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.
This omission is at best an accounting error. At worst, one would fear that the argument is a fabrication pushed forward to promote a hidden agenda. Either way, it will at a minimum end up disappointing those who were duped to believe that hospital beds could be bought with the savings from abolishing tax relief.
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 public sector and private sector workers equally, a nurse would on average have to pay Benefit-in-Kind tax on 30% of his salary and a guard would be stung with additional tax on more than half of her salary.
There is no mention of that, however.
Report on Tax Expenditures: Incorporating outcomes of Tax Expenditure Reviews completed since October 2015. October 2016
Department of Public Expenditure and Reform: Actuarial Review of Pension Provision in the Irish Public Service and a Comparison with the Private Sector
*Please note this content is the view of the author and not of Independent Trustee Company