# Pensions tax relief 'must be reduced radically' - Professor Gerry Hughes



## DerKaiser (26 May 2011)

http://www.independent.ie/business/irish/pensions-tax-relief-must-be-reduced-radically-2658143.html

I agree 100% with this guy.

I'd add the following:

Remove the ARF option
Make lifestyling mandatory
Remove the tax free lum sum.

If we took these measures instead of the levy or reducing the marginal rate on contributions, we would have a far more effective private pensions framework in terms of costs to the state and targetted positive incentives.

In terms of the public service, it would have the impact of leaving those on modest to average incomes (up to €50-60k) untouched whilst those with high salaries (whose pensions cost disproportionately more anyway) would no longer receive any tax relief on their pension contributions.


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## StevieC (26 May 2011)

I agree with his sentiment but I would also point out that the cap should allow for indexation, €37k will be worth an awful lot less in real terms in 20 to 30 years time. If he said allow a cap for an indexed pension of €37k I'd be all for that.

In regard to your points Derkaiser

- Why get rid of the ARF option? It gets taxed eventually and for someone with particularly bad health at retirement, why should they be forced into an annuity contract that will die with them or have to hand over half their fund to the government in tax if they take a taxable cash option? Its not just a tool for the super rich for inheritance planning purposes, it also allows those with a low life expectancy at retirement to provide for their spouses.

- I agree on lifestyling for managed funds but some people may want other options (ie invest in gilts all the time). It could be a default setting for pension investment but I think people should be allowed to opt out as a one size fits all approach rarely works.

- If you remove the tax free lump sum, then why would you bother investing in a pension. Do you really think gross roll up on a fund is a good enough reason to lock your money away for up to 40 years? Personally I dont. I do believe the tax free lump sum could be either decreased or staggered (.ie first 100k at 25%, rest at 10% etc), this would not hit the middle classes so much but would prevent the super rich from avoiding huge amounts of tax.


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## Sunny (26 May 2011)

Here are the slides from the ESRI conference on pensions including the one from Gerry Hughes

[broken link removed]


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## Complainer (26 May 2011)

StevieC said:


> - Why get rid of the ARF option? It gets taxed eventually and for someone with particularly bad health at retirement, why should they be forced into an annuity contract that will die with them or have to hand over half their fund to the government in tax if they tax a taxable cash option? Its not just a tool for the super rich for inheritance planning purposes, it also allows those with a low life expectancy at retirement to provide for their spouses.


Are the health issues not built into the pricing of the annuity?


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## StevieC (26 May 2011)

Complainer said:


> Are the health issues not built into the pricing of the annuity?


 
Generally no they arent unfortunately.


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## SPC100 (26 May 2011)

I agree with the sentiment.

The purpose of tax relief for pensions, should be to assist the average citizen, in getting an average pension. I would agree with the relief's being limited to this, and targeted more at this.

But IMO, has to be done hand in hand with significant claw back on PS pensions...


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## Conan (26 May 2011)

I noticed that all the contributors to the conference were either academics or civil servants (of one sort or another). If we are to follow Gerry Hughes' appraoch we need to have a fully thought through strategy:

Ban people from funding a pension of more than €37k
Abolish ARFs
The Gov't start issuing annuities (so it can take the pension fund at retirement)
Insist that all funds are invested in Ireland (preferably Govt Bonds)
Reduce "tax relief" to 20% , or lower
Abolish tax free lump sum
Introduce enforced euthanasia at 75 (after all, these old people are costing the "State" too much money)
In this way, nobody in their right mind  would save over 30 or 40 years for a pension. Therefore the so called "cost to the State" would be eliminated.

Lets ignore that the so called "tax reliefs" are largely tax deferrals. Lets also ignore that €2.3m would not actually buy an annuity of €115,000 in the real world (the figure is actually closer to €75,000).  Lets base our policy on the few "Michael Fingleton" cases (or the selective survey by Gerry Hughes) and penalise the vast majority of middle income people simply trying to save for their old age. It is worth remembering that not all Company Directors (many running small family businesses) have the luxury of funding their pension over 30 or 40 years, as with university professors. In many cases they can only afford to fund a pension after the business has been up and running for many years and some surplus profits (profits not re-invested) are are accumulated. 

Reading Prof Hughes' presentation I am reminded of the definition of an Economist -"Someone who knows a 1000 ways to make love but does not know any women".

I think I will form a new political party - State Before Profit or People.


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## DerKaiser (26 May 2011)

StevieC said:


> I agree with his sentiment but I would also point out that the cap should allow for indexation, €37k will be worth an awful lot less in real terms in 20 to 30 years time. If he said allow a cap for an indexed pension of €37k I'd be all for that.


 
Absolutely link the cap to inflation, I'd go further and allow relief limits to increase if the OAP was ever cut.



StevieC said:


> - Why get rid of the ARF option? It gets taxed eventually and for someone with particularly bad health at retirement, why should they be forced into an annuity contract that will die with them or have to hand over half their fund to the government in tax if they take a taxable cash option? Its not just a tool for the super rich for inheritance planning purposes, it also allows those with a low life expectancy at retirement to provide for their spouses..


