What tax relief will there be on auto-enrollment contributions?

[Brendan Burgess]

This has not been decided yet by the cabinet.

http://www.welfare.ie/en/pdf/Design_of_AE_update_and_next_steps.pdf

With respect to a State financial incentive, the Strawman proposal gave the illustrative
example that the State could contribute €1 for every €3 contributed by the individual to their
pension fund. However, the level of the State incentive and its interaction with the existing
marginal rate of tax relief scheme for occupational pensions was one of the issues that
generated much debate in the consultation process.

Although the proposed matching contribution approach, as set out in the Strawman
document, was supported by a number of contributors to the consultation process on the
basis of being equitable, with the incentive the same for all income levels, and easier to
understand, concerns were raised by other stakeholders as to how such an approach might
operate alongside the existing marginal tax relief scheme for private supplementary pension
contributions.

While the issue of State incentives within wider supplementary pensions is under the remit of
the Department of Finance, it formed part of the Interdepartmental Pensions Reform and
Taxation Groups (IDPRTG) Consultation on Supplementary Pensions Reform, whose work
on this issue was recently completed. On the basis of the findings from this review and the
responses to the Strawman consultation, further work is being undertaken examining the
design of the State financial incentive for the AE system and a set of options on how to
proceed will be brought to Government in Q1, 2020.

 

[Colm Fagan]

HI Brendan
Thanks for posting the link. A few thoughts on the document to which you posted the link (in the context of the approach I'm advocating, details of which can be found here):

(i) The maximum contribution rate (from both employer and employee) can be set at 4.5% rather than 6%. A total contribution rate of 10.5% (4.5% from employer and employee, 1.5% from state) will deliver a good pension - PROVIDED THAT 100% of the funds are invested in "real" assets (i.e. equities, real estate, etc.) during both the accumulation and draw-down phases. Investment returns will be smoothed over many years to remove the volatility.​

​

(ii) The two systems (AE with implied tax relief at 25%; private pensions with tax relief at the marginal rate) can operate side by side. Higher paid employees may prefer private pensions for both their auto-enrolled earnings and their higher (over 70k) earnings. That allows them to claim tax relief at their marginal rate. Employees in that category may also appreciate being able to choose their own investments, which won't be allowed under AE (as I'm proposing). Tax treatment of benefits is the same under both systems, i.e. pension is treated as earned income.​

​

(iii) It's a pity that consideration of the pay-out phase is being deferred. The UK made the mistake of ignoring the pay-out phase completely. (I understand that this was a political instruction, to ensure that pension companies and advisers could make nice profits from selling the UK version of ARF's to new retirees). One could argue the opposite: the idea is a pension for life, so that should be the starting point. You work back from that to decide what's the best accumulation approach to deliver that end result. If government goes down the road of "lifestyling" and "default funds", which move assets towards cash as retirement date approaches, you're going to bequeath the problem to new retirees of what to do with the stash of cash coming their way at retirement. Speaking from experience, it's a dilemma for a new retiree. I was lucky in having a good background in finance that allowed me to address the challenge. Others are not so lucky.​

​

(iv) If government persists in advocating multiple providers, carousels, etc., I strongly suggest that they reduce the operational risks by limiting the investment options to a single default fund (ideally on the lines I've suggested) in the early years.​