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Higher earners gain most from Pensions Tax Relief


Counting cost: Tony Gilhawley says dropping tax relief could hit public servants

Higher earners are the big winners from the tax relief system for pensions savings, according to university academics.

Their paper calls for reform of the tax relief system before the automatic enrolment scheme is set up.

However, actuaries pointed out that public servants would be the big losers if the tax relief was abolished.

The paper, by UCD’s Shane Whelan and UCC’s Maeve Hally, found that those on the 40pc tax rate get more “generous” relief compared with lower-paid people.

It suggests more lower-paid workers would take up pension saving if the tax reliefs were abolished and replaced with a matching contribution from the Exchequer. It is suggested this could see the State contributing €1 for each €1.60 saved. This would be an effective subsidy of 38pc. This is in line with the 2009 Commission on Taxation.

The paper worked out the current tax incentive to save for pension expressed if it was a State subsidy for every €1 invested.

The paper looked at a married, one-income household. It found that if the household earned €30,000 a year then the equivalent Government subsidy for investing in a pension works out at 35c.

If the household earns €50,000 its subsidy for investing in a pension is €1.04.

With earnings of €120,000, the subsidy falls to 69c.

However, actuary Tony Gilhawley said public servants could be the big losers if the tax relief was abolished.

Mr Gilhawley, of Technical Guidance, said: “The group who ‘consume’ most of the cost of private pension tax relief are the 260,000 or so who joined the public service before January 1, 2013 and who benefit from a hidden average employer contribution rate estimated at 29pc.”

Referencing calculations in an actuarial review of pension provision carried out by the Department of Public Expenditure and Reform, he said gardaí benefit from a higher “hidden employer contribution rate”, estimated at 53pc.

The average employer defined-contribution scheme contribution in the private sector is 7pc a year for about 330,000 private sector workers in defined contribution schemes, he said.

Any cut in private pension tax relief, to be equitable, has to take account of the implied or hidden public service employer contribution rate for pre-2013 entrants, Mr Gilhawley said.

Irish Independent