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Ireland proposes reform of pension tax relief

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  • Ireland proposes reform of pension tax relief

IRELAND - The Commission on Taxation has recommended the existing arrangement for tax relief on pension contributions should be changed to a system of matching contributions.

Current tax incentives provided for pension saving grant high income earners tax relief of 41%, while standard tax payers receive 20%, and those not earning enough to qualify for income tax receive no benefit at all.

The Commission rejected ideas to switch all earners to the higher rate of tax relief on the basis of the cost to the Exchequer, estimated at up to €756m, while a "stepped' approach allowing savers to earn a higher rate of relief to begin with and then move to a lower rate could stop people from continued saving at the lower rate.

Instead it proposed a matching contribution scheme where the Exchequer will contribute €1 for every €1.60 saved by the member, which means while higher earners receive less support low earners receive more, and the net overall cost to the Exchequer would be €400m.

The report also suggested the introduction of a 'kickstart' period, where the Exchequer would contribute €1 for every €1 saved by the member for the first five years of pension provision, with the possibility it could be restricted to those aged under 30 in an effort to get people saving earlier.

Other proposals outlined by the Commission, included the introduction of a new retirement account similar to a Special Savings Incentive Account (SSIA), which would be open to anyone aged over 18 and would provide a matching contribution from the government of €1 for every €2 saved, but with a maximum savings level of €3,300 a year.

However the Irish Association of Pension Funds (IAPF) noted that while the matching system would be beneficial to low earners and those in the 20% tax rate band, it could discourage existing savers, as some would be taxed on the pension income at the 41% rate despite not receiving that level of tax relief.

Jerry Moriarty, director of policy at IAPF, said: "There needs to be more work around what the behaviour and effects will be on higher earners as they will pay a higher rate on their income. We look forward to further opportunities to research and debate this issue."

The organisation acknowledged the proposals are recommended to take effect in the medium to long term, but added: "Now is not the right time to make radical changes to the pensions system we have in place". It also pointed out that the report is just one strand within the overall context of pension policy in Ireland that should be brought together in the Pensions Framework document that has been expected since last year.  

Meanwhile the Commission's report also proposed extending the use of Approved Retirement Funds (ARF) - which allow members to continue investing and to drawdown funds rather than buy an annuity - to all defined contribution (DC) schemes.

The IAPF welcomed the move, which has been one of its "long standing policy objectives", and highlighted that while ARFs may not necessarily be right for everyone, "at least the option will be there", and suggested there was no reason the measure could not be included in the next budget.

Brian Lenihan, minister of finance, said: "This report's longer term strategic perspective and its focus on the future will help shape the taxation system for the next decade and beyond. Given that focus, the implementation of the many complex and often inter-related recommendations in the report are likely to be phased in over several years."

If you have any comments you would like to add to this or any other story, contact Nyree Stewart on + 44 (0)20 7261 4618 or email nyree.stewart@ipe.com

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