SSIA-type scheme, single tax relief for all pensions

THE taxation committee has recommended that a single tax relief should be introduced for all pension schemes and has proposed a new retirement savings system similar to the SSIA scheme.

They say this is necessary to boost the level of private pensions, currently held by half of the working population, and because the current tax relief is distorted in favour of the better-off. They currently enjoy tax relief of 41% on their pensions against 20% for those on middle to lower incomes.

That was a serious anomaly, as they were much more likely to be saving actively through their own pension plans for their retirement years.

By contrast, those on middle to lower incomes are less likely to supplement the state pension with a private pension plan.

When the do commit they get relief at the basic tax rate of 20%, a fact seen as a major disincentive to encouraging greater numbers to take out private pensions, the Commission said.

Though the incentives are widely used, “there remains a gap in retirement savings coverage in the case of those with low to middle incomes.”

They said “a key concern was the fact that those liable to tax at the higher rate of income get tax relief at 41% while those on the standard rate of tax get relief at 20%.”

It concluded: “We consider that tax relief should be given at a single rate irrespective of the individual’s marginal rate.”

The report suggests a number of incentives to boost the current uptake of private pensions.

It proposes that all contributions towards additional pension cover should get a €1 supplement for every €1.60 set aside by the individual.

Such a move would improve equity and incentivise savings by low to middle income earners, it said.

It further proposes a “Kick Start” support mechanism, where the state would match euro for euro savings for a limited period for all supplementary pension contributions.

Employers would be obliged to offer PRSA pension plans to all employees, but a soft mandatory approach should be used, which in effect would allow workers to opt out of the scheme down the line.

To aid the process further, the Commission said the Government should introduce a further savings scheme similar to the highly successful SSIA scheme. It would be a simple plan where the Exchequer would contribute €1 for every €2 saved.

This scheme would be aimed at those on low incomes who worked part time or have no work.

The report also recognised that incentives alone “will not address the challenge of encouraging people to provide for their retirement.”

In another significant proposal, the report said that the first €200,000 of a pension lump sum should be tax-free and that any amount over that should be taxed at the standard rate.

Paula Clancy of TASC, the independent think tank for social change, said any changes in pension tax relief must be accompanied by real pension reform, and she called on the Government to lose no further time in bringing forward the promised Framework Document on pensions.

She said the recommendations relating to pension provision “do not constitute any fundamental reform of a system which, under these proposals, would continue to be market-led rather than state-led.”

It was now a matter for the Minister for Social and Family Affairs to bring forward the long-awaited Framework Document on pensions, she said.