Sunday, 20 March 2016

Retreat on Comprehensive Reform on Pension Taxation in Ireland and the U.K.

Prof Gerry Hughes: In the last fifteen years the cost of pension tax relief has doubled in Ireland and the U.K. and most of the tax relief accrues to higher taxpayers. In both countries there has been official concern about the sustainability of the cost of government subsidies for private pensions and some steps have been taken to make the system more equitable by, for example, introducing limits on the lifetime size of a pension fund and on an annual contribution to a pension.

In short, there was a doubling in this regressive subsidy to higher income tax earners over fifteen years, eight of which were crisis years, when money was short.

In Ireland in the agreement in 2011 between the Fianna Fáil/Green coalition government and the EU/IMF there was a proposal to standardise tax relief on contributions at the basic rate of tax. The Tax Strategy Group in the Department of Finance considered this proposal in 2012 and acknowledged that it would be “much more certain to deliver significant savings and more quickly than marginal changes in the S[tandard] F[und] T[hreshold].”  

Unfortunately, the Fine Gael/ Labour coalition government preferred changes in the annual limit on the contribution and the Minister for Finance, Mr. Noonan, announced in his Budget 2013 that “tax relief on pension contributions will continue at the marginal rate of tax.”

Under pressure to raise revenue the Conservative/Lib Dem coalition government in the U.K. published in 2015 a consultation paper on pension tax relief. It made no specific proposal for reform but gave an example of how introducing a Pensions ISA (Individual Savings Account) would be a fundamental change to a new Tax-Exempt-Exempt (TEE) system, in which the contribution is taxed and investment growth and the pension are exempt, from the current Exempt-Exempt-Tax (EET) system, in which the contribution and investment growth are exempt and the pension is taxed. 

Applying a TEE system to existing pension contributions would have given the Chancellor a huge boost in revenue. However, the pensions industry, and others, successfully lobbied Conservative back benchers against comprehensive reform of the system and there was no change in Budget 2016 to the tax treatment of pensions. Instead a Lifetime ISA was introduced for those under 40 years of age to complement pensions by giving a subsidy of £1,000 to those who save up to £4,000 per year towards retirement or buying a house. 

Instead of making the tax treatment of pensions sustainable or more equitable the Chancellor has increased the cost of government subsidies for pension savings by using an Exempt-Exempt-Exempt (EEE) system to give free money to young savers just as the Irish government did in 2001 when it gave billions away in Special Saving Incentive Accounts (SSIA).
So no comprehensive change in either Ireland or the U.K. to rectify one of the most glaring examples of inequality in fiscal welfare for high earners.
Gerry Hughes is a Adjunct Professor in Trinity Business School

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