Why is there a state contribution?

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faketales

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I note the state contribution starting at 0.5% and rising to 2% over 10 years.

I can kind of understand the state making a small contribution at the start to get things going but surprised to see it rise.

I have an occupational workplace DC pension. Am I correct in understanding that the state won’t contribute to that? The 2% free is pretty nice.

Perhaps it might be still good value for the state rather than have to support people without pensions in years to come?

I guess I’m asking “Where’s my 2%?!”
 
Brendan Burgess said:
Auto enrolment employees will see their contribution come from their net pay.

So the state contribution is the tax credit equivalent.

Brendan
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Oh interesting. Sorry I’m new to looking at this.

Does that mean it won’t impart their pension limit if they have a PRSA? Or are they allowed to?
 
faketales said:
Oh interesting. Sorry I’m new to looking at this.

Does that mean it won’t impart their pension limit if they have a PRSA? Or are they allowed to?
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No one knows, AE is still years away. In theory people are going to be allowed to make AVCs into AE, but that is in the 2nd/3rd/4th phase....
 
faketales said:
I note the state contribution starting at 0.5% and rising to 2% over 10 years.

I can kind of understand the state making a small contribution at the start to get things going but surprised to see it rise.

I have an occupational workplace DC pension. Am I correct in understanding that the state won’t contribute to that? The 2% free is pretty nice.

Perhaps it might be still good value for the state rather than have to support people without pensions in years to come?

I guess I’m asking “Where’s my 2%?!”
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If you are a standard rate tax payer this AE scheme will be slightly better than conventional schemes.
If you put €120 of take-home pay into AE the State will top that up by €40. If instead it was conventional you would be topped up by €30 tax relief if you are a standard rate taxpayer but you will be topped up by €80 is you are a 40% taxpayer. Simples.
 
faketales said:
I note the state contribution starting at 0.5% and rising to 2% over 10 years.

I can kind of understand the state making a small contribution at the start to get things going but surprised to see it rise.

I have an occupational workplace DC pension. Am I correct in understanding that the state won’t contribute to that? The 2% free is pretty nice.

Perhaps it might be still good value for the state rather than have to support people without pensions in years to come?

I guess I’m asking “Where’s my 2%?!”
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The government is contributing to your pension via tax relief. If you're a higher rate tax payer it's €1 for every €1.50 you pay.
 
Fortune said:
If you're a higher rate tax payer it's €1 for every €1.50 you pay.
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Yep, as opposed to 50c top-up under AE - tax relief a full 100% better. So advice to employers and employees alike - be in AE whilst you are not a 40% taxpayer but keep an eye out and be ready to change into a tax relief scheme when you get that pay rise.
 
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This is pure speculation on my part but once AE gets up and running there will be big pressure to equalise the state contribution and the tax relief for higher income payers.

So either a higher flat AE contribution across the board or lower tax relief for higher income payers.
 
Dr Strangelove said:
This is pure speculation on my part but once AE gets up and running there will be big pressure to equalise the state contribution and the tax relief for higher income payers.

So either a higher flat AE contribution across the board or lower tax relief for higher income payers.
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Yes, it is a very big issue well flagged elsewhere in this parish and the subject of a submission from the Society of Actuaries. IMHO the whole thing will collapse in chaos if they do not equalise the state subsidies/tax reliefs. Either system is justifiable but they cannot co-exist. A report for the UK Government highlighted the pros and cons between a flat subsidy and tax relief at the marginal rate but didn't even consider the nonsense of running both as a choice for the punter.
 
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Duke of Marmalade said:
Yes, it is a very big issue well flagged elsewhere in this parish and the subject of a submission from the Society of Actuaries. IMHO the whole thing will collapse in chaos if they do not equalise the state subsidies/tax reliefs. Either system is justifiable but they cannot co-exist. A report for the UK Government highlighted the pros and cons between a flat subsidy and tax relief at the marginal rate but didn't even consider the nonsense of running both as a choice for the punter.
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I was so used to the idea of tax relief I didn't even consider it wouldn't be. Idare ask what the logic is. Is the government contribution easier to explain / appear more generous than tax relief...
 
faketales said:
Is the government contribution easier to explain / appear more generous than tax relief...
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Yes. People seem to understand that if they put in 2 and the government matches it, they are getting good value for money.

