Pensions in excess of €60,000 per annum will no longer secure full tax relief as the Government delivered on a central element of its Programme for Government.
However, it was unclear last night how the cap would be measured for people in the public sector or in defined contribution schemes which are increasingly the norm within the private pensions sector. The new regime is scheduled to come into force from 2014.
In an effort, he said, to ensure equity between those still working and people who have already retired on pensions in excess of the new cap, Minister for Finance Michael Noonan said the reduced rate of universal social charge of 4 per cent for those over 70 will be discontinued for people with income over ¤60,000 a year.
From January 1st, they will pay USC at 7 per cent on income above that level.
However, higher earners will continue to receive relief at their higher, marginal rate on pension contributions up to that level.
And the Minister also gave a commitment that the pension levy would not be renewed beyond 2014. The levy controversially introduced the notion of retrospective taxation of income into the Irish tax code for the first time in 2010.
Mr Noonan also announced a measure allowing people early access to funds locked away in Additional Voluntary Contributions.
He said the Finance Bill would make provision for people to withdraw up to 30 per cent of their accumulated fund. Any withdrawals will be subject to tax in line with other income, he said, and there would be just a three year window for those looking to avail of the scheme, dating from the passing of the Finance Bill.
Announcing the changes, the Ministers said previous government had allowed some people to benefit from “hugely generous pension arrangement subsidised by the taxpayer”.
“While this Government wants to encourage those on lower and middle incomes to save for pensions, it will not allow pensions of the scale previously allowed to be accumulated at the expense of taxpayers whose actual earnings are, in many cases, a fraction of those large pensions,” Mr Noonan told the Dáil.
The Budget measures were generally welcomed by the pensions sector as “the least bad option”.
Irish Life, the largest pensions provider in the State, said: “We believe this is a more equitable approach than the alternative which was proposed of ending tax relief for pension contributions at the marginal rate”
It warned that it was important that the new cap is introduced in a manner which is equitable between defined benefit and defined contribution, and between the public and private sector schemes.
Pensions consultants Mercer said the new ¤60,000 cap will have implications for over 27,000 employees from 2014, including a significant number of higher paid public servants.
“The penalty for exceeding the cap is a 41 per cent charge on the excess value, on top of paying income and universal social charge on the pension, giving a net effective tax rate of nearly 70 per cent,” said Michael Madden, a partner at Mercer.
The troika of the European Union, the ECB and the IMF had pressured successive governments to move on what was seen as unreasonably generous and open ended relief on pension savings.
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