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MORE ON PENSION RESTRICTIONS

“Personal private pension contributions may become a thing of the past if the Recovery Plan’s proposals are implemented to restrict tax relief for personal pension contributions for employees and the self-employed,” according to John Heffernan, head of Ernst & Young’s regional tax services.

Writing in The Sunday Business Post, Heffernan says the aim to slash almost €1 billion from the annual €2.75 billion cost of pension tax and PRSI/Health Levy reliefs for the private sector will hit this form of saving hard.

The Government proposes to:

  • Remove PRSI and health levy reliefs on pension contributions in 2011
  • Reduce the annual earnings cap from €150,000 to €115,000, in tandem with cutting the standard fund threshold (STF)
  • Phase in a reduction in tax relief to 20% by 2014. Relief will be applied at 34% in 2012 and 27% in 2013
  • Cap tax-free commutation of an individual’s pension fund on retirement at €200,000

“The impact on individual taxpayers will be severe,” Heffernan writes. “For a self-employed person making a pension contribution of €10,000, or an employee paying additional voluntary contributions (AVCs) of the same amount, the increased annual tax liability could be more than €3,000 once all the changes are in place.

“Added to the increased liability from the proposed reduction in tax credits and narrowing of the tax bands, total additional tax costs could be around €5,500 for a married, higher-rate tax payer, equivalent to a monthly reduction in spending power of €450.

However, over in The Sunday Times, personal finance editor Niall Brady says pension advisers are already urging their clients to get in quick to exploit a loophole in the new austerity plan that allows and employee’s company or employer to pay into their pension funds for them.

Apparently, companies can continue to make substantial contributions on behalf of directors and employees without exposing them to tax as benefits in kind. Advisers expect the self-employed and professionals to set up companies to take advantage of this loophole before it is closed off.

Tony Lawless, the head of pensions at Irish Life, told the newspaper: “Irish Life supports curtailing loopholes for the wealthy around tax planning. The current proposal is not equitable. Middle income earners will be hit with company owners can legitimately avoid the reduced benefits.”

It is illegal to sacrifice salary to avoid paying tax, ruling out schemes whereby employees trade part of their pay for a higher pension contribution from their employers. However, there is nothing to stop high earners sacrificing future salary increases and bonuses in return for higher pension contributions by their employers.

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