There is growing concern that the temporary pension levy is for keeps. The controversial 0.6 per cent levy was to end this year, but the Budget added another 0.15 per cent, bringing it to 0.75 per cent. That's a 25 per cent increase in a levy that is inherently wrong. The Government is sending out the wrong signals. Savings will move offshore and underground, while domestic funds are looked on as fair game by a Government turned poacher.
In 2005 a limit of €5,000,000 was imposed on the size of the fund you could build up. A few rich developers used the system to take out millions in tax-free cash. But if the fund was already there, the limit didn't apply. As a result hundreds of millions in tax revenue was lost, maybe billions.
Fewer than 200 people disclosed funds over €5,000,000, but some had funds of more than €100m, allowing their owners to take tens of millions in tax-free cash, and they did. It's a classic case of closing the gate after the horse has bolted. Many think the bureaucrats were too preoccupied with preserving their own outrageous pensions and failed to see the loopholes for the rest.
The Government and the Department of Finance justify the pension levy as a claw back of tax relief that was too generous to begin with. But they are taking it from the people whose funds are too small to provide an adequate pension. Those who can afford to pay something back had their funds ring-fenced and remain essentially untouched. It's not as if they did anything wrong anyway. The logic doesn't stack up. The Government should pay back what it took from those who saved for their pensions. If everyone saved, we wouldn't be facing a pension crisis.
When the fund cap of €5,000,000 came in, an artificial method for valuing public sector pensions kept them out of charge. There was no fund to pay them, so they valued it at 20 times the pension. It would take an annual pension of €250,000 to breach the limits. The fund limit was cut to €2,300,000 in 2010. The judiciary, many of whom had valuable private sector schemes, feared that their public sector funds would bring them into the tax net. Enda Kenny was petitioned to exclude them from the tax. Funds in excess of the limits are subject to the tax at 41 per cent. Many others would be affected too, hospital consultants in particular.
In the last Budget, the fund cap was cut to €2,000,000, which would hit the pensions of top civil servants. A pension of over €100,000 a year would be hit, even if valued at 20 times the annual pension. A more realistic figure was introduced for valuing Defined Benefit pensions. Multiples of 22 to 37 can apply, but they only affect new recruits in the public sector. The cushioned elite get off the hook again. It is reported that senior civil servants would not have co-operated with the Government if they couldn't get what they want.
This elite can't expect the rest to pay anymore. Less than half the private sector have pensions and those who do are not saving enough to provide what they need.
In 2009, it was estimated that public sector pensions were underfunded by about €116bn. Divide that between serving public servants and each officer's fund is short of €400,000. To make this up over 20 years, the average public servant would need to put half their earnings into a pension fund. If they don't it must go up for everyone else. It's not sustainable for them and it's not sustainable for the economy. The sooner they realise it, the better. Then we can work on providing a good pension for everyone who needs one, and not everyone does.
The new 0.15 per cent levy is set to rise and become permanent, unless the Government sees sense. That won't happen while it is controlled by civil servants who are looking out for themselves. There are two types of private sector funds, Defined Benefit (DB) and Defined Contribution (DC) schemes. DB schemes were once guaranteed by employers, but they have proven to be too expensive and are disappearing, except for the public sector and the banks that the Government guarantees.
The extent of underfunding in DB schemes is massive. Most schemes are insolvent and this is making employers insolvent too. The Government is required to guarantee 50 per cent of the pensions if the employer and fund collapses. This can only be achieved with higher taxes on everyone else. The OECD prepared a pension report last year that blamed the Government for letting things get out of control. Like public sector schemes, DB schemes are the Roll-Royce of pensions, because the guarantee is linked to earnings and the employer carries the financial risk.
DC schemes on the other hand, are like a savings account. They build up a fund, and your pension depends on what the fund can buy when you retire. The employee takes all the risk and needs to monitor it closely every year. But few do and they don't save enough for what they need. The levy robs these meagre funds to prop up valuable DB schemes that employers have reneged on. It's just not fair and it's the Government's fault.
It should be putting more into private sector pensions and not robbing what's in them. They justify the levy because it takes back what they didn't intend to give. But most taxpayers need and deserve the tax relief. Take it from those who can afford to pay and there are many yet untapped. Companies have contributed nothing yet.
They built up financial reserves by paying only 12.5 per cent in tax. In some cases this is as low as 6 per cent.
Companies are paying €2bn a year less now than they were before the recession. Is it too much to ask for even half a billion more to get us out of the crisis. There's no harm in asking.
James Fitzsimons is an independent financial adviser specialising in tax and financial planning