Any decision to restrict the tax relief on pensions will be detrimental to the already critical pension situation, is the message from the Irish Insurance Federation (IIF) in response to fears the Government may look to reduce tax relief on pensions in the mini – budget on 7th April. At a time when Government should be doing all it can to promote retirement saving and investment this is not the time to be disincentivising pension planning through the proposed adoption of a restriction of tax relief to the standard rate. 

IIF have previously raised their concerns about the serious inadequacies in funding for pensions. IIF’s research on the savings gap showed that in 2007 savings shortfall in total for all the members of the labour force was €7.4bn. The average shortfall for each member of the labour force was €3,772 per annum. With the massive falls in asset values since then these figures have undoubtedly deteriorated further.

“Restricting the tax relief to the standard rate would lead to a reduction in the amount individuals contribute to their retirement funding at a time when people should be increasing their contributions. This may be good short-term news for Revenue but it has many knock-on effects such as the increase in the ‘savings gap’,” said Mike Kemp, Chief Executive, IIF.

The National Pensions Policy over the last decade has been to promote the current system of State plus supplementary private pension provision with fiscal incentives to encourage people to save for their own retirement. The current system represents deferred taxation – whilst tax relief is available on contributions, annuities are fully chargeable to tax at the marginal rate under PAYE.  A restriction of the tax relief on contributions whilst benefits continue to be taxed at the higher rate under PAYE would be inequitable, and would make pension savings less attractive than other investments. As an example, life assurance savings and investments do not qualify for tax relief on contributions but do benefit from tax-free roll-up of assets and only the gain is subject to tax (currently at 26%).  Such investments can be used for long term savings but can be cashed in at any time and offer no guarantee that the money saved will be used to provide a regular income in retirement.