# Government considering  standardising  tax relief on pension contributions



## Minnow2 (4 Mar 2018)

I read in the Indo this week that the government is considering standardising the tax relief on pension contributions to 30%, regardless of your marginal rate of tax.

While this will help encourage lower paid workers to contribute to their pension, surely it will reduce the contributions from workers on the top rate of tax.

Isn't this a retrograde step by the government? What is the logic behind it?

Sorry: cannot post link.


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## michaelm (5 Mar 2018)

https://www.independent.ie/business...uld-affect-thousands-of-workers-36656462.html


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## Sarenco (5 Mar 2018)

The thread title is a bit misleading - there is no actual Government proposal to standardise tax relief on pension contributions, it simply hasn't been ruled out as a possibility in the future.

FWIW, I think it would be a crazy move and I really can't see it happening any time soon.


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## Itchy (5 Mar 2018)

Interesting. What if it did go to 30%, would it still be beneficial to contribute if you pay tax at the marginal rate? What about for AVCs?


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## Brendan Burgess (5 Mar 2018)

Sarenco said:


> The thread title is a bit misleading -



Agreed, so I have edited the title.

Brendan


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## Steven Barrett (6 Mar 2018)

It would be a crazy move. The requirement for those on lower salaries to fund for private pensions is much less as the OAP makes up a large proportion of their salary. They will also have lower disposable income so the incentive will have a limited effect simply because the spare cash isn't there. 

For those on the higher rate, it will drive down those saving into pensions when we know there is a pension crisis in this country. Are they going to bring in auto enrollment and make it more expensive to contribute at the same time?

Finally, it will hit civil servants hard as they are in mandatory pensions as well as the pension related deduction. I can see those who help form policy pushing back on this one...


Steven
www.bluewaterfp.ie


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## ashambles (6 Mar 2018)

I think The Sunday Times had some more detail. 

The example option the government used was something along the lines of you'd put in 6% the government would put in 2%, equivalent to a 33% tax break. 
Considering how easy it was to reduce the relief by excluding relief on PRSI and USC, I'd not bet against future reductions. 
As for government employees, they could be insulated from the impact of the change by reducing their contribution level/PRD. 

I think this study has been quoted in recent news articles on why tax relief should be reduced.
http://www.pensionscouncil.ie/en/Me...-in-Ireland-Shane-Whelan-and-Maeve-Hally-.pdf

They've made the discovery that most pensioners won't have enough annual income from a pension to remain in the tax net at retirement. (An obvious point made repeatedly on this website.) 

 The "solution" is to reduce tax relief, making it even harder to save enough to get a pension large enough to be taxable.


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## Duke of Marmalade (6 Mar 2018)

ashambles said:


> I think The Sunday Times had some more detail.
> 
> The example option the government used was something along the lines of you'd put in 6% the government would put in 2%, equivalent to a 33% tax break.
> Considering how easy it was to reduce the relief by excluding relief on PRSI and USC, I'd not bet against future reductions.
> ...


The figures in that study are very stark.  They make a very good case to move to standardisation based on this.  I never really understood why the State subsidised pension savings beyond a safety net requirement.  There is nothing to stop people saving for their retirement without tax subsidies - the so called Third Pillar.


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## Gordon Gekko (6 Mar 2018)

The tax take from pensions should be offset against the tax cost of the relief whenever the latter figure is quoted.


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## Sarenco (6 Mar 2018)

Gordon Gekko said:


> The tax take from pensions should be offset against the tax cost of the relief whenever the latter figure is quoted.


Hi Gordon

Could you elaborate on that point?  I'm not sure I understand what you mean by the tax take from pensions.

Thanks.


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## Gordon Gekko (6 Mar 2018)

Sarenco said:


> Hi Gordon
> 
> Could you elaborate on that point?  I'm not sure I understand what you mean by the tax take from pensions.
> 
> Thanks.



No problem.

It’s often said that tax relief on pension contributions represents a tax cost or tax subsidy of €Xbn per year.

In my view, the tax paid on pensions and ARFs in the drawdown phase and inheritance tax on ARFs should be netted off against that figure to provide a truer picture.

