Tax-based incentives to encourage savings, personal pensions expected

 

Budget 2001 is expected to include provisions to encourage people to save and to make personal pension provision.

Tax-based incentives for saving could help reduce the inflationary impact of tax cuts or other Budget measures which will put more money in people's pockets.

Several pre-Budget submissions to Mr McCreevy sought tax incentives for saving schemes. There is fairly widespread support for some form of savings bond cashable in the medium to long term. Mr McCreevy now has to decide whether he will give taxpayers tax incentives as they save or when they cash in their savings after an agreed term.

Against the background of a fall in the national savings rate from just more than 9 per cent of income to 6.5 per cent over the last two years and rising inflation, Mr McCreevy is expected to make a move to boost saving levels.

New measures will have to be structured to stimulate an increase in savings rather than just deflect funds from current savings or pensions plans to tax-based schemes. And Mr McCreevy will have to ensure his measures will not lead to future flowback of cash into the economy.

Pre-Budget submissions included the ICTU's £500 pensions savings bond; the Small Firms Association proposal of tax incentives for savings of up to £5,000 a year and the extension of the Save As You Earn Scheme to unquoted companies; and the Irish Insurance Federation proposal of a reduction in the exit tax on long-term life assurance products to 12.5 per cent from 25 per cent.

The Irish Association of Investment Managers proposed a scheme where people could get tax relief at their marginal rate on savings of up to £500 a month which would have to be invested in a five-year unit fund.

Tax relief would be lost if contributions ceased or funds were withdrawn within the period.

The association stressed that investment in unit funds had the advantage of not increasing lending capacity in the economy. EBS, the Republic's largest building society, suggested the State would effectively pay savers £28 for every £100 they saved in a special 10-year savings account with an annual savings cap of £2,400.

The State portion would be placed in a special account which would not be passed on to savers who left the scheme before 10 years with some exceptions such as first-time house buyers.

All financial institutions would be able to participate. The advantage of its scheme, according to the EBS, is that for every £1 the State pays out it would take another £4 out of circulation.

The Tanaiste, Ms Harney, favours a voluntary scheme of contractual saving over the medium to long term which would carry significant tax reliefs. Offering tax incentives to encourage saving is not new. Savers have been able to earn tax-free interest on their savings with An Post through its National Instalment Savings Scheme, Savings Certificates and Savings Bonds for many years.

In the early 1990s, Special Savings Accounts were introduced whereby savers could put their funds into a bank or building society account and pay tax on their interest earnings of 10 per cent. This special rate compared with tax of 27 per cent plus levies of 2.25 per cent on the interest earned on other deposits.

But budget changes and low interest rates in recent years have made ordinary savings and investment schemes a lot less attractive.

The standard income tax rate has fallen from 26 per cent in 199-7/98, to 24 per cent in 1998/99 and 22 per cent in 2000-/2001.

But the tax rate charged on the special savings/ investment schemes has increased from the initial 10 per cent level to 15 per cent and then to 20 per cent.

On pensions, Mr McCreevy may signal tax-based improvements for contributors to occupational pension schemes which will be included in the forthcoming Pensions Bill from the Department of Social Community and Family Affairs. This Bill will set the legislative framework for Personal Retirement Savings Accounts. Improvements could include an increase in the tax deductible percentage of salary that can be paid into an Additional Voluntary Contributions fund from 15 per cent currently.

The Irish Insurance Federation wants pensions law to be amended to allow the use of part of an individual pension policyholder's fund at retirement (after payment of any tax-free lump sum) for the purchase of long-term care insurance on a single premium basis, with equivalent benefit payment tax exemptions as proposed above for regular premium long-term care policies.