Pension sums even more complex as Minister delivers on reform
Analysis: Tax relief protected but ‘once only’ levy a recurring feature, writes Dominic Coyle
The sharp dividing line between pension benefits accrued before the end of this year and those coming later has created a monster in terms of calculations which will ensure the healthy fee income of pension advisers for years to come. Photograph: Getty Images
Hitting pensions in the budget was not unexpected. But the Government still drew fire over its new levy, and for the complex way in which it is adjusting the measuring of whether a pension fund meets or exceeds new limits for tax relief.
On the plus side, there was general welcome that tax relief had been retained at the marginal tax rate of up to 41 per cent, and that the standard fund threshold was not reduced even further, as had widely been feared.
From his perspective, Minister for Finance Michael Noonan has followed through on the Government’s commitments. It kept its word on ending the controversial raid on pension funds (tapping 0.6 per cent of the value of funds each year over four years) and it brought down to €60,000 the retirement income that someone can receive while availing of tax relief on pension fund contributions.
But, as always, there’s the letter of the law and the spirit. And while the Minister may have observed his promises to the letter, his announcements fell some way shy of the spirit of previous commitments.
On the levy, both Noonan’s department and Joan Burton’s Department of Social Protection have been quick to round on those in the industry who claimed he would have to keep it going to fund workers caught up in collapsed pension schemes - like Waterford Crystal. In the event, while closing one levy, they have created a new one - 0.15 per cent of the value of pension funds - and, worse still, the two will overlap next year, meaning pension funds take an even bigger hit.
And while the Minister referred to the new charge only in the context of 2014 and 2015, unlike the original levy, he gave no express commitment that it would end there, or that the rate would not rise down the line.
Members of defined contribution schemes – and their advisers – were quick to criticise what amounts to a second round of retrospective taxation on savings, especially as DC fund members are unlikely to need bailing out at cost to the public purse, like their peers in the Waterford Crystal defined benefit scheme.
The Minister’s fig leaf – that the new levy would also continue to fund job creation programmes - has done nothing to disabuse them tonight of their sense of injustice.
In relation to the €60,000 cap on retirement income benefitting from tax relief under the new standard fund threshold of €2 million, it is somewhat instructive of departmental thinking that this “cap” relates to someone retiring at 60 – five years shy of the age at which most people retire.
For what it’s worth, at 65, you could take a tax-free lump sum of €200,000 and still enjoy annual income of more than €69,200 while staying under the new standard fund threshold cap.
A more serious shortcoming is that the Government has drawn a sharp dividing line between pension benefits accrued before the end of this year and those coming later - up to the end of this year, the old multiple of 20 applies: thereafter the multiple ranges from 22 to 37, depending on when you start drawing down benefits.
Apart from anything else, this has created a monster in terms of calculations which will ensure the healthy fee income of pension advisers for years to come. While the final detail will not be available until the Finance Bill, it appears, at first sight, that no ordinary member of a defined benefit pension fund will be able to determine how they measure up against the cap if they have joined a fund before the end of this year and draw down the benefits at some point after January 1st, 2014.
And, in an unflagged move, the end of top slicing relief means that people taking bigger lump sums will now pay higher marginal tax rates.