Paying into a private pension presents a moral dilemma. But the system is unfair no matter what you do, writes SARAH CAREY
LAST YEAR as the October 31st tax deadline approached, I predicted the annual pension conversation with the accountant. He’d evangelise on the merits of a private pension. I would dismiss his arguments and piously pay my full tax liability. It didn’t quite work out that way.
On arrival he was in possession of my column excoriating pension products and a wide grin on his face. He also had a spreadsheet detailing my income, tax already paid and the remaining liability. The bottom line: write a cheque to the Revenue Commissioners or one for a similar amount into a pension.
My objections to pension products were the high costs, the incompetent fund managers and the restricted access to funds. He acknowledged the criticisms had merit but argued that if I paid the tax I would never see the money again. If I had a pension, there was a chance, even if it was slim, of getting a return in the future. It was a “no-brainer”.
I submitted that my cash flow wouldn’t be affected either way but given the country’s liquidity issues, the state had a rather pressing need for my few bob. It seemed wrong to exploit pension allowances to look after myself.
Also, it wasn’t true to say I wouldn’t see the tax again. I would, but indirectly through the provision of public services, rather than in an account bearing my name. He said the issue was not escaping, but postponing income tax. I’d pay tax when I drew down the pension later on. That was technically correct, but tax delayed felt like tax denied. Surely there was a moral obligation to pay now?
I wondered if I could consult anyone on the ethical issue. Instead I asked myself WWJD? – What Would Jesus Do? In that instant I knew two things. Jesus would pay the tax. I am not Jesus. Damn those moments of self-revelation.
The rationalisation began. First, this was the “game theory” economists describe. If everyone plays by the same rules, mutual benefits are maximised. If everyone willingly coughed up their taxes, there’d be enough to fund generous state pensions and public services. But once some people pull out of the system, a run begins, not unlike a run on the bank, a good neighbourhood or the public health system. Momentum develops as more people withdraw their cash, sell their house to the wrong type or take out private health insurance. If it’s every man for himself, then it’s every woman too.
Secondly, it was clear that the State wants me to have a private pension in order to reduce its future liability. Saving money for oneself at the expense of current exchequer revenue is Government policy. If I don’t do it voluntarily, sooner or later it’ll be mandatory.
An enterprising soul in Davy’s, John Markey, had responded to my article and since I believe in rewarding enterprise I presented myself in his office – what marketers would call a hot lead.
I left with a PRSA and some further education in pensions. One surprising issue is that Ireland, for once, is ahead of the game on one key aspect of pension provision.
The first step in a private pension is building up a savings fund over the course of one’s working life. On retirement this fund is used to purchase an annuity – an annual income paid to you by the pension company. Its size depends on how much you saved and how wisely they invested it, minus their considerable costs.
The problem is that when the pensioner dies, so does the annuity. If a relatively young and recently retired father died, so did the annuity and all he left behind was an impoverished family.
Charlie McCreevy’s father died when he was just four and it is believed that the family’s consequential poverty motivated him to change the system. McCreevy believed that pensions should cover products other than annuities, which would give people more flexibility and protect the family’s income even if the pension holder died.
He made key reforms that allowed pension holders to invest in the stock market, bonds or just leave the money on deposit. Costs were reduced and the capacity to will the remains to next of kin was created. In European terms, this was genuinely innovative. For some reason, our EU colleagues have retained the rigid annuity system.
However the reforms were limited: only the self-employed were deemed responsible enough to take out these self-directed pensions. PAYE workers in defined contribution schemes remain tied to the expensive and restrictive annuity system. This was blatantly unfair and so the recent National Pensions Framework has indicated that over the next five years, people in defined contribution schemes will have greater access to these flexible options.
Of course that still leave us with a three-tier system. The lucky sods with their defined benefit pensions, including former taoisigh and presidents; those entirely dependent on the State pension, and us privately pensioned who must hope that despite recent evidence, someone knows what they’re doing.
These differences are fundamental. Imagine the impact on all decisions in the public and private sector if everyone – state employees from top to bottom to private citizens dependent on the state were paid the same rate on retirement? The concept of accountability might become a little less abstract if the politician, the principal officer and the porter had the same pension. That would be a game changer.