State to hit pensions again
Limiting tax relief on pensions is on the agenda as preparations intensify to frame the BudgetIT WOULD be exaggerating the point to suggest that accountants are twiddling their thumbs at what is traditionally their busiest time of the year, but there is little of the usual frenetic public exhortation to act now to minimise your exposure to income tax as the deadline for 2011 returns looms.
In part, of course, this is down to the ongoing difficulties in the economy. Recent figures show that six businesses are closing every day and unemployment remains stubbornly high – more than 14 per cent.
But uncertainty is not helping either – especially in the area of pensions. Despite changes over recent years, tax relief on pensions remains one of the most effective ways of reducing your exposure to tax.
But people are nervous. A series of changes in recent years means that these reliefs are not as generous as heretofore. More importantly, the Government has signalled plainly that it sees pension funds as fair game as it seeks to replenish State coffers in an environment where a commitment to Croke Park means it cannot address the bulk of spending (on salaries) in the public sector, and a promise not to interfere with income tax rates gives it little scope to raise the revenue necessary to meet the deficit targets under the State’s bailout programme.
It was for this reason that, when the Government last year outlined a plan to create 100,000 jobs in the economy over the next four years, the chosen method of funding the initiative was the introduction of a levy of 0.6 per cent on private sector pension funds.
Minister for Finance Michael Noonan said this would raise €470 million a year for four years, or €1.9 billion in total.
What was most radical about the initiative was that, for the first time, the Government retrospectively taxed its citizens.
The money targeted had been put aside by tens of thousands of private sector workers to provide for their retirement.
When they chose to lock that money away for up to 40 years, it was on the premise of the prevailing tax regime. And, while changes to pension tax reliefs are not unheard of, never before has the State dipped into funds already invested.
Defending the move, Mr Noonan said the Government was “pulling back a very small proportion” of the tax relief enjoyed by the industry over the years, and accused the pension industry of reacting in a “quasi-hysterical” manner to the levy. Earlier this month, he indicated that pensions were once again on his agenda as he frames the terms of what looks set to be a very tough Budget.
He told a recent Oireachtas Joint Committee on Finance that the troika would like the Government to bring forward proposals on pensions. “So we are considering that among our options,” he said.
The troika has been pressing for amendments to the current regime. In fact, the previous government in its Recovery Plan, set out a path to cut relief on pension contributions from 41 per cent to 34 per cent initially and then to 27 per cent and finally 20 per cent in successive years, bringing relief down to the standard rate of tax. And it was under Brian Lenihan’s watch as minister for finance that relief from PRSI was removed on pension contributions.