More planning needed on pension reform

There can be unexpected things in government reports. Did you know, for example, that car manufacturer BMW redesigned some of its assembly lines to make them ‘senior’-friendly?

Apparently they did things like replacing rubber flooring with wooden flooring to allow less strain on older joints when swivelling in work, and provided ergonomic chairs/tables that allowed work to continue whilst the older employee was sitting down for periods.

This BMW anecdote featured in a government report titled ‘Report of the Interdepartmental Group on Fuller Working Lives’, published the other week by the Minister for Public Expenditure and Reform.

Substitute “fuller” for “longer” in the title, and you’ll understand why the BMW story features as a positive example of a progressive approach to a longer working career.

It’s possibly a disservice to the report by describing it as a call for people to work for more years because the State can’t afford the pension bill. But it’s not a major disservice.

State pensions funding is one thing. Private pensions funding is quite another.

The tax system has long been concerned with pensions funding.

No matter whether you’re an employer or an employee, pensions remain one of the most tax efficient investments you can make.

Premiums paid by an employee to a Revenue- approved pension scheme, or by a self-employed person under a Retirement Annuity Contract (RAC) are allowed as an income tax deduction in the calculation of an individual’s income tax liability.

Even though some restrictions apply, the pension deduction is a valuable form of income tax relief because it gives individuals relief at their top rate of income tax.

I think pension funding is best understood as a way of averaging out your income over the whole of your life, rather than just over your working career.

There’s another pensions tax relief which doesn’t get as much attention, perhaps, but in the overall scheme of things makes a big difference to the final size of your pension.

Any growth in the value of the amount you’ve put into your pension fund is largely tax free.

For example, if you invest €100 at the miserly 1% typically available on deposit accounts, you’ll see about 50c after tax.

If your pension provider invests €100 of your pension contribution in the same way, it receives €1 to add to your pension pot.

That mightn’t sound like much of an advantage, but over a working career it makes a big difference to the final amount.

The current Government’s Partnership Programme makes little reference to pensions strategy other than to note that an action plan is needed.

Pension strategies are expensive to implement and, thus, are especially sensitive to economic demands as they arise.

It’s all very well encouraging people to work longer because a shorter retirement costs less to provide for, but that won’t solve the problem for everyone.

For many people the gap between the time they leave the workforce and the time their pension entitlements kick-in cannot be bridged by staying on at work.

Policy options which suit only elite groups offer poor solutions if applied across the entire workforce.

Recommending ways of extending the working career as a solution to burgeoning retirement costs will only be to the benefit of a talented, healthy and willing elite.

Brian Keegan is director of taxation with Chartered Accountants Ireland.