Retirement savings could collapse should the Government further reduce pension savings relief

Dublin, 23 November 2011 – Last year’s Budget saw employee PRSI relief on pension contributions abolished, employer PRSI relief halved and the Universal Social Charge being applied to pension contributions. These measures in themselves have introduced greater uncertainty in terms of long term savings and resulted in a reduction in employee contributions and lower engagement in planning for Retirement.

These changes combined with the “raid” on employees’ pension savings via the Pension Levy and the uncertainty as to whether further reductions as originally proposed by the previous Government’s National Recovery Plan (NRP) might be implemented has shaken confidence in much needed individual savings for retirement.

Towers Watson has called on Government to confirm that they will not further erode prudent pension planning by middle income earners.  Research has shown that if the proposals within the NRP to further reduce much needed marginal tax relief on employee pension contributions are implemented, the level of personal retirement savings by middle income earners could collapse. If implemented:

• In 2012 there would be no net tax benefit for employee pension contributions when taxable retirement income exceeds €400pw
• In 2012 there would be no net tax benefit for a standard rate tax payer where taxable retirement income exceeds €115pw.

The current system only provides a meaningful incentive for individuals to provide for a retirement benefit of €115 per week for a standard rate tax payer and a small incentive to provide for a retirement benefit of €400 per week for some one earning over €33,000 per annum. Any meaningful level of retirement provision above this would require an Employer contribution.

Raymond McKenna said the suggestion that tax reliefs might be further reduced also comes at a time when many defined benefit schemes have already turned to employees to seek additional contributions as part of a programme to restore the plan’s financial health. In addition, within defined contribution schemes, the Government, employers and representative bodies have all recognized the need for retirement contributions to be significantly increased to help employees accumulate an adequate income in retirement.

According to Towers Watson the effective removal of a tax incentive for individual pension savings by middle and standard rate income tax payers would have dramatic consequences for the State’s finances in the future and potentially leave the current generation of middle income tax payers not only contributing towards restoring Ireland’s fiscal position but also facing poverty in retirement.

According to Mr. McKenna “any perceived abuse of pension tax reliefs have been dealt with by introduction of the Standard Fund Threshold of €2.3 million as this is, in the current market, equivalent to the cost of a €50,000 pension.” Mr. McKenna continued “ any attempt to reduce tax reliefs on contributions will be ultimately inequitable unless corresponding adjustments are made to the taxation treatment of the pensions that result.”

Towers Watson have called on Government to confirm that fair, equitable and adequate incentives will be provided to employees to provide for a reasonable retirement, to avoid a pension catastrophe.

Noted to Editors
This analysis examines solely the incentive for an individual to personally save for retirement (e.g. via employee contributions, AVCs or self employed contributions) and does not compare the tax effectiveness of pension contributions by companies on behalf of their employees

For individuals fortunate enough to be members of company sponsored pension schemes, the tax effectiveness of employer contributions to such pension schemes remains unchanged. However, in some cases employer contributions may be contingent on some level of contribution by employees and therefore a lower level of member contributions could further reduce the level of their retirement savings.