# Moore McDowell critical of flat-rate pension tax relief suggestions



## LDFerguson

*Press Release - Monday 23rd November 2009*

Economist Moore McDowell has criticised the proposal to introduce a single rate of tax relief for pensions and radically reduce the tax-free lump sum which is the only real encouragement to pension saving in the current system. 
The criticism is contained in a paper on the taxation of pension contributions commissioned from McDowell by Irish Life – the country’s largest pensions company. 
There are increasing signs that the Government is moving to the introduction of a single rate of tax relief of 30% on pension contributions and to further limit the tax-free lump sum which is currently available on retirement.



McDowell’s arguments include:

*Contrary to common belief, the current tax reliefs encourage middle income earners to save for their pension much more than higher income earners*
*Proposed reforms will run counter to EU policy on tax relief for pensions* 
*Critics of current system using a flawed argument* 
*Changes will discourage saving for pensions* 
Moore McDowell was commissioned to study the proposed pension reforms in the context of the growing debate in Ireland about tax relief on pensions. Critics of the current scheme have argued that because tax relief is applied at the marginal rate of tax, higher income earners get greater relief than middle / low income earners. Critics have also suggested that the current scheme represents a State subsidy to the well-off.
McDowell defends the current system and argues that criticisms of it stem from a fundamental misunderstanding of the way in which the tax treatment of pensions works in practice; “A myth has grown which suggests that tax reliefs on pensions are net benefits to the taxpayer. They conveniently ignore the fact that pension funds are taxed at the point of _drawdown_ not at the point of _contribution_ but the net effect for the exchequer and for the tax payer are broadly neutral under the current system. However under the reforms proposed, middle income earners will be disadvantaged by paying the marginal rate of tax on drawdown but enjoying less relief at the point of contribution.”
McDowell points out that contrary to popular belief, the main beneficiaries in most cases [ie: where the use of pensions is not simply a tax avoidance device by the very wealthy] from the present structure are not the very rich but those with middle incomes [€45,000 - €75,000]. 
The proposed change to a flat 30% rate of relief would in effect mean charging 11% income tax on contributions in the case of contributors paying the higher rate of tax [who will then be taxed at the higher rate when taking their pension out] while reducing the tax bill of those on the lower rate by 150% of their contributions. McDowell argues that such a change will mean that anyone earning over €35,000 will face a reduced incentive to make pension contributions; 
McDowell also warns that the proposed move to a single rate of tax relief on pension contributions [of 30%] will ensure Ireland’s pension is less attractive than that which applies in most of the EU15 countries and which has been explicitly endorsed by the EU Commission as the correct approach to taxing pensions.
McDowell warns that the move to a single rate of tax relief on pensions [30%] will result in a tax structure which discourages saving for pensions and which will ultimately work AGAINST the stated policy goals of the State to increase the level of provision people make for themselves. 
Finally McDowell cautioned the Government against using the present budget crisis to introduce a “reform” that is simply a device to improve the Exchequer’s cash flow position rather than to address the problem of inadequate pension provision – and in fact exacerbates it.
Welcoming the report, Gerry Hassett Chief Executive of Irish Life commented “Clearly the Government is facing extremely difficult decisions in the coming budget but pensions are a long-term issue which has very significant consequences for our society. There’s a real risk here that the Government will take short-term action which will greatly damage the country in the long-run”
Hassett cautioned in particular against introducing a partial reform whereby the rate of relief for higher rate tax-payer is reduced but improved reliefs for standard rate players is deferred.


----------



## Duke of Marmalade

Agree almost entirely with the comments in the paper. What about this quote in particular?


			
				McDowell said:
			
		

> A myth has *grown* which suggests that tax reliefs on pensions are net benefits to the taxpayer. They conveniently ignore the fact that pension funds are taxed at the point of _drawdown_ not at the point of _contribution_ but the net effect for the exchequer and for the tax payer are broadly neutral under the current system.


The myth didn't just "grow". It was nurtured by the whole system, life industry, media and government alike. How long would a broker stay in business who said to his prospects _"don't mind that ol' tax relief bunkum, it's all broadly neutral"_. The marketing of pensions has almost exclusively focussed on the "very generous" tax breaks. I do hope this paper does not lead to misselling complaints.


----------



## LDFerguson

I don't understand this.  

Let's say I have a pension fund at 65 of €1.7 M.  I take out €425,000 tax-free, leaving a fund of €1.275M.  I buy an annuity of €50,000 per year, including spouse's pension.  

According to Karl Jeacle's wonderful tax calculator a couple aged 65 earning €50,000 a year will pay tax of €5,826 on it.  That's an effective tax rate of about 11.6% on the pension.  Bearing in mind that the pension is only 75% of the fund, the total effective tax rate is 75% of 11.6% or under 8.75%.  

So I got high rate tax relief on contributions on the way in and am paying an effective rate of tax of 8.75% on the way out.  

Surely the idea of paying high-rate tax on pensions will only apply to a very small number of people with very well funded pensions?  (Or am I hanging around with the wrong class of client?  )


----------



## STEINER

I think that someone who pays tax at 20% should only get tax relief at 20% for pension contributions.  They should get a higher paid job if they want higher tax relief on pensions.  As a higher rate taxpayer, I will not be happy, if in 2010, I will only get relief at a lower rate than 41%.


----------



## Duke of Marmalade

Ok, _Fergie_, you're right.  The neutrality breaks down for two reasons:

1) Tax free lump sum

2)  Lower average tax rate on pension than tax relief on contribution

For low earners and real high earners it is broadly neutral, but for the large middle section it is positive.  I think the paper rather reveals its bias when it makes such a generalised statement that the current tax treatment of pensions is broadly neutral.


