Are tax reliefs on pensions for higher earners too generous?

Brendan Burgess

Brendan Burgess

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As part of the consultation on pensions, there will be a review of the tax relief on pensions for higher earners.

If they reduce the rate of tax relief from the marginal rate of 40% to 20% or even 30%, I would imagine that most people would stop contributing to a pension until fairly late in their working lives.

So I would be totally opposed to that.

So should the rate be retained but the limits be reduced?

This is a simplified summary

What are the contribution limits at present?

1) Maximum salary on which pension contributions can be calculated: €115,000
2) Age related limits for contributions e.g.
  • Under 30:15% of salary
  • 60 and over: 40% of salary
3) No practical limits on what an employer can contribute in an employer scheme (Is this correct?)
4)Maximum size for a pension fund €2m - subject to draconian tax on draw-down of funding over this.

Tax-relief on drawdown
1) 25% of fund can be taken tax-free up to €200k - no PRSI, No USC
2) Within the 25%, the next €300k can be taken at standard rate - No PRSI, No USC
 
I can't see the rationale in the age-related contribution limits.

An age-related fund size would make more sense.


For example:
upload_2018-9-26_8-41-35.png


So someone who is on the lower tax rate when they are younger would make no contributions, but would be allowed to "catch up" in later years when they are on a higher salary.

Or, if I spent my 20s and 30s paying down my mortgage, I could then stuff my pension in my 40s and not be limited to 25% of my income.
 
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
 
Brendan,

NO!!! An age related fund limit is a terrible idea as it restricts the benefits of risk taking in the early years.

I know several Professionals in their mid 40s who all have to invest their pensions in cash type investments as they are "fined" 70% tax if their pension exceeds €2M in retirement. They are already restricted to the amount that they can personally contribute to around €25,000pa

They should not be discouraged from putting their capital to work in the real economy as well
 
Hi Marc

I wonder if I have explained it badly, as my proposal would have the opposite effect to what you have suggested.

At the moment, a high earner in their 20s is encouraged/forced to contribute 15% of their salary to a pension scheme. If they don't, they lose the right to contribute it.

Under my scheme, there would be no hurry. They could invest their money in the real economy and realise that in later years they could make up for the earlier lack of contributions.

I would scrap the 70% tax. If someone sticks to the interim fund size limits and by the age of 65 good investment returns makes their fund worth more than €2m, fair play to them.

Brendan
 
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
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I suspect the rationale came from the permanent government feathering there own nest when it came to pensions ,
When they came up with the idea of giving themselves an extra 25% cash along with there pensions the next thing the had to sort out was how to receive it tax free,

Following on from this they would have allowed it for everyone so as not to scare the Horses, Knowing well most would not be in a position to take advantage of the break,
 
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I agree - I think a fund limit is totally perverse disincentive to save. A fund limit punishes an investor for making good investment decisions or from investing early in life.
If I invest in a company or a fund after carefully selecting it for say, its ability to grow or pay a healthy dividend over many years, why should I be penalised?
If I decide to start a pension at 18 to give myself 50 years of growth in my pension pot, while my peers fritter away their income, why should I be penalised?
The stated problem is tax relief - if so then limit the relief granted on contributions. Remember, the government is also potentially taxing the resulting fund when it is paid out as a pension at retirement.
 
Interesting article in today's Indo

Higher earners gain most from pensions tax relief, say experts

HIGHER earners are the big winners from the tax relief system for pensions savings, according to university academics.

...

The paper, by UCD's Shane Whelan and UCC's Maeve Hally, found that those on the 40pc tax rate get more "generous" relief compared with lower-paid people.


It suggests more lower-paid workers would take up pension saving if the tax reliefs were abolished and replaced with a matching contribution from the Exchequer. It is suggested this could see the State contributing €1 for each €1.60 saved. This would be an effective subsidy of 38pc. This is in line with the 2009 Commission on Taxation.

The paper looked at a married, one-income household. It found that if the household earned €30,000 a year then the equivalent Government subsidy for investing in a pension works out at 35c.

If the household earns €50,000 its subsidy for investing in a pension is €1.04.
 
Fake news, in the form of a report with selective and pre-determined findings, commissioned and published with the intention of influencing public opinion and ultimately public policy.

These things are ten-a-penny at this time of year, ahead of the annual Budget.
 
