Tax Cut on Pension Contributions - but who is protected?

Barnacle

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There are many ways that the Government could have tackled the issue of Tax Relief on Pension Contributions. In my opinion, they picked to the worst option. Tax Relief has only been restricted on Personal Contributions and this opens the area up for further abuse and will not stop the High Paid Directors and people in positions of control from receiving full tax relief. It also creates an inequity between the employee and the Self Employed and an inequity between Pre 1995 and Post 1995 Civil Servants (and some PS). Sorry for the length of this post but it’s the only way that I can explain.

Personal Pension
These are pensions taken out in the Private Sector written under Personal Pension rules. The contributions allowed are limited to a percentage of Schedule E earnings (which includes BIK, Bonuses, Commissions, etc.) and the percentage is determined by the age of the payer. No employer contributions are allowed for the purpose of tax relief as any payments made by an employer is subject to BIK which includes employer PRSI. These contracts are typically taken out by the Self-Employed (non Limited companies) and employees who do not have the option to join a Company Scheme. The types of contracts that fall under this are commonly known as RAC, Non-AVC PRSA’s, and Personal Pensions.

Occupational Pensions
All Defined Contribution Schemes and Defined Benefit Schemes fall under these rules. Contributions are paid by both employer and employees and Tax Relief is granted on all contributions subject to the maximum premium allowed to provide the maximum benefits which is 2/3rd of Final Remuneration.

Restrict relief on Personal Contributions
Restricting relief to personal contributions would mean that employer contributions would be treated more favourable and often a large element paid into these schemes is made up of such payments, particularly for those who are in a position to manipulate their salaries or negotiate their contracts.

Restriction to Personal Contributions would also encourage Salary Sacrifice which is a term frowned on by the Revenue Commissioners. Presently this is only allowed for underfunded benefits but to access this you really have to be paying your full personal contribution. In general, this does not really affect business owners as their salaries tend to fluctuate and they also control the profits of the business. So how will the revenue monitor such a practice, could prove very difficult. Employees moving jobs will also be looking for contracts that provide for this. Employers could also encourage employee to take any future pay rises as an employer contributions, particularly beneficial to the employer as if the employee was not considering making the contribution personally, the cost of the pay rise to the employer would be reduced by the cost of employer PRSI, i.e paid as salary would have an employer PRSI charge but a pension contributions receives PRSI relief.

You may think that only a small element of the contributions paid into Occupational Pensions is made up by the employer. You may also think that there is no way that a member can pay 5% and while the employer is paying 50% or even 100% or more. Well think again. The employer’s contribution is unlimited providing it does not exceed the maximum amount required to provide maximum benefits as the earning cap is only applied to employee contributions. For business owners the only contribution often made into their schemes is the employer.

In the Civil Service, pre 1995 workers salary is calculated as being 19/20th of post 1995 workers. Pre 1995 workers do not pay explicit contributions into the pension scheme (apart from the 1.5% contribution to the Spouses & Children Scheme if a member). They do pay the Pension Levy however as their base salary is lower than post 1995 workers, they pay a lesser amount. The post 1995 worker pay explicit contributions which are 3.5% of salary less 2xOAP plus 1.5% on gross (and the 1.5% for membership to the Spouses & Children’s Scheme if a member). Their pension levy is calculated on their gross salary which is 1/20th higher that the pre 1995 worker. The pre 1995 worker therefore pays a lesser explicit contribution than the post 1995 worker so will not feel the effect of the reduction in relief as much. I made a brief calculation and for someone earning - pre €47,500/post €50,000, the loss to the post 1995 worker is about €800 per year.

The 4 Year Plan states:-

removing the BIK exemption from employer contributions to occupational pension schemes would remove the rationale for making those contributions in the first place from the point of view of the employee.
In addition, a consequential reduced rate of relief on the public service “pension-related deduction” will yield a further €240 million in a full year.

They could have easily applied a much fairer system but this would have affected the people in control and also themselves so it does not surprise me in the slightest.
 


nonpartyboy

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What do you expect from ff, that's why their so determined to see the budget and 4 year plan through in the "national interest". This is all about protecting their friends and cronies from the worst of the cuts, that's how ff operate.
 

wexfordman

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There are many who called for exactly this to be implemented, citing the fact that it was unfair that the rich were being subsidised to save or their pensions and pointing to how many bullion was being wasted on private pension scheme tax incentives!

These same people neve actually realised or bothered to consider that the relief is used by the ordinary Joe soap to save for his pension, and that they will be impact hard!

Sounds great to shout unfairness from the rooftops about pension subsidies froth rich, but the reality is completely different as many are about to learn!
 