----------



## Complainer

I wonder if the Govt had commissioned Moore to write the paper, would have come up with the same conclusion, or is he just a gun for hire?


----------



## Sumatra

Irish Life commission a report which they deliver as a 'Press release' this afternoon but which has already appeared in this mornings Irish Times? Had good potential but a bit of a fluff somewhere along the line don't you think?


----------



## LDFerguson

Complainer said:


> I wonder if the Govt had commissioned Moore to write the paper, would have come up with the same conclusion, or is he just a gun for hire?


 
I would hope that an academic who holds views contrary to Irish Life's agenda would have just declined the invitation and they would move on until they found one with views broadly in line with their own.  Or am I being naive?


----------



## Complainer

LDFerguson said:


> I would hope that an academic who holds views contrary to Irish Life's agenda would have just declined the invitation and they would move on until they found one with views broadly in line with their own.  Or am I being naive?


I was thinking about an allegation made on one of the public sector pension threads when I wrote this. Someone mentioned about a friend working for one of the big consultancies who rewrote their report findings at the behest of the client, as their initial report didn't give the answer the client wanted.


----------



## Protocol

A lot of people will benefit from 41% tax relief on conts and will pay zero tax on pension as their combined income is below 40k.

I fell that all tax relief on pension conts should be abolished.

People should be obliged, not just encouraged, to make pension conts.  Everybody.


----------



## Duke of Marmalade

As I have observed in other threads, our pensions system is one of deferred taxation. That is, tax due on this year's economic activity is deferred to a later year, so as to encourage pension savings.

From a purely macro economic point of view this is totally against the requirements of our current situation.

1. We cannot afford to defer taxation which belongs to current activity.

2. We should not be encouraging savings in a depression.

Individuals make these calls instinctively - if they can't afford day to day living the first thing to give (hopefully temporariliy) is savings for the future.  The national finances are in dire straits and so there is an argument that savings for pensions and foregoing tax revenues to encourage same is a luxury we cannot currently afford.


----------



## Sumatra

If you touch the tax relief then you introduce a major deterrant in pension provision.

Later, it will be our children who will bear the burden as our population ages.


----------



## LDFerguson

Protocol - In a way, people already are making obligatory pension contributions, through PRSI, which funds the State Contributory Pension. 

So are you suggesting that the State Pension be increased, with a corresponding increase in PRSI rates?


----------



## Protocol

That's one option.  If we feel, as a society, that pension incomes are inadequate, then we could increase PRSI conts and introduce maybe a CSP linked to former wages, as all other EU countries have.

However, I prefer leaving the PRSI / CSP pension more or less as it is, and obliging everybody to save into a supplemental work-based pension.

Workers contributes 5%, maybe increasing to 10% over time, or else with an option to save more.

Employer contributes 5%.

Govt contributes 5%, maybe increasing to match the increased employee contribution.

It looks a bit like the SSIA scheme.
Tax relief on conts scrapped, replaced with the State contribution.
Maybe limited tax relief on above-mandatory contributions?


----------



## Complainer

Sumatra said:


> If you touch the tax relief then you introduce a major deterrant in pension provision.
> 
> Later, it will be our children who will bear the burden as our population ages.


Strange how this argument wasn't a major factor when we had to raid our National Pension Reserve Fund to pay for the excesses of our bankers and builders?


----------



## Sumatra

You're right it wasn't a factor. Don't they seem to just love sticking another finger into the collapsing dam?

One can imagine the idea being that an ever increasing number of persons who are close to poverty simply won't need to provide for the future.


----------



## LDFerguson

Protocol said:


> However, I prefer leaving the PRSI / CSP pension more or less as it is, and obliging everybody to save into a supplemental work-based pension.
> 
> Workers contributes 5%, maybe increasing to 10% over time, or else with an option to save more.
> 
> Employer contributes 5%.
> 
> Govt contributes 5%, maybe increasing to match the increased employee contribution.
> 
> It looks a bit like the SSIA scheme.
> Tax relief on conts scrapped, replaced with the State contribution.
> Maybe limited tax relief on above-mandatory contributions?




It's an interesting idea, but I could see huge resistance to it, particularly from the lower-paid and their unions.  Tell someone who's barely scraping by now that their wages are going to be docked by 5%, even if it is for their benefit in later years.  

In the bigger picture, does any Government have the right to force people to save towards their retirement?  The State Pension is designed to provide a very basic income to those who retire.  It's enough to live a very frugal, basic existence.  If you want to have more money in retirement, surely that's up to you?  That said, I do favour the soft-mandatory approach, where people are automatically enrolled in a pension scheme but have the option to opt out.


----------



## Complainer

Sumatra said:


> You're right it wasn't a factor. Don't they seem to just love sticking another finger into the collapsing dam?
> 
> One can imagine the idea being that an ever increasing number of persons who are close to poverty simply won't need to provide for the future.


Do you think that perhaps some of the resistance to this idea might be pensions industry concern about losing all that lovely commission?


----------



## Sumatra

There really isn't too much lovely commission being paid. One way to boost pension coverage would be to increase the commission paid. Take a Standard PRSA for example - it is only 5% so probably not worth going out on a wet night for. 

If you take away or reduce tax relief then what would be the justification for anyone to take out a pension plan? They are going to be taxed on the proceeds anyway aren't they?


----------



## Nermal

Constant tinkering with pension regimes screws up the ability of people to plan ahead.


----------



## DerKaiser

Complainer said:


> Do you think that perhaps some of the resistance to this idea might be pensions industry concern about losing all that lovely commission?



The pension industry naturally has an agenda, and that is maximising pensions coverage to maximise profits.

Is this agenda good for society?

I would argue yes.  It encourages middle income individuals to provide for their own retirement rather than become a burden for their children or the state.

