UK's IFS proposes reducing tax reliefs on pensions

Brendan Burgess

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The Institute for Fiscal Studies, an independent, but tending right wing, think tank has proposed rebalancing of tax reliefs on pensions as they favour the rich and are of less benefit to the poor.

A blueprint for a better tax treatment of pensions | Institute for Fiscal Studies

How should pensions be taxed? We propose income tax and National Insurance reforms that would more evenly support pension saving.
ifs.org.uk

1) At the very least (the 25% tax-free on retirement0 should be capped so that it only applies to 25% of, say, the first £400,000 of accumulated pension wealth. Going further, we propose providing the equivalent of a capped 25% tax-free component for basic-rate taxpayers,
2) Employee contributions should not be exempt from the equivalent of PRSI
3) Employer contributions should not be exempt from the equivalent of PRSI
 
This got me thinking.

One easy change in Ireland would be to reduce the tax-free lump sum on retirement to €100k as distinct from 25% of €800k.

This would be a lot fairer and would benefit a lot more people.

Obviously those with a pension fund over €400k would lose out. But that would be far fewer I imagine.

Brendan
 

Fairer for people who are through the gate like yourself Brendan

It’s very easy to spend other people’s money!
 
T McGibney said:
Shouldn't we be encouraging people to invest in pensions Brendan rather than seeking new ways to make them unattractive?
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We should be targeting those encouragements towards people who will be dependent on the state pension and other state aids in retirement though.

I’m in the fortunate position of having access to an executive pension and I find it baffling that I’m able to load €750k into it in a single year while most people are limited to a few percent of that, and why I should get such a big tax free lump sum when by virtue of the fact that I was able to build that pension pot I don’t need it. Take some of the overly generous tax breaks I’m being given and use them to encourage people who have no pension or the average €100k pot I say.

As for the tax free lump sum specifically, I’m not really sure what the point of it is - we spend all these tax breaks trying to get people to save up for their retirement then let them take a load of it back out before retirement. Scrap it altogether maybe?
 
It would impact a huge amount of people.


Brendan Burgess said:
The Institute for Fiscal Studies, an independent, but tending right wing, think tank has proposed rebalancing of tax reliefs on pensions as they favour the rich and are of less benefit to the poor.
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That's always been the way and isn't new. If you are on a lower income, the need for a private pension is less as the State pension should provide enough relevant to your income. The higher the income, the more you need to top up the State pension through private pension.

It's not rocket science.
 
You are under no obligation to put €750k into your pension. You can take it out as income and pay tax on it if you want to.

And you are able to do this because you are a business owner (I assume). You take the risk of setting up and running a business. You provide employment. These are the rewards. Employees do not take any such risks, they work in return for an agreed salary plus benefits.
 
It's a question of balance.

Pension relief benefits high earners but the contributory state pension is also a hugely progressive policy.

Someone with a 40-year career on part-time work earning €20k on average gets exactly the same state pension as someone with a 40-year career on full-time work earning €80k on average. The latter will pay more than four terms as much PRSI!
 
Zenith63 said:
We should be targeting those encouragements towards people who will be dependent on the state pension and other state aids in retirement though.
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Waste of time. They won't invest scarce money in pensions no matter how good the incentives are.

And you won't help them one whit by taking more from the squeezed middle who already finance everything else.
 
Sorry I do understand the rationale and it was on-point in my situation as I couldn’t contribute to a pension at all until my 40s. My bafflement is at the level of generosity.

T McGibney said:
Waste of time. They won't invest scarce money in pensions no matter how good the incentives are.

And you won't help them one whit by taking more from the squeezed middle who already finance everything else.
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Fair point on low income earners. On the middle though, I’m suggesting they would be the beneficiaries of a restructure.

I don’t think a wealthier couple need to be able to shelter €4m in a pension and take €400k as a tax free lump sum. Reduce those caps and use the tax collected to increase incentives for low and middle income individuals.
 
Zenith63 said:
My bafflement is at the level of generosity.
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It's not "generosity" - the tax is simply deferred, not eliminated.

Retirees pay income tax on drawdown of pension and any residual ARF when the retiree passes away has something equivalent to CAT applied.

Zenith63 said:
Reduce those caps and use the tax collected to increase incentives for low and middle income individuals.
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Most full-time workers earn more than €40k or so and can benefit from higher rate relief.

For part-time and/or low-wage workers there is an issue but as I've pointed out above a contributory state pension is pretty good value for the 4% PRSI you pay.
 
I think relief could be reviewed in terms of lifetime relief. Many people are stretched financially at some point. They might work in companies that offer very limited pension plans. Then pension contribution are the least of their worries. It's difficult to project yourself in your sixties when you struggle and have family responsibility in your 40s. Your financial situation might change and you then have no possibilities to make up time.
This is particularly an issue with low or middle income individuals.
If not over a lifetime, perhaps over a few years (for example 5).
 
Zenith63 said:
I don’t think a wealthier couple need to be able to shelter €4m in a pension and take €400k as a tax free lump sum. Reduce those caps and use the tax collected to increase incentives for low and middle income individuals.
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The numbers of couples enjoying €4m pensions (outside the public sector) must be vanishingly small. Spread the extra tax collected from this tiny number over a large number of low to middle income earners and the benefit to each will be so small as to be meaningless.

Meanwhile a message will go out to those low to middle income earners to steer clear of pensions because if they do well, the government will grab as much of it as they can.
 
Also worth noting that in the UK, where the maximum tax relieved pension pot is £1m, compared to our €2m, there are calls to increase it sharply as they're finding that doctors among others are retiring early to avoid falling foul of it, adding to already abject GP shortages.
 
But uk has one of the most favourable investor regimes anywhere in Europe and especially in relation to Ireland. You can save and buy shares tax free via isa account's, no dividend withholding taxes and a yearly tax free CGT allowance of circa £10,000.
However there is no prospect of Ireland copying any of that or any other stuff the UK does.
Yet when they appear to have a slight left wing slant by wanting to reduce pension benefits a bit we jump on that aspect as something worth looking into. Pension are the only tax efficient vehicle left in Ireland now for wealth accumulation, we are in a totally different space to the UK.
We cant jump on minor aspects of their system just because it suits an agenda to tax more
 
But is the pension tax relief there to provide a tax efficient wealth accumulation vehicle or help people to provide in their older years? No one need a 2 millions pot to survive while surviving on 13k is difficult. To me, the pension system encourage high earners to save. They don't necessarily encourage middle/lower income to provide for their retirement.
 
azerty said:
But is the pension tax relief there to provide a tax efficient wealth accumulation vehicle or help people to provide in their older years?
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Why shouldn't it do both?

There is zero social benefit in GPs and entrepreneurs amongst others retiring in their mid-50s to avoid a huge tax hit if they stay working another decade.

And nobody ever gets their knickers in a twist over public sector pensions that often dwarf €2m, every cent paid for by the taxpayer.
 
azerty said:
But is the pension tax relief there to provide a tax efficient wealth accumulation vehicle or help people to provide in their older years? No one need a 2 millions pot to survive
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I think this is fair point. Residual ARF is taxed at 30% for a non-spouse who inherits it so there is an incentive not to draw down too much as part of estate planning.

So there is a good argument that this tax should be at 41% which is what someone with a 2-million ARF is going to be paying tax on while alive.

But this is a pretty niche case.
 
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