Gordon


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## Conan (6 Mar 2018)

This proposal is similar to the SSIA concept. The SSIA style tax incentive worked back then, but particularly because the investment term was short. People could see payback in the near future.
Pensions are a long term investment, often up to 40 years into the future. Most people accept the principle of such long term saving but life (mortgages, holidays, cars, tv’s, children etc etc) gets in the way. So, short term need versus long term ideal.
In the end, some form of compulsion (auto- enrollment) is required to get people saving. Focusing on standardizing the tax relief may well discourage middle to higher earners from maximizing contributions but will unlikely do anything to encourage lower earners to contribute.


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## RETIRED2017 (7 Mar 2018)

[QUOTE="
In the end, some form of compulsion (auto- enrollment) is required to get people saving. Focusing on standardizing the tax relief may well discourage middle to higher earners from maximizing contributions but will unlikely do anything to encourage lower earners to contribute.[/QUOTE]

I suspect you already have your mind made up and are against standardizing the tax relief which is a pity .I have seen Irish pension advisers going all the way back to the eighties pushing pensions using the high tax break and picking the currents out of the cake rather than giving good advice to people on the average industrial wage on saving for a pension it may have being a bit harder work than picking the low hanging fruit ,

I suspect If the government had standardizing pension  tax break at 30% in the beginning pension advisers would be saying how good value it is for middle and higher earners to save through a pension fund,

The reason I hold the above view is back in the eighties I seen a company which did a lot of business manufacturing original parts for the German Machine Manufactures  get in an German company to look at how best to provide a pension for there direct paid Employees who were on average Industrial wages they pointed out that the Irish Tax breaks at 20% was very good value,

I know lots of people on the average Industrial wage who took there advice back then who are now retired and paid extra avc at 20% and are glad the did not listening to negative advisers back then ,

I think people paying tax at 40% should get tax relief at 40% the problem is because pension advisers were getting so much mileage out of pointing out that people on middle to high income would in most cases be getting tax break at 40% there top tax rate  and paying 20% tax when taking from the fund in most cases. 

People on the lower tax rate think the are getting a bad deal from listening to pension advisers negetive advice which may  need to be countered by standardizing the tax break,


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## Duke of Marmalade (7 Mar 2018)

Gordon Gekko said:


> No problem.
> 
> It’s often said that tax relief on pension contributions represents a tax cost or tax subsidy of €Xbn per year.
> 
> ...


The Whelan-Halley paper did allow for netting off but it found that under the assumptions not much tax was payable even for higher earners.  It ignored inheritance tax but this actually favors ARFs over other assets.


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## T McGibney (7 Mar 2018)

RETIRED2017 said:


> People on the lower tax rate think the are getting a bad deal from listening to pension advisers negetive advice which may  need to be countered by standardizing the tax break,



The idea that "negative advice" from pension industry salespeople is somehow stopping a lot of people from investing in pensions is kinda funny.


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## ashambles (7 Mar 2018)

It's incorrect to assume that tax relief on pensions should be returned directly in income tax later. This seems to be the underlying assumption in the some of reporting.

The only way that that the government can back get all the tax back in real inflation adjusted terms is they've made pensions so unattractive that no one is contributing.

However it is better for retirees to have adequate incomes and the economy benefits even though the tax relief does not equal the tax returned on pensions. 

Rather than deferred income tax I think it's better to think of pensions as deferred income, it's an arrangement between an employer and employee to pay something now and at retirement.

This is literally the case with government defined benefit pensions - for many each year they earn one year's salary + a promise to pay 1/80th of a salary every year after they retire. With private pensions it's similar but there's legislation and pension companies.

When someone decides to take some of this years income and instead have it as income at retirement under a strictly controlled pension scheme, then it's clear why there's justification for not taxing that deferred part at the point it's granted.


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## Sarenco (7 Mar 2018)

Conan said:


> Focusing on standardizing the tax relief may well discourage middle to higher earners from maximizing contributions but will unlikely do anything to encourage lower earners to contribute


I strongly agree with that conclusion.

The Whelan-Halley paper itself shows that the modelled "net effective tax relief" tapers quite quickly at higher income levels - it's the poor old "squeezed middle" that seem to benefit most from the reliefs. 

I would be very interested to hear the views of @Colm Fagan on this subject.


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## Duke of Marmalade (7 Mar 2018)

Relief for pensions contributions has its origins in the concept that you can only charge income tax on disposable income i.e. you can't get blood out of a stone.

