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Money Times - March 20, 2018

Posted by Jill Kerby on March 20 2018 @ 09:04

THE PENSIONS ROADMAP NEEDS MORE SIGNPOSTS

 

The Beast from the East upstaged one of the two big policy announcements the government made at the start of the month – the Pensions Roadmap.

Like the ambitious National Development Plan 2040, The Roadmap for Pensions Reform 2018-2023 includes multiple threads for the reform of private, state and public service pensions, but a much shorter time-frame:  by 2021, all private sector workers – and their employers – who do not already participate in an occupational pension scheme are going to be signed up for an auto-enrolment scheme that will involve contributions from worker, boss and a top up from the government.

The State Pension will also be reformed in tandem with the the introduction of the auto-enrolment one, making it more fair, transparent and sustainable, claims the government.

With a public consultation process about to begin, The Roadmap is “ambitious but achievable”, said Mairead O’Mahony, of Mercer consultants. It is also very necessary given that fewer than half of private sector workers are saving for retirement and Mercer research shows that  “70%...expect to live past 80, yet only 24% feel they will be able to afford to live comfortably for that length of time.”

O’Mahoney especially welcomed how the PRSI funded state pension is to be redesigned, with the number of lifetime contributions reflecting the final income (currently a maximum €12,663 or c34% of the average industrial wage).This simpler, more transparent ‘Total Contributions’ approach will allow workers to easily calculate what their combined final state and private pension income will be when they retire.  It’s also been suggested that workers who defer taking their state pension at age 66 (or 68 by 2028) will enjoy a higher income when they do finally decide to take it.

What the Roadmap hasn’t definitively determined is exactly how much worker, employer and state will have to pay into the new scheme, nor how tax relief will work. Government is understood to be considering a flat-rate tax relief of 30%, halfway between the current standard 20% people earning under €34,800 now get on their pension contributions and the marginal 40% rate relief that people earning over that amount receive.

Getting the tax incentive right will be important: in Ireland we don’t tax income diverted into a pension or any growth in the fund. The tax is paid when the fund (less a tax free amount) is turned into retirement income. (In other countries, like Australia it is the reverse and the pension income is entirely tax free.)

Will higher earners balk at being signed up to a pension that not only taxes a portion of the savings they contribute at 40%, but also taxes – at 40% - pension income that exceeds the lower standard income limit? The current system avoids this kind of double taxation by not taxing contributions, but it is extra generous if the pensioner’s total income ends up only attracting a 20% tax rate.

Pension advisers worry about another anomaly: what happens to people earning more than €34,800 who are self-employed, company directors with private pensions or have a PRSA – a personal retirement savings account - because their employer doesn’t operate an occupational scheme?  Will the 40% tax relief they currently get on their pension contributions be reduced to 30%?

The other concern about the Roadmap’s proposed new private pension – aside from the reluctance of employers to have to pay into it (at the moment no employer is compelled to provide any retirement provision for their workers) – is how the new auto-enrolment funds will be administered and invested. Will workers have a choice of investment provider or fund, or will there be a ‘default’ strategy? Part of the reluctance of many people to take out a pension, whether they are employed by a company or work for themselves, is the element of chance involved in the putting money into investment markets, and the notoriously high and the still opaque charges that too many investment firms and their agents apply to Defined Contribution pension plans.

This question of safeguards, not just to guarantee the honest and efficient administration of the money but to actually provide a positive return after decades of saving – is going to have to be addressed.

What workers want are Defined Benefit pensions – a pension that reflects the worker’s final income and years of service. But these are few and far between outside a select number of private and semi-state companies and the civil service, the latter whose indexed, DB pensions are paid from direct taxation.

But without those DB safeguards, the auto-enrolment pension being proposed in this Roadmap is going to a hard sell to many people who may have little spare income and have other saving priorities, like buying a home.

Next week: how the Pensions Roadmap proposes to change the State old age pension and public service pensions.

The TAB Guide to Money Pensions & Tax 2018 is available in good bookshops. See www.tab.ie for ebook edition.

 

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