Budget cuts will force us to pay another €800 a year for pensions
Published 22/10/2012 | 05:00
PLANS by the Government to reduce tax relief on pensions in the Budget will cut the average worker's take-home pay by €800 a year.
More than 550,000 workers will be hit by the move, a new analysis shows. Public servants are set to be the biggest losers, but thousands of private-sector workers who pay into a pension will also be heavily hit.
It follows a warning from the secretary general at the Department of Finance, John Moran -- one of the country's most senior civil servants -- last month that the tax relief for putting money in a pension will fall to 20pc, less than half the current level.
Workers would be forced to stump up more money just to keep the same percentage of their salary going into their pension scheme.
Now research carried out by actuarial consultants Milliman shows that 550,000 workers will end up being effectively €830 each worse off, the Irish Independent has learned.
The new research was jointly commissioned by the Irish Association of Pension Funds, the Irish Taxation Institute, the Irish Insurance Federation and the Society of Actuaries.
The calculations assume 5pc of salary is going into a pension for the average worker.
The revelation comes at a time when pensions are failing badly.
Eight out of 10 company defined benefit schemes are insolvent, with most expected to close.
Finance Minister Michael Noonan confirmed to an Oireachtas committee last week that the tax relief for putting money into a pension would be cut. At the moment, higher-rate taxpayers get relief at 41pc.
This means that for every €100 put into a pension, it costs the worker just €59.
But if the tax relief for pension contributions drops to 20pc, it will cost €80 to put €100 into a pension.
Jerry Moriarty of the Irish Association of Pension Funds (IAPF) said the total savings from pensions was €1.43bn in the last two Budgets.
"Our research shows that a further reduction of tax relief, which has been mooted by the Government from the current 41pc to 20pc for a typical worker, would cost them €830 per annum in take-home pay and this would impact over 555,000 workers."
Mr Moriarty warned that the move would force thousands of workers to stop paying into a pension.
"There would seem to be little logic in saving through a scheme giving 20pc relief on the way in and charging up to 50pc on the way out."
Public servants would lose on the double, as they get tax relief on their pension contributions and on the controversial pensions levy, so cutting the tax reliefs would mean a big pay cut for them.
Reducing the tax relief would hike the pensions levy by an average of €364 for some 277,000 public servants, as well as costing them more for their traditional pension contributions.
Mr Moriarty said the Government could meet its cuts target by restricting the size of pension that could get tax relief to no more than €60,000 a year.
Very high earners would lose out, but most would benefit from this, he said.
The revelations about the higher cost of pensions come as the Irish League of Credit Unions publishes stark new research.
Just weeks away from another tough Budget, some seven out of 10 people say they are unable to save money in a bank or credit union account, the highest level to date. The sobering statistics from the survey show that:
• Four out of 10 consumers have had to borrow money to pay bills in the last 12 months, an increase on June figures.
• Utility bills are the second-most expensive essential bill.
• 52pc of adults feel that the introduction of property tax is unfair since they already paid a property tax in the form of stamp duty.
The survey, conducted by iReach Market Research, found that one in five adults will be seriously cutting back on expenditure this Christmas.
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