Moore McDowell critical of flat-rate pension tax relief suggestions

[Duke of Marmalade]

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]

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]

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]

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]

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

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]

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]

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]

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]

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]

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]

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.