Public-sector workers receive about nine times more pension tax relief per person, on average, than those in the private sector, new figures show, as pressure from the pensions industry mounts to retain the current generous tax relief regime in an effort to shore up private retirement savings.
However, some responding to a new consultation on the Government’s road map for pensions argue that offering tax relief at the higher rate to some, and at the lower rate to others, is both inequitable and unsustainable.
Earlier this year the Interdepartmental Pensions Reform and Taxation Group (IDPRTG) launched a consultation as part of the Government's road map for pensions reform.
The consultation sought to canvass opinion on issues such as harmonisation of pension products and tax relief, and follows a report from the ESRI earlier this year on the issue, which found that slashing tax relief on pensions could boost exchequer funds by up to €1 billion annually.
Now, responding to the process, the pensions industry has argued that cutting tax relief would hit those getting relief at 40 per cent hard – and would do nothing to boost pension coverage.
"The suggestions from government that halving income tax relief for middle-income earners to 20 per cent or reducing it to 25 per cent would somehow lead to greater coverage/adequacy or no change to current pension saving rates are profoundly flawed," said Michael McKenna, managing director of Standard Life, adding that he would expect the exact opposite from such a change.
Average cost
Over 30 years, cutting tax relief from 40 per cent to 25 per cent could cost an average saver €18,000, Standard Life says, as it argues that public-sector workers already receive about nine times more pension tax relief per person than those in the private sector, given that the average public sector pension is 80 per cent higher than private-sector pensions, at €25,000 versus €14,000 a year.
The call to retain tax relief is echoed by the Irish Association of Pension Funds (IAPF), who argue that there is no evidence that changing tax relief will do anything to increase the numbers with a private pension.
“If anything, it is more likely to reduce coverage,” the association said in its submission, while Dublin Chamber also called for tax relief to “remain as it is”.
However, the Pensions Council, which looks to represent consumers' interests, wants tax relief to be "abolished". Instead, it is in favour of " a more equitable top-up system".
“A top-up rate capped at a certain figure would be more equitable than the current system of marginal tax relief,” it said.
Similarly, the Pensions Policy Research Group, an independent and inter-institutional research group, has an issue with the current tax relief regime.
“At great cost, the current system induces a minority of employees to put money into private pensions and among these the contributions are small,” it said, arguing that the current system is “unsustainable given its cost, inefficient outcomes and inequitable outcomes”.
AMRF rules
Also raised in the consultation is current rules surrounding approved managed retirement funds (AMRFs) and approved retirement funds (ARFs). AMRFs, which require retirees to retain up to €63,500 in this fund, are “almost redundant”, the IAPF argues, given recent hikes in the State pension, which means that everyone with a full State pension now satisfies the minimum income requirement for an ARF.
“There is also no rational link between the income requirement and the amount required to be placed in an AMRF,” it said, adding that these rules “effectively force people to take income they may not need and would have been more beneficial to them in later life if it continued to be invested.”
The Society of Actuaries wants AMRFs to be “ removed entirely” for future retirees, noting that having an ARF and an AMRF just adds “needless complexity”.
It also wants the distribution rate for an ARF to fall from 4 per cent to 3 per cent, arguing that drawing down at a higher rate “ could significantly increase the risk of an ARF pot running out within the retiree’s lifetime”, although it does concede that with less money drawn down, less tax would be transferred to the exchequer.
The Pensions Council takes a view counter to that of the industry, however, arguing that there may in fact be a case for increasing the 4 per cent rate, “depending on movement in longevity and interest rates/investment return”.
Brokers Ireland, which represents some 1,250 financial advisers and brokers , has argued that the current threshold limit for tax-efficient pension savings, of €2 million, acts as a “ significant disincentive” to higher earners to continue pension contributions beyond this level.
“This can mean for some, throttling back contributions/accrual well in advance of retirement age because investment/earnings growth alone without any further contributions could carry the value of benefits over the threshold limit by retirement age,” the association said.