There is very little for low income individuals in private pensions, but we're not going to solve that by varying current rules.  Whatever way you look at it, if they can't afford to save fr the future no amount of encouragement can change that.

If you look at high income individuals there is a limit to the benefit they can get.  Once their fund hits a certain level, any extra contributions will ultimately be taxed at the higher rate.  (Any perceived unwarranted benefit from tax free lump sums could be addressed by limiting their value, separately from the tax relief on contributions).

The real target is, and always has been, middle income earners.  If you can encourage these people to put away disposable income for the future you will have ultimately succeeded in restricting the number of retired individuals dependent on state welfare and eligible for medical benefits, etc

See below for the Society of Actuaries press release:

[broken link removed]


----------



## Complainer

DerKaiser said:


> The pension industry naturally has an agenda, and that is maximising pensions coverage to maximise profits.
> 
> Is this agenda good for society?
> 
> I would argue yes.  It encourages middle income individuals to provide for their own retirement rather than become a burden for their children or the state.
> 
> There is very little for low income individuals in private pensions, but we're not going to solve that by varying current rules.  Whatever way you look at it, if they can't afford to save fr the future no amount of encouragement can change that.
> 
> If you look at high income individuals there is a limit to the benefit they can get.  Once their fund hits a certain level, any extra contributions will ultimately be taxed at the higher rate.  (Any perceived unwarranted benefit from tax free lump sums could be addressed by limiting their value, separately from the tax relief on contributions).
> 
> The real target is, and always has been, middle income earners.  If you can encourage these people to put away disposable income for the future you will have ultimately succeeded in restricting the number of retired individuals dependent on state welfare and eligible for medical benefits, etc



I wouldn't argue with too much of this 'benefits' stuff, but the cost has to be considered. You could make a similar good case for most aspects of Govt expenditure, but something has to go.

In terms of overall priorities, there is lots of room for reducing the cap for high earners substantially, and reducing the tax relief to standard rate (as has been done for most other tax reliefs). 

Perhaps the pensions industry could cut their generous commission rates then to show their commitment to pensions coverage?


----------



## DerKaiser

Complainer said:


> In terms of overall priorities, there is lots of room for reducing the cap for high earners substantially, and reducing the tax relief to standard rate (as has been done for most other tax reliefs).


 
The cap could be reduced for high earners, but the real long term saving would be in restricting the tax free lump sum.

If the tax relief on contributions is set to the standard rate then we are effectively limiting the income people should provide for themselves in retirement to the tax free level i.e. about €5k p.a. income on top of the OAP for an individual. I think this is a backward step in terms of aiming for those who can afford to put away money now avoiding being a burden in retirement.


----------



## Complainer

DerKaiser said:


> The cap could be reduced for high earners, but the real long term saving would be in restricting the tax free lump sum.
> 
> I


Good point re the lump sum.


DerKaiser said:


> If the tax relief on contributions is set to the standard rate then we are effectively limiting the income people should provide for themselves in retirement to the tax free level i.e. about €5k p.a. income on top of the OAP for an individual. I think this is a backward step in terms of aiming for those who can afford to put away money now avoiding being a burden in retirement.


The only limit is to the state subsidy - People are still able to save for their retirement.


----------



## LDFerguson

Complainer said:


> The only limit is to the state subsidy - People are still able to save for their retirement.


 
In this instance, the only people who would benefit from tax relief on pensions would be those whose income will be so low as to be tax-exempt in retirement.  Nobody else would bother putting money into pensions if the tax relief rate was standardised.  As you say, we could all then simply save money into deposit accounts towards our retirement instead.  

So are you suggesting that the whole private pension system, i.e. public sector and private sector pension schemes, be abolished, except for those who will be tax-exempt in retirement?


----------



## Complainer

LDFerguson said:


> So are you suggesting that the whole private pension system, i.e. public sector and private sector pension schemes, be abolished, except for those who will be tax-exempt in retirement?


Please don't put words into my mouth. The only thing that I'm suggesting is abolished is the unfair subsidy to higher-rate taxpayers. 

If the 'whole private pension system' has no value to add to retirement savings without tax relief, perhaps we are better off without it anyway. Is it your view that this entire industry has no value to offer consumers, other than tax relief?


----------



## LDFerguson

If tax relief on pensions is standardised, then Employer Contributions for higher-rate taxpayers would then also need to deemed taxable as they're effectively attracting higher-rate tax relief also.  Are you in favour of an additional tax on Employer contributions to all pension schemes, private & public sector, for higher-rate taxpayers?   

As a high-rate taxpayer, if I'm faced with a choice of (a) investing in a pension product which only attracts tax relief at the low rate, and on which my benefits in retirement are going to be taxed or (b) investing in the same fund outside of a pension product, subject only to exit tax on gains, I'd seriously consider (b). 

If the Government make it unattractive for all but a small group of people to contribute to pensions, there will only be a need for a pensions industry to service that small group.


----------



## Complainer

LDFerguson said:


> If tax relief on pensions is standardised, then Employer Contributions for higher-rate taxpayers would then also need to deemed taxable as they're effectively attracting higher-rate tax relief also.  Are you in favour of an additional tax on Employer contributions to all pension schemes, private & public sector, for higher-rate taxpayers?



I confess that I hadn't thought too much about employer contributions, but I don't see why the same principle should apply. Perhaps you could explain why you think the state should provide a higher subsidy to medium/high earners over low earners.



LDFerguson said:


> As a high-rate taxpayer, if I'm faced with a choice of (a) investing in a pension product which only attracts tax relief at the low rate, and on which my benefits in retirement are going to be taxed or (b) investing in the same fund outside of a pension product, subject only to exit tax on gains, I'd seriously consider (b).
> 
> If the Government make it unattractive for all but a small group of people to contribute to pensions, there will only be a need for a pensions industry to service that small group.