 
In reality it is priced into the rates - the annuity provider doesn't just keep it as a supernormal profit, competition ensures this.

Also, with an annuity, a person in ill health can take the following actions:

1) Invest the proceeds of the pension in a PRSA until age 75 and then take out the annuity
2) Take out a 100% spouses annuity
3) Choose level rather than escalating payments
4) Choose a 10 year guarantee period
5) Take the maxiumum tax free allowable




StevieC said:


> If you remove the tax free lump sum, then why would you bother investing in a pension. Do you really think gross roll up on a fund is a good enough reason to lock your money away for up to 40 years? Personally I dont.


 
I'll address this in a follow on mail, Conan has raised similar points


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## DerKaiser (26 May 2011)

Conan said:


> I noticed that all the contributors to the conference were either academics or civil servants (of one sort or another)


 
I think you make some excellent points in this forum, but it's really not worth pitching this as a battle between private and public



Conan said:


> If we are to follow Gerry Hughes' appraoch we need to have a fully thought through strategy:
> 
> Ban people from funding a pension of more than €37k


 
Nobody is banning anyone from saving - you can do this without the government holding your hand, it's a case of targetting the relief.



Conan said:


> The Gov't start issuing annuities (so it can take the pension fund at retirement)
> Insist that all funds are invested in Ireland (preferably Govt Bonds)


I agree that this would be an ill advised move for private pensions provision - it's bad enough for public pension provision to be unfunded. 



Conan said:


> Reading Prof Hughes' presentation I am reminded of the definition of an Economist -"Someone who knows a 1000 ways to make love but does not know any women".


 
I like the above analogy. A lot of people involved in pensions think they know 'women' intimately. In reality they don't, they simply think they do.

Pensions are not about risky investment strategies, tax free lump sums and paying higher rates of tax on retirement income.

If you can put away a steady amount of pension contributions with tax relief at the higher rate for a reasonable period throughout your working life to leave you in a situation where you have enough income for a comfortable retirement but are not subject to the higher rate of tax at that point, the pension tax regime will incentivise you handsomely.

If, on the other hand, you will have substantial means in retirement, then private pensions provision becomes a game of trying to benefit at the margins from tax free lump sums, etc. You are therefore not the ideal candidate for government subsidised private pension provision.

We currently have a game where people of very decent means are simply availing of tax relief now that they will inevitably pay back in retirement taxes. It does not benefit the individual as they may pay more tax in the long run. It certainly does not benefit the state, as they forgo a much needed immediate revenue stream (at a time when 10 year bond yields are 11%).

This doesn't mean there's anything wrong with the taxation regime other than the fact that people who do not need government subsidised private pension provision and should not avail of it are: 
1) not being prevent from doing so by appropriate caps, and 
2) do not have the sense to stop contributing even though it makes no sense from a taxation perspective


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## Conan (27 May 2011)

Interesting article in the Buiness section of today's Irish Times by Pat McArdle. Great to see that some Economists can separate theory from reality.

Conan


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## Duke of Marmalade (27 May 2011)

I think we sometimes overstate the perception that our current pension system is a deliberate subsidy of pensions savings from the Government.  Except for the tax free lump sum the system is in fact natural not artificial.

Consider that in the beginning, employers promised their employees a pension but didn't fund for it.  Then it is totally consistent that the employer would get tax relief on the payment of the pension and the retired employee would pay tax on that pension when they received it.  Deferred remuneration, no more.  Under our progressive taxation system some employees would enjoy an "arbitrage" arising from the spreading of his remuneration.  Cal lthis "tax spreading".

Of course this arrangement has its obvious drawbacks and employers began to fund for their promises.  This is obviously good for society and so the taxman made the rather minor concession that the pensioners would continue to get taxed on receipt of their pension and not on BIK on the funding but the employer would be allowed to count the funding as an expense but would forego claiming the eventual pension payments as expenses.  In other words the only "concesssion" was in the timing of the recognition of the employer's pension expenses.

Now, the ability to simply defer remuneration is still fully available to highly paid professionals.  They can simply incorporate (many do), pay themselves living expenses whilst they are earning and then divie out the surpluses in retirement.  For middle earners this is not practicable and so it is only equitable that our tax system should allow them a similar facility for "tax spreading".


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## Conan (27 May 2011)

Duke,
An excellent description.

DerKaiser .
I am not making this a "public v private debate", but to include BIK on the Employer contribution as a tax subsidy only penalises those who actually fund their pension laibility/promise as opposed to those who dont fund. It is somewhat ironic that those Employers who try to fund their pension promise (which potentially could become even more difficult if new funding standards are imposed) are now being taxed for doing so whereas those who do not fund the pension promise (State employers, and employees) escape.  
As Duke points out, if you tax the Employer contribution as a BIK, then you cannot also tax the eventual income. So Prof. Hughes is effectively double counting if he included the BIK as a tax break and ignores the tax collected when pensions become payable.

