Study finds 30% tax relief on pensions could save €500m

Thu, Nov 26, 2009, 00:00

THE INTRODUCTION of a single rate of tax relief on pension contributions would save public money and would be fairer, according to a report from the Economic and Social Research Institute (ESRI).

The report estimates that between €500 million and €1 billion could be saved by changing the system of pensions tax relief.

Minister for Social and Family Affairs Mary Hanafin said changes to the pensions system would “take place in the context of the Nationals Pensions Framework”, which would have a lead-in period of at least a few years.

“We don’t want to do anything that might impact on competitiveness. Under no circumstances would we publish a plan with immediate implementation,” said Ms Hanafin, who suggested new measures could come into effect in 2014.

The ESRI’s report on pensions policy found that, if the tax relief was restricted to the standard rate of 20 per cent on all pension contributions, it would raise revenue of more than €1 billion a year. Such a move would result in losses for top rate taxpayers and no change for standard rate taxpayers. More than 80 per cent of the revenue raised would come from the richest one-fifth of earners.

The ESRI said the revenue raised could be used to sustain State pension levels, as the demographic pressures from the Republic’s ageing population on the financing of State pensions intensifies. A single 30 per cent rate of relief in between the standard rate and the higher 41 per cent rate of tax would result in gains to the exchequer of about €500 million a year, the report found.

This move, which echoes proposals in the Commission on Taxation report and is similar to a proposal in the renewed Programme for Government, would involve gains for standard rate and losses for top rate taxpayers.

The ESRI said evidence from the US and Britain suggested that many high-income individuals would have saved for their retirement even without the tax relief.

The Programme for Government document released in October stated that a single rate of 30 per cent would be introduced.

However, a spokesman for the Department of Finance said earlier this week that this was a “typo” and the rate “was always 33 per cent”.