If people choose product b over product a, they are still going to be (most likely) dealing with the same intermediary and the same investment company. The only thing that changes is the name of the product and the tax relief available.


----------



## LDFerguson

Complainer said:


> I confess that I hadn't thought too much about employer contributions, but I don't see why the same principle should apply.


 
But that's a hugely important aspect of any proposals to standardise or reduce tax-relief on personal contributions. If the same principle doesn't apply to employer contributions, the plan is unworkable. Any high-rate taxpayer simply arranges with their employer to make the scheme non-contributory (i.e. entirely funded by employer contributions) and continues to enjoy effective high-rate tax relief.  No saving to the Exchequer.  



Complainer said:


> Perhaps you could explain why you think the state should provide a higher subsidy to medium/high earners over low earners.


 
I think that it is important that there should be an incentive for all earners (low, medium or high) to save towards their retirement. We all know that the State Pension will be under pressure in a few short years due to changing demographics of the country. If the rate is standardised, it reduces the incentive for higher-rate taxpayers. 

Incidentally, I have no problem with there being ceilings on tax relief on pension contributions, pension funds and/or tax-free lump sums.



Complainer said:


> If people choose product b over product a, they are still going to be (most likely) dealing with the same intermediary and the same investment company. The only thing that changes is the name of the product and the tax relief available.


 
That may or may not be the case for the intermediary *firm, *if the firm has the resources and expertise to switch to savings & investment products once their pension clients decide to stop their pension contributions. But what about all the back-office staff whose entire career has been built on pensions administration? Many of the larger schemes are administered a handful of corporate pension brokers, e.g. Mercer, Hewitt etc. If everyone switches from pensions to savings products, the job losses will be huge.


----------



## Complainer

LDFerguson said:


> But that's a hugely important aspect of any proposals to standardise or reduce tax-relief on personal contributions. If the same principle doesn't apply to employer contributions, the plan is unworkable. Any high-rate taxpayer simply arranges with their employer to make the scheme non-contributory (i.e. entirely funded by employer contributions) and continues to enjoy effective high-rate tax relief.  No saving to the Exchequer.


Sorry - typo there. I meant to say "I confess that I hadn't thought too much about employer contributions, but I don't see why the same principle should*n't* apply"



LDFerguson said:


> I think that it is important that there should be an incentive for all earners (low, medium or high) to save towards their retirement. We all know that the State Pension will be under pressure in a few short years due to changing demographics of the country. If the rate is standardised, it reduces the incentive for higher-rate taxpayers.


An incentive to save is certainly desireable in principle, but where does it come in the overall priority. No point in incentivising saving for tomorrow at the expense of basic services today.

It is important that such an incentive is equal for all workers - I still haven't seen any good reason why medium-high earners should get higher incentives?



LDFerguson said:


> That may or may not be the case for the intermediary *firm, *if the firm has the resources and expertise to switch to savings & investment products once their pension clients decide to stop their pension contributions. But what about all the back-office staff whose entire career has been built on pensions administration? Many of the larger schemes are administered a handful of corporate pension brokers, e.g. Mercer, Hewitt etc. If everyone switches from pensions to savings products, the job losses will be huge.



I've no wish to push anyone out of a job (though there is a special place in customer service hell reserved for Mercer I reckon). However, if these people are adding no value (other than tax relief), why should pensioners be paying for these services? If huge volumes move from pensions to standard investments, isn't it likely that many of the jobs will move as well?


----------



## LDFerguson

> I've no wish to push anyone out of a job (though there is a special place in customer service hell reserved for Mercer I reckon). However, if these people are adding no value (other than tax relief), why should pensioners be paying for these services? If huge volumes move from pensions to standard investments, isn't it likely that many of the jobs will move as well?


 
I don't agree that the current pensions industry workforce are creating no value.  The current regime of tax relief creates a demand for pensions administrators and staff.  Lots of people are employed to meet that demand.  

If the demand is eliminated by an adverse change in tax relief, I agree that there would presumably be a demand for extra staff to adminsister all the extra savings & investments products.  But I suspect that it wouldn't be the same people.  So you'd have an lot of people losing their jobs because their skills are specifically pensions-related and the new jobs are created in the savings & investments industry.  Fine from a big picture view, but not if you're one of the people who loses their pension administration job.      



> Sorry - typo there. I meant to say "I confess that I hadn't thought too much about employer contributions, but I don't see why the same principle should*n't* apply"



There would be serious implications.  If an employer is currently making contributions to a pension plan for a high-rate taxpayer, presumably there would then need to be some form of BIK assessment on the difference between the standard rated tax relief and the high rate.  Without wanting to get into any public vs private sector debates, there would be some huge practical issues in the public sector (or, for that matter, many private sector DB schemes) as the employer contribution to such schemes is not defined per employee and therefore there would need to be a calculation of the notional value of the employer contributions, which would then be taxed.  



> It is important that such an incentive is equal for all workers - I still haven't seen any good reason why medium-high earners should get higher incentives?



In theory I agree with a system where everyone receives the same level of incentive, up to a ceiling.  It would need to be proportionate, e.g. someone earning €100,000 gets the same *rate* of incentive as some earning €10,000; just ten times the amount.  But that will only work if the regime at retirement is also overhauled.  Simply standard-rating tax relief pre-retirement but doing nothing about taxes post-retirement doesn't achieve this.  It just reduces the incentive altogether for a huge swathe of higher-rate taxpayers.

An exercise to standard-rate tax relief pre-retirement must be done in conjunction with a change to the taxation of such vehicles post-retirement - a separate rate of tax on the proceeds of such standard rated pension plans, perhaps?


