Mistake to sink budget axe into tax relief on pensions
The pensions industry can be forgiven for feeling a little paranoid given recent events.
The last few weeks have seen the publication of a couple of not very flattering reports about pensions. First the Department of Social Protection released a report on pension charges carried out by PricewaterhouseCoopers. It looked at both the transparency and reasonableness of pension charges and concluded that there is a “a wide variation in charges”.
However, the key factoid to emerge from the report, and highlighted in the department’s press release, was the startling revelation that someone who accumulates a pension fund of €400,000 could, under certain circumstances, end up paying over €120,000 in fees.
Then last week saw the publication of a study by Gerard Hughes of the TCD Pension Policy Research Group under the umbrella of the Economic and Social Research Institute. He looked at 48 large companies and found that 45 per cent of them offered guaranteed pensions based on final salaries to executive directors, while only 8 per cent of them offered such generous schemes to the rank and file.
The combined import of the two reports would appear to be that the private pension system – which is generously supported by the taxpayer via tax breaks on contributions – has been hijacked by an evil axis of an industry hell-bent on self-enrichment and its fat cat bosses.
The timing of the reports may just be coincidental but it amounts to some very helpful mood music for a government on the verge of yet another budget day smash-and-grab raid on private pensions .
The industry seems to have all but put its hands up at this stage, with the chief executive of the Irish Association of Pensions Funds, Jerry Moriarty, telling this paper last week a cap on tax relief on contributions that exceed what is needed to deliver a €60,000 pension is “the least worst option” of the various measures being trailed ahead of the budget.
It is important – amid all this pragmatism – not to lose sight of the fact that the the Government’s ever-clumsier efforts to try and squeeze money out of pensions risks doing irreparable harm.
Short-term thinking is unavoidable when the national books don’t balance and cuts have to be made. Five years into the crisis, we are at the “hard choices” stage. Public-sector wages remain off the table so it’s coming down to choices like hospital beds or tax relief on pensions.
It is obvious that tax relief for pension contributions is going to lose out, although the Government may have miscalculated the backlash from middle-class voters once they see the impact of the changes on their take-home pay.
What is harder to justify is the lack of any real sign the Government is interested in innovative alternatives or measures to try and alleviate the long-term consequences for pension provision of short-term expediency.
One such idea that has been floating around but does not seem to have gained much support is to match any reductions in the tax relief on contributions with some sort of tax credit on payments. A proposal along these lines would be tax-neutral in the long term for the contributor but the State would be getting the tax now rather than when the pension is paid.
The benefit for the pension scheme member is that the impact on their retirement income of accruing a smaller pension pot is offset by paying less tax on the retirement income.
There are various other ideas in the ether of equal or greater complexity. None of them could be easily implemented at the best of times, never mind by a badly stretched public administration in the midst of a chronic fiscal crisis.
It would be prudent then to assume the changes in tax relief on pension contributions in the budget will probably not be mitigated in any way. This will damage people’s faith in private pensions, which has already taken quite a battering as a result of poor market returns and various measures brought in by the Government in the last few years to reduce reliefs and raise revenues, the most significant being the 0.6 per cent levy on assets.
The great fear must be that if we continue in this vein, the money which would normally have gone into pensions to avail of tax relief – and ultimately be taxed on the way out – will now be channelled into other vehicles, possibly avoiding tax entirely. Anyone remember Ansbacher?