ANALYSIS: This retrospective – and supposedly temporary – tax is an unenlightened attack on easy targets
IT IS somewhat ironic that as Garret FitzGerald, a tireless campaigner for social justice is buried, a Government led by his own party seems hell-bent on undermining one long-standing social contract – to strive for adequacy for all in retirement income. The introduction of the 0.6 per cent levy over each of the next four years on funds invested in pension schemes also marks a fundamental change in the principle that no tax measure should be retrospective.
It marks the latest in a series of developments that points to successive governments viewing pensions – both private and public – as an easy target for fundraising, and one that allows them to avoid essential long-term decisions on public spending.
In response to objections to its imposition, Government voices have made three points:
* the levy is purely temporary and necessary to fund a vital jobs initiative at a time when the State has no reasonable alternative source of funds. Other areas such as bank deposits have Dirt;
* pensions have been in receipt of tax relief for years and the Government is only pulling back a small proportion of it; and
* most of the money in pension funds is invested outside the State anyway.
This is gombeen economics. Tackling them in reverse order, the notion that pension funds should be invested entirely within the State is so inane that you would wonder about the wisdom of hopes the people of the State have invested in our new leaders.
To have invested them entirely within the State would have ensured only that pension savings went the same way as other investments in Irish equities and property in recent years. It also runs counter to the very active and reasonable pressure from regulators to diversify out of Ireland in the aftermath of the creation of the euro zone.
In relation to tax relief, the purpose of relief is twofold. It recognises that an incentive is required to persuade people to lock money away for up to 40 years in the face of competing financial calls on that cash. Second, it is as much a deferral of tax as a relief. Any money withdrawn from a pension fund is subject to tax at a person’s marginal rate. Reducing tax relief as currently proposed is simply taxing the same income twice.
The one exception to this is lump sums taken on retirement. The last budget reduced the amount that can be taken to €200,000 – down from roughly €1.35 million previously. There was very little dissent. It was clearly inequitable people could take huge sums from tax-relieved funds free of tax when others pay tax on all income.
On the initial point – the temporary nature of the levy and the allusion to other taxes on savings – the Government and its senior Ministers seem to show a truly shocking level of ignorance. Deposit Interest Tax Relief (Dirt) on bank savings and exit tax on unit fund investments apply only to the interest or investment gain.
The levy is attacking the underlying capital sum.
As to it being temporary, we have only the Government’s word – and governments historically have been very reluctant to walk away from levies. It takes a touching degree of optimism to believe Ireland will be back in good order economically by 2014. And, if we are still struggling, who believes this or any other government would not extend the levy on a rolling basis.
More worryingly, now that the Government has crossed the Rubicon by retrospectively taxing pension funds, why should we remain confident it has no intention of raiding other savings?
Before the last election, there was no mention of raiding pension funds – just of addressing relief on future pension contributions. In fact, the standout pension commitment was to address ministerial pensions. Under the levy, they are untouched.
People are already deeply concerned about their savings – on both commercial and personal levels – as regular Central Bank updates on capital outflows attest. By its action, the Government simply cannot expect to be taken at face value in any assurances on its intentions for other savings, be they deposit accounts or funds. And that could have serious knock-on effects on our long-term viability as a worldwide centre for funds management – an area where we expect to create 800 jobs by year-end. These are real jobs, measurable ones, unlike the vague aspirations of 100,000 jobs in tourism which Ministers are already admitting can never be accurately measured.
In the background, further trouble looms as a body composed entirely of civil and public servants proposes a tightening of the funding standard that may well fatally undermine what is left of the defined-benefit pension model.
And all this comes as the Government looks to increase the level of double taxation on pensions by reducing relief.
It urges scheme members to take their anger out on the pensions industry, which certainly charges disproportionately large fees by industry standards – notwithstanding how opaque those fee structures are. But it will do nothing to force more transparency on fees or show the way by reducing the charges allowable on standard PRSAs, the benchmark for the industry.
If there is policy at all at Government level, it seems little more than a policy of expediency – hitting easy targets to meet immediate exchequer requirements. As people worry about their savings, and their welfare, they deserve a little more.
