PENSIONS:WORKERS PAYING tax at the higher 41 per cent rate could see relief on pension contributions reduced if the Government accepts proposals put forward by the commission to make retirement savings more equitable.
The commission deems the current system of tax relief to be “regressive”, and has proposed a number of recommendations aimed at redistributing the tax expenditures on pension provision towards those on lower and middle incomes. Its main recommendation is the introduction of a new “matching” contribution system, which would apply to people across the tax brackets and even to those who are outside the tax net.
At present higher earners get a contribution of almost €1 for every €1 they invest in their pension fund. Under the commission’s new “matching” proposals, pension contributions would qualify for an Exchequer contribution of €1 for each €1.60 contributed by the taxpayer, subject to the current age-related and earnings limits. This means for every €100 a higher rate taxpayer contributes to their pension, the net cost to them will increase from €51 to €62.
Those on lower incomes, however, will fare better under the commission’s recommendations. At present, the tax relief which standard rate taxpayers get translates to a contribution from the State of roughly €1 for each €2.50 invested by the taxpayer. So if a standard rate taxpayer contributes €100 to their pension, the net cost to them will be just €62 under the matching scheme, €10 less than under the present arrangement.
The commission accepted that a downside of the proposal is that it could disincentivise some existing contributors.
David Croughan, chief economist with Ibec, says: “a new hybrid rate may reduce the incentive to save for those on the higher rate, with no guarantee that it would encourage those on the lower rate to increase their pension provision”.
The commission also suggests the introduction of a “soft mandatory auto-enrolment” approach to private retirement provision, whereby employees would have to opt out of, rather than opt into, a PRSA scheme.
The Department of Finance has estimated the annual cost of the new matching approach would be €400 million if auto-enrolment were to apply.
The commission also proposes the introduction of a “kick-start” period, which would be used in conjunction with the matching approach. This would facilitate an increased Exchequer contribution, of €1 for each €1 contributed by the taxpayer in the first five years of a pension, and would “help to embed the savings habit”.
A more popular recommendation proposes extending the flexibility of an Approved Retirement Fund to defined contribution occupational pension schemes.
Jerry Moriarty, director of policy with the Irish Association of Pension Funds, describes it as “especially welcome” and sees no reason why it could not be introduced in the next budget.
The commission proposes the introduction of a new retirement savings scheme, along the lines of the Special Savings Incentive Account, to try and entice more lower-income earners into the private pensions net.
It also recommends a change to the current situation whereby an individual can take a tax-free lump sum at retirement. It proposes that lump sums up to €200,000 should continue to be tax free, but that the balance of any lump sum should be subject to tax at the standard rate of income tax.
Following the reduction in the level of earnings eligible for pension tax relief from €275,239 to €150,000 in last year’s budget, the commission recommends that this move be “accompanied by a corresponding movement in the level of the standard fund threshold”, currently set at €5.4 million.