----------



## Complainer

LDFerguson said:


> I don't agree that the current pensions industry workforce are creating no value.  The current regime of tax relief creates a demand for pensions administrators and staff.  Lots of people are employed to meet that demand.


I have to say that I'm still not getting any kind of clear picture of the value added by pensions administrators, all of whom are being paid for by pensioners, with the state subsiding this cost through tax relief.



LDFerguson said:


> If the demand is eliminated by an adverse change in tax relief, I agree that there would presumably be a demand for extra staff to adminsister all the extra savings & investments products. But I suspect that it wouldn't be the same people. So you'd have an lot of people losing their jobs because their skills are specifically pensions-related and the new jobs are created in the savings & investments industry. Fine from a big picture view, but not if you're one of the people who loses their pension administration job.


I can only imagine the kind of outrage/vitriol/hostility that would happen here on AAM if there was a proposal to keep a pile of public servants in jobs through a particular tax relief scheme. Strange eh?

But anyway, if the main arguement for tax relief is to keep a pile of administrators in jobs, I think the arguement has been lost already.



LDFerguson said:


> There would be serious implications. If an employer is currently making contributions to a pension plan for a high-rate taxpayer, presumably there would then need to be some form of BIK assessment on the difference between the standard rated tax relief and the high rate. Without wanting to get into any public vs private sector debates, there would be some huge practical issues in the public sector (or, for that matter, many private sector DB schemes) as the employer contribution to such schemes is not defined per employee and therefore there would need to be a calculation of the notional value of the employer contributions, which would then be taxed.


Indeed, the implications are very serious. But the more I think about it, the more some form of BIK assessment is needed. Why should an employer get away with this kind of tax-free payments to medium-high earners? 

The issue is not so complicated in the public sector, as there are no employer contributions. Pensions are simply funded out of current expenditure, so there would be no BIK impact.




LDFerguson said:


> In theory I agree with a system where everyone receives the same level of incentive, up to a ceiling. It would need to be proportionate, e.g. someone earning €100,000 gets the same *rate* of incentive as some earning €10,000; just ten times the amount. But that will only work if the regime at retirement is also overhauled. Simply standard-rating tax relief pre-retirement but doing nothing about taxes post-retirement doesn't achieve this. It just reduces the incentive altogether for a huge swathe of higher-rate taxpayers.
> 
> An exercise to standard-rate tax relief pre-retirement must be done in conjunction with a change to the taxation of such vehicles post-retirement - a separate rate of tax on the proceeds of such standard rated pension plans, perhaps?


The proportionate rate sounds nice in theory, but again, I'm not so sure. The purpose of the state subsidy should be to ensure that people have a reasonable chance of providing for their own independence during retirement. I'd have thought a cap would important, so that once the state has ensured that a basic level of funding will be available, the subsidy cuts out. 

Again, I don't quite see the value of complicating things with different tax rates. A simple tax system, whereby you pay appropriate rates of tax on all your income, regardless of the source seems better to me that the kind of relief and special deals that got us into this mess.


----------



## Duke of Marmalade

Complainer said:


> The issue is not so complicated in the public sector, as there are no employer contributions. Pensions are simply funded out of current expenditure, so there would be no BIK impact.


Actually the issue is hugely complicated in the public sector. Let's stick with private sector DB schemes for a moment. In determining BIK, the employer's contribution is almost irrelevant. In theory (ignoring PB rules) an employer could also not fund its pension promise. As it is, the quality of funding greatly varies between employer. In determining BIK what matters is what is the actuarial value of the increase in the promise year by year. This varies by several factors _inter alia:_

- The rules of the scheme

- The age of the person

- The level of inflation adjusting

- Crucially, the quality of the employer's covenant.

This last one shows how totally impossible it would be to come up with a fair determination of the BIK of a DB promise.

Incidentally, the BIK of the public service promise would be very high indeed.

_Complainer_, your arguments would be valid if we had a clean sheet, but we are were we are and Fergie has rightly highlighted this particular BIK aspect as a real showstopper for the standard rate relief brigade.

Having said that, we might be able to drop the relief to say 35% and live with the anomalies between DB/DC/PS.


----------



## Conan

Complainer says:
"Indeed, the implications are very serious. But the more I think about it, the more some form of BIK assessment is needed. Why should an employer get away with this kind of tax-free payments to medium-high earners? 

The issue is not so complicated in the public sector, as there are no employer contributions. Pensions are simply funded out of current expenditure, so there would be no BIK impact."


If this is the quality of analysis being adopted on this issue we are really lost. A few points:

If a BIK is to be applied to an Employer contribution into an occupational Pension Fund, then the pension/annuity would have to be paid tax free. Otherwise you have double taxation.
Yes there is no employer contribution in the Public Sector, but that is not to say there is no "cost". The cost of the unfunded liability in the Public Service is huge (as identified elsewhere). So if the private sector had to suffer BIK, then equally so with the Public Sector (on some imputed basis). And since the typical Public Sector scheme is a "gold plated" scheme, the BIK would be much higher than a typical private sector scheme.
The major differentiation in cost between the Public Sector and the typical private sector is the post retirement indexation. This is and has been hugely expensive and is behind the current charade to cut public sector costs but without cutting public sector pay rates. Now that the Gov't have banned upward only rent reviews could be also ban upward only bechamarking/indexation in the Public Service?
Conan


----------



## LDFerguson

On the jobs issue, it's not my primary argument. The current system encourages people to put money into pensions. That creates a need for people to administer such monies. Many of such people would lose their jobs if the system was changed, even though they might be doing their job efficiently, to the best of their ability etc. I'd always feel sympathy for someone who loses a job through no fault of their own. 

Do I think that's a strong enough reason to maintain the status quo? No, I suppose not. 



