How can lower earners be encouraged to contribute more to their pension funds?

Brendan Burgess

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These are the relevant questions from the Pensions Consultation

B2. To the extent that the State’s tax expenditure on pensions has not resulted in high coverage rates, what in your view explains this?

B3. What adjustments, if any, could be made to marginal relief to best support the rollout of automatic enrolment?

B4. What form of financial incentives for supplementary pensions, alternative to existing ones offered by the State, would better encourage lower and middle income earners to save for their retirement?


It makes very little sense for a young person on a marginal rate of 20% to contribute to a pension fund.
  • They get tax relief on the way in, but could be paying a higher tax rate on the way out
  • They lose access to their money and on their salaries at a time when access is most important
  • They would nearly always be better off in saving their money outside a pension scheme and then contributing it to a pension fund when they are paying the top rate of tax
Although it makes very little sense, the government's auto enrolment proposals will effectively make it mandatory for low earners to contribute to a pension fund although it's not in their financial interest.

Suggestion 1 Give 40% tax relief on all pension contributions
Say I earn €30,000
I will pay €6,000 tax before credits
Say I make a pension contribution of €2,000
At the moment, I will get € 400 tax credit (20%)
Increase the credit for the pension contribution from €400 (20%) to €800 (40%)

Now, there is no advantage in waiting to start a pension.

Suggestion 1A Give a 20% tax credit deferral to be used against top rate tax later
Using the above example, give a €400 tax credit now and a further €400 to be used whenever the employee earns enough to put them in the top rate of tax.

Could be a bit difficult to explain and so would be difficult to hard to encourage people to contribute to something they don't understand.

Might be hard to administer.

Suggestion 2 Allow people access their pension fund for the deposit on their home.
 
I understand exactly what you are proposing on the 20% tax credit


Could be a bit difficult to explain to existing high income taxpayers already in a pension scheme ,

I do not think allowing people access there pension fund for a deposit on there home would work
The price of homes would just go up it would be the same as banks raising the 3.5 times salary to five times salary house prices would follow what people can borrow,
Have you thought about allowing people who start a pension at an early age to borrow over a longer time frame
as you know in some Country's a house Mortgage can cross more than one generation,
 
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Ireland's other popular tax-advantaged long-term investment vehicle is property. Admittedly, it's a non-option for low-earning dubs at this stage, but to whatever extent an Irish household budget has got an "investment" category, Home Equity and Pension are the major competitors.

Any measure which reduces the perceived advantages of property ownership, or improves the viability of long-term renting, should implicitly strengthen the case for pension contributions.
 

Sounds frankly like cutting off one's nose to spite one's face.
 
The problem for low earners contributing to pensions is simply that they do not have much in the way of "spare" money to invest in a pension. No amount of tax relief can incentivise you to save if you don't have anything to save. If you're stacking shelves in a supermarket, and all your income goes on food and very high rent, then anything other than the state pension is a luxury. Your supermarket employer might have to contribute the bare minimum to your pension with an automatic enrollment scheme, and you'll still end up with a tiny pension pot that might only get you fish and chips on a Friday evening. In fact, the state pension, whether contributory or non-contributory is so generous in comparison to their working-life low incomes, that they already have a relatively good deal. Of course, state pensions may not be as generous in the future...

In the UK it's possible to contribute to a pension for a child, and for a short period of time the UK government gave every newborn a small amount of money to build a nest egg. A lot of this has now been transferred into pensions for children. The amounts might be small, but the one thing children have going for them is time - lots and lots of time until pension age for a fund to grow. If you had a similar scheme here in Ireland, then maybe low-to-middle earners might consider putting some of their child benefit aside into a pension?
 

I see where you're coming from but there's a contradiction there too.
 
The key to encouraging low earners to contribute more to there pension funds is very simple ,

break the link there is at present to funding pensions up to the level of higher public servants and cap it to a lower grade public servants earning around (38K Grade 3 public servant )


Higher paid public servants pay more in the euro for there pension than a grade 3 will in pension levy which will become a contribution in 2019


give all taxpayers who pay PRSI from lets say 2022 a generous credit to fund there pension of lets say 45% in the euro for every year they still have to work up to retirement so they have a pension pot of 250 k by the time they reach 60 to be taken when they reach the state pension age,

state pension is around 12604 euro at present leaving around 6500 to be funded to bring them up to 19000 same level as a grade 3 public servant at retirement,

175000 will buy you a pension of around 6.500 to bring them up to around 19000 per year in retirement,

The balance left in the fund can be taken tax free or used to buy an ARF if they so wish,

once you can fund it from paid employment you can claim the credit,

You could for the want of a better word have an AVC type tax break between lets say earnings of 38K and 75K the tax relief at top rate,


Tax coming out fixed @25% or less this tax ringed fenced into a special rainy day fund to help pay future PRSI state pensions,

