Removing higher-rate tax relief from pensions would be a severe disincentive to retirement saving and a major blow to over 750,000 pension scheme members and their families, the Irish Association of Pension Funds (IAPF) has warned.
The IAPF questioned the findings of an Economic and Social Research Institute (ESRI) report published last week, which said the Government should consider curtailing the tax breaks on occupational and personal pensions to contain the cost to the Exchequer.
The ESRI said the State was spending almost as much on the provision of tax breaks to private pension holders as it was on basic State pensions, despite the fact that only a third of pensioners receive income from private pensions but more than nine out of 10 receive a State pension.
Paul O'Brien, chairman of the IAPF benefits committee, said tax relief on pensions was designed to encourage contributions, with the ultimate benefits being subject to income tax.
"The figure of €1.5 billion in tax reliefs granted to contributions to private pension schemes therefore largely represents a deferral of tax rather than a total giveaway, and cannot be compared against the one-year cash cost of State pensions of €1.6 billion."
The ESRI said last week that many people received tax relief on contributions at the 42 per cent but only paid tax on their income in retirement at the standard 20 per cent rate.
The ESRI's recommendation that the Government should consider abolishing tax relief at the higher 42 per cent rate is partly linked to concerns that the tax incentives on pensions are skewed toward higher-income people.
The tax relief on pensions is being reviewed as part of the Department of Finance's examination of how wealthy people have used various tax shelters to reduce their tax liabilities.
However, the Pensions Board is examining ways to increase tax incentives for people who pay tax at the standard rate of 20 per cent or who are outside the tax net. The aim is to increase the numbers of people who are not relying on the State pension
