Proposed pension tax regime: How big is the gain?

A lot has already been said about the proposal to exempt pension contributions to the National Social Security Fund (NSSF), then exempt the NSSF investment income from tax, but finally tax the pension benefits when the pensioner collects the accumulated amount before the age of 60 years. The EET stands for Exempt, Exempt, Tax. This means that if the pensioner attains the age of 60 years, it become EEE (Exempt, Exempt, Exempt).
I would like to say the examples that have been used to date have been for illustration purposes for easy reading. For example, there has been an example of Shs1m as monthly salary and the view was that the employment tax is Shs300,000 under the current tax TTE regime. Not exactly. Using the exact tables from Uganda Revenue Authority (URA), the employment tax is actually Shs202,000.
Under the proposed EET regime, the employment tax would reduce to Shs187,000. But in both regimes, the employee still contributes 5 per cent (Shs50,000) to NSSF; it is the employment tax that has reduced by about 1 per cent point or 100 basis points.
What this means is that financial model can quickly be developed to calculate the quantum of the employment tax savings that employees will attain from the proposed EET regime. The bigger the monthly salary, the bigger the employment tax saving. For example, an employee earning Shs1m per month will save about 200 basis points. Therefore, the bigger pension fund gain will come at Level 2 – when the NSSF investment income is exempted from tax. What is the current situation? NSSF invests most of its money in government paper of which there is a 20 per cent final tax on the interest earned for short-dated instruments. If NSSF invested Shs100b treasury bill at an 10 per cent per annum, the income would be Shs10b. But under the current TTE regime, Bank of Uganda would withhold 20 per cent (Shs2b) as final tax and NSSF will only receive Shs8b.
If this final tax is reduced to 0 per cent as proposed, then NSSF would receive the entire Shs10b, which automatically increases the money available for distribution to members (as interest). The exact final interest paid to members will depend on the final net comprehensive income – the bottom line in the income statement.
Obviously, the NSSF will also receive more contributions from the waiver of the five-employee limit, plus other voluntary contributions.
Level 3 – this is where the controversy and complications begin. The fact that the pension benefits will be taxed if the money is collected by the pension before attaining the age of 60 years. The unanswered question is: “How better off will the pensioner be under proposed EET compared to the current TTE?” This requires financial modelling using several variables about interest rates, inflation, salary increments, employment tax rates, employment tax threshold. This is important because of time value of money.
A 25-year old employee is retaining a higher net pay upfront (employment tax at Level 1 has reduced) but 30 years down the road (in the year 2049), his/her accumulated pension will be taxed – what will the employment rate be in 2049 and will the amount be spread out per annum before calculating the employment tax? I am optimistic that the pensioner stands to gain, I don’t know yet how big the gain will be until I am appointed to work the model on case-by-case basis. If the 25-year old waits until 60 years (the year 2054), this is a straight forward gain from the triple-E (Exempt, Exempt, Exempt). EET proposed pension tax regime – how big is the gain?