CONSUMERS who are sensible enough to be putting money aside for their retirement income have some difficult choices to make in the next while.
Under the National Recovery Plan 2011-2014, better known as the four-year plan, tax reliefs on pensions are due to gradually fall to 20pc by 2014.
Already this year, money put into pensions by employees will no longer get relief from pay related social insurance (PRSI) and the health levy. Instead, contributions will be liable for the new universal social contribution and will have PRSI imposed on them. Next year higher rate taxpayers will get 34pc tax relief instead of 41pc at present.
What these changes are intended to do is stop high-earning 'fat cats' from using pensions as a means to avoid paying tax. Instead, Finance Minister Brian Lenihan's pension plans will have the additional impact of making it more expensive for middle Ireland to fund a decent retirement.
Justin O'Gorman, of myadviser.ie maintains that despite the reduction in the tax relief, from a retirement perspective it is vitally important that contributions to a pension are maintained.
"Minster Lenihan clearly stated that his intention with the reduction in tax relief on pension contributions was to hit those on higher incomes. Unfortunately, his blunderbuss approach has caused huge collateral damage among middle-income Ireland." Mr O'Gorman reckons that for those people with no access to employer-sponsored pensions, the reduction in the tax relief from 41pc to 20pc will seriously impact on their ability to fund for a decent income at retirement age.
These individuals are at the mercy of markets when it comes to their pensions. The value of their pension depends on the level of contribution they make but more so on the performance of the assets they invest in.
There is no safety net in the event that markets perform poorly as is the case with a defined benefit pension, Mr O'Gorman said.
All the individual can do is hope that markets turn round or increase the contributions, he added.
However, these individuals base their pension contributions on the net cost rather than the gross cost of each contribution. Reducing the relief from 49pc (including PRSI and health levy relief) to 20pc increases the net cost of each contribution by circa 60pc. "It also goes completely against the mantra that successive governments have adopted of trying to increase pension coverage in Ireland.
"Tax relief made it more affordable for people to attempt to provide some form of private pension at retirement age," Mr O'Gorman said.
For these individuals it isn't a case of let's save some tax. It is about trying to make sure they can pay the bills when they are 65, he said.
With individuals in this bracket, the tax relief on the contributions really is only a deferral of tax as the rules in relation to Approved Retirement Fund (ARF) availability are now even more onerous and will eliminate this option from most private pension holders. Therefore, the income they receive at retirement age will be taxed and thus the tax relief they received will be paid back over time.
Under the recent changes in tax credits, a married couple with one income now starts paying the higher tax at €41,800 income. That is not fat cat income territory yet that person is being punished in the same way as a wealthier person, Mr O'Gorman added. For middle-income Ireland, it is still vitally and hugely important that they continue to fund for their retirement, he said.
"Even relief at 20pc is better than nothing. However, I fear that it will not be the reduction in the tax relief that will stop people from continuing or even starting their pension, it will be the increasing burden of other taxes and charges that will lead to the decision to stop the pension contribution."
Broker Liam McNamara, of MCN Associates, is adamant that people need to provide for their retirement, irrespective of the tax breaks.
"No matter how you come at it we have to provide for our retirement in old age and that needs money."
Like other brokers, Tom Deegan of Fitzgerald Life & Pensions, Waterforld, is hopeful the next government will abandon the proposals in the four-year plan, to slash the tax relief for higher earners from 41pc to 20pc.
Some in the pensions industry are pushing the idea of a levy, of say 0.25pc, being imposed on existing pension funds as a way to raise the same amount of money as cutting the tax reliefs. If the Government sticks with its plan to radically reduce the pensions tax relief then people will simply not fund a private pension, Mr McNamara said.
Shane Brennan, of Chartered Financial Solutions, argues that there are no proposals to change the fact that money invested in a pension can still grow tax-free. "Pension funds are still valuable long-term savings vehicles. It is important to remember that with a pension you are embarking on a 20 or 30-year saving plan."
Tony Lawless, head of pensions, Irish Life, says that planning now for your retirement has never been more important. "In 2009, there were five people working for every one person retired -- within the next 20 years that will have fallen to just three people."
He said this situation puts massive pressure on the state pension, and we are already seeing the results of this. "In a few years, the state pension won't start until you are aged 68. And there's likely to be more pressure to reduce the amount paid. That's why having your own pension plan is vital, and why it's so well-supported by the State," he added.
He stressed that despite the planned tax relief changes those investing in a pension still get full tax relief on their contributions (up to very generous levels) this year.
Then there is the fact that there is no tax at all on the growth of pension funds, and a tax-free lump sum at retirement.
"My advice is that everyone should put some money into your own private pension," Mr Lawless said.