Digging the Hole Deeper: The National Pensions Review and Tax

Incentives for Pensions

Gerard HughesEconomic and Social Research Institute

Presented at Pensions Forum 2006

Dublin Castle Conference Centre5 May 2006

Overview of Presentation

1. The pensions problem & NPR proposals 2. How effective are the State and the private

sector in delivering pensions? 3. Is the private pension system likely to pay

higher pensions?4. How should we provide for pensions in the

future?

Percentage of Pensioners at Risk of Poverty in the EU in 2001

0%

10%

20%

30%

40%

50%

NL LU SW GE IT EU15FR SP FI AT UK BE PT GR IRL

Projected Increase in Cost of Public Pensions in EU15 between 2004 and 2050

0.0

5.0

10.0

15.0

20.0

25.0

30.0

Greece

*

Portug

al

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mbourg

Spain

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France Ita

ly

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y

EU-15+

Denmar

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Austria

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Netherl

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Irelan

d UK

2004

2050

The Pensions Board Proposals

1. No change in targets: 50% RR pre-retirement income; 34% RR for State pension; 70% coverage rate for over 30s (NPR, p. 5 “…the OACP is now below the risk-of-poverty line”)

2. Give State incentive for PRSA as a €1 for €1 matching contribution rather than as a tax relief

3. Give tax relief for other private pension saving at the higher rate for all personal contributions

4. Eliminate the fact-finding questionnaire required at point of sale of standard PRSA

5. Give incentives to put proceeds of SSIAs into pension saving

Percentage of All Pensioner Units Receiving Income from Each Source

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100%

Benefit income Occupational/Personalpension

Investment income Earnings Other income

Percentage of Pensioners' Income Provided by Each Source

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60%

Benefit income Occupational pension Investment income Earnings Other income

Incomes of Male and Female Single Pensioners

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20

40

60

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Males Females

Other incomeEarningsInvestment incomeOccupational/personal pensionBenefit income

Sources of Average Gross Income of All Pensioner Units by Income Quintile

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Bottom Second Third Fourth Top

IR £ Other income

EarningsInvest-ment incomeOccup-ational pensionBenefit income

Some Facts About the Private Pension System 1. Coverage of occupational schemes

All DB DC1985 44% 1992 33% 5%2004 40% 2004 27% 13%

2. Approximately 30% DB schemes underfunded3. IAPF survey: average DC contribution = 10%

(NPR p. 102.: “In the great majority of cases, at present only members of …[DB] schemes appear to have a reasonable chance of achieving the NPPI adequacy targets”)

4. PRSA employee take-up Dec 2005: 1.6% of labour force

Distribution of Pension Tax Relief on Employee & Self-Employed Contributions

by Income Quintiles Around 2000

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10.0

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Employees Self-Employed

Approved Retirement Funds and Tax Avoidance

Small Self-Administered Scheme set up. Value of the fund at retirement c. €100 million 25% of fund taken as tax-free lump sum Remaining 75% invested in an ARF “The analysis does suggest, …, that for those who

have the capacity to survive in retirement without the need to rely on funds invested in an ARF, our “EET” system of pension taxation is much closer to an “EEE” system where effectively no tax is paid, or if it is, it is at a low rate and far into the future”

DoF Section G: Tax Relief for Pensions Provision, p. G.22

How Should We Provide for Pensions in the Future?

1. Raise basic State pension to prevent poverty in retirement

2. Reduce cap on pension contributions from €254,000 p.a. to a reasonable multiple of GAIE & gradually change the incentives to favour lower & middle income earners

3. Use additional revenue & increase PRSI to pay for increases in State pension

4. Gradually increase the retirement age, LFPRs, and the skill level of the labour force