Reducing tax relief on contributions will not solve pension crisis, say actuaries

Reducing tax relief on pension contributions risks undermining the Government's strategy to improve coverage and adequacy of income for people in retirement, pension advisers have said.

The Society of Actuaries in Ireland notes that significant reductions in relief have already been achieved with lower lifetime limits on pension funds and the elimination of relief from PRSI and USC.

It has broadly welcomed the Government Roadmap for Pension Reform, and particularly the introduction of auto-enrolment and a focus on pension charges.

However, in an initial submission to the Government’s consultation on the plan, it says the much-touted SSIA model of tax relief is not necessarily the panacea for the industry that its advocates believe.

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SSIAs (Special Savings Incentive Accounts) were introduced by former minister for finance Charlie McCreevy. They offered savers a €1 government top-up for every €4 saved and matured within five years.

Some proponents maintain that the current tax relief system is too complex for many people to understand and have argued that an SSIA model should be adopted instead.

The Society of Actuaries accepts the SSIA-type approach might be easier to understand but says that it presents its own problems.

Taking the roadmap scenario where, for every 6 per cent of earnings a person saves, the State would contribute 2 per cent – effectively tax relief of 25 per cent, the submission said this would increase the cost of pension relief to the State for people who do not currently pay income tax or who pay income tax at 20 per cent.

At the same time, it would be a disincentive to continue current levels of pension savings for people paying income tax at the higher, 40 per cent rate.

That would undermine adequacy and run counter to the intention of the roadmap.

“Issues with achieving a target percentage [income] replacement ratio are most pronounced with middle-income earners,” the report says. “Reducing the tax incentives would run directly counter to improving the current situation for this group.”

Cost aside, the society has other issues with the SSIA model. First, it notes, SSIAs had a hard deadline that encouraged savers to make a decision. Close to half of all SSIAs were taken out in the month before the scheme closed to new entrants.

But pension savings were a lifetime exercise without such a deadline.

SSIAs were also short-term in nature with the money maturing in five years and being used by many people for big ticket purchases. That short-term window – with the prospect of access to the cash within a foreseeable time-frame – contrasts with pension savings that would not be accessible until retirement.

In any case, the actuaries say, even with the attractions of SSIAs, 60 per cent of Irish adults did not participate – effectively rejecting the offer of free money.

“In the light of the above, we would caution against assuming that adopting an SSIA-type approach will automatically lead to high pension take-ups,” the actuaries body says.