PRIVATE sector pensions should be paid out tax free if a new levy is introduced on pension funds as an alternative to cutting tax reliefs, a pension expert argued last night.
Head of the Independent Trustee Company Aidan McLoughlin said this would level the playing field with public sector workers as the levy would not apply to public sector pensions.
A levy of about 0.25pc has been proposed by the Professional Insurance Brokers Association as an alternative to eventually reducing the tax relief for investing in a pension to 20pc.
Mr McLoughlin said this proposal would solve the short-term cash crisis for the Government.
"When the alternatives to the proposed cut in pension tax relief are considered, most experts agree that a pension fund levy will deliver a better yield for the Exchequer and cause the least devastation to the retirement plans of most workers," he said.
A 0.25pc levy on pension funds will yield €215m a year for the State -- well in excess of the total of €700m over four years targeted in the State Plan for National Recovery.
But pension trustees contend that while the levy is simple and effective, it will disadvantage the private sector worker as it won't be applied to public sector workers.
"They will get off scot free as there is simply no specific fund to tax; to balance that we are advocating a tax free pension income for all private sector workers," Mr McLoughlin said.
The tax expert proposed that private sector pensions that are levied would be exempt from income tax in retirement.
For existing private sector workers, this change would only apply for the proportion of their pension accrual from the date the levy was applied, he said.
"Civil servants' normal pensions would remain unchanged -- their pension incomes would be taxable as they would not have paid the levy," he said.
"However, their privately funded AVCs (additional voluntary contributions) could benefit from this proposal."