Pension savings still the best tax break but planning is essential

The National Recovery Plan has received a lot of bad press but from a pension savings point of view there is some good news!

Whilst the government has indicated some significant changes to pensions it has also indicated a willingness to talk to the industry. In particular some of the points made by Aidan McLoughlin when he appeared before the Finance Committee of the Oireachtas are reflected in the Plan  itself:

1.                   The figures bandied about for tax relief are not properly understood

2.                   Pensions tax relief is actually only a form of tax deferral

3.                   Pensions have a key role to play in terms of investing in the economy

On the negative side the Plan suggests that tax reliefs on contributions made by the employee, to include AVCs, will be curtailed. A phased introduction of income tax relief for employee contributions is anticipated. The marginal rate will over a period until 2014 be reduced to the standard rate of 20% for everybody. In addition, the relief from PRSI and health levy for employee contributions will be abolished. It is also significant that the €150,000 earnings cap which determines the maximum tax deductible pension contribution is to be reduced to €115,000.

The good news for most pension holders is that they can continue to avail of the existing reliefs in relation to pension contributions made by their employer. Contributions may be made by the employer before corporation tax and are not taxed in the hands of the employee.

While there are very few commitments in the Plan to not increase taxation in specific areas, significantly in the domain of pensions relief, the Government pledges not to make pension contributions made by the employer subject to Benefit-In-Kind for the employee.  This basically gives certainty to those who continue to plan for retirement reassurance that they may continue to avail of tax relief.

We believe this will impact significantly on the design of remuneration packages for the future.

The Plan however does have a negative impact on the reliefs available on retirement. It is anticipated that the max tax free lump sum available on retirement be set at €200,000. Furthermore, the standard fund threshold which is the max funding which can be achieved tax-free in all your pension arrangements will be reduced from the current €5.4 million to a yet unspecified level.

Both of these are extremely retrograde steps with no revenue raising potential for the State. At a time when we Ireland is trying to attract multinational headquarters and high tech business it is critical that key decision makers in those enterprises aren’t discouraged. It is to be hoped that the discussions with the industry will allow sanity to prevail on this point.