Stealth taxes will push up pension costs, warns expert
Private sector workers forking out up to 25pc more to grow their nest egg
Published 09/03/2010 | 05:00
A RANGE of "stealth taxes" sneaked into the new pensions framework and changes in recent Budgets have made it hugely more expensive for private sector workers to invest in a pension, a leading expert has warned.
The changes mean it will cost up to a quarter more than it did to build up a pensions nest egg, Aidan McLoughlin of the Independent Trustee Committee says.
Proposals in the Government's pensions framework, launched last week, mean that the tax reliefs for pension investment will drop for those paying tax at the 41pc rate.
But those who invest in their own pension are also being hit by the income levy, as this tax does not qualify for relief.
The imposition of higher PRSI (pay related social insurance) and the hikes in the health levy also made it more expensive to fund a pension, Mr McLoughlin told the Irish Independent.
He accused the Government of taxing pension fund investment by stealth.
"The changes have been imposed without any individual or any pension fund realising it. It is only when you piece it all together that you realise the full extent of it."
He added that the new pensions framework lacked coherence and was not co-ordinated with other state policies.
An example of this was the failure of the Government to consider how someone who retires at 65, but will not get a state pension until the age of 68, will fund those three years.
Mr McLoughlin said that pensions had been impacted by the income levy, which was not deductible for pension contributions, and the increase in the health levy up to 5pc.
In 2008, a person putting €10,000 into their pension fund on the day before their 60th birthday could have got an annual income of €5,700.
But this year it will cost €11,424 because of the imposition of the income levy, the higher health levy and the imposition of higher PRSI.
This means the cost of getting €5,700 a year in pension income has shot up by 14pc.
And plans by the Government to reduce the tax relief for investing in a pension for higher rate taxpayers will make it even more expensive to fund retirement investment.
The Government plans to cut the tax relief from 41pc for higher rate taxpayers to a figure of 33pc for both higher and standard rate taxpayers. This will add €8 to the cost of putting every €100 into a pension.
The combined changes mean there will be a cumulative increase of up to 24pc in the cost of buying €5,700 in retirement income.
Instead of spending €10,000 to get an income of €5,700, it would cost €12,417 after 2014, he said.
Mr McLoughlin added that PRSI was being imposed on drawdowns from approved retirement funds (ARFs), which was an extra 4pc tax on these funds.
Ordinarily, PRSI is not imposed on those over the age of 66. But a letter from the Department of Social and Family Affairs shows that withdrawals from ARFs are liable for PRSI at Class S.