> The issue is not so complicated in the public sector, as there are no employer contributions. Pensions are simply funded out of current expenditure, so there would be no BIK impact.


 
Of course there are employer contributions! The issue of how the employer chooses to fund a DB scheme (which ultimately all Public Service schemes are) is irrelevant. There is a big employer contribution to all Public Service schemes. The State schemes are just structured so that the employer contribution is paid post-retirement, instead of pre-retirement. But for such a proposal to be fair, the notional employer contribution would have to be calculated and taxed. Otherwise all public servants would be avoiding the new BIK while private sector workers would be subject to it, even though both benefit from an employer contribution to their retirement. That would be unfair. 



> The proportionate rate sounds nice in theory, but again, I'm not so sure. The purpose of the state subsidy should be to ensure that people have a reasonable chance of providing for their own independence during retirement. I'd have thought a cap would important, so that once the state has ensured that a basic level of funding will be available, the subsidy cuts out.


 
Yes - agree with this. What point the cap would be would be a matter of debate in itself. 



> Again, I don't quite see the value of complicating things with different tax rates. A simple tax system, whereby you pay appropriate rates of tax on all your income, regardless of the source seems better to me that the kind of relief and special deals that got us into this mess.


 
If you're giving someone an incentive to fund their retirement, then taking it back after retirement through taxes, it's not an incentive. The system would need to ensure that the incentive is not taken away after retirement.


----------



## Duke of Marmalade

This has me thinking that there is a very fundamental difference between a DB and a DC arrangement.

A DB arrangement is effectively deferred remuneration, and it seems to make sense that the remuneration would be taxed when received.  Contributions should be an irrelevance.  A person contributing 5% of her salary is really receiving a 95% salary, and it is reasonable that this is what should be taxed.

DC is clearly not deferred remuneration, it is simply savings.  Therefore I don't think there is an anomaly with taxing an employer DC contribution at the excess of the marginal rate over, say, 35% as BIK whilst leaving the existing DB arrangements untouched.

If this encourages a return to DB, wouldn't that be a good thing?


----------



## Towger

Complainer said:


> The issue is not so complicated in the public sector, as there are no employer contributions. Pensions are simply funded out of current expenditure, so there would be no BIK impact.



I am speechless with this statement.... Well without breaking AAM rules.


----------



## DerKaiser

Complainer said:


> An incentive to save is certainly desireable in principle, but where does it come in the overall priority. No point in incentivising saving for tomorrow at the expense of basic services today.


 
Maybe we'll be even worse off in the future and those of us who can, should save for the rainy day?



Complainer said:


> It is important that such an incentive is equal for all workers - I still haven't seen any good reason why medium-high earners should get higher incentives?


 
The actual incentive is allowing you to distribute your earnings over your lifetime for taxation purposes. If medium/high earners already pay more tax, there is naturally a better saving in it from them.

This all stems back to people's view of fair share. 

If I earn an average of 75k p.a. for 40 years and have no pension I pay €1m in tax over my life time. Putting aside €15k p.a. into a pension to provide a retirement income for myself will reduce my life time tax bill by about €175k.

If on the other hand I earn €35k p.a. for 40 years and have no pension I pay €200k in tax over my life time. Putting aside €7k p.a. into a pension to provide a retirement income for myself will reduce my life time tax bill by about €75k.

So what's the issue?

Is it that a guy paying €1m in tax gains €100k more from a pension than a guy paying €200k tax?

Could we say the €35k guy cuts his tax bill by almost 40% compared to 17.5% for the €75k guy?

Is it that the €75k guy pays an effective tax rate of 27.5% whilst the €35k guy pays 9%?

Yes, the higher earner benefits more in absolute terms from the existence of pensions.

But I think we need to ask is an effective tax rate of 27.5% on the higher incomes versus 9% on the lower income (Allowing for pensions) less fair than 33% on higher income and 15% of the lower income (a world with no pensions tax relief)?

I think some people have very entrenched views about what's fair but for me it's not all that clear cut.


----------



## LDFerguson

Duke of Marmalade said:


> This has me thinking that there is a very fundamental difference between a DB and a DC arrangement.
> 
> A DB arrangement is effectively deferred remuneration, and it seems to make sense that the remuneration would be taxed when received. Contributions should be an irrelevance. A person contributing 5% of her salary is really receiving a 95% salary, and it is reasonable that this is what should be taxed.
> 
> DC is clearly not deferred remuneration, it is simply savings. Therefore I don't think there is an anomaly with taxing an employer DC contribution at the excess of the marginal rate over, say, 35% as BIK whilst leaving the existing DB arrangements untouched.
> 
> If this encourages a return to DB, wouldn't that be a good thing?


 
Okay, so following this line in thinking, would the resulting pensions from DC schemes be tax-free (as they are merely drawdowns of savings) and the pensions from DB schemes taxed?


----------



## DerKaiser

LDFerguson said:


> Okay, so following this line in thinking, would the resulting pensions from DC schemes be tax-free (as they are merely drawdowns of savings) and the pensions from DB schemes taxed?



That is correct, but I don't think you could argue that there is a fundamental difference in purpose or potential tax treatment between contributions under DB and DC.


----------



## Duke of Marmalade

LDFerguson said:


> Okay, so following this line in thinking, would the resulting pensions from DC schemes be tax-free (as they are merely drawdowns of savings) and the pensions from DB schemes taxed?


Yes, I think so, though of course no tax relief upfront.  Tax free roll-up would be justified.

Tax relief on the way in and tax on the way out is clearly only an incentive if the latter is less.  The tax free lump sum points in this direction as would for persons who expect to be in a lower tax bracket in retirement than they are now.


----------



## Duke of Marmalade

I am seriously warming to this theme.  A DB scheme is a genuine pensions arrangement.  It is deferred remuneration.  It is a promise from your employer to see you right in retirement.

