Move to reduce pension-related tax breaks viewed as ‘a retrograde step’

THE Government is proposing a phased reduction in pension-related reliefs and tax breaks over the course of the next four years, in order to raise €700m in savings, something which has already been criticised as paving the way for a wholesale reduction in people making pension contributions in the future.

The four-year plan is looking for a phased-in reduction in tax breaks for those people on the higher rate of tax to the standard rate; beginning with the abolition of employee PRSI and health levy relief on pension contributions in 2011. The three years after that will see the rate of relief come down from 41% to 34%, 27% and finally 20% in 2014.

“The phasing out of tax relief on pension contributions from 41% to 20% over four years is a retrograde step and will lead to a scenario whereby individuals will cease to make contribution in 2014 and beyond,” according to John Heffernan, tax partner at Ernst & Young Ireland.

He added: “Why would you make a contribution which costs you a net 80%, only to be in a position whereby you could conceivably be exposed to tax rates of circa 50% when you draw down your pension. Pension tax relief incentivises people to risk locking away their money for up to 40 years. There is no parole for good fund behaviour or early release for family emergencies. The reduction in tax relief might well make people reluctant to do the time.”

Mr Heffernan did note the PRSI/health levy exemptions on pension contributions brings employees in line with the self-employed, in terms of tax treatment, “who were unfairly treated in this regard”.

PIBA, the Professional Insurance Brokers’ Association, added that keeping the 41% tax relief rate on pension contributions in place for 2011 keeps room for alternative proposals to be heard, relating to stemming long-term damage to pensions savings.

“In recent weeks we, alongside other groups, have called for a temporary pension fund levy system, as opposed to a reduction in tax relief to achieve the desired Exchequer savings. This has many benefits including equity, macro-economic benefits and a continuation of the incentive for long-term funding of pensions. These announcements give some breathing space for the further examination of these options,” the body’s chief executive Diarmuid Kelly said yesterday.