<p>Pension levy: Q&amp;A</p>

Monday 16 May 2011 16.53
Pensions - SFA call for changes
Pensions - SFA call for changes

Confused by the pension levy announced by the government? Want to know why it affects the private sector and not the public sector and how it will affect your pension. Here's the government's Q & A

QUESTIONS AND ANSWERS

Q1. What are the principal features of the proposed pension fund levy scheme?

• A [stamp duty]levy of 0.6% will be applied to the market value of assets under management in pension funds and pension plans approved under Irish tax legislation (occupational pension schemes, Retirement Annuity Contracts and Personal Retirement Savings Accounts).

• The value of the assets would be determined as at 1 January 2011, or on the last date of the accounting period ending in the twelve months preceding that date.

• The scheme will operate for a period of 4 years (2011 to 2014) with a view to raising yields of c. €470 million each year.

• The levy will not apply to the assets of pension funds in respect of the provision of retirement benefits to non-resident members.

• The levy will not apply to pension funds where the trustees have already passed a resolution (before 10 May 2011) to wind-up the fund and where the employer sponsors are insolvent and no longer in business.

• Legislative provision will have to be made to allow pension scheme trustees or administrators the option to adjust the benefits payable under pension schemes or plans.

• The chargeable persons for the levy will be the trustees or other persons (including insurance companies) having the management of the assets of the pension schemes or plans.

• The levy will be administered by the Revenue Commissioners. The levy will be payable in two tranches for each of the four years of its operation, including 2011.

Q2. Why are private sector pension funds being burdened with the cost of the Jobs Initiative?

• Applying a temporary levy to pension funds is less damaging economically than raising other taxes.

• Other savings or investment products have not benefited from the generous tax reliefs that pension savings have historically been granted and continue to receive.

• The rate of DIRT on deposit accounts has increased from 20% in 2008 to 27% since 1 January 2011. Exit taxes on income from investment products have also risen by 7% in that period. Life insurance premiums have been subject to a life insurance levy since mid-2009.

• Pension savings were not generally affected by similar tax impositions in recent budgets.

• Much of the value of pension funds is attributable to the rolled up value of tax relief. The overwhelming majority of money in Irish pension funds is not invested in the Irish economy. The pension fund levy is a reasonable temporary contribution from these funds to assist in the Jobs Initiative and boost the economy at this time of national need.

Q.3 What about the alternatives suggested by the IAPF involving early access to pension savings which would be taxable, or long-term loans to Government from the pension funds at concessionary interest rates?

• Early access to pension funds would be voluntary – no one would be obliged to cash in their pension savings, nor would we want them to – so there is no guarantee that the tax yield arising from this alternative would be sufficient to meet the costs of the Jobs Initiative measures.

• The individuals who are likely to cash in their savings are arguably those most likely to need them in retirement, so if we allowed early access to pension savings we may well create further problems for them and for the State in future years. This is an issue which needs very careful consideration. This course of action might cause difficulty for future pensioners and does not seem consistent with the aim of encouraging long term saving for retirement.

• The long term loan suggestion would also be voluntary so, as with the “early access” suggestion, there is no guarantee that pension funds would invest in loans to Government in sufficient numbers to fund the Jobs Initiative. Moreover, under this suggestion, the Jobs Initiative would not be revenue neutral from a fiscal perspective. We would be increasing borrowing to pay for additional expenditure.

Q.4 Why does the private sector incur the levy and the public sector not?

• Public servants are paying a “pension-related deduction” which is open-ended (note: it is subject an annual statutory review), is paid from current public servants’ salaries, and is at a high rate of 10.5% on income over €60,000 and approximately 7% on average.

• In contrast, the pension fund levy is time limited (it will apply for four years), does not affect current salaries, may not have an immediate impact for many pension savers, and is at a much lower rate (0.6%) than the public service pension-related deduction.

• The pay of all public servants was cut by 5 to 15% in 2010, on top of the pension related deduction in the previous year, and pay rates for new entrants were cut by a further 10% this year. These cuts will lead to lower pensions for public servants from 2012 onwards, particularly for senior public servants whose pay was cut the most.

• Public service pensioners are to date the only group to suffer a reduction in their defined benefit pensions in payment, with existing public service pensions being reduced by an average of 4% this year. The balance of public service pensions over €60,000 is reduced by 12%. Private sector defined benefit pensions have not been reduced to date.

• The pension entitlements of new entrants to the public service will, when the new single scheme is legislated for later this year, be earned on a career-average basis.

• The pension fund levy will apply to funded pension arrangements. While most public sector workers are in unfunded schemes, some public sector and public service schemes are funded and will be subject to the pension fund levy.

• If a public sector worker makes additional voluntary contributions (AVCs) to a pension, those contributions, like those of individuals making similar contributions in the private sector, will also be subject to the pension fund levy.

Q.5 Will the levy result in cuts of €500 per annum in private sector pensions?

• How the pension fund levy will affect individual pensions will be a matter for individual pension scheme trustees and administrators to determine.

Q.6 Why is the Government imposing this levy?

• This is a reasonable and targeted tax measure within the competence of the Government. It is the Government’s right to raise tax. The country is facing an economic and unemployment crisis and the Jobs Initiative will help tackle that crisis.

• Other savings or investment products have not benefited from the generous tax reliefs that pension savings have historically been granted and continue to receive.

• The rate of DIRT on deposit accounts has increased from 20% in 2008 to 27% since 1 January 2011. Exit taxes on income from investment products have also risen by 7% in that period. Life insurance premiums have been subject to a life insurance levy since mid-2009. Pension savings were not affected by similar tax increases in recent budgets.

Q 7 How will this affect my pension?

• How the pension fund levy will affect individual pensions will be a matter for individual pension scheme trustees and administrators. It is open to the pensions industry to decide how and whether to pass on the levy.

Q.8 Will the pension fund levy place an additional cost on employers?

• How the pension fund levy will be paid will be a matter for individual pension scheme trustees and administrators. It is open to the pensions industry to decide how and whether to pass on the levy.

Q. 9 Are there any exclusions from the pension fund levy?

• The levy will not apply to the assets of pension funds in respect of the provision of retirement benefits to non-resident members.

• The levy will not apply to pension funds that have already passed a resolution (before 10 May 2011) to wind-up a pension scheme and where the employer sponsors are insolvent and no longer in business.