Pensions shouldn’t be an easy target

In the general cut and thrust of politics and the formulation of public policy, it is generally accepted that proposing any measure that impacts on the living standards of old age pensioners is an act of political suicide.

It is therefore ironic that changes to how pensions are accrued and taxed are rarely controversial.

For instance, the current Government introduced a private pension levy in 2014 which skimmed 0.15% off the value of private pensions funds. This was withdrawn after 2 years, but still represented a system of double taxation that only applied to the holders of private pensions funds. The move did provoke a certain backlash, but many commentators welcomed it, and there was none of the outrage that followed the withdrawal of the medical card for all over-70s, millionaires and paupers alike.

The reason for this seems to stem from a mistaken view of what private pensions are. The system under which a taxpayer is allowed to deduct their pension contribution from their income before that income is subjected to the calculation of PAYE is referred to has a “relief”, as if the State is cutting the taxpayer some slack for saving for their retirement. Indeed, arguments in favour of this measure and frequently framed in the context of rewarding and incentivising people to save for the future.

This view of private pensions is also promoted by frequent media references to the pension arrangements of senior private and public sector executives, as if to suggest that the only people who have private pensions are people who are already well-heeled and not in need of any more “relief” from the State.

This understanding of private pensions if mistaken, and in promoting it, the media is doing no favours to large sections of middle and low income earners.

Firstly, not having to pay PAYE on your pension contribution is not a “relief”. If you make a pension contribution, you don’t pay tax on that income in the current year because you are deferring that income until after your retirement, when you will pay tax on it. The State isn’t doing you any favours here. You’re just making an agreement with the State to defer your income and its associated tax liability to a later time. If you weren’t allowed make the deduction, you’d be paying tax on the same income twice: once in the current year and once when you draw down your pension.

Secondly, private pensions are not the sole reserve of the elite. Figures regarding how many people working in the Irish economy have pensions vary, but none put the figure at below 50%. A recent Friends First survey put the figure at 67%.

This level of engagement brings some of the proposals of the political parties contesting the General Election into sharp relief.

Several parties are proposing converting the Universal Social Charge, which was designed as an emergency measure, into a permanent feature of the taxation system.

Unlike PAYE (income tax), USC is charged on all your earnings, including any income you decide to defer until after your retirement (your pension contribution), and for retired people, any income they receive from private pensions. If the USC were a temporary measure, this would be logical, as you wouldn’t be paying it a second time further down the road when you draw down your pension, and if you’re a pensioner, you wouldn’t have paid it when you were building your pension: ie, everybody is paying it only once.

However, if the USC is to be made permanent, and continues to be chargeable on both all your income in the current year and income from private pensions, everybody who has a private pension will be paying it twice: once in the current year and once when you draw down your pension.

None of the parties proposing retention of the USC have addressed this anomaly, again reflecting the general view that private pensions are a “privilege” and therefore a soft target for rhetoric driven policy.

If the USC anomaly were not bad enough, one party is going even further.

Sinn Fein is proposing to standardise the tax “relief” given for private pension contributions. This is a somewhat obscure concept that doesn’t register easily, but it involves a significant drain on income for anyone earning more than €33,800 per annum (where the higher rate of income tax kicks in) who is making a contribution to a private pension.

Currently, if someone earns €36,000 per annum and makes a pension contribution of €1,000, their PAYE calculation begins at €35,000, not €36,000.

They then pay tax of 20% on €33,800 and 40% tax on the remaining €1,200. They don’t pay 40% tax on the €1,000 they used to contribute to their pension, which is income they deferred to pay tax on at a later time. As such, their tax liability is reduced *in the current year* by €400.

Sinn Fein has positioned this as a “gift” from the State to the taxpayer, and want to claw it back. What they propose is that the person in question pays tax of 20% on €33,800 and 40% on the remaining €2,200, without making any allowance for the income deferred to a later time.

Instead, they will give the taxpayer a refund of 20% of the pension contribution, which in this case will be €200. This represents an increase in income tax for that person of €200 per year (which is greater than their annual liability for water charges).

What is particularly unfair about this proposal is that it means 2 people with the same net income in a given tax year will pay differing amounts of tax depending on whether or not they have made a pension contribution.

Someone who earns €35,000 and doesn’t make a pension contribution will pay €200 less tax than someone who earns €36,000 and makes a pension contribution of €1,000, even though the person making the contribution will pay tax on the €1,000 they have deferred when they draw it down.

It also means that the minimum rate of tax on income on many pensions would be 40%, even if the total income from that pension is less that than €33,800 (the standard rate cut off point). Pensioners who earn more than €33,800 from their pension could be paying as much as 60% tax, depending on how their pension fund was accrued.

The intricacies of the tax system don’t often emerge in the heat of a general election campaign, but on this occasion, they probably should.

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