Current tax relief on pensions just not working study says

Galway Daily business How much will I need to save for my pension

A new report released from NUI Galway is saying that that the pension system in Ireland has failed and calls for revisiting the tax relief provisions on pensions.

The pensions study was taken against the backdrop of an ageing population, a problem that isn’t just confined to Ireland.

This poses a great challenge to the Irish government in maintaining the current level of pension provision when claims are going to keep on rising against the amount of people contributing to the system.

Like most countries, Ireland provides tax advantages and financial incentives to advance a policy goal of promoting savings in private pensions as a means to improve coverage and the overall adequacy of the incomes of older people.

In Ireland the tax reliefs are generous by international standards and include tax relief at the marginal rate of tax on pension contributions, and exempting the gross build-up of private pension funds.

However this report says that the tax sacrificed in the majority of cases as a result of the tax relief granted on pension savings raises questions of fairness and efficiency in relation to tax expenditure.

“Based on our findings, there is now a clear need to investigate the true cost to the taxpayer of the arguably overly generous provisions in the tax system for pensions,” said Dr Emer Mulligan, lead author of the study.

“Any investigation should cover the differential effects by gender and the relevance for those on low incomes, and consideration should be given to abolishing generous tax reliefs for a private pension.”

“The tax relief for pensions may well represent a good return on investment for individuals availing of it, but it does not appear to be achieving its objective of increasing pension coverage.”

According to the study some citizens see the tax relief on pension contributions as nothing more than an important way of reducing their tax liability, and accumulating wealth.

Many citizens were not aware that they could receive favourable tax treatment on any pension contributions they had made.

For others, in particular those on low incomes and in precarious jobs, the idea of tax subsidised retirement savings made little difference, as they did not have the capacity to either save or increase their savings for retirement.

This is highlighted as a major factor contributing to the gender gap in pensions in Ireland.

In addition, many people who took part seemed troubled by wealthy people receiving a subsidy they probably did not need according to the NUIG research team.

Mulligan also highlights the need to address the important issue of trust in the system: “I was particularly struck by the low level of trust interviewees who participated in the study have in the current pension system.

“They are concerned about how the Government is addressing the challenges we are facing with respect to pensions, and many interviewees spoke of their lack of trust in the ‘pensions industry’”.

She said that this is particularly troubling in light recent proposals on Automatic Enrolment where employers would introduce a workplace pension scheme and employees would be automatically enrolled in it.

“There is a real and urgent need now to build trust between citizens and government, pension fund managers, and financial intermediaries,” Dr Mulligan concluded.