The Cost of Tax Relief

Reports on the cost for the Exchequer of tax relief on pensions are either misunderstood or disingenuous. Experts in the Department of Finance claim that an additional €2.1bn could be collected by Revenue if we abolished tax relief on pensions.

Obviously, if one is looking at pension reform, which the Government currently is, what could be bought in terms of hospital beds, social welfare, housing etc., for €2.1bn, is an enticing prospect. Some political parties and independents have taken up the mantle.

The financial basis of their conclusions is erroneous, however. And where one could forgive the political establishment for accepting the figures in their blind pursuit for electoral votes, there is little basis for exonerating the experts in the Department for producing a skewed picture.

To begin with, pensions do not benefit from tax relief; it is more accurately a deferral of tax. The tax is paid when the pension is drawn down. However, when producing the costings, the Department omits to account for the tax collected by Revenue on exit.

Furthermore, no attempt has been made to quantify the fact that that the State makes a profit on this system of deferral. The profit materialises because employer contributions to occupational schemes (which represent the largest proportion of funded pension benefits) typically generate a tax saving of 12.5%. On exit, however, the benefits are taxed in the hands of individuals at rates up to 52%.

The end result is a set of numbers that actually mean nothing. Using them as a basis for decision-making is extremely dangerous.

Finally, the manner in which the tax reliefs on pension schemes is calculated has the effect of increasing the divide between private sector pensions and public-sector pensions. Figures reveal that the annual cost to Revenue of exempting public sector workers from Benefit-in-Kind tax on their pensions approaches €2bn. If it is accepted that any tampering with tax relief must affect the public sector and private sector workers equally.

2018-09-13T12:06:35+00:00