Thus everybody was allowed certain reliefs for the basics of daily living and these personal reliefs would broadly align with personal circumstances such as marital status and number of children. 

But also things like mortgage interest, indeed any interest, life assurance premiums, private health insurance and other medical expenses and pensions contributions were deducted from gross income in order to determine disposable income.  In this way relief was naturally at the marginal rate and also the more you paid towards these costs the more you benefited from the relief.

This scaffolding has largely been dismantled.  Life Assurance Premium Relief is long gone as is relief for interest on ordinary loans.  Mortgage interest relief is much restricted.  Medical expense relief is at the standard rate.

It leaves pensions relief looking starkly as a regressive subsidy whereas it did not originate as an attempt by the State to provide such a subsidy.


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## elacsaplau (7 Mar 2018)

Sarenco said:


> I would be very interested to hear the views of @Colm Fagan on this subject.



Hi Sarenco,

Surely, there's no need to guess Colm's views. Whelan and Hally may have started out life as actuaries but they've gone all academic now and you know what Colm's gut feeling of academics is!


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## RETIRED2017 (7 Mar 2018)

T McGibney said:


> The idea that "negative advice" from pension industry salespeople is somehow stopping a lot of people from investing in pensions is kinda funny.


Before the pension levy on funds came in the Government first proposal was to put a levy in the profits in the pension Industry  they lobbied to get it put on the funds instead ,

There was more to be creamed off 40% tax break than 20% tax break,Lots of the pension advisers started off giving advice to people on high income they still see them as there bread and cream,
There is more cream on the 40% subsidy,

As you can see some are already out of the block's ,

It is not that long ago employers and employees gained when people  on lower incomes put extra income into pensions when they did not have to pay PRSI on pension Contributions there is a case to be made for giving extra tax break to people on lower Income  in the long term there is more tax to be taken from there income when they retire as I know well,


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## RETIRED2017 (7 Mar 2018)

Duke of Marmalade said:


> Relief for pensions contributions has its origins in the concept that you can only charge income tax on disposable income i.e. you can't get blood out of a stone.
> 
> Thus everybody was allowed certain reliefs for the basics of daily living and these personal reliefs would broadly align with personal circumstances such as marital status and number of children.
> 
> ...



They usual suspects will having a problem dealing with this post they cannot pigeon hole the Duke in as a left winger ,

The Duke in no dog in the manger no time for the penny looking down in the ha'penny ,


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## T McGibney (7 Mar 2018)

The fact remains though that standard rate tax relief is not an attractive incentive to lock one's spare cash away for 20-40 years in a risky pension fund, when the attendant costs and charges are factored in. For lots of people, it still isn't attractive even with the 40% tax relief. Cut that to 30% and it will be attractive to fewer still. 

The notion that pension salespeople are making so much money off 40% taxpayers that they simply couldn't be bothered selling pensions to 20% taxpayers is, to put it mildly, questionable.

The contrast in treatment with those who benefit from very generous occupational pension entitlements is stark.


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## RETIRED2017 (7 Mar 2018)

[QUOTE="T McGibney, post:The fact remains though that standard rate tax relief is not an attractive incentive to lock one's spare cash away for 20-40 years in a risky pension fund, when the attendant costs and charges are factored in. For lots of people, it still isn't attractive even with the 40% tax relief. Cut that to 30% and it will be attractive to fewer still.

The notion that pension salespeople are making so much money off 40% taxpayers that they simply couldn't be bothered selling pensions to 20% taxpayers is, to put it mildly, questionable.



As you know well there used to be lots of good tax wrappers using pension funds when banks were paying up to 30% interest over four or five years not many pension/tax advisers selling them back then because people would be able to see there was very little management required so less cream to be had,[/QUOTE]


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## orka (7 Mar 2018)

T McGibney said:


> The contrast in treatment with those who benefit from very generous occupational pension entitlements is stark.


