Are tax reliefs on pensions for higher earners too generous?

Brendan Burgess said:
What is the rationale for any tax-free lump sum on retirement? A pension fund should be to provide a person with an income and not with a tax-free lump sum.

The 25% tax-free up to €200k is too generous.

But can you reduce that for people who have made pension contributions in the expectation of getting this?

Brendan
Click to expand...

Hi Brendan

I'd imagine it serves as something of an escape route for people approaching retirement who still have residual mortgage or kids college fees debt.

I also think it encourages pension investment, which is a good thing.
 
Sarenco said:
That's mad!

Surely there should be a more reasonable limit on what the company can contribute?

It's no wonder @Marc has clients in their 40s with ~€2m pension pots...
Click to expand...

They still use the defined benefit pension rules, how much is needed to provide a pension of 2/3 salary at retirement. And seeing as the Revenue sets the formula and they receive DB pensions, they aren't going to change them.

In fact, only recently did the Revenue come out with a uniform formula for doing the calculations. There used to be a lot of leeway for life companies to allow even higher contributions. Meanwhile the self employed are limited to a % of earnings...and get hit with 11% USC for earning over €100k too!!


Steven
www.bluewaterfp.ie
 
The bit I like is that Charlie Weston discusses the report in question which dates from 2017 (and discussed on AAM yonks ago) as if it's hot off the press?!:rolleyes:
 
  • Like
Reactions: mtk
SBarrett said:
They still use the defined benefit pension rules...
Click to expand...
Well, surely that's one area that's crying out for reform.

Aside from the inequitable treatment of different cohorts of taxpayers, it can hardly be in the State's interest to allow company directors to shelter income from tax to that extent.

Maybe the maximum amount that a company can contribute to a director's (or employee's) pension pot should be capped at, say, 25% of the individual's own pension contributions. Would that work?
 
The rational for the “generous” limits applicable to Directors (but applicable to Employees also) is that many Companies/ Directors might only be able to start contributing later in life (say from their 40’s onwards) after the business becomes successful. So there is an element of “catching up”.
 
Conan said:
The rational for the “generous” limits applicable to Directors (but applicable to Employees also) is that many Companies/ Directors might only be able to start contributing later in life (say from their 40’s onwards) after the business becomes successful. So there is an element of “catching up”.
Click to expand...
Ok but we already have progressive age-related contribution limits that surely adequately allow for "catching up". Somebody in their 50's, for example, can get tax relief on contributions of up to 30% of their net relevant earnings.

Surely it's inequitable that a 40-year old freelancing programmer that operates through a company can get tax relief on contributions equivalent to almost their entire income, whereas a self-employed dentist (for example) at the same age is subject to a 25% limit? What justifies that difference in treatment?
 
I don't think tax relief on pension contributions by higher earners are overly generous, as such, but the extent to which tax-relieved contributions can be made by companies to their directors'/employees' pension pots definitely seems overly generous to me.

I hadn't realised the position was that extreme before @SBarrett posted the example above.
 
Sarenco
I don’t disagree that Self Employed are treated unfairly by comparison to Directors. But even a Director contributing 30% of Salary from age 50 would not accumulate sufficient to buy a 2/3rds Pension (or equivalent to say a senior civil servant) by say age 65.
The €2m cap is the ultimate limit (in effect). But even €2m fund is equivalent to a joint life pension of c€60,000 pa in Annuity terms. A good pension but not a fortune ( and lower than many a senior civil serving).
 
Conan said:
Sarenco
I don’t disagree that Self Employed are treated unfairly by comparison to Directors. But even a Director contributing 30% of Salary from age 50 would not accumulate sufficient to buy a 2/3rds Pension (or equivalent to say a senior civil servant) by say age 65.
The €2m cap is the ultimate limit (in effect). But even €2m fund is equivalent to a joint life pension of c€60,000 pa in Annuity terms. A good pension but not a fortune ( and lower than many a senior civil serving).
Click to expand...
Are you comparing like with like the civil servant employer only started giving him credits form when he reached 50 he/she would not get 2/3 pension,for 15 years cont,
 
Last edited:
Retired 20@7
You are missing my point. An SME type company may be in existence for 20, 30 years but perhaps in the early years cannot afford pension contributions. Perhaps only when it grows to a certain level can it begin contributing and making up for earlier years.
Yes most civil servants accumulate their pension probably over 40 years, though Judges can accumulate a full pension with only 15 or 20 years service.
 
