategy at Scottish Life


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