Pension Tax Relief Cut to Reduce Take Home Pay by €830 PA and Hit 555,000 Middle Class Workers
In advance of their Annual Pension Benefits Conference in the Convention Centre Dublin on Tuesday October 23rd, the Irish Association of Pension Funds has highlighted the financial impact on pension savers from the options facing Government in the upcoming budget. According to the IAPF, the total budgetary savings from pensions already made in last 2 budgets is circa €530m. The pension levy has extracted a further €900m so far with another €900m to come in 2013 & 2014. The Conference will discuss the alternatives facing Government should it feel the need to hit pension savers again. The IAPF believe that any changes should focus on minimising the impact on employment in the economy and protecting coverage and adequacy in both public and private sector pensions. The pension experts contend that this can best be achieved by not reducing tax relief, but by limiting the tax incentives for higher earners with a €60,000 pension income limit.
According to Jerry Moriarty, CEO of the Irish Association of Pension Funds, “Huge sums have already been extracted from pension savers; the national recovery plan only required €940m to be taken from pension savers, but we’ve already exceeded that level so there’s no justification for taking more. Our research shows that a reduction of tax relief, which has been mooted by the Government from the current 41% to 20% for a typical worker, would cost them €830 per annum in take home pay [1] and this would impact over 555,000 workers. In light of this we believe that any further general reduction tax relief would be sufficient to persuade thousands of workers to halt their current savings habit and to dissuade many more from saving for retirement at all as there seems little logic in saving through a scheme which gives 20% tax relief on the way in and charges up to 50% on the way out”.
The IAPF contend that if tax relief was to be reduced the hardest hit would be those pension savers in the average to middle income brackets generally paying tax at the higher rate. They believe that such changes would also have a disproportionate effect on the self-employed who fund their entire pension themselves and would suck money from the economy in its wake.
Jerry went on to comment, “A previous study completed by Milliman in association with the Irish Association of Pension Funds identified that over half (52%) of private sector pension savers, earn between €30,000 and €60,000 and most of these would suffer a considerable cut in net take home pay if the pension tax relief rate on their contributions contribution was further reduced. Less than 7% had income exceeding €100,000”.
According to the IAPF, if we want to see real savings appropriated in a fair and equitable fashion then State support for retirement savings should be limited to a €60,000 pension income and attaching lump sum – all of which was outlined in the programme for Government.
Jerry went on to say, “The Programme for Government outlined the State’s intention to apply a cap of €60,000 on pensions that receive State support. Anyone who wants and can afford a pension income in excess of €60,000 can then provide for it themselves through unsupported savings. The vast majority of ordinary pension savers (98%+) will continue to be unaffected as they are average workers saving average amounts. The introduction of this measure could ensure the same rules apply to all those saving for retirement - whether they public servants, private sector workers or the self-employed. Critically, this measure will save the State over €400m pa and enable it to exceed the revenue target set for the pensions sector. The impact will only be felt by approximately 27,000 higher paid taxpayers rather than the 555,000 that would be hit by a change to the marginal rate of tax relief. Those affected are employees typically earning in excess of €125,000 per annum”.
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