And it also treats those on 20% and 40% the same.

Brendan
 
This was how the Deputy Secretary of the DSP explained the rationale to the JOC examining the draft Bill
DSP said:
Mr. Tim Duggan: It has been suggested that the State top-up approach should not be used, and tax relief maintained because this does not have an impact on whether people stay in or not. I think that is too simplistic an analysis. First, it is worth noting that the AE system is the only retirement savings system that people may be compelled to join by law. Therefore, the Government decided that all people within that pseudo-mandatory system should be afforded the same level of incentivisation from the State to ensure equality of treatment. Everyone’s euro gets incentivised in exactly the same way. The tax relief system would not do that.
Second, in advance of that decision by Government, the Department examined a range of options, including the possibility of applying normal tax relief and compensating with top-ups, those who would not benefit greatly from that tax relief. Such approaches would prove quite complex to design and implement. They would be difficult to explain in simple, understandable terms, and could be costly for the Exchequer.
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I personally would favour the flat incentive. I see little rationale for the State incentivising people on higher incomes. But we are where we are largely because of defined benefit arrangements, most notably in the Public Service. If we wanted a flat incentive, employer contributions, implied or actual, would need to be treated as BIK.
The two ideologically opposed systems cannot co-exist in a situation where there is ongoing choice of which system suits you best.
 
Duke of Marmalade said:
But we are where we are largely because of defined benefit arrangements, most notably in the Public Service.
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Serious question: do you say this?

Public servants get tax relief on their pension contributions but these are mandatory, flat-rated and small compared to what a private sector high-earner could opt to save.

People also tend to forget that tax relief isn’t a state top up per se, it is a deferral of tax until the income is drawn down.
 
Dr Strangelove said:
Serious question: do you say this?

Public servants get tax relief on their pension contributions but these are mandatory, flat-rated and small compared to what a private sector high-earner could opt to save.

People also tend to forget that tax relief isn’t a state top up per se, it is a deferral of tax until the income is drawn down.
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It's said because DB schemes give a massive employer contribution to the members. For public servants it's even bigger as there's no investment growth to reduce the cost to the employer (well, to reduce the cost to the exchequer).
 
Dr Strangelove said:
Serious question: do you say this?

Public servants get tax relief on their pension contributions but these are mandatory, flat-rated and small compared to what a private sector high-earner could opt to save.

People also tend to forget that tax relief isn’t a state top up per se, it is a deferral of tax until the income is drawn down.
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@Fortune is right that it is all about the treatment of the employer contribution, whether explicit or implicit as in the Public Service and to some extent all DB schemes.
We're getting into deep waters here. This is an extract of a paper submitted by Fagan and Woods to the Statistical Society. Full paper attached.
Fagan and Woods said:
So why has our current EET system evolved? It has evolved to ensure a level playing field in the labour market between at the one extreme the State and (large) companies which can remunerate employees through a combination of salary and pension, and at the other extreme the self-employed. Ireland has a progressive income tax system, structured around the calendar year, which of itself encourages deferral or spreading of income from high-earning years to low-earning ones. To level the playing field, the self-employed in particular would need some proxy to this income spreading/ deferral. A theoretically correct way to achieve this is through the EET system. That is, contributions to pension savings are considered as deferral of income and are therefore exempt from income tax in the year that they are made; investment of those contributions is exempt from tax to equate with the discounting rate that would be appropriate to the State or companies; and finally, when the income is eventually taken in retirement it is subject to income tax.
Now clearly the fact that Ireland’s income tax system is progressive on an annual cycle, as mentioned above, and that investment income outside the system is taxed gives the EET system a high incentive which is unavoidably regressive, being a spreading of a progressive system with annual rests, as observed by Whelan & Hally.
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Attachments

  • Submission by Woods and Fagan.docx
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Just to clarify the terminology here.

The government aren't "contributing" to anyone's pension. The government don't create any money/wealth, they appropriate from one party to another.

By contributing to a pension you are deferring recognition of your income.
Therefore the government are simply deferring their appropriation of that income by means of tax.
They'll get that tax later, under whatever regime and rates are ruling at that time.
 
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