Pension tax bill 'will be double the cost of NAMA'
THE cost of public pensions is set to be more than twice the €40bn cost to the State of toxic loans agency NAMA, pensions experts have calculated.
Life companies and broker body PIBA (the Professional Insurance Brokers Association) said the Government needed to be fully aware of the €116bn cost, over the next 60 years, of public sector and state pensions as it proposes cutting tax reliefs on private pensions.
At present anyone paying tax at 41pc can claim back the tax for investing in a pension.
A single person pays tax at 41pc on earnings above €36,400.
Employees, as opposed to the self-employed, can also claim back PRSI (pay related social insurance) and the health levy contribution when they invest in a pension.
This means that an employee can get an effective €100 worth of pension investment for an outlay of €49.
The Government wants to standardise the tax relief for pension investing at 33pc for all taxpayers.
Last month the Comptroller and Auditor General highlighted that accumulated pension liabilities for existing service by the public sector amounted to €116bn.
PIBA boss Diarmuid Kelly said: "Government liability for public pensions funded out of current taxation is more than twice the size of NAMA."
NAMA was set up to take toxic developer loans off the banks' balance sheets. It is buying the loans for €40bn, but may eventually break even.
He added that Government proposals to reduce the tax relief available to private sector workers, who pay tax at 41pc, would undermine pension investing for private sector workers.
He was supported by pensions director at Zurich Life Brendan Johnston who stressed that personal pension provision in this country was hugely supported by tax relief.
"People who expect to pay marginal rates (41pc) on income in retirement will see little potential upside in putting money into a pension," Mr Johnston said.
"It will also affect those who end up on a lower tax rate because this tax rate is uncertain today. Tax relief has been an unquestioned reason to make pension contributions. To make these tax-relief benefits questionable will severely hamper pension provision."
Mr Kelly said that the proposed new regime will not save the Exchequer sufficient funds to warrant the damage it will do to private sector pension funding.
"It will not serve equity and the treatment of employer and state 'implicit' contributions have the potential to aggravate the existing inequalities between public and private pensions," Mr Kelly added.
A recent Dail question, answered by Finance Minister Brian Lenihan, revealed that the gain to the Exchequer of standardising the tax reliefs will be just €115m. In contrast, the cash costs for public sector pensions is €2.2bn per year, while the "accrual" costs (costs that arise but do not have to be paid upfront) have been estimated at €5bn to €6bn.
"If the Government was a private employer it would have to make provisions for both cash and accrual costs amounting to €8bn per year," Mr Kelly said. "On top of this, the State social welfare pension costs €4.6bn per year and this bill is rising exponentially, from €1.7bn in 2000."