SSIA-style pension scheme targeted at lower-paid
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RADICAL changes to the way pensions tax reliefs work in this country are recommended by the Commission on Taxation.
The commission's report calls for a new SSIA-type pension to be introduced for the lower paid with the State putting in €1 for every €2 a worker puts into this new retirement scheme.
This is a move to capitalise on the huge success of the SSIA (Special Savings Incentive Accounts) scheme which encouraged around one million people to save regularly for five years. The Government topped up each account by €1 for every €4 saved.
But despite the fact that tax reliefs for pensions are even more generous, particularly for those paying tax at 41pc, some one million people do not have a private pension.
Now the commission is recommending that the SSIA model be used to encourage the low paid to take out a pension.
It favours a system where the State would put in €1 for every €2 saved by a worker.
Such as scheme is seen as simple to understand. Current tax relief arrangements for pensions are not fully understood by people, tax advisers said.
Losers
However, the losers are set to be those on the higher rate of tax who currently pay into a pension. A new tax relief rate of 30pc would apply for those already paying into a pension.
This would result in those on the 20pc income tax rate getting more tax relief, but those on the 41pc rate would get less tax relief for their contributions.
Currently, someone paying tax at the higher 41pc rate can claim this back and also claim PRSI (4pc) and the health levy, which is 2pc up to May 1. This means that they get €100 put into their pension at a net cost of just €53.
Capping the tax rate at which higher paid workers could claim pensions relief would mean generating a pension pot of €100 will cost €64. This is because they could only claim tax relief of 30pc, and not 41pc, along with claiming back their PRSI and health levy payments.
The commission also recommends a €200,000 cap on the tax-free lump sum that someone who is retiring is entitled to receive.
Currently, public servants and private sector workers in defined benefit or final salary schemes can get, tax free, one and a half times their final salary when they retire.
- Charlie Weston Personal Finance Editor
