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Digging the Hole Deeper: The National Pensions Review and Tax Incentives for Pensions

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Title: Digging the Hole Deeper: The National Pensions Review and Tax Incentives for Pensions


1
Digging the Hole Deeper The National Pensions
Review and Tax Incentives for Pensions
  • Gerard Hughes
  • Economic and Social Research Institute
  • Presented at
  • Pensions Forum 2006
  • Dublin Castle Conference Centre
  • 5 May 2006

2
Overview of Presentation
  • The pensions problem NPR proposals
  • How effective are the State and the private
    sector in delivering pensions?
  • Is the private pension system likely to pay
    higher pensions?
  • How should we provide for pensions in the future?

3
Percentage of Pensioners at Risk of Poverty in
the EU in 2001
4
Projected Increase in Cost of Public Pensions in
EU15 between 2004 and 2050
5
The Pensions Board Proposals
  • 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)
  • Give State incentive for PRSA as a 1 for 1
    matching contribution rather than as a tax relief
  • Give tax relief for other private pension saving
    at the higher rate for all personal contributions
  • Eliminate the fact-finding questionnaire required
    at point of sale of standard PRSA
  • Give incentives to put proceeds of SSIAs into
    pension saving

6
Percentage of All Pensioner Units Receiving
Income from Each Source
7
Percentage of Pensioners' Income Provided by Each
Source
8
Incomes of Male and Female Single Pensioners
9
Sources of Average Gross Income of All Pensioner
Units by Income Quintile
10
Some Facts About the Private Pension System
  • Coverage of occupational schemes
  • All DB DC
  • 1985 44 1992 33 5
  • 2004 40 2004 27 13
  • Approximately 30 DB schemes underfunded
  • 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)
  • PRSA employee take-up Dec 2005 1.6 of labour
    force

11
Distribution of Pension Tax Relief on Employee
Self-Employed Contributions by Income Quintiles
Around 2000
12
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

13
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
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