THE GOVERNMENT has moved to trim relief on contributions to private pension schemes in the Budget.
Minister for Finance Brian Lenihan also confirmed that former public sector workers, now retired, will see their pensions cut.
However, there will be no change this year to the State pension.
“It is the Government’s view that the security this has brought to older people should be preserved,” Mr Lenihan said in his Budget speech to the Dáil yesterday, noting that the State pension had increased “significantly” over the past 10 years.
All three measures had been flagged by the Government.
Mr Lenihan confirmed that private pension contributions will no longer be able to claim relief from Pay Related Social Insurance (PRSI) and the health levy (now renamed the universal social charge) from the beginning of next year.
However, in an unexpected move, the PRSI exemption for employers on payments to staff pension schemes will be cut by 50 per cent from the new year.
The Government expects the cut in relief on private sector pension contributions to save the exchequer €80 million in 2011 and €150 million in a full year.
It has already signalled that the next three years will see further reductions in the tax relief on private pensions. At the moment, contributions avail of relief at the individual’s higher rate of taxation. By 2014, relief will be available only at the 20 per cent basic rate of income tax.
Other changes on personal pensions announced yesterday include the predicted reduction in the annual earnings limit on which pension tax relief is applicable to €115,000 from €150,000 previously.
The related Standard Fund Threshold – the maximum allowable pension fund on retirement for tax purposes – is also to be cut dramatically, from €5.4 million last year to €2.3 million. A new €200,000 limit will be imposed on tax-free retirement lump sums.
Separately, the Government is increasing the annual “imputed distribution” on Approved Retirement Funds (ARFs) from 3 per cent to 5 per cent with immediate effect. This affects only those people not drawing down at least that portion of their ARF in any given year and means tax will be charged on at least this percentage of an ARF each year.
Overall, changes to the private pension regime are expected to yield savings of €117 million in 2011 and €235 million in a full year. Flexible options on retirement for members of defined contribution pension schemes will be extended, with details being published in the Finance Bill.
Mr Lenihan said the number of public service pensioners had increased 36 per cent to about 103,500 this year compared to 2006, with the cost of these pensions jumping 53 per cent to €2.235 million per annum in the same period.
“Accordingly, public service pensions above €12,000 a year will be reduced by an average of 4 per cent,” Mr Lenihan told the Dáil.
Those with a pension under €12,000 – roughly equivalent to a State pension would be exempted. Those on higher pensions would pay more, with a cut of 6 per cent on income between €12,001 and €24,000; 9 per cent on incomes between €24,001 and €60,000, and 12 per cent on sums higher than that.
The changes will also apply to former political office holders, retired members of the judiciary and their survivors or dependants.
“Reducing the income of pensioners is an exceptional measure. But these are exceptional times. The Government has to make savings and pension costs are a very significant part of public expenditure.
He added that it would be “unfair if highly-paid pensioners remained unaffected while serving staff on low pay have had their pay reduced”.
