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Pensions
- Back to the Future
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James
Kavanagh
Senior Manager, Pensions - Dublin
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The Government continues to be deeply
concerned over the growing lack of pension coverage
in Ireland. Upon appointment, the Minister for Social
and Family Affairs requested an overall review of
pension provision in Ireland to be brought forward
to 2005. The reasoning behind this move? A reported
59% aged 30+ years being covered by a private pension
scheme1 , coupled with only 55,011 Personal
Retirement Savings Accounts (PRSAs) being effected
to the end of June 20052 , means that
the coverage target set by the Pensions Board of 66%
by the end of 2005 (70% by 2008) is unlikely to be
realised unless remedial action is taken.3
Given the long-term consequences for individuals,
the Government’s concern is more than justified.
What can be done? It is imperative that the Department
of Finance uses the provision of tax incentives as
a tool to support any government action plan put forward.
In this case, the right hand must support the left
— anything else and our position will be compromised
even further. Some of the courses of action include
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No dilution of existing tax relief for pension contributions.
Doing otherwise would have a negative impact for
pension investors. Only the streamlining of various
tax incentives, with a view to making pensions more
accessible and less complicated, would be considered
advantageous.
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Allowing those on the basic rate of income tax to
claim income tax relief on personal pension contributions
at the higher rate, albeit subject to the age-related
sliding scale, would assist the attractiveness of
pensions to individuals.
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Streamlining the tax relief benefits which are open
to PRSA versus Retirement Annuity Contract (RAC)
contributors, so that there is equality in how tax
relief is granted.
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Streamlining the pension options open to the self-employed,
employer, Additional Voluntary Contribution (AVC)
contributors and proprietary directors by means
of the Approved Retirement Fund (ARF) options.
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In the event that past ideas of the National Pensions
Policy Initiative and Securing Retirement Income
report are considered — for example, a cap
on earnings that an employer can fund in Defined
Benefit (DB) or Defined Contribution (DC) schemes,
or on tax-free commutations — there should
be sufficient 'grandfathering' provisions which
do not detract from the good efforts one may have
made in funding for one's retirement.
- 6.
Building on the success of the savings habit created
by the SSIA by (a) allowing transfers to existing
products without a tax penalty on interest earned;
and (b) introducing a tax credit system whereby
the Government would pay a certain percentage for
every €1 contributed by the pension investor.
In
conclusion, given the end goal is to increase the
coverage of pensions in Ireland, Budget 2006 needs
to instigate change in a positive manner. This means
providing sufficient tax incentives to pension investors
and employers so as to facilitate the recommendations
in the National Pensions Review (2006).
1 Pensioners Incomes and
Replacement Rates in 2000, G Hughes & D Watson.
(May 2005).
2 PRSA figures for 2nd Quarter,2005 by
the Pensions Board
3 Securing Retirement Income - Report of
the Pensions Board to the Minister for Social, Community
and Family Affairs (1998).
Review of Potential Options to Encourage Increased
Pension Coverage, Indecon International Economic Consultants
(March 2005)
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