A flat rate of pension incentivisation is certainly plausible and has been discussed at length in the UK. It is ideologically different from our current EET system and effectively removes subsidization of pension provision by high earners. But running the two systems in parallel is a recipe for disaster. Companies will need two parallel systems and move members between the two according as which gets the gets the better State subsidy.I'd guess the government does intend to move to a single rate of pension tax relief (vaguely recall some party floating the idea), but just like every other pensions idea they had, they forgot to implement half of their plan. PRSAs to replace PPPs, PRBs and AVCs: introduce the PRSA, forget to get rid of the others. Now they e brought in their new tax relief, but forgot to get rid of the old ones
That is understandable. The DSP says 1 for 3 top-up is equivalent to 25% tax relief for all taxpayers. What they mean is that a 1 for 3 top-up is 25% of the amount invested in the pension fund. That is a misleading comparison in terms of tax relief. It would only be equivalent to 25% tax relief if you were taxed at 25%!I must admit I don't understand parts of this letter, as follows:
1. "Standard rate taxpayers in the auto-enrolment scheme will get an effective 26.6 per cent top-up of their gross income" - what does this actually mean and where does the 26.6% come from?
2. "They [higher rate taxpayers] currently get tax relief of 40 per cent of gross income forgone, but under auto-enrolment will only get a third of 60 per cent of that amount" - what's this meant to mean?
3. "Existing tax relief will therefore be a full double of the Department of Social Protection €1 for €3 top-up proposal" - again what does this mean?
Trad approach | AE approach | ||||
Relative income | 100 | 100 | Relative income | 100 | 100 |
Pension contrib | 3 | 3 | Tax rate | 20% | 40% |
Net taxable | 97 | 97 | Net income | 80 | 60 |
Tax rate | 20% | 40% | Net AE contrib | 2.25 | 2.25 |
Net income | 77.60 | 58.20 | Net income after AE | 77.75 | 57.75 |
Amount in Employee pension fund | 3 | 3 | Employee pension Fund | 3 | 3 |
Only difference between Trad and AE approach is the treatment of contributions | 20% | 40% |
Actual monetary differences in final net income | 0.15 | -0.45 |
Expressing this monetary difference as a % of gross employee pension contribution | 5% | -15.00% |
Actual relief on gross employee pension contribution as a % of that contribution under AE | 25% | 25% |
Financial Advisor on LinkedIn said:Earning €42,000 or more... beware!
According to the department there is approx 200,000 higher rate employees that will be brought into the AE scheme. For this cohort a Master Trust arrangement would generally be a preferable option for those employees. Employers need to seek advice and enable advisors to educate this cohort of employees in the benefits of alternative options instead of staying in the auto enrolled scheme.
I'm trying to wrap my head around why they've come up with two different incentive systems, the existing tax relief one, and this new scheme. It seems a backward move to make an already complex system more complicated.
The problem is you have to pay tax to get tax relief. We have system in Ireland (created by Bertie & Co) were the lower paid pay no Income Tax. The AE system is designed to give pensions to the lower paid and *in the long run reduce the burden on the state.I'm trying to wrap my head around why they've come up with two different incentive systems, the existing tax relief one, and this new scheme. It seems a backward move to make an already complex system more complicated.
I agree the "€1 for €3" has an attractive 'sales pitch', similar to the old SSIA scheme, and no doubt the idea is well intentioned, but did anyone stand back for a moment and ask the simple question, if you're auto-enrolling people, do you really need the 'sales pitch'?
Indeed, a SSIA type incentive is required for very low or zero income tax payers. 1 for 3 is 33% better than 20% tax relief but it is a massive 50% less than 40% tax relief! The winners will be the financial advisors who will have a field day setting up parallel arrangements where employees switch between whichever system is best for their individual circumstances. Nonetheless there will be a large number of those 200,000 40% taxpayers who are automatically enrolled and who through ignorance or inertia will only get a half of the State subsidy that is available to them with a conventional arrangement.The problem is you have to pay tax to get tax relief.
You have to look at the result. Ending up with duplicate incentive systems, with all of the associated additional overhead which goes with it, is a drastic response to that problem. By all means top up those who don't earn enough, but do it within the existing system. Every variable adds to complexity exponentially, creating yet another system doesn't serve the state nor its citizens well.The problem is you have to pay tax to get tax relief. We have system in Ireland (created by Bertie & Co) were the lower paid pay no Income Tax. The AE system is designed to give pensions to the lower paid and *in the long run reduce the burden on the state.
* 'Reduce the burden on the state' by denied by some.
The introduction of the PRSA was supposed to simplify pensions, but the government didn't fully implement the plans.You have to look at the result. Ending up with duplicate incentive systems, with all of the associated additional overhead which goes with it, is a drastic response to that problem. By all means top up those who don't earn enough, but do it within the existing system. Every variable adds to complexity exponentially, creating yet another system doesn't serve the state nor its citizens well.
Very interesting point. It is currently structured as an SSIA. Even the benefits, which will be paid 100% as a lump sum, will be tax free up to €200k, taxed at 20% between €200k and €500k and subject to full marginal tax (and USC?) over that amount. A 1 for 3 top up across the board would make the scheme unattractive to use this vehicle to provided for large pensions.AE will similarly complicate matters, but there was never an inventor it to simplify pensions (unless there's an objective of eventually making all tax relief on all pensions operate on the €1 for €3 basis).