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Barnacle

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There are many who called for exactly this to be implemented, citing the fact that it was unfair that the rich were being subsidised to save or their pensions and pointing to how many bullion was being wasted on private pension scheme tax incentives!

These same people neve actually realised or bothered to consider that the relief is used by the ordinary Joe soap to save for his pension, and that they will be impact hard!

Sounds great to shout unfairness from the rooftops about pension subsidies froth rich, but the reality is completely different as many are about to learn!

I agree completely and the wealthy they were talking about will still get Tax Relief at full rate along with PRSI relief.
 

hmmm

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This will make pensions unaffordable and uneconomic for private sector workers, why would anyone pay tax twice on income. If you stay in this country, get a job in the public sector or you will retire in poverty.
 

Indiansign

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I'm not sure this is the point you are making, however some coverage of the these changes seems to imply that PS have been somewhat protected in this regard.

To my knowledge, Public (not civil) service pre & post 1995 workers pay pension contribution of (I think) about 5%, on top of the 1.5% W/O scheme. They also pay the pension levy, the Health levy, and PRSI.

The changes to in the 4yp effects every one of these. How is this any different than a private sector worker?
 

Expatriot

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Like everything else in this country it is intentionally complex to allow us to be had. Everyones pay slip should be easy to understand. Most are not impossible to understand. In the confusion the banks and pension industry will again be winners.

What is so bloody complex about taking a set % of income and sticking it somewhere safe for 40 years?

The public service pension scheme is a total scam now. So are paying in that are entitled to nothing, others are paying in less to get the same pension are those that pay more. It is a total joke the way it is run. The pension levy was a pay cut and should have called one.
 

Barnacle

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I'm not sure this is the point you are making, however some coverage of the these changes seems to imply that PS have been somewhat protected in this regard.

To my knowledge, Public (not civil) service pre & post 1995 workers pay pension contribution of (I think) about 5%, on top of the 1.5% W/O scheme. They also pay the pension levy, the Health levy, and PRSI.

The changes to in the 4yp effects every one of these. How is this any different than a private sector worker?
It is for Civil Servants and some PS (not most PS). A pre 1995 worker does not pay explicit contribution but they do pay the pension levy. Because post 1995 workers had to pay contributions, their salaries were increased so it not affect them too much in terms of net pay. A Post 1995 pays both explicit contributions plus pension levy. Therefore the overall explicit contribution paid by the pre 1995 is less then the amount paid by the post 1995 worker. The tax charge will therefore be more to the post 1995 worker for the same benefits.

E.g. A pre 1995 worker has a salary of €47,500, the equivalent post 1995 workers salary is €50,000. Pension contributions paid by the pre 1995 is approximately €4,200 which is made up of Pension Levy and 1.5% to S&C.

The post 1995 worker pays €6,100 which is made up of Pension Contributions, Pension Levy and contribution to S&C. Pre 1995 workers relief is restricted to 20% which means that they lose 21% tax and 4.5% PRSI on €4,200 but the post 1995 worker loses 21% tax plus 8.5% PRSI on €6,100. Difference in charge approximately €800.
 

Nermal

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How is this any different than a private sector worker?
Because many (most? not sure) private sector workers don't have an occupational pension, or if they do it's inadequate compared to those on offer in the public sector.

So they have to contribute to an AVC or PRSA to get one. Now that the tax deferment (and it is deferment, not relief) will be withdrawn it's not worthwhile doing so.
 

Barnacle

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Because many (most? not sure) private sector workers don't have an occupational pension, or if they do it's inadequate compared to those on offer in the public sector.

So they have to contribute to an AVC or PRSA to get one. Now that the tax deferment (and it is deferment, not relief) will be withdrawn it's not worthwhile doing so.
For the purpose of what I was saying I would exclude AVC as these are linked to Occupational Pensions. Any payment into personal plans, the ones many people have because they do not have the option of joining an Occupational Plan, can only receive relief at the maximum 20% as there is no option for employer contributions.
 

Grizzly Man

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I'm not sure this is the point you are making, however some coverage of the these changes seems to imply that PS have been somewhat protected in this regard.

To my knowledge, Public (not civil) service pre & post 1995 workers pay pension contribution of (I think) about 5%, on top of the 1.5% W/O scheme. They also pay the pension levy, the Health levy, and PRSI.

The changes to in the 4yp effects every one of these. How is this any different than a private sector worker?
+1.

