Changes in pension contribution ceilings introduced in the Finance Bill this week will provide a welcome boost to late starters in company schemes. However, the increased contribution rates favour higher earners, and those on lower incomes will not benefit, according to the Pensions Board.
The move has been welcomed by tax practitioners as progressive, which allows employees more flexibility and retirement saving potential. It effectively harmonises the amount that can be saved by employees with the existing rates for the self-employed. The maximum pension contribution rate remains the same for employees under 30, at 15 per cent of relevant earnings. It increases to 20 per cent for those aged 30 to 39 and 25 per cent of earnings for workers in their 40s.
Members of company schemes aged 50 or over can now save up to 30 per cent of their salary as additional voluntary contributions (AVCs) and avail of full tax relief. This is particularly useful to those who have started their pensions relatively late as it enables them to catch up by boosting contributions in the final stretch.
Mr Michael Kelly, head of pensions at KPMG, estimated the raised limits would mainly have an impact on managerial and professional classes.
"This is a radical and unexpected move that will help people cope with difficult investment market conditions and low annuity rates. AVCs are popular at all age levels but this will make a huge difference to people in their 50s, who had been stuck at 15 per cent until now."
The restructuring was welcomed by the chief executive of the Pensions Board, Ms Anne Maher. "People should be allowed to contribute as much as they want to and we welcome any initiative which will increase pensions coverage and adequacy." Ms Maher said the changes would introduce an increased degree of complexity, which was a concern for the board but she was supportive in general of tax relief measures to encourage pension provision.
The increased flexibility could lead to a major boost of money into pension funds, according to Mr Kelly. He said that investment strategy should not be overlooked. "Each person has to decide on the investment strategy for their AVC fund and the closer you get to retirement, the more cautious you should be."
Editorial Comment: page 15
