At this stage most self employed people know that as part of the Government’s initiative to promote job creation, a 0.6% levy has been introduced on personal pension funds. The levy is being applied on all capital value assets under management of funded pension schemes and personal pension plans established in Ireland. Thankfully it is not applied on Approved Retirement Funds of those who have retired.
The levy has been stated by the Government to be temporary, and will be in force until 2014, thereby hoping to raise an estimated €470m annually.
Before we go any further, let’s not deal in semantics. This is not a levy – this is a TAX to add to all of the other taxes that the Government finds that it has to implement because of past transgressions.
While the market has been advised that the TAX will apply based on the market value of assets as at 1st January 2011 there has been very little specific detail from the Department of Finance on the practicalities of the proposal. Whether the TAX will be introduced before and, if so, continue after 2014, time will tell but its very existence points to a very basic lack of understanding on the Government’s approach to retirement funding.
Firstly the long term timebomb of the need to have adequate retirement funding for our aging population just started to tick louder. By taxing pension funds by a further 0.6% a personal pension fund will be reduced by 6.2% over a ten year period or 12.7% over a 20 year period. If the eventual fund was originally likely to be €1,000,000 this would account to a reduction of €62,000 or €127,000 over time, depending on your term. These reductions, based on current annuity rates of, say, 4.5% will see a loss in annual income from retirement age onwards of €2,790 or €5,715.
This is all the more incredible when one considers that up to even last year, the previous Government had stated that they sought to ensure that all employers have some form of compulsory pension scheme in place. While a different Government is in place now, the same problem remains and has been exasperated by the raiding of the National Pension Reserve Fund just to help bail out the banks. One can only hope that when the banks become permanently solvent that they will be capable of being sold on by the State for a considerable profit and thus recharge the National Pension Reserve Fund.
The application of the levy/tax is also unfair on the private sector. If one assumes an annuity rate of 4.5%, the o.6% levy represents a 13% reduction in annual income being absorbed by the private pension holders.
This is a one sided tax as no equivalent charge is being placed on public setor pensions which, if it was, would have resulted in a 13% reduction in gross monthly pension payments. I don’t imagine that too many public servants would stand idly by for a 13% reduction in retirement income.
At its heart is a totally inequitable position which is fundamentally unconstitutional. Why is one sector of Irish life being penalised directly without the other side having to take any pain?
Within the pensions industry, even in the last few short days, there is a growing voice for legal action by way of a test case to be taken. Time and many actuaries and lawyers later will tell if the Government really knows how to handle this problem of their own making!