Now, despite being a public sector worker, I would be the last to pull the 'poor PS....' line, but this will affect most PS workers I know (incl. myself). By my rough calculations, it will mean an effective increase in employee contribution of approx 60%, incl on the lension levy. Obviously this will apply to private sector workers too (but not the pension levy element). Personally, while my pre-tax total contribution (i.e. incl levy) will remain at approx €750 (I'm paying AVCs before anyone decides I'm filthy rich!), my post-tax contribution (i.e. from my pocket) will increase from approx €375/month to €610/month, an increase of €235. Now, while the whole 'actuarial funding cost' is a subject for another thread, I'm sure most would agree that this (particularly when added to a similar loss every month from income tax increases) is a significant sum to be down every month. Personally, it will absolutely mean rowing back further on discretionary spending as I simply do not have €235 left at the end of the month (not to mind the income tax increase)!


and before anyone says it - no I'm not whinging, I'm lucky to have a job etc..
 

wexfordman

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I think the main point that this raises is that the populist cry that pension reliefs (or deferals) are anwast of money and a subsidy for the rich has been shown to be completely untrue! This change will hammer the real amount that the average Joe or joeline is able to save for their pensions!

We have people saying not to touch existing pensioners on one hand, while on the other we are effectively ensuring that future pensioners will be unable to provide for themselves by saving adequate amounts towRds their own pensions, and leaving them vuleranlbe to relying Ailey on future oap state pensions!

I am sure Joe Higgins and the likes are delighted with this!

From a personal point of view, this, combined with other aspects of the 4th plan means that I will not be able to make up the funds to account for this loss! My pension fund has been robbed and I am also being forced to work till I am 68!

But that's ok, because existing pensioners can still retire at 65, can still avail of free medical cards, still get free transport, fuel allowances etc irrespective of income or ability to pay themselves!
 

Nermal

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For the purpose of what I was saying I would exclude AVC as these are linked to Occupational Pensions.
While they're linked to an occupational pension, occupational pensions are often deficient in some way (no index or salary linking, don't take account of overtime or bonuses, or the contributor has fewer than 40 years' service) so an AVC is worthwhile. Or will be till the end of 2011 or 2012, anyway.
 

Barnacle

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I think the main point that this raises is that the populist cry that pension reliefs (or deferals) are anwast of money and a subsidy for the rich has been shown to be completely untrue! This change will hammer the real amount that the average Joe or joeline is able to save for their pensions!
What it highlights is the fact that a person in control, e.g. the business owner/director, will still be able to obtain full tax relief at marginal rate and full PRSI relief on payment into the pension. He will not be affected as all the contributions could be put in as employer which is not subject to the reduction.


It highlights the different treatment between Self-Employed and Employees and the additional charge to income for some PS workers. If this gets into legislation it will encourage salary sacrifice where people can do it, so relief will then be converted to full rate and prsi relief therefore counter productive.
 

firefly123

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It is for Civil Servants and some PS (not most PS). A pre 1995 worker does not pay explicit contribution but they do pay the pension levy. Because post 1995 workers had to pay contributions, their salaries were increased so it not affect them too much in terms of net pay. A Post 1995 pays both explicit contributions plus pension levy. Therefore the overall explicit contribution paid by the pre 1995 is less then the amount paid by the post 1995 worker. The tax charge will therefore be more to the post 1995 worker for the same benefits.

E.g. A pre 1995 worker has a salary of €47,500, the equivalent post 1995 workers salary is €50,000. Pension contributions paid by the pre 1995 is approximately €4,200 which is made up of Pension Levy and 1.5% to S&C.

The post 1995 worker pays €6,100 which is made up of Pension Contributions, Pension Levy and contribution to S&C. Pre 1995 workers relief is restricted to 20% which means that they lose 21% tax and 4.5% PRSI on €4,200 but the post 1995 worker loses 21% tax plus 8.5% PRSI on €6,100. Difference in charge approximately €800.

Just to clarify Barnacle. Firefighters post 95 received no increase in wage to offset the loss in pay. We were overlooked for some inexplicable reason. I am sure the same applies to other groups within the public service also
 

neutral_lurker

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While they're linked to an occupational pension, occupational pensions are often deficient in some way (no index or salary linking, don't take account of overtime or bonuses, or the contributor has fewer than 40 years' service) so an AVC is worthwhile. Or will be till the end of 2011 or 2012, anyway.
I thought one of the selling points of the AVC is that you will get tax relief at the higher rate if you are a higher rate tax payer on your AVC contribution - how is it still worthwhile?
 

Barnacle

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While they're linked to an occupational pension, occupational pensions are often deficient in some way (no index or salary linking, don't take account of overtime or bonuses, or the contributor has fewer than 40 years' service) so an AVC is worthwhile. Or will be till the end of 2011 or 2012, anyway.

I know and you are right, this is how members make further contributions where their potential benefits are in deficite. But I did not want to use the term in relation to personal pensions as I did not want to confuse the issue.
 


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