Private sector pension funds hit for €1.9bn levy
PENSION LEVY:PRIVATE SECTOR pension funds will be hit with a €1.9 billion levy to fund the jobs initiative.
Minister for Finance Michael Noonan announced yesterday that the Government was introducing a pension levy of 0.6 per cent, which will be paid each year for four years. The levy is expected to raise €470 million a year, some €1.9 billion in total.
The Government has also said it will need to introduce legislation to allow pension funds for the first time to cut the level of pensions paid to people in retirement. Until now pensions already being paid were untouchable.
Mr Noonan told the Dáil that pension funds were being tapped to pay the cost of the jobs initiative “because I believe that the alternatives for increases in taxation elsewhere at this time would be more damaging to the economy”.
The levy will not be applied to pensions in the public sector or to those established for people not resident in the State – a measure to protect the funds industry in the IFSC. However, it will affect all defined benefit and defined contribution pension schemes in the private sector.
Defined benefit schemes promise to pay a certain proportion of your salary in retirement, while defined contribution schemes build up a retirement fund based on contributions and investment performance.
Personal Retirement Savings Accounts and retirement annuity contracts will also be hit.
Over its lifetime the levy will amount to a charge of 2.4 per cent of the value of pension funds.
Members of defined benefit schemes who are already retired and whose schemes have bought a annuity to fund their retirement income will not be affected.
However, the Irish Association of Pension Funds said most defined benefit schemes were funding annuities directly from their funds and these would be subject to the tax. While the Government said it would be up to scheme trustees to decide whether to pass on the levy, most defined benefit pension schemes are already in deficit and will not be in a position to absorb the charge.
That means members of defined benefit schemes are likely to see their benefits reduced.
Those in defined contribution schemes will have lower funds to sustain them in retirement.
The tax will be based on the value of the funds on January 1st last “or on the last date of the accounting period ending in the 12 months preceding that date”. It will be paid in two tranches each year by fund trustees or managers.
The levy is the latest in a series of measures affecting the pensions sector. The cap on lifetime pension assets eligible for pensions relief was more than halved to €2.3 million in the last budget.
That budget also announced plans to significantly reduce the tax relief available on pensions contributions. Until last year pension contributions were exempt from income tax, and from PRSI and the health levy.
The plan is to reduce relief to the standard income tax rate of 21 per cent in three stages. As a first step relief from the health levy and employee PRSI was abolished in the last budget. Relief on employer PRSI was halved.
The Minister said yesterday that he would examine the issue again “in the context of the results of the comprehensive review of expenditure currently being undertaken”.
Pensions industry sources said last night the levy was unfair and ill thought out.