Pension underpayment scandal leaves thousands out of pocket
Thousands of pensioners can hope for a significant increase in their income, as a massive underpayments scandal is being probed by Revenue.
Pension companies are suspected of not paying out on increases in pension payments under schemes that are supposed to cover rising prices, the Irish Independent has learned.
These schemes had been sold to thousands of people as part of their pension plans, to guard against the effects of inflation. But the failure of pensions firms to pay up has sparked a Revenue probe.
The pension companies are accused of putting the money into their reserves - and then keeping it when the pensioners pass away.
It emerged that one woman who was affected lost up to one-third of her pension, due to the cumulative impact of not getting cost-of-living increases for years. The woman, who is in her 80s, is owed significant arrears and is due a rise in her pension payment of up to a third.
She got a pensions expert to successfully argue her case with Revenue and is now in the process of getting her money.
While in its early stages, the pensions row is already drawing comparisons to the tracker mortgage scandal.
But pension providers deny they are withholding any money. They argue that strict tax rules imposed by Revenue prohibit them paying out what are known as cost-of-living increases.
Chief executive of the Irish Association of Pension Funds Jerry Moriarty said: "People have paid for something that they are not getting because of Revenue rules."
Pensions experts have called on Revenue to alter the strict rule on the cost-of-living rise, a move that would force higher payouts by pension providers.
One expert said the Revenue rule was framed at a time when inflation was much higher than today and a 5pc-per-year increase was the best guess at future inflation at the time.
But now inflation has fallen so low, some pensioners haven't had an increase in years and the insurers are pocketing the increases not paid out.
A spokesperson for the tax authority said: "Revenue is currently engaging with the pensions industry in order to establish the facts surrounding this issue, the extent of the issue, and whether the practice is in line with pension tax legislation and with Revenue published practice in this area."
The issue relates to people who bought what is known as an annuity when they reached retirement age after paying into an employer pension scheme.
A pension annuity is a fixed sum of money paid to someone each year, typically for the rest of their life.
The affected people opted to buy an annuity with a fixed cost-of-living increase, sometimes called an escalator. This made the annuity more expensive.
A pensions expert explained that thousands of people bought annuities from life companies with a fixed 5pc-a-year increase.
Inflation was far higher when many of the older people bought these annuities with the cost-of-living increases built into them.
Now inflation is as low as 0.4pc, compared with close to 5pc in 2007.
However, a complicated Revenue rule says that anyone who buys an annuity with a fixed-rate increase of more than 3pc a year can only get a rise in line with the inflation rate in any one year.
A pensions expert said the current low-inflation environment and the way the Revenue restriction works mean most pensioners who paid for a fixed-rate increase are not getting their annual rises.
Revenue argues there has been no, or little, inflation since the crash.
But pension experts accused insurance firms that provide annuities of reserving for these escalator increases, and then keeping the money when the pensioners die. The Exchequer is also losing out due to lower pensions, and so lower tax being paid on them, they said.
Revenue said the purpose of these rules reflects Revenue's concern regarding the real value of pension payments.
This is why the rules allow for the real value of pensions in payment to be maintained over the course of a pensioner's lifetime, it said.
The rules have been in existence for more than 30 years, Revenue said.
But it said it was now going to investigate insurers to ensure they are operating in line with pension tax law.
Insurers blamed the tax rules, which limit what they can pay out.
A spokesperson for Insurance Ireland said: "People who have well-funded retirement savings may find that their annual payout is limited by these Revenue limits.
"The taxation of life and pensions products, including the limits on amounts paid by way of annuities, is the responsibility of the Revenue Commissioners."
Irish Life insisted that in all cases income was paid in accordance with the agreed policy terms.
Aviva denied withholding any money from those who bought annuities from it.
New Ireland said its practice for members who retire from its policies is to check Revenue limits at the point of retirement, and at that point choose an appropriate level of increases.