Actuaries warn on changes to tax relief for pensions

THE GOVERNMENT is ahead of target on savings from the pensions sector under the national recovery plan but needs to assess the adverse impact of some recent changes, according to the Society of Actuaries.

In a position paper on private pension provision, the actuaries note that measures implemented this year have achieved savings of €293 million against a target for the year of €260 million.

“Further savings of well over €100 million have been achieved due to a fall-off in contributions,” the authors add. As a result, the measures already implemented will deliver a significant part of the €485 million target for next year.

The industry group is calling for a review of further planned cuts in tax relief in light of the outperformance to date and the substantial impact existing measures have had on saving for retirement.

The national recovery plan wants to deliver €940 million in savings annually by 2014. The four-year pension levy imposed this year has raised €460 million so far this year on top of the national recovery plan measures.

At present, the plan is to reduce the relief on pension contributions from the top 41 per cent rate of tax to 34 per cent next year, 27 per cent in 2013 and the standard 20 per cent rate in 2014.

The removal of relief from PRSI and the health levy this year has had only a modest impact on take-home pay – roughly €250 over the year for a person earning about €100,000 under a model used in the Society of Actuaries paper.

However, confidence in the system to deliver retirement benefits in the future has been dented.

The actuaries say measures curbing relief from high earners – such as the reduction in the maximum value of a pension, the lower earnings cap and the ceiling on tax-free lump sums – has already helped redistribute tax relief to those on average earnings.

Updating a 2008 assessment by consultants Milliman, the society suggests the “net effective rate of tax relief” for higher-rate taxpayers peaks at 34 per cent for those earning €40,000 a year. This falls to 23 per cent for those on €100,000 and 2 per cent for those on €200,000.

If the further planned measures are introduced, the society argues, using the same model, the net effective rate of tax relief will fall dramatically – to 13 per cent for those earning €40,000, 2 per cent for those on €100,000 and minus 19 per cent for those on a €200,000 salary. This will greatly reduce the incentive for those likely to pay tax at the higher rate in retirement to save money in a pension fund.