Sunday 15 December 2019

How state levy will hit private pensions by €1k a year

Finance Minister Michael Noonan added an extra pension levy of 0.15pc in the most recent budget
Finance Minister Michael Noonan added an extra pension levy of 0.15pc in the most recent budget

Charlie Weston, Personal Finance Editor

PRIVATE sector workers will retire with an average of €1,000 less a year from their pensions due to the government levy.

And the figure could increase if the charge is left in place beyond next year, according to calculations by IFG Corporate Pensions.

The levy was introduced as a temporary measure to boost job creation, but it was extended in the last Budget – and is now expected to be in place indefinitely.

Calculations by Samantha McConnell of IFG show that somebody on the average industrial wage who starts saving at 35 will end up with a pension pot of €200,000.

But the impact of the levy on all private sector schemes will mean that this person will have their pension reduced by €1,000 every year for the rest of their life.

The first levy of 0.6pc imposed on the total value of each fund was introduced in 2011. This has to be paid for four years, from 2011 to 2014.

In the last Budget, Finance Minister Michael Noonan added an extra levy of 0.15pc, to apply this year and in 2015.

Ms McConnell, chief investment officer at IFG, said: "Figures of 0.6pc and 0.15pc may not seem like high figures, but they can take a tidy chunk of change from your pension pot when aggregated over the relevant years. The Minister for Finance had the option of introducing a tax on the growth element in pension funds, but actually went much further – unfairly in our opinion – by introducing a levy on the total value of your fund."

Figures released by the minister recently, in response to a parliamentary question, show that the pension levy had netted the Government more than €1.4bn over the past three years.

This was used to help fund the €1.7bn worth of measures introduced under the Government's Jobs Initiative scheme. The levy will bring in more than €2bn over its lifetime.

IFG also warned that the long-term impact of both levies would be to reduce the incentive for people to save for their pensions. This could pose serious problems for government pension policy as it would deter companies and employees from investing in pensions.

"Before any type of compulsory pension arrangement is introduced, the Government needs to stop raiding pension schemes," Ms McConnell said. "Otherwise it is like putting money into a bucket with a hole in the bottom of it."

She said money would continue to leak out to the Government from the levy – and that did not provide an incentive to increase pension savings.

Irish Independent

Also in Business