Proposal mired in confusion but one thing is clear - few are likely to escape paying levy
ANALYSIS:AMID THE clamour over the introduction of a pensions levy to pay for the Government’s jobs initiative, there is still considerable confusion over who exactly will be affected and how its impact will be felt.
Apart from a short briefing note on its website, the Department of Finance would say only that “the detailed list of the products to which the pension levy will apply will be contained in the Finance Bill”, which will be published next Thursday.
Minister for Finance Michael Noonan stated in the Dáil that the charge would be levied on all private pension funds.
Some confusion remains over the status of Approved Retirement Schemes, to which self-employed people, company owners and other wealthy individuals are entitled to transfer their assets from small defined-contribution schemes. It appears that, once transferred, such schemes are no longer pension schemes per se, and may escape the levy.
Similar questions surround the status of Personal Retirement Savings Accounts, whose benefits have been “vested” (drawn down). Until the supplementary Finance Bill is published next week, it is not possible to say whether such arrangements will be affected.
Most people, however, will be unable to escape the charge of 0.6 per cent per year between now and 2014, bringing €470 million a year into the exchequer, or €1.9 billion in total.
This is particularly so for people enrolled in defined-benefit pension schemes – where the employer-sponsored scheme promises to pay up to two-thirds of your salary in retirement on the basis of the number of years worked.
The trustees of such schemes face a number of choices in relation to how they handle the levy on their fund. They can:
* Absorb the impact within the fund. This is unlikely to be possible for the vast majority of defined-benefit schemes which are already in funding difficulties and making arrangements with the regulator, the Pensions Board, to regularise their situation;
* Seek to have their fund managers absorb the levy by reducing their charges. This was proposed by Shane Ross yesterday and received support from Taoiseach Enda Kenny. However, the industry has been quick to rubbish the prospect;
* Impose higher contributions on either employers or working members, or both. This is seen as difficult at a time when many scheme members and employers are struggling to meet existing funding commitments;
* Reduce benefits. Benefits are already being reduced in many pension schemes by agreement with the members and this appears the most likely option for many funds.
The situation of people who have retired from such schemes is also complicated. If they are in receipt of an annuity bought from an insurance company, they are exempt from the levy.
However, most defined-benefit schemes have chosen in recent times to pay “annuities” directly from their fund rather than avail of historically low annuity rates. In such cases, the fund is liable to the levy.
This may have a disproportionate impact on the actual pension received because the levy is charged on the fund – generally up to 15 times the annual pension – not the actual pension.
The Irish Association of Pension Funds says this could, in extremis, see pensioners facing cuts of up to 9 per cent in their retirement income.
The Government has acknowledged it will have to introduce separate legislation to allow scheme trustees reduce benefits of pensions already in payment. Until that is published it is impossible to be specific on the approach that will be adopted.
People on defined-contribution schemes – the majority – will see their fund diminish by 2.4 per cent over the four years. They can choose either to top up their fund by a similar amount or face the prospect of lower pension benefits in retirement, unless they can persuade their fund manager to take the hit by reducing fees.