# How would it work? - a cap on private pension tax relief at €60,000



## bovis (3 Dec 2012)

Hi All,
There has been a lot of talk about the potential changes in budget 2013 regarding pensions tax relief. I understand the impact of reducing the tax relief for contributions (which basically means I'll stop any AVCs immediately as there'll be little or no incentive). But what does it mean if there's a cap put on private pension tax relief at 60K? How would that effectively work for a defined contribution pension? 

1) Would that mean that until a fund reaches 2Million (e.g. 60K by a multiplier of 30 + 200K tax free) one can continue to get tax relief at the marginal rate? 
2) Or does it mean that a tax payer can only tax efficiently contribute each year up to a maximum of your aged limited max contribution percentage of 60K? E.g. if you are between 40-45 you can only contribute 25% of 60K as an personal contribution?

Bovis


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## LDFerguson (3 Dec 2012)

bovis said:


> I understand the impact of reducing the tax relief for contributions (which basically means I'll stop any AVCs immediately as there'll be little or no incentive).


 
Everyone needs to evaluate their own position. If you're already in the fortunate position that your income in retirement is likely to be taxed at the high rate, then I'd agree that any reduction in tax relief on contributions should probably cause you to stop making further contributions. 

However, a huge portion of the population will be on low-rate tax or none at all in retirement. When you take into account that the lump sum from a pension arrangement is typically 25% of the fund, that's an effective tax rate of 0% to 15% on pension funds in retirement. 

So I wouldn't automatically assume that if tax relief is reduced on contributions that everyone should stop theirs. 



bovis said:


> But what does it mean if there's a cap put on private pension tax relief at 60K? How would that effectively work for a defined contribution pension?


 
How it _should_ work is as you describe in your first example: a limit on funds of about €2 million would be the equivalent of a pension of €60,000 per annum. But at the moment the factor used by Revenue for calculating the "value" of a pension is 20:1 which is not based on any reality. So the limit could be €1.4 million - (€60,000 x 20) + €200,000.


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## mandelbrot (3 Dec 2012)

bovis said:


> Hi All,
> There has been a lot of talk about the potential changes in budget 2013 regarding pensions tax relief. I understand the impact of reducing the tax relief for contributions (which basically means I'll stop any AVCs immediately as there'll be little or no incentive). But what does it mean if there's a cap put on private pension tax relief at 60K? How would that effectively work for a defined contribution pension?
> 
> 1) Would that mean that until a fund reaches 2Million (e.g. 60K by a multiplier of 30 + 200K tax free) one can continue to get tax relief at the marginal rate?
> ...



Sorry if I'm misreading, but you're baulking at a situation whereby you can ONLY get tax relief on the first 15k you put into a pension in a year?!

If you can maintain that level of contribution from early 40s, you're going to have a pretty decent pension at retirement. And if you've got more than 15k in disposable cash then maybe you should be spending/investing it in the economy...?


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## bovis (4 Dec 2012)

Great thanks for the responses. Very helpful as always.

Mandelbrot, I wasn't baulking at any situation. I was simply asking how it would work. But if you think that contributing 15K into a pension is high then maybe you and I have a different view on the lump sums required for retirement. Its impossible to say what is a "good" pension so lets take a comparison. A public servant gets a
Retirement pension 1/80th of pensionable remuneration per year of pensionable service up to a maximum of ½ pensionable remuneration - i.e. 40 years services = 50% final salary as pension (minus the COAP old age pension)
>>> e.g. If someone earns €80k then their public sector pension = 80/2 – 14 = €26K. Lets assume they started work at 20. So at 60 the retire and take the max tax-free amount (e.g. 200K). Lets say they live 25 years.

The actuarial value of such a pension is roughly 26*25years+200K = 850K (leaving aside any index linking). 

So starting at age 45, an annual private pension contribution of 56K would be required in order to have a similar pension value at age 60. You might say starting at 45 is a bit extreme - but is it? The negative equity generation will have spent their 30s & 40s drowning in debt and not paying into private pensions.

Now - does a 15K per year contribution seem like a lot? I'd argue differently.


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## T McGibney (4 Dec 2012)

mandelbrot said:


> And if you've got  more than 15k in disposable cash then maybe you should be  spending/investing it in the economy...?



Pension fund monies are invested in the economy.


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## Firefly (4 Dec 2012)

LDFerguson said:


> a limit on funds of about €2 million would be the equivalent of a pension of €60,000 per annum.


 
Hi LD,

Would you have a link / reference for this by any chance?

Firefly.


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## LDFerguson (4 Dec 2012)

Firefly said:


> Hi LD,
> 
> Would you have a link / reference for this by any chance?
> 
> Firefly.


 
I based this on a very rough figure that it costs around 30 times the required annual pension to fund an annuity plus €200,000 tax-free cash.  

You can do more precise calculations on the Irish Life annuity calculator www.pensionchoice.ie - for example an annuity quote for a male aged 65 (with a female spouse aged 65), looking for a pension of €60,000 per year comparable to the Public Service format, i.e. escalation on pensions in payment, 50% pension to spouse, would actually cost €2,049,770 and that's before the tax-free lump sum.


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