Standard Life have this month warned that Pension tax relief must remain unchanged under Pension Reform to avoid impoverishment for middle income earners in retirement – particularly the private sector.
Standard Life is concerned that Pension Reform policy under consideration by government will be financially detrimental to middle income workers unless income tax relief at 40% remains in place. The financial experts recently submitted recommendations on how best to improve pension coverage and adequacy for the "poorly provisioned" private sector.
The Interdepartmental Pensions Reform and Taxation Group is expected to report on their findings by year end.
According to Standard Life, it will cost higher rate taxpayers (from €34,550 p.a. for a single person to €43,550 for a married couple on one income) more money per month to save the same amount if tax relief is cut. For example, a €330 monthly pension contribution will mean an extra €50 missing from their pay packet each month. Over a year, this amounts to €600 and over a recommended 30 years (minimum) saving into a pension it’s €18,000.
Standard Life say this will affect both private and public sector workers paying higher rate tax.
Speaking this month, Managing Director at Standard Life, Michael McKenna said, "The suggestions from government that halving income tax relief for middle income earners to 20% or reducing it to 25% would somehow lead to greater coverage/adequacy or no change to current pension saving rates are profoundly flawed. We anticipate the exact opposite – i.e. a mass exodus of those who consider reduced pension tax benefits unattractive and reduce their pension saving accordingly."
He continued, "It’s important to note higher rate taxpayers does not mean high earners.” said McKenna.” We know the vast majority of people benefiting from 40% tax relief are middle income earners. The squeezed middle might feel this is a bridge too far following the post financial crash hardships endured."
McKenna believes that if tax relief is slashed the government and policymakers will sanction the "continued relative impoverishment" of the private sector vis a vis their public sector counterparts.
"It has been well documented that just roughly a third of the private sector owns a pension and a poor one at that, whilst virtually all of the public sector have pensions most private sector workers can only dream of," said McKenna.
"At current rates of pensions tax relief, private sector pension savings are already deeply inadequate, not solely due to affordability but also because most people do not understand how big a pot they need to save and the value of tax relief on their pension contributions. People need to be encouraged via education and incentivised via tax relief to save for their golden years."