Cutting pension tax relief equals double taxation - IFG

IFG claims that reducing the tax relief on private pensions will kill off any saving for pensions at a time where the Government is urging people to save more to reduce the level of state dependency.

It is urging the Government to review the proposed changes to the tax relief structures contained in its Pension Framework document published back in March.

“It is unfortunate that the Government continues to propose reducing the tax relief on individual pension contributions to 33pc. Individuals paying the higher rate of income tax in retirement will effectively be subject to double taxation when they take their pension benefits,” said Fionán O’Sullivan, director at IFG Corporate Pensions.

According to O’Sullivan, the move is “highly inconsistent” with the overall aim of encouraging saving for retirement and contradicts the overall objective of the Government’s Pension Framework document. “Imposing new limits on pension tax relief will effectively reduce the impact of any contribution made by employees and lower retirement incomes in the future. If the Government is concerned about inequity and increasing pension coverage, they should simply increase tax relief for all to the higher tax rate of 41pc. This course of action would have some hope of persuading the lower-paid and younger workforce into the mindset of saving.”

IFG Corporate Pensions looked at the affect the proposed changes would have on a typical private-sector worker with an annual salary of €50,000. It found that if the individual contributes the same net amount (after tax) they will have €26,500 less in their pension fund at retirement as a result of the changes to the pension tax releifs - ie €304,600 versus €331,100.

“This basic example demonstrates the likely negative financial impact the reduced relief will have on the amount of an individual’s fund balance in retirement. Very few people will be persuaded to increase their contributions to make up for this deficit, as they simply cannot afford it,” O’Sullivan said.

 “The Government is implying that this is fairer to the lower income individuals but if they are serious about ensuring the vast majority of individuals have an adequate retirement fund they should be extending the tax relief benefit rather than curtailing it, and we would strongly propose that this issue be further reviewed and considered by the Government.”