FREE KIC - NO. 70 SEPTEMBER 11
THE PENSION LEVY HAS CREATED TOO MUCH CONFUSION
I believe that it is an obligation of every civilised society to provide a minimum standard of living for all citizens in old age. What constitutes that minimum standard of living is hard to define but would include food, shelter and heat. Providing anything beyond the minimum has to be down to whether or not it can be afforded. Given that most people want more than the minimum I believe that it is prudent for them to make additional personal provision for retirement and old age. I therefore believe that they should put some money away to enable them to have more than just a subsistence existence. I therefore also support the idea that a government is being sensible when it provides a system of forgoing current tax in order to incentivise people to put money away in a pension. At the same time I do not support the idea of a pension being used as a means for the rich to build up a limitless pot of money out of the reach of the taxman.
Given this view on pension provision I think the current rules that allow a maximum pension pot of €2.3m with a maximum tax free lump sum of €200,000 is reasonable. I had supported the earlier change that had got rid of limitless pots and I had not got too upset when the limit was cut from €5.3m to €2.3m. I have however now reached the point where I think the incentives are being cut too much. In particular the "temporary" 0.6% pension levy has gone too far. I might accept it if I could trust the authorities when they say it is only temporary and if I could trust them to not make even further cuts in incentives but unfortunately we are now in a situation where rumours about impending changes continue to fly.
This is also happening at a time when private sector defined benefit pension schemes are disappearing. In my time working for AIB, New Ireland and Canada Life I was a member of their defined benefit schemes. This gives me a certain degree of certainty but it gives the companies a massive degree of uncertainty because in theory they could be paying out money to me in 2050 or beyond! I can therefore understand why companies have closed down these schemes to new members. It also does not surprise me that these companies have used this as an opportunity to not only cut their uncertainty but to massively cut their costs. The evidence I have read suggests that companies are putting far too little into the new defined contribution schemes to achieve anything like the equivalent of the old defined benefit schemes. Here is what Deloittes said in their 2011 survey:
This means that the majority of private sector employees are now in a situation where they need to make their own contributions but I believe that in order to convince them to do so they need to be provided with some degree of certainty.
I believe that whatever changes take place in the next budget should be the final changes. This pattern of annual changes has backfired and is going to backfire even further if ordinary people are not given some help. The fact that deposits are leaving the banks indicates that people have lost confidence in both the banks and the government. Money is leaving the country and if further changes are made it will lead to even more money going.
If the government want to convince people to put money away for the long term the least they should do is state that they are committed to providing sufficient incentives to allow people accumulate enough funds to live in moderate comfort. Even if the government did say this I presume nobody would believe them. What they would need to do is follow up their words with some action. In other words they would have to make sure that the levy is temporary. If I had my way they should make a commitment to resign if they break such a promise but I guess that will never happen. I can already guess what will happen in four years time. The Minister will come along and say that the “temporary” levy is being continued because the fiscal position is still too difficult or as Jedward / Enda and Michael would say:
We have the bailout rate cut but I am afraid that the pension levy might last a lot longer than Jedward’s singing careers!
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