The Department of Finance is preparing to slash all tax relief on pension contributions to the standard rate of 20% in a move that will cost savers €500m per year in new taxes, according to industry sources briefed on the matter by department officials.
The change, which is expected to be part of the budget, will affect hundreds of thousands of middle- and high-income savers who currently can claim back at least 41% of the money they put into their pensions as tax relief. By cutting the tax incentives for these people by more than half, the government would be able to collect an extra €500m in income taxes annually.
It follows an earlier proposal, made just two months ago in the National Pensions Framework, to introduce a new 33% tax relief rate on pension contributions for savers of all income levels. That change would have raised only €115m in additional revenue for the state, according to pensions industry estimates, because it would have increased reliefs for low-income savers while cutting them for the better-off.
Industry sources warned that removing incentives for people on the higher rate of tax would cause savers on moderate incomes to either opt out of pension schemes or drastically reduce their contributions to make up for lost income.
"We have to preserve the structure of the system," said Dermot Kelly, chief executive of the Professional Insurance Brokers Association. "If we lose contributions, it will take an awful long time to recover the funding."
He said there was a "frenzy" around eliminating tax reliefs for people on the top rate, which had left a "political impression" that there were "easy pickings" in pensions.
"There is no problem with giving up something on pensions, but we can't undermine the whole system," said Jerry Moriarty, director of policy at the Irish Association of Pension Funds.
Katie - agreed.
Pension reform is long overdue, particularly in the public sector. Many taxpayer-guaranteed pensions - not least those of government ministers - would be nakedly intolerable if valued at actuarial cost, and included as such in salaries.
More generally, in the private and public sector, the current tax break can be justified as being in the average taxpayers' interest only to the extent that it relieves them of the future burden of caring for the pensioner - yet a huge amount of tax is foregone allowing the wealthiest to build far greater pensions than this, while much of the money going into these pensions is invested outside the country. Cutting tax relief might not redirect all of what would go into foreign bonds and equities back into spending within the country, but to the extent that it does the net benefit to the taxpayer will only increase from the projected figure.
The tax break also provides cover for the fatcat pension industry leeches who have been screwing us for years with the crutch of this subsidy to cover up excessive charges and dreadful performance: people getting 40% up front often don't bother to calculate how much 1.75% a year over (say) the next 30 years will cost them. How can that be justified relative to the fees on, e.g., ETFs which perform better than the pension fund managers?
So to Jerry Moriarty's "we can't undermine the whole system", I say we have to go well beyond merely undermining this parasitic industry and reform it utterly.
It is well past time to abolish ministerial and all political pensions and to abolish 99% of allowances and perks being foisted on our backs by these fat-cat parasites in the Dail and Seanad.
Looking at Lowry and the tribunals, Frank Fahey and NAMA etc. etc. it is time for voters to decide to vote candidates in once only and to refuse to re-elect any politician to a second or multiple term, to clean out the grabbers and swindlers who populate our political caste system.
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If they are going to cut the tax relief on personal contributions, the same cut must apply to employer contributions in all types of pension. Personal Pension can only be funded by personal pension however Occupational Schemes are funded by employer and employee contributions. If you take from one, you must also take from the other otherwise the system would be totally unfair particularly if you look at those who are in a position to fund large amounts by employer contributions therefore redirecting their salaries which is currently what happens and will continue to happen.