Pension tax relief cuts will be costly for middle earners
25 July 2010
Sunday Business Post
Reducing tax reliefs for pension savers could cost a typical middle-income earner more than €25,000, according to figures from a leading pensions company.
IFG Corporate Pensions has called on the government to review the proposed changes to the tax relief structures for pensions, saying that the proposed measures would disincentivise savings at a time when the government is urging people to save more to make them less reliant on the state in retirement.
Details of the proposed tax changes were announced in the national pensions framework last March.
Following the government’s previous commitment on tax relief on pensions in the programme for government last October, the national pensions framework announced plans to introduce a single rate of 33 per cent for income tax relief on private pensions.
Among the national pensions framework’s other provisions were a higher retirement age, a mandatory pension system and a new system of public sector pensions.
For anyone currently getting tax relief on pension provision at the marginal rate of tax, the proposed changes will mean significantly lower reliefs on retirement saving.
According to IFG’s figures, a person earning €50,000 could expect the value of their pension fund to be as much as €26,500 lower at retirement as a result of the changes.
‘‘It is unfortunate that the government continues to propose reducing the tax relief on individual pension contributions to 33 per cent,” said Fionan O’Sullivan, director at IFG Corporate Pensions.
‘‘Individuals paying the higher rate of income tax in retirement will effectively be subject to double taxation when they take their pension benefits.”
O’Sullivan said the proposed changes to tax relief on pensions were ‘‘highly inconsistent’’ with the aim of encouraging saving for retirement, and went against the overall objective of the framework document.
‘‘Very few people will be persuaded to increase their contributions to make up for this deficit, as they simply can’t afford it,” he said.
H e said that an employee who was currently receiving tax relief at a marginal rate of 41 per cent on pension contributions would lose 8 per cent of every €1 invested if the tax relief was cut to 33 per cent.
‘‘Imposing new limits on pension tax relief will effectively deter rather than incentivise employees to contribute to a pension and, ultimately, will lead to lower pensions in retirement.”
‘‘If the government is concerned about inequity and increasing pension coverage, they should simply increase tax relief for all to the higher tax rate of 41 per cent,” he said.
He added that this would encourage lower-paid and younger workers to save for retirement.
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