Why is there a state contribution?

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faketales

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I note the state contribution starting at 0.5% and rising to 2% over 10 years.

I can kind of understand the state making a small contribution at the start to get things going but surprised to see it rise.

I have an occupational workplace DC pension. Am I correct in understanding that the state won’t contribute to that? The 2% free is pretty nice.

Perhaps it might be still good value for the state rather than have to support people without pensions in years to come?

I guess I’m asking “Where’s my 2%?!”
 
Brendan Burgess said:
Auto enrolment employees will see their contribution come from their net pay.

So the state contribution is the tax credit equivalent.

Brendan
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Oh interesting. Sorry I’m new to looking at this.

Does that mean it won’t impart their pension limit if they have a PRSA? Or are they allowed to?
 
faketales said:
Oh interesting. Sorry I’m new to looking at this.

Does that mean it won’t impart their pension limit if they have a PRSA? Or are they allowed to?
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No one knows, AE is still years away. In theory people are going to be allowed to make AVCs into AE, but that is in the 2nd/3rd/4th phase....
 
If you are a standard rate tax payer this AE scheme will be slightly better than conventional schemes.
If you put €120 of take-home pay into AE the State will top that up by €40. If instead it was conventional you would be topped up by €30 tax relief if you are a standard rate taxpayer but you will be topped up by €80 is you are a 40% taxpayer. Simples.
 
The government is contributing to your pension via tax relief. If you're a higher rate tax payer it's €1 for every €1.50 you pay.
 
Fortune said:
If you're a higher rate tax payer it's €1 for every €1.50 you pay.
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Yep, as opposed to 50c top-up under AE - tax relief a full 100% better. So advice to employers and employees alike - be in AE whilst you are not a 40% taxpayer but keep an eye out and be ready to change into a tax relief scheme when you get that pay rise.
 
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This is pure speculation on my part but once AE gets up and running there will be big pressure to equalise the state contribution and the tax relief for higher income payers.

So either a higher flat AE contribution across the board or lower tax relief for higher income payers.
 
Yes, it is a very big issue well flagged elsewhere in this parish and the subject of a submission from the Society of Actuaries. IMHO the whole thing will collapse in chaos if they do not equalise the state subsidies/tax reliefs. Either system is justifiable but they cannot co-exist. A report for the UK Government highlighted the pros and cons between a flat subsidy and tax relief at the marginal rate but didn't even consider the nonsense of running both as a choice for the punter.
 
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I was so used to the idea of tax relief I didn't even consider it wouldn't be. Idare ask what the logic is. Is the government contribution easier to explain / appear more generous than tax relief...
 
faketales said:
Is the government contribution easier to explain / appear more generous than tax relief...
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Yes. People seem to understand that if they put in 2 and the government matches it, they are getting good value for money.

And it also treats those on 20% and 40% the same.

Brendan
 
This was how the Deputy Secretary of the DSP explained the rationale to the JOC examining the draft Bill
I personally would favour the flat incentive. I see little rationale for the State incentivising people on higher incomes. But we are where we are largely because of defined benefit arrangements, most notably in the Public Service. If we wanted a flat incentive, employer contributions, implied or actual, would need to be treated as BIK.
The two ideologically opposed systems cannot co-exist in a situation where there is ongoing choice of which system suits you best.
 
Duke of Marmalade said:
But we are where we are largely because of defined benefit arrangements, most notably in the Public Service.
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Serious question: do you say this?

Public servants get tax relief on their pension contributions but these are mandatory, flat-rated and small compared to what a private sector high-earner could opt to save.

People also tend to forget that tax relief isn’t a state top up per se, it is a deferral of tax until the income is drawn down.
 
It's said because DB schemes give a massive employer contribution to the members. For public servants it's even bigger as there's no investment growth to reduce the cost to the employer (well, to reduce the cost to the exchequer).
 
@Fortune is right that it is all about the treatment of the employer contribution, whether explicit or implicit as in the Public Service and to some extent all DB schemes.
We're getting into deep waters here. This is an extract of a paper submitted by Fagan and Woods to the Statistical Society. Full paper attached.
 

Attachments

  • Submission by Woods and Fagan.docx
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Just to clarify the terminology here.

The government aren't "contributing" to anyone's pension. The government don't create any money/wealth, they appropriate from one party to another.

By contributing to a pension you are deferring recognition of your income.
Therefore the government are simply deferring their appropriation of that income by means of tax.
They'll get that tax later, under whatever regime and rates are ruling at that time.
 
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