Lump sum tax free of 100K allowed for all who pay into a defined contributions pension very attractive for lower income taxpayers to pay into a pension,( Defined benefit contribution fund can go up or down extra tax free to reflect this,

You can still take a lump sum tax free of up to one and a half times your salary from a defined benefit pension but capped at that,

When i get out of bed in the morning I will be watching out for rabbit holes,

anyone interested in reworking the above and ,(I was thinking of allowing 25K to be withdrawn from the fund for first time buyers seeing we have a shortage of housing it would just push up prices at present,
 
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Introduce a similar system to the US by introducing IRA Roth's. You gain no tax relief when you put money into an IRA Roth pension , but taking out money at retirement is tax free. If you are a college student who isn't even earning enough to pay any incomte tax an IRA Roth is attractive to you.
 
irishguy2015

The permanent Government would not be very happy with a system like that, they have a defined benefit pension and no funds,
Defined contributions pension pots are full of deferred tax (real money) kind of a silent rainy day pension funding for the unfunded defined benefit schemes at present,

giving tax credits now while we can and collecting the deferred tax later is a better option,
 
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You can't encourage low earners to start a pension because they don't have the spare cash to contribute to a pension. Auto enrollment or mandatory pensions is the way to do it. And let's not forget, that if you work in the public service, you join the pension scheme and that's that. It doesn't matter what your salary is.


Steven
http://www.bluewaterfp.ie (www.bluewaterfp.ie)
 
I agree up to a point
back in 1985 The Company i worked For put in a pension scheme for direct workers( low income workers) there were lots of meetings the biggest problem was trust in the pension scheme and trust in what they were being told by pension providers,
It was a American Engineering company supplying parts to EEC most of there Business was in Germany the got a suppliers to come and explain how there pension scheme worked for low income workers,
The funny part was some workers could not afford to pay 3% the company were paying 6% total 9%
The same workers had no problem paying 4% into a fund which over time back dated there start date to age 25 company paid 8% and all fees,
 
Retired
I cannot make sense of your text above. Perhaps you might re-write in clearer English
 
Conan said:
Retired
I cannot make sense of your text above. Perhaps you might re-write in clearer English
Click to expand...

A good adviser will,
I am working on the clearer english, At least I am not sitting on the side line,
The best advice i ever got was form a german pension advisor in broken english
Turned out better than the Guy who spoke clear English long term,

If I remember correctly the German said in broken English not so good advice for you ,
 
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Got lost on the last sentence but sadly, everything else you said rings true. There is huge mistrust of pensions, which is largely unfair. I regularly hear "my pension isn't performing", when the problem is usually they are invested in low risk funds and/or they are paying high charges. I would argue that most of the mistrust around pensions is down to charges and commissions (which the charges pay for); something that is completely fair. Until the Central Bank ban commissions, I can't see that changing.

Apparently, there's €80m in employer pension contributions being left on the table by employees who can't/ won't join pension schemes!

Steven
http://www.bluewaterfp.ie (www.bluewaterfp.ie)
 
I am so glad you responded after posting the thought crossed my mind that I may have offended you ,
My english as a german would say not so good,
but it has it's up side when meeting people,
I cut the last sentence short because when it comes to the type of pension that was set up It is well known in pension circles and I did not want to be traced,

I always remember the German saying good for him not so good for you,


I have being following this forum for a good few years I remember well a few years ago you were looking for feed back on how to provide a better service. Which speak's for itself,

My reading at the time you are trying to provide a service which will be good for all long term,
 
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It may already be covered hear If so Sorry for this Post
we could give a lot more than 20% tax credit to the lower income tax payer where the employer is not matching,
I suspect This will not go down well with some on hear could be wrong,
So rather than explain I am asking a Question,
Cost to the Exchequer at present is 2.4 billion ,
How much is from the tax break to Employee ???
how much is from the tax break to Employer ???

Retired earns 50000 and pays 4% into there pension total 2000 Euro he/she gets a tax break at top rate or 800 euro,

His employer also pays 8% matching contributions into there pension total 4000 Euro Employer can offset this against profit ( I am leaving this blank put in the cost to the Exchequer( )

Joe earns 50000 and pays 4% into there pension total 2000 euros he gets a tax break at top rate 800 euro,

His employer also Pays 20%into there pension total 10000 Euro Employer can offset against profit (I am leaving this blank put in the cost to the Exchequer ( )

The point I am making the % of the employee tax break is a small part of the 2.4 Billion tax break given to fund private pensions,
 
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Ask the government to go to Vanguard and Blackrock, remind them of the great set up they have here and ask them to design (they have the infra structure elsewhere already) and implement a few funds (in competition with each other) that suit the individual investor packaged for "dummies". No disrespect intended. Amend the tax legislation to suit and use a series of simple income thresholds to satisfy the socialist types.
 
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