 A DC scheme is nothing more than a savings plan.

There is no reason whatsoever why the former should not have a more favourable tax treatment (to encourage them) than the latter.


----------



## Complainer

Duke of Marmalade said:


> This has me thinking that there is a very fundamental difference between a DB and a DC arrangement.
> 
> A DB arrangement is effectively deferred remuneration, and it seems to make sense that the remuneration would be taxed when received.  Contributions should be an irrelevance.  A person contributing 5% of her salary is really receiving a 95% salary, and it is reasonable that this is what should be taxed.
> 
> DC is clearly not deferred remuneration, it is simply savings.  Therefore I don't think there is an anomaly with taxing an employer DC contribution at the excess of the marginal rate over, say, 35% as BIK whilst leaving the existing DB arrangements untouched.
> 
> If this encourages a return to DB, wouldn't that be a good thing?


I think the Duke is onto something very big here. However, even within the DB sector, there is a huge difference between public and private sector.

It is a matter of fact that there is no pension contribution made by public sector employers. And indeed, the notional contribution made by the employee is just that, notional - it doesn't go into a pension fund either. This isn't an attempt to wiggle out of BIK, it is just a statement of fact.

The benefit for the public sector employee is the promise of the pension down the line. At this particular point in our social history, many public servants are very doubtful as to whether these promises will come to fruition, i.e. will they ever actually recieve the pension. You are not going to get away with applying BIK to a promise. If you want to apply BIK, you'll need to make damn sure that the funds to support the benefit are segregated and under control of trustees (just like any private pension fund), and not going to be raided on the next time that AIB/Anglo/BOI get the State into trouble.


----------



## DerKaiser

Complainer said:


> It is a matter of fact that there is no pension contribution made by public sector employers. And indeed, the notional contribution made by the employee is just that, notional - it doesn't go into a pension fund either. This isn't an attempt to wiggle out of BIK, it is just a statement of fact.
> 
> The benefit for the public sector employee is the promise of the pension down the line. At this particular point in our social history, many public servants are very doubtful as to whether these promises will come to fruition, i.e. will they ever actually recieve the pension


 
If it doesn't qualify as a credible pension scheme then employee contributions would be deducted from net rather than gross pay.

I really don't see the angle people are trying to work here.  DB and DC are essentially the same thing, the only difference being that DB will have certain guarantees attached.

What all this highlights is that tinkering with current taxation treatment is a complex undertaking.  Parameters, such as taxing lump sums and limiting tax free contributions to higher earners, rather than structures could easily be changed  to achieve immediate reductions in tax relief


----------



## Duke of Marmalade

DerKaiser said:


> I really don't see the angle people are trying to work here. DB and DC are essentially the same thing, the only difference being that DB will have certain guarantees attached.


 That is the argument the industry is using. They argue that there is no conceptual difference between DB and DC and therefore they should have similar tax treatment. They then argue that a non marginal tax relief for DC (which would be easy to administer) would lead to BIK on DB/PS and since that is undoubtedly impossible to do fairly they argue that the whole idea is unworkable in the first place.

But DB is conceptually very different from DC. DB is deferred remuneration. DC is savings. It is perfectly natural and logical to ignore any employers contributions or funding of a DB scheme as BIK and to tax the pension when it is paid. Similarly it is perfectly logical to treat pay net of employee contribution as the taxable salary.

But a DC scheme is completely different. It is clearly a savings arrangement and cannot in anyway be argued as deferred remuneration. Thus a lesser or different tax treatment is not out of the question. As I said before, if the tax treatment of DC savings becomes less favourable than DB deferred remuneration is that such a bad thing?


----------



## DerKaiser

Duke of Marmalade said:


> But a DC scheme is completely different. It is clearly a savings arrangement and cannot in anyway be argued as deferred remuneration.


....except for the fact that you are putting away money now that cannot be touched until retirement



Duke of Marmalade said:


> Thus a lesser or different tax treatment is not out of the question. As I said before, if the tax treatment of DC savings becomes less favourable than DB deferred remuneration is that such a bad thing?


Maybe I'm missing something but at face value you are suggesting to hell with the self employed and people whose employer won't offer DB.  This would exclude over 70% of working adults from access to incentivised retirement provision.  Employers are opting out of DB schemes in droves due to the high cost of guarantees, that trend won't be reversed by this.


----------



## Duke of Marmalade

DerKaiser said:


> Maybe I'm missing something but at face value you are suggesting to hell with the self employed and people whose employer won't offer DB.


 I think that's a bit strong. 35% relief would favour lower paid self employed and is hardly sending higher rate payers to hell.

But let us consider the natural order of things. Pensions originated as DB arrangements. Good employers attracted employees by promising them a pension and presumably got away with paying lesser salary in return. Now we don't need an elaborate tax machinery to support this. The natural application of income tax would be to tax the income as the employee receives it. _[Add on benefits like the tax free lump sum and immediate corporation tax relief for employer funding are really an afterthought.]_

It is in the nature of self employment that they would find it somewhat impracticable to ask their clients to pay a bit now and more in 30 years time!! That is exactly what an employee does when she accepts reduced salary in return for a pension.

Thus we can see that the edifice of tax support for self employed pension savings is in fact quite artificial. It is similarly artificial to support an arrangement (DC) whereby an employee receives a contribution to a savings plan in lieu of salary. That is rather obviously BIK where defererd remuneration is not.


----------



## LDFerguson

I would strongly disagree with the idea that DC and DB schemes are so fundamentally different as to be treated differently for tax purposes.  The only difference is the level of funding the employer is willing to commit.  

