Why is there an annual limit on pension contributions?

Brendan Burgess said:
I am saying that the same rules should apply to all. A PAYE worker and a company owner should have age limits and not annual limits.
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In reality what you are doing with a pension is deferring the liability until drawdown. This is described however as tax relief, as if some kind of gift is being granted. For many people with low incomes it just looks like high-income people are not paying tax at all.

In the late 2000s there was a lot of public anger about high-income individuals paying very low effective rates of tax through use of reliefes:


If implemented, your scheme would immediately generate headlines like: "taxpayer pays zero income tax on €1m income" as someone who has had a good year tops up their pension late in their career.

It's a political non starter Brendan.
 
OK, folks, let me put another proposal to you.


Let's change this to a cumulative percentage starting at Age 21.

So, if you make no contribution in Year 1, say aged 21 ,e.g. because you are still at college, you can contribute 30% in Year 2.
If you don't start until Year 10, you can contribute 150% of your salary.

Why should there be a "use it or lose it" on an annual basis?

Brendan
 
Brendan Burgess said:
It is right to promote the right thing whether it is unpopular or not.
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I am not arguing only on political economy grounds, but on behavioural ones.

If humans were perfectly rational and far-seeing then you could trust them to make use of lifetime allowances like this.

I don't believe they are, however.
 
Brendan Burgess said:
If you don't start until Year 10, you can contribute 150% of your salary.
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It's obviously not even theoretically possible to get tax relief on more than 100% of your income in any given year.

There is no limit on what you can contribute to a pension - there are only limits on the amount of tax relief that can be claimed in any given year.

I think you are now arguing that it should be possible to carry forward any unused tax relief. But that's not how our income tax system works.

Income tax liabilities are incurred on an annual basis and it follows that reliefs are available on an annual basis.
 
There is no rule that stops people from making contributions to any pension scheme. They can save as much as they want in a deposit account or equity fund.
These rules are for tax allowance limits.

Without them, rich people wouldn't pay any tax, at all.
 
Allpartied said:
Without them, rich people wouldn't pay any tax, at all.
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I will say it yet again, this is a completely separate argument.

I am not saying that the annual limit should be 15%. If that is too generous and you want to reduce it to 5% fine.
I put in a figure of €2m as that is the limit now after which big penalties kick in. But if people want to reduce it that is fine.

Come to think of it, why have a percentage of income at all?

Why not say the limit on contributions on which you can claim tax relief is €10,000 a year? And if you don't use it in any year, you can carry it over to the next year.

Brendan
 
Brendan Burgess said:
Why not say the limit on contributions on which you can claim tax relief is €10,000 a year? And if you don't use it in any year, you can carry it over to the next year.
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Something like that might work.

As I understand it, the UK has a fixed annual allowance (rather than a relief) of £40k that can be contributed to a pension scheme and any unused annual allowance can be carried forward for a maximum of three years.

So it is possible to get tax relief on contributions of up to £160k in any given tax year (obviously you would need earnings of that least that amount in the tax year where you make the contributions). There are some additional complexities but that's the basic position.

Mind you, I am still unconvinced that this is really a problem in search of a solution.
 
Sarenco said:
the UK has a fixed annual allowance (rather than a relief) of £40k
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That is very interesting. So like our old allowances before we had tax credits.

If you have an income of £100k, you could reduce it to £60k.
So the Credit equivalent would be £40k @ the top rate of tax.

Brendan
 
Mind you, the UK's annual allowance system has resulted in all sorts of unintended consequences.

Our system of age-related annual reliefs works pretty well - I would be an advocate of leaving well enough alone.
 
Brendan,

To push your idea a little further, why have age limits or bands at all.
If no relief was available above a fund of 2 million, and all contributions up to that amount get relief,people could fund throughout their working lives until they hit the threshold. People could contribute more when their younger.
 
Here’s one to really ‘upset the apple tart’:

What about people who get tax relief at the 40% rate, build a €2m fund, expatriate it to Malta, and then draw it down tax free in a sunnier clime.

That’s the worst of both worlds for the Exchequer, but difficult to curtail due to ‘Freedom of Movement’ within the EU.
 

I would imagine the only way to address that issue is to move the EU to some sort of tax equalisation programme.

But that would cause Ireland quite a few problems, especially if the principle was extended to Corporation Tax.
 
Gordon Gekko said:
What about people who get tax relief at the 40% rate, build a €2m fund, expatriate it to Malta, and then draw it down tax free in a sunnier clime.
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Can't they do that now? That is not a problem of my proposal.

jb's extension would make it possible earlier which is why I think that the limit should be on the fund size by age.

And maybe the fund size should have a much lower limit than €2m.

Brendan
 

Correct, it’s not an issue with your proposal at all.

It’s more of a general issue.

I agree with your proposal; people should be able to accumulate €2m over a more flexible timeframe.

It’s crazy that when I’m trying to buy a house, have kids, etc and can’t afford to make AVCs, I lose that year’s ability to contribute, whereas when things stabilise, I’m constrained.
 
What if the current age band restrictions were maintained but everyone was allowed to backdate contributions based on their annual tax returns?

Gross income for all PAYE workers is recorded by Revenue every year, so they know exactly what you earned in gross income since you started working (presumably). They could calculate the maximum you could have contributed until you were 30 @15%, plus between 30-39 @ 20% and so on, giving you a total maximum backdated amount. Subtract what you've actually put in so far and there you go...

It doesn't factor in any gains you've made within the fund so everyone is on parity whether they've gained/lost anything within the pension it doesn't matter. What Brendan initially proposed would seem unfair to me, in that if you contributed early and made gains, then you hit a threshold that you can't get past even though you want to keep contributing.

The figures would possibly have to be adjusted for inflation but I assume Revenue have all the data needed. This mightn't cover the self-employed/entrepreneur situation but at least bring some fairness to the PAYE situation. Are there some obvious/naive flaws to this?
 

Actually, no.

Historical records are scattered on different IT systems and if you go back long enough paper files.

It would be an administrative nightmare to try to allow people to access unused allowances from 1992 or whenever.
 
SBarrett said:
Why not?

Because it will be manipulated and abused by the wealthy. Company owners can pay themselves and their spouse €5,000 a year each and fund for a pension of €2m each.

Steven
http://www.bluewaterfp.ie (www.bluewaterfp.ie)
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I presume you're referring to SSAPs? I don't know how the limits are calculated exactly, I'm told there's an arcane formula provided by Revenue to pension providers to calculate maximum backdated company contributions.

My understanding is that maximum SSAP contributions are based on the average of the last several years of your declared income. Unless you're contributing back payments, you can't just declare an income of €5,000 every year and have the company sticking 100k into your pension on your behalf. You have to have a high enough salary to justify contributing large amounts that would result in a pension that pays a decent percentage of your recent salary.

Notwithstanding that, my impression is that we have a two-tier that allows large amounts of backdated contributions to be made by self-employed/company directors, a mechanism not available to PAYE workers which is totally unfair. Given the looming pension crisis, I find it amazing that an equivalent mechanism isn't made available to PAYE workers, or just have one applicable mechanism that's fair for all. Wouldn't it garner a lot of positive coverage for the government??

I just realised at least one gap in my previous idea... homemakers who have much-reduced or no income for a number of years. Perhaps they could be given notional salaries, either based on previous income, the going social welfare rate or the average national salary?
 
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