Irish Budget 2015: In last October's budget a second pension tax/ levy on Irish private sector pension funds was introduced and this new tax may well be raised to fund the much spinned income tax cuts or to make the continued raid on funds appear more palatable - to help finance a social housing programme.
In a sleight of hand, Michael Noonan, finance minister, introduced the new pension tax so that he could claim that the levy he had introduced in May 2011 was temporary after all and would be abolished as promised by December 2014.
Noonan said in last year's budget speech: "I wish to confirm that contributions to pension schemes will continue to attract income tax relief at the marginal rate of tax. I wish to confirm that the 0.6% Pension Levy introduced to fund the Jobs Initiative in 2011 will be abolished from the 31st of December 2014. I will however, introduce an additional levy on pension funds at 0.15%. I am doing this to continue to help fund the Jobs Initiative and to make provision for potential State liabilities which may emerge from pre-existing or future pension fund difficulties. The levy within the existing legal framework will apply to pension fund assets in 2014 and 2015."
In May 2011 Noonan introduced the first tax/ levy at a rate of 0.6% on the capital value of assets under management in pension funds established in the State.
He said: "It will apply for a period of 4 years commencing this year and is intended to raise about €470m in each of those years. The levy will not apply to pension funds established here and providing services and benefits solely to non-resident employers and members [ ] the imposition of the levy is for a relatively short period."
Over €2bn has been seized since 2011 and the current year's take is estimated to be €700m compared with property tax at €550m and the estimated water tax charge at €400m.
So the minister with 3 public pensions (teacher, TD and minister) just like Enda Kenny, taoiseach, engaged in economy with the truth, and the new tax /levy is estimated to raise about €135m in 2015.
However, the official budget leaks have not signalled that the rate of the new levy at 0.15% will not be raised.
Enda Kenny provided a budget leak to members of the Dublin Chamber of Commerce last night by confirming an income tax cut:
“Next week’s budget will be the first step of a multi-annual plan to reduce the 52% rate on low and middle incomes. It will improve the competitiveness of our tax regime in a way that strengthens the economic recovery.”
However, he [cautioned that the “chorus of calls” to abolish various charges and taxes would amount to “economic and social madness.”]
...and the spinning on income tax cuts is all about economics and not politics?
So as the pension levies/ taxes have triggered no public protests, the funds make an easy target.
Wonder also the priority given to pensions by ministers who themselves have no worries about retirement income.
Joan Burton, tánaiste (deputy prime minister) and social protection minister, in October 2012 published a report [pdf] on pension charges that she commissioned PricewaterhouseCoopers (PwC) to produce.
It provides the following example: "If an individual age 35 saves €250 per month for a pension for 30 years, a fund of approximately €200,000 is created which results in a pension of about €10,000 per annum. Apply the average charge of 2.18% per annum to this fund and the final fund is reduced by 31% i.e. the fund is reduced by €62,000, resulting in a lower pension of €6,900 per annum. This impact would be significantly higher where the maximum charges apply."
Did this prompt any urgency at policy level?
A recent report from the European Federation of Financial Services Users reveals the pathetic returns on pensions in Belgium, UK, France, Italy and Spain.
The real (inflation-adjusted) returns from private pension schemes have been negative for most of the period since 2000.
In Spain pension plans lost 1.2% a year in real terms between 2000 and 2013, while in the UK they lost 0.7% a year between 2000 and 2012.
The effect of charges on returns is huge: one French equity fund cited returned just 16% after charges over ten years, compared with a gain for the index it was tracking of 73%.
Pension saving receives capped tax relief. However, money paid to pensioners from their pension fund is taxed as income. In effect pension saving is incentivised by deferring tax, not by eliminating tax.
On Irish pensions, according to a 2013 OECD report [pdf] :
- At the end of 2009, only 41.3% of private sector workers aged 20 to 69 were enrolled in a funded pension plan, either occupational or personal.
- There is unequal treatment of public and private sector workers due to the prevalence of defined-benefit (DB - guaranteed payout) plans in the public sector and defined-contribution (DC) plans in the private sector.
- Ireland and New Zealand are the only OECD countries which do not have a mandatory earnings-related pillar to complement the State pension at basic level; as a result, Ireland, like New Zealand, faces the challenge of filling the retirement savings gap to reach adequate levels of pension replacement rates to ward off pensioner poverty. The level of the basic pension in New Zealand, however, is higher than in Ireland. It corresponds to almost 40% of the average wage compared to 29% in Ireland.
- Pension charges by the Irish pension industry on large occupational DC plans are not too high when assessed on an international context; they are however rather expensive for small occupational schemes and personal pension schemes.
Mercer, the pension consultants, provided sample cases for a brochure [pdf] on the pension levies that was produced by Ibec, the business lobby.
David, an executive in his sixties, will pay €4,275 in 2014
David is an executive in a manufacturing company. He is due to retire on his 66th birthday, 1 January 2016. He was earning €80,000 in 2011. David contributes 5% of his salary to the scheme and his employer contributes 10%. Contributions have built up over many years. Although he was aware that DC pensions do not guarantee a particular amount, he had expected his fund to deliver him a pre-tax pension of about €24,700 (in 2011 values) in each year of his retirement.
In 2014, the amount of levy deducted from David’s pension fund will be €4,275.
The overall effect of the five years of pension levy imposed on David will mean that he suffers a 2.5% pension reduction for each year of his retirement. This will reduce his pension by more than €600 per annum. He will pay income tax on the remainder.
David and his family live in a house which is now worth almost €500,000 - - much less than they paid for it. David’s local property tax bill for 2014 was €855.
Irish Economy: Tourism/restaurant jobs up 23,000 since 2011 - how many from VAT cut? - - funded by the pension levy