I would never wish to disagree with two eminent academics, but I will.
For someone earning €30,0000 or even a little higher, I doubt that “Pensions” are high on their list of priority spends. I suspect that mortgage/rent, putting food on the table, child costs etc rank higher.
In addition, a married one-income household would currently get a State Pension (including Adult Dependant additional ) of over €20,000 ( so over 2/3rds). I know that the State Pension conditions may change in the future, but as things stand I suspect that changing the tax relief structure will have little impact on lower paid employees when it comes to pension contributions. If the Employer has a Occupational Pension and membership is a condition of employment, then the tax relief structure is not a big issue. For employees with no Occupational Pension, changing the tax relief as suggested is very unlikely to see an upsurge in PRSA type plans.
Even the proposed auto-enrollment will not change the fundamental question as to whether individuals can afford to make pension contributions, irrespective of how tax-relief is structured.

It is stating the “bleeding obvious” that higher rate tax payers get more tax relief than lower rate tax payers. But in all probability, higher rate tax payers also pay more tax on the resulting pension income. The current tax relief system is more about “tax deferral”. Tax relief at marginal rate on contributions going in, but higher rate tax on the marginal income arising at retirement.
 
If you look at trough they eyes of high earners who can afford to pay in to get the max break I would expect most would argue it is not two generous

If you looked at it through they eyes of high earners who cannot afford to pay in because they have other commitments they wont argue one way or the other most would have a lingering hope to one day take advantage of the generous tax break so it is very easy to include them in along with the people who can take advantage of the generous tax break,

the high earners who cannot take advantage of the tax break finish up long term paying more tax to help the high earners who can afford to take advantage of the generous tax break

The Generous tax break on private pensions to high earners long term works against them they are on the hook long term to foot the bill for the people the present system leaves behind,

Generous tax breaks on pensions to high earners is an action that saves some high earners money at the beginning .but which over a longer period of time results in more money/tax being spent or wasted trying to cope with the people the generous tax break left behind most/all of this tax finishes up coming out of high earners wages/taxes,

I do not really have a problem with generous tax relief to high earners or any other group for that matter but it should be capped around the same wage level as a grade 3 public servant salary of around 38000 euro averaged over there life time





Please do not use this post to take tread of topic ,
 
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Brendan Burgess said:
I can't see the rationale in the age-related contribution limits.
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Use-it-or-lose it is a powerful psychological spur. The date of a person's first contribution is a really powerful predictor of their eventual pot.
Any marketing grad will tell you the most important moment is when the customer opens his wallet, even a by hair.

Brendan Burgess said:
Under my scheme, there would be no hurry.
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To my mind, this would be a bug not a feature.

Brendan Burgess said:
in later years they could make up for the earlier lack of contributions.
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Maybe. If everything goes the way they hope. Long-finger thinking may be the biggest psychological enemy of private savings.

Brendan Burgess said:
They could invest their money in the real economy.
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I don't understand the dichotomy you're drawing here. What's the 'fake economy', and why is the 'real economy' inaccessible to investments within a pension wrapper?
 
trasneoir said:
I don't understand the dichotomy you're drawing here. What's the 'fake economy', and why is the 'real economy' inaccessible to investments within a pension wrapper?
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By "forcing" pension savers into cash to avoid a 70% tax charge (there is an asymmetric risk-reward payoff - I am not being rewarded for taking equity risk in my pension so I hold cash since the upside is taxed but I would bear all the downside risk) this restricts the availability of capital for employment or house building. There is already nearly €100 BN rotting on the balance sheets of banks, best not to add to that by encouraging young professionals to avoid risk assets within their pension.
 
I would argue that they are not generous enough. The self employed are at a serious disadvantage compared to company directors when it comes to funding for retirement. The self employed are limited to a percentage of salary up to a max earnings of €115,000. A company director can make the contributions required to fund 2/3 salary pension.

For actual numbers, consider two 42 year olds, both earning €115,000 a year. The self employed person can contribute €28,750. The company director's company can contribute €103,683 a year!!

Keep the cap of €115,000 but increase the limits across the age brackets.


The govt are too focused on the tax relief elements of retirement planning. They should be looking at how much you actually need to save to have provide a decent income in retirement and helping people achieve that instead of mucking it up.


Steven
http://www.bluewaterfp.ie (www.bluewaterfp.ie)
 
Marc said:
By "forcing" pension savers into cash to avoid a 70% tax charge.
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I'm guessing it's a pretty small cohort who are actively trying to minimize returns for fear of hitting the cap. I _imagine_ savvy near-retirees would avoid the issue by reducing their contributions accordingly.

OTOH speaking for myself as a 33yo, i'm much more likely to make high risk/return investments _within_ a pension wrapper, where I can defer tax on the upside.
 
SBarrett said:
For actual numbers, consider two 42 year olds, both earning €115,000 a year. The self employed person can contribute €28,750. The company director's company can contribute €103,683 a year!!
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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...
 
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
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Since, I mandatorily retire at 65, I will currently get roughly only half my pension, the rest being the old age pension at 68, then the tax free lump sum will tide me over until that is received.
 
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