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.
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