Conan said:
An SME type company may be in existence for 20, 30 years but perhaps in the early years cannot afford pension contributions.
Click to expand...
But how is that different to a self-employed dentist who may struggle to afford to make contributions in the early years of his practice?

It doesn't sound like much of a justification for the different treatment to me TBH.

Public service pensions are certainly extremely generous by any reasonable standard but that's a different issue.
 
If I’m on €150k, I can stick €29k into my pension.

If I’m an “employee” with, for example, RTE, I have my own one-man-band company and I can squirrel multiples of that away.

That isn’t fair. Either allow everyone to fund for a capital sum that will deliver 2/3 of final salary or restrict employer contributions by one-man-band companies to the same €115k/percentage stuff.
 
Last edited:
Sarenco said:
Well, surely that's one area that's crying out for reform.

Aside from the inequitable treatment of different cohorts of taxpayers, it can hardly be in the State's interest to allow company directors to shelter income from tax to that extent.

Maybe the maximum amount that a company can contribute to a director's (or employee's) pension pot should be capped at, say, 25% of the individual's own pension contributions. Would that work?
Click to expand...

As long as public service employees still get DB pensions, can you see them changing funding requirements?

Again, we should stop looking at how much is going into the pensions and what is coming out. The example I gave was for a pension of €76,666 a year, which is a generous pension. The provide a pension of that amount, you are looking at €2m. Pensions are very expensive to provide for and it is very difficult to fund a decent one all on your own. Companies should be encouraged to help their staff pay for retirement. It is those who don't have help i.e. self employed and non pensionable employment, should be helped more.

And as for Marc's clients who are approaching €2m in their 40's and have to invest in cash? They are the outliers, there's not many people in their position. The limit is €2m and they should be thankful that they are in such a position at a young age. At least they don't have to worry about market volatility over the coming decades when they are sitting in cash.


Steven
www.bluewaterfp.ie
 
Conan said:
An SME type company may be in existence for 20, 30 years but perhaps in the early years cannot afford pension contributions. Perhaps only when it grows to a certain level can it begin contributing and making up for earlier years.
Click to expand...

My suggestion of having fund limits at certain ages would resolve this.

upload_2018-9-27_8-19-35.png

As the fund size would be limited by age, it would not matter if the employee or their company contributed the money.

So a 50 year old self-employed person who has ploughed all their profits into developing the business and who has made no pension contributions before aged 50, could now start stuffing their pension fund.

Brendan
 
Brendan Burgess said:
The fact that something wrong is difficult to change, does not mean that we should not try to change it.

Brendan
Click to expand...

I don't think the amounts company's can contribute to pensions for staff or directors is wrong. It is evidence of how expensive it is to provide a good pension is. I would not expect someone who has been successful in their working life have to have a massive drop in pension income in retirement.

But as I pointed out originally, those who can't avail of company contributions are at a disadvantage and that should be addressed. But I can't see the govt giving more tax relief!

Lets not forget, there is a pension crises in this country and finding ways to limit the pensions for people isn't the way to address it.


Steven
www.bluewaterfp.ie
 
Brendan Burgess said:
My suggestion of having fund limits at certain ages would resolve this.

View attachment 3107
As the fund size would be limited by age, it would not matter if the employee or their company contributed the money.

So a 50 year old self-employed person who has ploughed all their profits into developing the business and who has made no pension contributions before aged 50, could now start stuffing their pension fund.

Brendan
Click to expand...
Your suggestion I think is full of loop holes it would allow very rich people who held there wealth outside of a pension fund to transfer 60% 1.2 of 2 million into a fund and expect the people who pay the most income tax high income earners to foot 800k ,
Do you see a way of stopping it from not being abused in fact people may borrow short term to use the loop holes in the system putting more pressure on taxpayers,
 
Hi Retired
That is the system at the moment.
People can build up a fund of €2m anyway.
I am just suggesting that the build up should not be age-related.
So, a person who focuses on using their surplus income to buy a house in their 20s and 30s could start building up their pension fund later and not be restricted by the 30% of maximum salary. They would have the same fund and tax relief as someone who had contributed 20% of their salary during their 20s.

Brendan
 
The age-related limits prevented younger operators in the Celtic Tiger-era building and property trades from investing more of their spare funds in pensions. I saw many tradesmen for example invest up to the limit for tax relief and then blow their remaining spare cash on crazy overseas properties and the like. Had these people enjoyed a higher tax relief limit, they would now have these funds available for their retirement.

Now these guys are 10-15 years older and now typically don't have the earnings capacity to make substantial pension contributions, so their pensions could well be in shortfall on retirement.
 
You must log in or register to reply here.
Back
Top