The difficulty with Pensions is that they are a long term investment whereas politicians have a purely short term perspective - to the next election. Whilst this current Govt have done much to stabilise the economy after the mess they inherited from FF, they have shown little understanding of the long term nature of pension funding.
I know it's tempting when faced with a Govt policy that I disagree with or don't like or costs me money to assume that the folks involved don't get it. This generally isn't true. Whatever about Ministers, the officials and advisors involved generally get it. They generally know their areas very very well.
While there is a temptation for most politicians to be ‘short-termist’ (because most voters vote on ‘short-termist’), this Govt can genuinely stand up better than most Govts to this criticism.
- Pension contributions are largely a tax deferral exercise. Yes one gets tax relief on contributions invested, but one pays income tax + USC on income drawn down in retirement. So you might get 41% tax relief on the way in but currently might pay 48% tax on the way out.
The ‘largely a tax deferral’ line is spin, usually coming from those who make a living from pension commissions. Yes, you correct to point out the USC percentages, but that only tells you half the story. It ignores the fact that by spreading income over the additional pension years, one pays considerably less tax due to tax credits. It ignores the fact that the additional tax credit for older people considerably reduces the tax take. It ignores the effect of the tax free lump sum. It ignores the effect of the tax-free growth. It ignores all these options that aren’t available to those who can’t or don’t invest in pensions.
- Private sector pensions involve funding in advance to provide the ultimate benefits. Such arrangements are subject to the vagaries of investment markets and increasingly to Govt regulation ( which in the case of DB schemes seems to be making such funding more difficult). Most Public Sector schemes are unfunded or effectively underwritten by the Govt (e.g. recent changes to Universities Superannuation Schemes). So when a Pension Levy was introduced it largely only impacted private sector funded schemes. Public Sector schemes escaped scott free.
Perhaps you missed the coverage of the Pensions Levy imposed on public servants as one of the first responses to the economic collapse. Since early 2009, public and civil servants have paid between 5%-10.5% of gross income above €15k as a pensions levy, including some staff who don’t get any pension benefit at all. This 10%-ish deduction doesn’t quite meet my definition of escaping scott-free.
But while we’re on the topic of ‘scott free’, would this be a good time to talk about bondholders in Irish banks (which of course included many pensions funds) who got off scott free?
- Apart from raiding private pension funds, many of which are struggling to meet funding standards, the other impact is that individuals are less likely to invest in private pension structures if they feel that the Govt cannot resist the temptation to continually raid their private pension fund.
The levy is no more a ‘raid’ than your income tax is a ‘raid’ on your salary, or the VAT on your supermarket bill is a ‘raid’. Really, you don’t do yourself any favours with the melodramatic language. If you want to decide that ALL taxes are ‘raids’, then so be it, but I don’t think it really helps the discussion.
- The Ministers excuse for continuing with the 0.15% levy was entirely deceitful. The pensions industry had worked out the potential tax saving to the Govt if they both reduced the pension fund cap to €2m AND increased the multiplier for DB pensions (because the original 20:1 multiplier grossly underestimated the real value of DB pensions). However in the Dec Budget whilst the Minister reduced the cap to €2m immediately (and therefore impacted DC immediately) the increase in the multiplier would only apply to DB benefits earned after Jan 2014. So guess what, the higher valuation factors would have minimal impact on current senior civil servants and current senior politicians.
- The effect of the above, not well understood by most, is that a member retiring from a DC scheme in 2014 is immediately limited to the €2m cap which in reality would buy an annuity of about €65,000 p.a. whereas a senior civil servant retiring in 2014 could have a pension of €115,000 p.a. without exceeding the notional fund cap. Not exactly equitable.
- So private sector DC members are hit with a pension levy and immediately subject to a pension cap of €65,000 whereas senior civil servants are not subject to any equivalent pension levy and can earn a pension of up to €115,000 without exceeding the pension cap.
There does indeed seem to be an equity issue here. It is worth pointing out that the number of politicians or civil servants who retire on pensions of €115k pa is tiny, probably something like 20-ish people each year, at an uneducated guess. I’m not condoning the inequity, just putting it in context.
With increasing longevity, Govt policy should be on encouraging people to make provision for their old age rather than only relying on the State Pension (which itself is coming under financial pressure because of longevity). The problem is that there is no long term thinking in Govt when it comes to pensions. Unfortunately the Minister cannot pass up the opportunity to take a slice of private savings whilst similar public sector employees (whose pension benefits are largely funded by taxpayers generally) escape scott free.
Public sector employees have by no means escaped scott free, and have paid more than their fair share in the area for years before the levy on private schemes was introduced. Yes, the Govt should be encouraging people to make provisions, but there is a difference between ‘encouraging’ and ‘subsidising’. Certainly, the Govt was right to introduce the caps on tax relief, and any inequity between DB and DC schemes should be addressed by bringing the DB cap down.
This discussion highlights the more fundamental point of the reliance of the pensions industry on tax relief to add value. It seems that there is a whole industry out there whose main purpose is to exploit tax relief. If the industry is really that concerned about Govt ‘raids’ or meddling, then it is very welcome to offer services and value to consumers for their after-tax income. If indeed the tax relief is as worthless as many of the posts here would seem to suggest, then surely the industry should be taking up this option regardless.
