Tax reliefs are flawed, says OECD
THE current system of tax relief for pension savers favours high earners and should be altered, a report from prestigious think-tank OECD says.
Those with the highest incomes have the greatest incentive to save for retirement, while those most in need get the lowest incentive, the Organisation for Economic Co-operation and Development (OECD) says.
The report, which was commissioned by Social Protection Minister Joan Burton, recommends changing to a system of tax credits, the Irish Independent understands.
At the moment those on the higher 41pc tax rate can effectively save €100 for their pension at a net cost of €59.
But those on the 20pc tax rate have to spend €80 to get €100, the report, which is due to be published today, says.
Government plans next year for a cap of €60,000 annually from tax reliefs are acknowledged in the report.
But it says it would be preferable to dispense with the tax relief system and move to one where tax credits are awarded to people to encourage them to save for retirement.
This would give people back an amount of money after they have paid their income taxes. The amount could be capped, the OECD recommends.
This cap could be a fixed amount for all, or a percentage of pension contributions with a cap.
Despite this change, lower-income people may still not be inclined to save.
Government subsidies or matching contributions to a private pension may be needed as encouragement, the OECD says.
Finance Minister Michael Noonan decided not to radically reduce tax relief on pensions in the last Budget after this newspaper revealed it would have hit the average worker's take-home pay by €800 a year.
More than 550,000 workers would have been hit by the move, an analysis by actuaries Milliman showed.
Public servants would be the biggest losers, but thousands of private-sector workers who pay into a pension would also be hit.
OECD officials also recommend that lower paid civil servants should be switched to career average systems.