Changes to pension tax relief to hit workers’ pay
MIDDLE-INCOME workers will effectively have to take a pay cut if they want to continue investing the same amount of money into their pensions, a leading pensions body said.
The Government plans to reduce the tax relief rate from 41pc, for higher earners, to 33pc. The move is seen as a way to encourage those on the lower 20pc tax rate to put money into a private pension as they would get tax relief at 33pc.
But the planned change, which is contained in the National Pensions Framework, has been criticised by the Irish Association of Pension Funds (IAPF).
IAPF director of policy Jerry Moriarty said reducing the tax reliefs for those on the 41pc tax rate would change the behaviour of those already investing in a pension.
“Reducing tax relief currently being received does a number of things that will cause behavioural change. “The first impact would be on take-home pay, which would be reduced for anyone currently receiving higher rate relief.”
Mr Moriarty pointed out that a single person moves on to higher-rate tax on €36,400, so workers on average earnings would see their take-home pay reduced because they are trying to save for retirement.
“This impact will be particularly felt by public servants, as in addition to the relief they receive on their contributions, they are also receiving relief on the pensions levy.”
For many people the only way to reduce the impact of this loss of income would be to reduce their pension contributions, the IAPF director said.
“It is also difficult to see that many standard-rate taxpayers will be in a position to start or increase contributions to take advantage of the increased relief they would get,” Mr Moriarity advised.
He added that the planned change would also increase the complexity of pensions investment.
Many workers would need to decide if it continues to make any sense to pay pension contributions and get 33pc relief and then be taxed at 41pc on the income that derives from those.
In the recent UK budget the government decided to ditch plans for a similar move and instead it is working on having a maximum annual allowance for pension contributions.
The Government here launched its pensions framework in March this year, but has yet to give a date for when it intends altering the tax reliefs for investing in an occupational or a private pension.
Part of the framework involves introducing a new mandatory, or auto-enrolment, pension scheme in four years’ time as part of a restructuring of pension provision.