ESRI urges curtailing tax breaks on private pensions

The Government should consider curtailing the tax breaks on occupational and personal pensions to contain the cost to the Exchequer and make the pensions system more equitable, according to a new report by the Economic and Social Research Institute (ESRI).

The State is spending almost as much on the provision of tax breaks to occupational and personal pension holders as it is on social welfare pensions, despite the fact that only a third of pensioners are in receipt of income from private pensions, while more than nine out of 10 receive a social welfare pension.

The cost of providing tax breaks to private pension holders was €1.5 billion in the 2000-2001 tax year, while expenditure on State social welfare pensions was only slightly higher at €1.6 billion.

The report on pensioners' incomes by Gerard Hughes and Dorothy Watson of the ESRI shows that in 2000, the latest year for which figures are available, benefits from private pension schemes accounted for less than a quarter of average income during retirement.

When pensioners were ranked according to their incomes, it found that occupational and personal pensions provided virtually no additional financial support to the bottom three-fifths.

The report's authors said this proved that favourable tax arrangements for private pensions predominantly benefit higher income taxpayers and that the system was "inequitable".

The long-term cost to the Exchequer of tax reliefs for the private pension system should be reviewed, according to the ESRI.

Abolishing higher-rate tax relief on pension contributions, phasing out the tax-free lump sum, lowering the cap on the value of contributions eligible for relief and taxing the returns on pension investments are among the measures that should be considered, the ESRI said.

Although it does not make specific recommendations, the ESRI's findings represent a departure from the Pensions Board's approach, which has sought to increase the number of people in private pension schemes by promoting the tax reliefs available.

The board has also examined the possibility of introducing tax credits or bonuses to people who are outside the tax net or pay tax only at the standard rate to widen the appeal of pensions, but it has not openly discussed removing the top-rate relief to make the schemes more equitable.

The ESRI found that the risk of pensioners living in poverty increased during the 1990s. Pensioner poverty rates are higher in the Republic than in most other OECD countries.

In 2000, the overall percentage of income in the first year of retirement in relation to pre-retirement income, was 51 per cent for couples, which met the Pensions Board's income security target of 50 per cent.

But the income rate for single pensioners fell to 43 per cent of their pre-retirement income.