This will be an interesting aspect of any move to standardise relief.  For non-contributory or non-funded schemes, there is no explicit contribution but there is a benefit accruing each year.  Revenue doesn't need to look at this at the moment because there would be full tax-relief of any accrued benefit (although PRSI/USC should probably be payable).  But if there is a move to standardise relief, high rate tax-payers should have to pay benefit in kind on their employers contributions - both actual and notional.  The issue was already identified in the tax commission's report: 


> The regime for non-funded pensions should be examined to identify the implicit tax cost to the Exchequer in the context of an equitable distribution of the tax expenditure on pensions.


page 374 [broken link removed]


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## RETIRED2017 (7 Mar 2018)

T McGibney said:


> The fact remains though that standard rate tax relief is not an attractive incentive to lock one's spare cash away for 20-40 years in a risky pension fund, when the attendant costs and charges are factored in. For lots of people, it still isn't attractive even with the 40% tax relief. Cut that to 30% and it will be attractive to fewer still.
> 
> I suspect you are correct in saying there are





orka said:


> This will be an interesting aspect of any move to standardise relief.  For non-contributory or non-funded schemes, there is no explicit contribution but there is a benefit accruing each year.  Revenue doesn't need to look at this at the moment because there would be full tax-relief of any accrued benefit (although PRSI/USC should probably be payable).  But if there is a move to standardise relief, high rate tax-payers should have to pay benefit in kind on their employers contributions - both actual and notional.  The issue was already identified in the tax commission's report:
> 
> page 374 [broken link removed]


I think there are very few non funded schemes open to people on the the average industrial wage which is where pension tax relief need to be aimed if you look at what is left of the pre 1995 public service pension they now have to pay the pension levy along with what ever they were paying before the pension levy came in,


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## Duke of Marmalade (7 Mar 2018)

RETIRED2017 said:


> They usual suspects will having a problem dealing with this post they cannot pigeon hole the Duke in as a left winger ,
> 
> The Duke in no dog in the manger no time for the penny looking down in the ha'penny ,


I don't know quite what point I was making.  Originally pensions contributions were regarded as quasi essential expenditure as was life assurance and health insurance and expenses.  Therefore they ate into truly disposable income and it was only this latter which was regarded as fair game for income tax.  It wasn't that the State was encouraging or subsidising folk to incur these costs it was simply that prudent man (or woman) couldn't avoid them.

However, the paradigm has completely shifted.  Tax reliefs are now regarded as subsidies to achieve certain social ends.  Under this new paradigm the Whelan-Hally paper paints relief for pensions contributions as a regressive subsidy.  Under the original paradigm it was simply a recognition that pension contributions are an unavoidable expense of prudent man.


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## Gordon Gekko (7 Mar 2018)

My plan is to contribute the maximum over a 30 year period. That’s €900k of contributions at a “cost” of €360k to the Exchequer. I estimate that the pot will be worth circa €3m at retirement.

Based on current rules, the State will get Chargeable Excess Tax of €340k and tax of €60k on my lump sum when I retire.

Then I’ll be compelled to take 6% per year from my ARF which will equate to circa €130k a year, all of which will be taxable at the 40% rate; that’s €52k a year of tax, nevermind USC.

My wife can inherit my ARF intact, so there’s a strong possibility that the State will get circa €52k a year every year for circa 30 years; that’s around €1.5m in tax.

Then when the last of us kicks the bucket, having spent 30 years trying to at least preserve the nominal value of our ARF, the State will get 30% of its circa €2.15m value from our kids, i.e. another €650k of tax.

So the State foregoes €360k and makes around €2.5m. Even taking the time value of money into account, the State is quids in. Why? Because I take its money and handle it better than the State would by investing it.


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## Gordon Gekko (7 Mar 2018)

It’s the missing piece to solve the pensions crisis; by all means introduce autoenrolment etc, but it’s vital that the investment piece is optimised. If people are persuaded to fund their pensions and ensure that they are invested wisely, it should actually be a bonanza for the State in terms of taxation.

Take even the inheritance tax piece in isolation; 30% of virtually every ARF will go to the State when the ARF holder (or spouse) dies. There is no CAT free threshold.


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## Duke of Marmalade (7 Mar 2018)

Gordon Gekko said:


> My plan is to contribute the maximum over a 30 year period. That’s €900k of contributions at a “cost” of €360k to the Exchequer. I estimate that the pot will be worth circa €3m at retirement.
> 
> Based on current rules, the State will get Chargeable Excess Tax of €340k and tax of €60k on my lump sum when I retire.
> 
> ...


Yep, tax is a big deal.  The question is - is it is a bigger deal using tax subsidised supplementary pensions or providing for your pension through the third pillar, i.e. making your own pension provision.  I think the second pillar is superior, i.e. the tax system is subsidising private pensions.


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