If an employer is prepared to commit to paying enough money into a DC scheme to provide an agreed level of pension at retirement, then it's a de facto DB scheme.


----------



## LDFerguson

Complainer said:


> It is a matter of fact that there is no pension contribution made by public sector employers. And indeed, the notional contribution made by the employee is just that, notional - it doesn't go into a pension fund either. This isn't an attempt to wiggle out of BIK, it is just a statement of fact.


 
It's also a matter of fact that the pensions received by Public Servants are worth far more than the sum total of their own employee contributions. So the employer is footing the bill for the larger portion of these pensions. Whether the employer foots this bill pre or post-retirement is irrelevant. If the employee isn't paying for their own pensions through their employee contributions, it stands to reason that the employer is paying for the rest. So if employer contributions were taxed for private sector employees, why should in not be so for public sector staff?


----------



## Duke of Marmalade

LDFerguson said:


> I would strongly disagree with the idea that DC and DB schemes are so fundamentally different as to be treated differently for tax purposes. The only difference is the level of funding the employer is willing to commit.


 
But they are fundamentally different. And indeed the tax rules are quite different as between self employed DC and employee DB. Employee DC are really a latter day abberration and maybe it would have been better if the tax system had strongly deterred the flight to employee DC.

I am just pointing out that the arguments about having to apply hopelessly complex BIK type contortions in DB/PS situations is not as convincing as it seems.


----------



## LDFerguson

I think that the simplicity of the situation is getting unnecessarily clouded by references to different types of pension schemes.  

There are three types of people who put money into a pension.  

Type A.  Those who put money into their own pension plans.  There is a strong argument that such people should be incentivised to do so.  

Type B.  Those people who put money into a pension and their employer boosts their pension.  Sometimes the employer boosts their pension by adding money into a fund before retirement.  Sometimes the employer boosts their pension by simply paying an agreed level of pension at retirement.  

Either way the simple fact is that if Type A person and Type B person put the exact same amount of employee contributions away towards their pension throughout their working life, Type B person wil get a bigger pension at the end.  Why? Because their employer has helped them to do so.  If the help of the employer is to be taxed, it must be taxed for all Type B.  The mechanics of how the employer boosts the pension is irrelevant.   

Type C are the lucky ones in non-contributory pension schemes where the employer picks up the entire tab.  They are somewhat irrelevant to the debate that has gone before, although obviously if a BIK tax of some form was to be introduced, it would apply here too.


----------



## DerKaiser

Duke of Marmalade said:


> But they are fundamentally different. And indeed the tax rules are quite different as between self employed DC and employee DB. Employee DC are really a latter day abberration and maybe it would have been better if the tax system had strongly deterred the flight to employee DC.
> 
> I am just pointing out that the arguments about having to apply hopelessly complex BIK type contortions in DB/PS situations is not as convincing as it seems.



The rate at which DB schemes are closing is fairly fast at the moment.  For most people pensions mean a DC pension, and I think it would be wrong to favour legislation which will hurt the majority of people paying into a pension.

The point the industry is making is that having tax free pension contributions is a simple system that has worked well for decades across the world.  Changing  any element of the tax treatment potentially brings unwanted complex issues into play such as the possibility of BIK on contributions.


----------



## MOB

Duke of Marmalade said:


> But DB is conceptually very different from DC. DB is deferred remuneration. DC is savings.



I think I agree with LD on this point.  This conceptual difference might have been true years ago when paternalistic employers were able to pay pensions out of current revenue.   But a DB pension these days is a highly regulated thing ( as it should be).  It must be funded.  That fund must be kept separate from the employer's assets.  There are rules which dictate how and when the employer has to fund it - it certainly isn't permissible for the employer to say 'I'll pay you that in 20 years time' and for the employee to hope that the employer will still be around to honour this promise.  

I don't know what you could call the money that the employer socks away into the DB fund other than 'savings'.   

And yes - I know that employers do not always honour their obligations to properly fund their DB schemes.  Another reason, as far as I am concerned, why they are a bad idea.


----------



## Duke of Marmalade

_MOB_, very valid points, I am aware that in practical terms the original concept of deferred remuneration has morphed to be closer to a savings plan held in trust for the employees.

But there is still a fundamental difference. This is well recognised in the great ARF debate. Most contributors to the Green Paper discussion argued for the ARFability o) of DC pension schemes and I fully agree with that argument. The concept of an ARF fits easily with that of a savings plan.

But most contributors conceded that ARFs were not appropriate for the Public Sector or for private sector DB schemes.

So now we are hearing that any tampering with the tax treatment of DC contributions has inexorable and hopelessly impossible ramifications for DB arrangements, a poison pill if you like for anyone contemplating such changes. I think the case for this consistency is being somewhat overstated and, as I said, there doesn't seem to be this passion for consistency on the ARF debate.

In fact, if DC schemes are made ARFable, this will be a part justification for allowing a more favourable tax regime for DB than DC as well as the argument that we should be encouraging DB schemes against this tide of employers deserting their traditional "paternalistic" approach, as you call it. 

In all this we have, of course, that gray area of the sole trader or the partnership of a few, were the delineation between DB and DC could be confused if there were strong incentives to make what is essentially a DC arrangement look like a DB one. But these type of anomalies between self employed status and incorporated sole trader have always been with us and are not insurmountable. Besides most of these guys would far rather have their ARF than a slightly tax enhanced annuity option.


----------



## minion

Nermal said:


> Constant tinkering with pension regimes screws up the ability of people to plan ahead.



That is the most important point made here so far.
Why try to plan for your futures when the goal posts keep moving


----------



## Ballack

There are so many pension plans which will tell people about tax saving tips which are very much helpful for the people to get some deductions when they are filing the tax. Investments and pension schemes are the best thing a person can contribute to get the tax deductions.


----------

