Pensions tax relief 'must be reduced radically'
Published 26/05/2011 | 05:00
TAX reliefs for investing in a pension should be radically reduced so that the maximum pension all workers would get would be €37,000 a year, an ESRI (Economic and Social Research Institute) conference on pensions will be told today.
This could be achieved by capping the tax reliefs for everyone in the private and public sectors, Professor Gerry Hughes of Trinity College will argue.
At the moment it is possible to build up a pension fund, tax free, of €2.3m.
This would pay out an annual pension of €115,000 a year.
But Prof Hughes recommends that the value of all pension funds should be capped at €600,000.
This would mean the most anyone could get in an annual pension would be €37,000.
Such a pension includes the state contributory pension of almost €12,000 a year.
If someone had a pension worth more than €37,000 a year they would face tax at the highest rate. People would be reluctant to put money away into a pension fund for up to 40 years if it did not attract tax relief.
At the moment, for every €100 put into a pension it costs a higher rate taxpayer €70, as they get tax relief at 41pc. But since the last budget they have to pay PRSI and the universal social charge on their contributions.
Further restricting tax reliefs would deal with the fact that executives in private firms have 36 times more money put into their pensions by their companies than their staff, Prof Hughes will tell the conference.
He said the average annual pension of an executive who retires from a stock market company is €200,000, compared with €18,000 for ordinary workers.
Prof Hughes, who is attached to the school of business in Trinity College, Dublin, said executives make little or no contribution to their own pensions. In contrast, ordinary workers are required to make contributions to their pensions.
Executives are among the biggest beneficiaries of a tax relief regime for pensions, which is among the most generous in the world.
Prof Hughes wrote in a paper to be presented to the conference: "Much greater equity in the pension system could be achieved by targeting pension tax reliefs at earners."
The Government has committed, as part of the €85bn IMF/EU bailout, to cut the tax reliefs on pension-investing further.
But there were indications from Taoiseach Enda Kenny earlier this week that this may not now happen if savings can be found elsewhere.
The Government has been taken aback by the backlash over the plans to levy private pension funds by 0.6pc a year and is reluctant to further antagonise workers.
Meanwhile, rules being considered by the Government for company funds could mean reductions of up to 40pc in pension benefits, leading experts said.
KPMG's Olivia Lynch said: "The reality is that companies will either need to significantly increase contributions to defined-benefit schemes or apply for reductions to benefits to maintain current contribution levels."