The Government has moved to trim relief on contributions to private pension schemes in the Budget.
Minister for Finance Brian Lenihan also confirmed that retired former public sector workers will see their pensions cut.
However, there will be no change this year to the State pension. “It is the Government’s view that the security this has brought to older people should be preserved,” Mr Lenihan said in his Budget speech to the Dáil, noting that the State pension had increased “significantly” over the past 10 years.
All three measures had been well-flagged by the Government.
Mr Lenihan confirmed that private pension contributions will no longer be able to claim relief from Pay Related Social Insurance (PRSI) and the health levy (now renamed the universal social charge) from the beginning of next year.
However, in an unexpected move, the current PRSI exemption for employers on payments they make to staff pension schemes will also be cut – by 50 per cent – from the new year.
The Government expects the cut in relief on private sector pension contributions to save the exchequer €80 million in 2011 and €150 million in a full year.
It has already been signalled that the next three years will see further reductions in the tax relief on private pensions. At the moment, contributions avail of relief at the individual’s higher rate of taxation.
Next year’s budget will see this reduced by seven percentage points to 34 per cent. Similar cuts will take place in 2013 and 2014, by which stage relief will be available only at the basic rate of income tax, 20 per cent.
Other changes on personal pensions announced today include the predicted reduction in the annual earnings limit on which pension tax relief is applicable to €115,000 from €150,000 previously.
The related Standard Fund Threshold – the maximum allowable pension fund on retirement for tax purposes - is also to be cut dramatically, from €5.4 million last year to €2.3 million.
A new €200,000 limit will be imposed on tax-free retirement lump sums.
Separately, the Government is increasing the annual “imputed distribution” on Approved Retirement Funds (ARFs) from 3 per cent to 5 per cent with immediate effect. This affects only those people not drawing down at least that portion of their ARF in any given year and means tax will be charged on at least this percentage of an ARF each year.
Flexible options on retirement for members of defined contribution pension schemes will be extended, with details being published in the Finance Bill.
In relation to public service pensions, Mr Lenihan said public service pensioners had, so far, been unaffected by reductions imposed on serving staff and the Government considered it “appropriate that those pensioners who can afford to should now share the burden of adjustment”.
He noted that the number of public service pensioners had increased 36 per cent to about 103,500 this year compared to 2006, with the cost of these pensions jumping 53 per cent to €2.235 million per annum in the same period.
“Accordingly, public service pensions above €12,000 a year will be reduced by an average of 4 per cent,” Mr Lenihan told the Dáil.
Those with a pension under €12,000 - roughly equivalent to a social welfare/state pension would be exempted. Those on higher pension would pay more with a cut of 6 per cent on income between €12,001 and €24,000; 9 per cent on anything above €24,001 and €60,000 and 12 per cent on sums higher than that.
The changes will also apply to former political office holders, retired members of the judiciary and their survivors or dependants.
“Reducing the income of pensioners is an exceptional measure. But these are exceptional times. The Government has to make savings and pension costs are a very significant part of public expenditure.
He added that it would be “unfair if highly-paid pensioners remained unaffected while serving staff on low pay have had their pay reduced”.
From the start of next year, previously announced arrangements will come into force for new entrants. These will see public service pensions for future staff linked to career average pay rather than final salary. People will also retire later and pension increases in retirement will be set in relation to the consumer price index rather than increases in pay for serving public servants as at present.