How the new 0.6pc levy on pensions will hit your pocket
The Government plans to raise €470m for each of the next four years from a measure which has been described as a tax on prudent savers
IT has been dubbed as the plundering of private pensions. The Government's plan to slap a levy on the value of private pensions has been met with a wall of criticism.
Trade unions and employers' bodies have hit out at the levy, which they claim will mean cuts in pension benefits and more pressure on company pension plans, many of which are already insolvent.
The Government plans to impose an annual levy of 0.6pc on the value of the assets in private sector pension schemes, whether group schemes or individual pension plans.
And in a further sting in the tail, the levy will be backdated to January this year.
Critics, and there are many, see the levy plan as a tax on prudence because it will hit those sensible enough to provide for their income in retirement.
It is also a retrospective tax as it applies to funds put in place in the past.
Others say that it is a levy on the little guy as 'fat cats' will be able to find ways to avoid it, such as transferring their funds abroad to get around having to pay the annual levy.
The Government is planning to raise €470m a year for four years from the measure. That will amount to almost €1.9bn.
However, the levy will not apply to public service pensions, which are regarded as the best in the State.
Taoiseach Enda Kenny countered the criticisms by arguing that the levy was a modest one, especially as pension-fund savers have benefited from generous pensions tax reliefs in the past.
Those paying into a pension get tax relief at their highest tax rate and the funds grow tax-free.
So how will the new measure impact on pension-fund members and schemes?
Some 250,000 people who are members of company or defined-benefit (DB) schemes will be impacted by the levy.
DB schemes traditionally give members with a full 40 years' service a pension of two-thirds of their final salary at retirement.
But eight out of 10 of these schemes are in deficit, which means the old promises attached to these schemes cannot be kept.
Now the scheme will have to pony up a levy based on the value of the assets, starting with the value of those assets at the beginning of this year.
Take a reasonably sized, indigenous Irish company with a DB scheme. It has 400 pension-scheme members, of whom 200 are pensioners and 200 are still working.
The scheme is in deficit, which means it would not be able to meet all the pension commitments of its members if it had to close tomorrow.
Assets of the scheme amount to €50m, although that is nowhere near enough to pay all its liabilities. The trustees of the scheme will now have to pay €300,000 a year to the Government under the 0.6pc levy.
The fact that the scheme is in deficit means the trustees will already have been engaged in coming up with a plan to wipe out the shortfall.
Unless the members and/or the employer can come up with additional contributions to plug the deficit, the trustees will probably have been planning to cut the accrued benefits of the members.
Now, the trustees have more tough choices to make. Will they cut the benefits of the members further to pay the levy or will the employer foot the levy bill?
The Government is to change the law to allow for the cutting of the pensions in payment, something that was completely illegal up to now.
Where the employer can't pay the levy, the trustees of each scheme will have to decide to cut the future pension benefits of the members -- and even the pensions that are currently being paid out.
Defined contribution and self-employed schemes
With a defined-contribution (DC) scheme, you get a pension based on what you have contributed to your pension and on how that fund has performed over the time that you have put the fund together.
Around 250,000 people have DC schemes, with the same number again having self-employed pensions.
This is the case whether it is a PRSA (personal retirement savings account), an additional voluntary contribution (AVC) or a self-employed or personal pension.
The fund will have to be valued from the start of this year by the life company that administers it and the 0.6pc paid to the Government.
Suppose there is €150,000 in your DC fund (which would pay a pension in retirement of between €7,000 and €8,000). The levy will amount to €900 a year.
Poor stock market returns at the moment mean that the impact of the levy may be enough to wipe out the annual returns of the fund.
This raises the question of whether the life companies administering funds will be prepared to lower their fees.
With total fees often as high as 1.5pc of the value of the fund, once dealing costs and management charges are added in, there is scope for the industry to cut its costs.
People whose pension is provided through an annuity should escape the levy. An annuity is a financial product to provide an income.
Most people with defined-contribution-type schemes have an annuity bought for them when they retire, but DB schemes tend not to buy annuities for pensioners. Instead, they pay pensions out of the scheme funds.
State and semi-state schemes
The levy will apply to some pension funds in the state sector, but not to others. Generally, in semi-states where there is a funded defined benefit scheme the levy will apply.
But in the likes of the IDA or FAS, where the schemes were brought into the embrace of the State, the pensions levy will not apply.
The fear now is that along with the levy on private pensions the Government will also go ahead with its plans to cut the tax reliefs on pensions.
The memorandum of understanding between the State and the IMF/EU as part of the €85bn bailout commits the State to reducing these reliefs over the next four years.
All of this comes as workers who are lucky enough to be in a job and are under the age of 50 will be forced to wait until they are 68 before they get the state pension.