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Friday 21 September 2018

Pension tax relief cut? Up to 600,000 - mainly middle earners - would be big losers

Donohoe sparks fears of cuts to 'generous' pension tax relief

Minister for Finance Paschal Donohoe. Photo: Bloomberg
Minister for Finance Paschal Donohoe. Photo: Bloomberg

Charlie Weston and Philip Ryan

Finance Minister Paschal Donohoe has sparked fears he will reduce the tax relief on pension contributions in the Budget, after describing the current system as "generous".

Any cuts in the scheme would affect more than 600,000 workers, mainly middle earners.

A committee of public servants, chaired by the Department of Finance, has been set up to examine contributions relief.

The Interdepartmental Pensions Reform and Taxation Group will report by the end of the third quarter, just before the Budget.

The Department of Finance insisted it currently has no plans to "do away with" marginal relief for pension contributions. However, the new committee is tasked with looking at the cost of pensions to the Exchequer, as Government prepares to develop a new auto-enrolment scheme for 2022.

The State-supported think tank the ESRI also recently issued research showing that cutting the tax relief on pension contributions would save the Exchequer €1bn a year.

Fianna Fáil’s Michael McGrath. Photo: Tom Burke
Fianna Fáil’s Michael McGrath. Photo: Tom Burke

Some 619,000 people got such tax relief in 2015, the latest date for which data is available.

Most of the contributions paid into pensions enjoy tax relief at the person's highest rate of tax.

So those paying income tax at 40pc get relief at that rate, but those paying tax at 20pc get lower levels of relief. A single person hits the 40pc tax rate on income as low as €34,550. The threshold is €43,550 for married one-earner couples.

The ESRI said the system could be changed by restricting tax relief on pension contributions to 20pc for everyone.

That would seriously impact workers currently on the higher rate, effectively halving the relief they enjoy.

Standardising the tax relief at 20pc would cost someone on €50,000 some €200 for every €1,000 put into a retirement fund. So a worker making the typical contribution of €2,500 a year would be down €500.

Mr Donohoe told Fianna Fáil finance spokesman Michael McGrath in a Dáil reply that "pension related tax relief represents a large and generous tax expenditure".

Mr McGrath said this must be protected. "According to the Revenue Commissioners, tax relief on employee pension contributions is availed of by 618,900 workers, a significant proportion of which avail of relief at the marginal rate of 40pc.

"Contrary to what some believe, a pension is not a luxury. Any change to the marginal rate of relief would represent a significant tax increase for middle Ireland and it is something we could not support."

Chief executive of the Irish Association of Pension Funds Jerry Moriarty said most of those who benefit from the tax relief earn close to average earnings.

"The biggest problem we have with pensions in Ireland is that we don't have enough people saving enough, and we need to focus on fixing that and not discouraging those who are saving."

The Department of Finance said in a statement: "In general, pension drawdown is taxed at prevailing tax rates through the income tax system in retirement. On this basis, it is considered that marginal relief represents a significant incentive to encourage pension savings and to a degree represents a deferral of taxation."

It added: "It should also be noted that tax policy is a matter for the Finance Minister and the Department of Finance, and, more broadly speaking, such matters are considered in the context of the annual budgetary cycle."

Irish Independent

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