I have no problem in principle with capping the pension benefit. We might argue over what level of income is "reasonable". Personally I think €37k is very low. But what I have a problem with is the knee-jerk policy reaction of Govt/Dept of Finance to such a long-term issue and the inequity in how that policy imapcts on differing individuals - self-employed, business owners, senior executives, employees, public service employees, civil servants, pensioners (public and private) etc.

I find it somewhat galling for a University Professor to suggest that tax relief be reduced to 20% when I see what happened to the underfunded University Pension Schemes (taken onto the State books) and the cavalier attitute to salary increases, bonuses and "added years" so prevalent in that sector.


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## DerKaiser (27 May 2011)

Conan said:


> I find it somewhat galling for a University Professor to suggest that tax relief be reduced to 20% when I see what happened to the underfunded University Pension Schemes (taken onto the State books) and the cavalier attitute to salary increases, bonuses and "added years" so prevalent in that sector.



Hi Conan/Duke.  

I didn't actually gather from the Indo article that he was recommending tax relief only apply at the standard rate - having read his slides, I now see that is the case.

No one in their right mind would build up a fund of over €100k (let alone €600k or even €2.3m) if they were only getting standard tax relief.  So this suggestion discredits his understanding of the pensions tax regime in my mind.  If anything, the state should be encouraging people to put massive amounts of money in (if relief is only at the standard rate) as they would then get a multiple of the tax revenues on retirement incomes (much of them at the higher rate) at a later point!

I still believe the €37k limit (inclusive of OAP) in conjunction with higher rate tax relief on contributions is the best pensions strategy.

I 100% take on your points that most executives will end up paying higher rate tax on retirement, so this is not really a subsidy.  It is, however, a sad fact that we, as a state, are borrowing a lot of money at relatively high rates of interest at the moment.  So even though this may be just a case of deferring tax revenues (rather than being a cost), it is a deferral the state can ill afford and on close examination benefits the very high earning individuals very little.

In my mind the following apply:

1) If you are not in a position to benefit from higher rate tax relief on pensions contributions, you are not likely to be able to afford long term savings in the first place.  The notion that there are (or ever could be) masses of ordinary workers on low wages putting away what little they have and being disadvantaged by the tax regime is a red herring.

2) If you are on a high income and have more than enough means to ensure a comfortable retirement, you are unlikely to gain much from the private pensions provision tax regime - and there is nothing wrong with that.  If you have very good means, take care of your own discretionary retirement funds.

That leaves us with people in the say €35k-€70k earnings band, who can provide for a decent uplift to their retirement income through government subsidised private pensions provision, but might otherwise neglect to do so.  It is only right and proper that incentivised private pension provison should focus on this group


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## Complainer (30 May 2011)

SPC100 said:


> But IMO, has to be done hand in hand with significant claw back on PS pensions...



Assuming that PS refers to 'public sector', you're two years late. The public sector have being paying their equivalent levy for over two years now.


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## ajapale (30 May 2011)

Complainer said:


> Assuming that PS refers to 'public sector', you're two years late. The public sector have being paying their equivalent levy for over two years now.



Not true. Large sections of the Public Sector (Commercial Semi States ESB, BGE etc) do not pay the public* service* pension levy since they are not part of the public service.


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## Complainer (31 May 2011)

ajapale said:


> Not true. Large sections of the Public Sector (Commercial Semi States ESB, BGE etc) do not pay the public* service* pension levy since they are not part of the public service.



True indeed - I guess that's half the problem of using vague terms like PS


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## SPC100 (1 Jun 2011)

My point is, If tax relieved pension funding for private sector was to be limited to getting back a 40k salary, public sector pensions would have to be radically reform

P.s. Please don't plan your finances based on getting your existing public sector pension paid in full in the future, a lot of those employers are bust, but don't want to admit it, esp the govt.


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## SPC100 (1 Jun 2011)

I will not answer the "already paying for our pension with levy" in this thread. As it would side track it. Truth always comes out in the end.


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## Homer (3 Jun 2011)

I've been around for a long time, so I don't know why it still surprises me how clueless some so called experts can be when it comes to matters slightly outside their particular area of expertise.


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## Complainer (3 Jun 2011)

SPC100 said:


> My point is, If tax relieved pension funding for private sector was to be limited to getting back a 40k salary, public sector pensions would have to be radically reform


I'm not sure why you're so keen to pit one against the other. It is not an A or B choice. Indeed, they are two overlapping schemes. Tax relief is design to incentivise people (both public sector and private sector) to save for their retirement. Public sector pensions are public sector pensions - part of the contracted remuneration arrangements for public sector staff.

You might as well call for radical reform of property tax relief, or social welfare spending or any other area of Govt spending.



SPC100 said:


> P.s. Please don't plan your finances based on getting your existing public sector pension paid in full in the future, a lot of those employers are bust, but don't want to admit it, esp the govt.


I guess this was intended as a bit of a wind-up, but it is a very good point. Many public servants now see a very serious risk of NOT getting the pensions that are their contractual entitlements. This is particularly important for those who are voluntarily buying back extra years of pension service. They are saving the State money now by foregoing salary on the basis of improved pension entitlements in the future.


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