Pay ministers pensions we can afford, which is zilch
Retirement reforms in the Budget will bleed the private sector dry, writes James Fitzsimons
THE Budget proposes radical changes for pension planning and provision, but at best it is work in progress. The cut in tax relief is counter-productive and unfair.
The changes leave loopholes for abuse, while restricting those who most need to be supported in funding their pensions. The system remains more complicated than ever and is full of pitfalls.
The cap on relevant earnings is being cut to €115,000 in 2011, but it applies to payments made against income of the year 2010.
Therefore, a self-employed person making pension contributions next October could lose more than €14,000 in tax, unless he makes the payment early -- and no later than December 31, 2010. Those affected need to talk to their professional advisers.
We need to give more time to planning for our retirement. Life expectancy and dependency ratios are rising. If we are lucky enough to live longer, retirement is going to cost more than we have allowed for. Tax legislation may need to be changed for pension provision to prevent abuse by a small number of very wealthy individuals. The current changes fail to do this.
The Government and senior public servants sat by for years while the rich and their advisers exploited loopholes to avoid tax. The system should have been changed to stop the abuse. The proposed solution will not achieve this. Those in charge should be held accountable.
Occupational Pension Schemes
In order to provide pensions for staff, employers commonly use what are called 'occupational pension schemes'. They are also used for company directors, including owner-managers. At retirement, the scheme can give a tax-free lump sum to an employee of 1.5 times final salary. A typical pension of 50 per cent to 75 per cent of final salary can be provided.
Under the 2011 Budget, flexible options will be extended to all employees in defined-contribution schemes (they pay set annual amounts to build up a fund). This will give more options as to how the pension is drawn. It also creates a greater need for independent financial advice.
Defined-benefit schemes are funded to give a predetermined pension, usually based on final salary. There is no indication that flexible options are being extended to them. They are already seen as more valuable than defined-contribution schemes.
For years, loopholes in the tax system facilitated using pension schemes to withdraw unlimited amounts of tax-free cash. In some cases, this ran into millions of euro. Few employees could have benefited. The new rules propose to cap this at €200,000.
However, the next €375,000 is only subject to standard-rate tax (20 per cent at present). The balance will attract top-rate tax.
Special arrangements will be made for those who have already built up larger funds to safeguard their higher tax-free entitlements. However, they need to act quickly as there is only a short period in which to claim entitlements.
Personal Pension Plans
These are commonly associated with the self-employed. Employees whose employers don't provide pension benefits can also use them. The annual contributions get tax relief at the taxpayer's marginal rate of tax (top rate). Under the new rules, the relief will only be given at a reduced rate of tax. This is being deferred until after 2011. It will be up to the next government to carry it through.
With occupational schemes the firm can make pension payments for its employees and owners without tax. Therefore they can be more effective in avoiding tax than personal pension plans -- particularly for owner-managers.
Under the new rules, the maximum amount that can be built up in a pension fund is €2.3m. That could provide an annual pension of about €140,000, depending on personal circumstances and choice. Under the old rules, the fund might be €5.4m, which could provide an annual pension of €330,000. Of course, pre-2005 schemes were not restricted. It is thought that there are less than 200 of those.
Until recently, only the self-employed were given flexible options in retirement. The fund didn't have to be used to buy an annuity pension.
Instead, they could draw whatever pension they wished. The flexible options are being extended to all employees in occupational pension schemes
Public Sector Pensions
Many feel that public sector pensions are the Rolls-Royce of pension schemes. They are a form of defined-benefit scheme in that the pension is based on the final salary of the individual. However, the pension continues to be increased on an annual basis in line with salary levels in the public sector. As a result, it has become common for public sector pensioners to earn more in retirement than they did while employed.
The real cost of these schemes is unknown. It's a bit like writing a blank cheque. This wouldn't be such a problem if public sector pensions were funded during the employees' career. It would certainly have a dampening effect on the public sector pay bill, which would be welcome.
Until this is brought under control, the Government will continue to gamble recklessly with taxpayers' money.
The Government's pension reforms are stealing from the private sector to avoid the reform of public sector pay and pensions that is long overdue. Maybe the next Government will do what is needed.
Many who work in the public sector are not well paid, and the only thing they have to look forward to is a guaranteed pension in retirement. They must work for 40 years to get the maximum entitlement. On the other hand, government ministers can retire on full pensions after 10 years. Who can justify paying exorbitant amounts when there is no fund or national income out of which to pay them?
In the private sector, when pension funds collapsed, pensioners faced the prospect of poverty. So what have the Government and its senior public servants done to justify having their unfunded pensions covered by the impoverished taxpayer? Even the National Pension Reserve Fund has been robbed in order to support government waste.
Now that our national income has collapsed, ministers and their senior officials should be made suffer.
Their pension arrangements should be cut to what we can afford to pay -- nothing. Until then, they can't be trusted to find a fair solution for the rest of us.
They are forcing pension reforms on us that are counter-productive and will inhibit private pension funding. Meanwhile, the government continues to provide sweetheart deals and escape clauses for those who have created the problem.
Pay and pensions of the lower-paid can be protected, but those in charge do not deserve the same treatment. The private sector cannot be used any more to sustain this uncontrolled waste in the public sector.
James Fitzsimons is an independent tax and financial adviser