Pension pot tax relief in danger under new plan

The country’s biggest trade union group fears those already saving for retirement will lose out if the current tax relief is scrapped.

A report concerning auto-enrolment has sparked concern that people paying income tax at the higher rate on pension contributions will lose out.

And the Irish Congress of Trade Unions (ICTU) also wants older workers to be allowed to join the new scheme once it is launched.

ICTU has made a submission which questions any move to threaten the 40pc tax relief rate, and says people should be able to contribute to the new scheme beyond the age of 60. Earlier this month, Social Protection Minister Regina Doherty’s department published what are known as “strawman” proposals, on how the new scheme might work, and sought submissions.

The obligatory pension scheme is being brought in to address a significantly high number of workers who will have only the State pension on retirement. Just 35pc of the current private sector workforce has private pension coverage.

Unions, employers and individuals have been invited to give their opinion on the proposed system. In its submission, the trade union body fears auto-enrolment pensions will lead to a move to reduce the tax relief for employees who already have a pension.

Those who pay the 40pc rate of income tax get relief at this rate for putting money into a pension.

Workers hit the higher tax rate on income over €34,550 this year, and on income over €43,550 for a married couple.

The document suggests that for the auto-enrolment pension the State would contribute €1 for every €3 contributed by the member.

This is an effective 25pc tax relief, even if a worker in the auto-enrolment scheme is paying income tax at 40pc.

The ICTU submission, written by social policy officer Dr Laura Bambrick, says of the State contribution for auto-enrolled pension: "The proposed State contribution is different to current tax relief."

It is suggested that the State contribution be increased to €1 for every €2.50 put into the auto-enrolment pension scheme by employees: "Congress calls for the value of the State contribution to reflect the value of the current 40pc tax relief arrangement by increasing the State contribution to €1 for every €2.50 a worker saves, while the employee contribution be 5pc and the employer contribution be 7pc."

Congress has also said that Revenue should collect contributions, and all self-employed people with no employees should be enrolled. This is to discourage bogus self-employment where sole traders, with no employees, are forced to contract their services to a firm so the company avoids having to make contributions.

Issue is also taken with the suggestion the new scheme would only apply to those over the age of 23, and end at 60.

This would mean someone entering the workforce at 16 would lose seven years of pension contributions, while the State pension will not apply until the age of 68 from 2028.

The scheme should apply to workers from the age of 16, in line with PRSI (pay-related social insurance) contributions and apply beyond the age of 60. It should also apply on earnings below €20,000, the ICTU said.

It wants the auto-enrolment scheme to be mandatory, to avoid too many opting out.

The State's strawman document says the self-employed could opt-in. Making them join up would avoid bogus self-employment situations where people working for themselves have no employees but are encouraged by an employer to set up as a sole trader.

The department says Ireland is one of only two OECD countries without mandatory earnings-related pension savings.

The strawman document is a draft proposal on how the scheme could work - but is designed to generate discussion and will be revisited in the context of responses to the consultation.