# Towers Watson report - disincentive to make contributions?



## thedarkone (29 Nov 2011)

I see Towers Watson have published some commentary in respect of the optimal size of future pension contributions in the event of future cuts.  This was alluded to in Business Pages in Sunday Times 2 weeks ago, so have been watching out.

Full link is below but best summarised with the following extract
"In 2012 [assuming NRP proposals are implemented] there would be no net tax benefit for employee pension contributions when taxable retirement income exceeds €400pw"

Link is towerswatson.com/ireland/press/5947  (sorry, can't post URL)

Presumably this is on the basis that contributions will be part taxed on the way in (PRSI + difference between 41% and 30%), taxed while in there (0.6% levy) and then taxed on the way out under income tax code.  

Interested in seeing if anyone here had a take on this, whether this makes mathematical sense, and what might any general recommendations be.  

On the latter, it seems to me that if TW analysis is true, means looking at current pension pot, level of future contribution required (if any) to make income = €400 pw, and any post tax surplus one should invest on own account (and not treat as disposable income!!)

Thanks


----------



## DerKaiser (30 Nov 2011)

thedarkone said:


> On the latter, it seems to me that if TW analysis is true, means looking at current pension pot, level of future contribution required (if any) to make income = €400 pw, and any post tax surplus one should invest on own account (and not treat as disposable income!!)Thanks


 
There are a few other posts on this topic if you have a root around.

At the moment you could probably aim for a pension of €800pw and be reasonably sure that you'll get favourable tax treatment taking account of both pre and post retirement taxation. Given the state pension is about €230pw, this means saving for a €570pw pension from your own private pot. You should not build up a pot of over €1m - €200k tax free lump sum and €800k to provide the weekly pension.

Under the new proposal you could probably aim for a pension of €400pw and be reasonably sure that you'll get favourable tax treatment taking account of both pre and post retirement taxation. Deducting the €230pw state pension means saving for a €170pw pension from your own private pot. Under this scenario you should not build up a pot of over €300k - €75k lump sum and €225k to provide the weekly pension.

The current system gives large incentives to supplement the €12k state pension with another €8k p.a. from your own private pension, modest incentives to save for an additional €20k p.a. and no incentive to aim to earn more than €40k p.a. in retirement.

The new system will give modest incentives to supplement the €12k state pension with another €8k p.a. from your own private pension, and no incentive to aim to earn more than €20k p.a. in retirement.

Given the more modest incentives, the fact that people may already have reasonable pension pots and the fact that many people may already have taxable incomes from other sources in retirement (e.g. investment property), the new proposal is an effective removal of state incentivised retirement savings. Whether that is for the public good or not is another argument.


----------



## thedarkone (8 Dec 2011)

Thanks DerKaiser for your succinct response; I will in a spare moment over Christmas see if I can do a mathematical proof of this.

Fortunately I see we were left relatively untouched for now, but as indicated in another post, there is continued uncertainty in the years to come.


----------



## DerKaiser (8 Dec 2011)

thedarkone said:


> Thanks DerKaiser for your succinct response; I will in a spare moment over Christmas see if I can do a mathematical proof of this.
> 
> Fortunately I see we were left relatively untouched for now, but as indicated in another post, there is continued uncertainty in the years to come.


 
Thankfully the 41% was left untouched. With appropriate caps on tax free lump sums and contributions the system is quite elegant in its workings, favouring people on incomes of €33k to €55k who shoulder a large tax burdens currently.

It should not be forgotton that the person on €55k pays 5 times the level of income taxes that someone on €25k does. 

If such a person makes a 10% pension contribution, their gain will be that they "only" pay 4 times the income tax of the person on the lower wage.

People who oppose pensions tax relief would do well to remember that its impact is to marginally redress the imbalance of people on moderate wages above the standard rate threshold paying multiples of the taxtion of those below it.


----------



## Knuttell (9 Dec 2011)

DerKaiser said:


> Thankfully the 41% was left untouched. With appropriate caps on tax free lump sums and contributions the system is quite elegant in its workings, favouring people on incomes of €33k to €55k who shoulder a large tax burdens currently.




I thought the 4 year plan proposed to gradually reduce tax-relief to 20% between 2012 and 2014?


So I am still able to get 41% relief on all AVCs?


----------



## T McGibney (9 Dec 2011)

Knuttell said:


> I thought the 4 year plan proposed to gradually reduce tax-relief to 20% between 2012 and 2014?



Brian Lenihan suggested this but he is now out of office and also (sadly) deceased.


----------



## Knuttell (9 Dec 2011)

Thanks for clarification TMG,I had thought it had been enacted,glad to hear that it hasn't been.


----------

