33% pension rate could save €500m
However, as the ESRI proposal incorporates a new benefit-in-kind (BIK) tax on the employer’s pension contribution, an intense public debate is likely to precede any changes being introduced in the National Pensions Framework early next year.
While there is a broad acceptance of the Exchequer’s need to make sizeable savings, the Irish Association of Pension Funds (IAPF) warns that the proposed BIK tax would simply cause top earners to move their money away from pensions into other types of investment.
IAPF director of policy Jerry Moriarty explains: “I am glad that Minister Hanafin has said there will be a lead-in time. You really must look at the consequences and make sure that any action does not cause people to stop saving.
“You really don’t want to introduce something that would set back the Government’s policy of encouraging people to save for their pensions. At present, you are not taxed on any contribution your employer makes to your pension.
“When you retire, you pay tax on your pension like any other income. To pay a tax on your contributions as well would not make any economic sense. It would be a double taxation.”
The ESRI proposal incorporates a tax on the employer’s pension contribution, but only applicable for those on the top tax rate, and payable only on the difference between the present rates of 41% and 20%.
In brief, under the ESRI’s proposed 33% standardised rate, top earners would lose €8 per €100 in tax relief, while those on lower incomes would gain €13.
The ESRI view is that this would deliver a more equitable distribution of tax relief. At present, over €8 out of every €10 of tax relief goes to taxpayers in the top fifth of earners.
However, a Friends First survey issued last week found that 20% of people have either reduced or stopped contributing to their pensions since the downturn. The IAPF warns against any change which would aggravate this trend.
ESRI research professor and co-author of the report, Tim Callan said: “There is a balance to be struck. Some people on high incomes are leaving their pension funds on the basis of their personal calculations. My feeling is that most will not leave because the standardised rate of 33% is a fair proposal. There is a debate that taxation is not the best way to achieve savings for the Exchequer.
“One idea is having a soft mandatory scheme for three months, with an option to then voluntarily withdraw, with partial matching funding from the state. Either way, we welcome the debate.”
The Minister for Social and Family Affairs Mary Hanafin, TD, said the ESRI report reflected the new pressures faced by the Irish economy, such as GNP of -8%, unemployment of 12%, and the deficit in the Social Insurance Fund, from which state pensions are paid.
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