The Commission on Taxation report has been published and contains 14 recommendations on pensions. We take a brief look at the main proposals below.

The commission’s main proposal is to replace the current system of tax reliefs on pension contributions with a new system known as “matching”. At the moment, pension relief is granted at the rate of tax paid by the individual. Individuals paying tax at the higher rate benefit most from this system, receiving relief of up to 49% on their pension contributions. Those who pay tax at the lower rate receive a much more limited benefit with those paying no tax receiving no benefit under the current system. 

Under the proposed “matching” system, the Exchequer would contribute €1 for each €1.60 contributed by the individual taxpayer. According to the commission, the benefit of this approach is that it has “the potential to incentivise those on lower levels of income, while still providing those on higher levels of income with reasonably generous levels of support”. In other words, those on lower incomes should find it more attractive to fund their pension while middle and higher earners will see a reduction in the tax benefits enjoyed by them. The proposed changes mean that calculating the rate of tax on different types of benefit at retirement will be complicated. This may have the unintended result of deterring higher rate taxpayers from saving for retirement. 

The commission has also recommended that the Approved Retirement Fund (“ARF”) option be extended to members of defined contribution (“DC”) occupational pension schemes. Currently, members of these schemes may take part of their pension savings as a tax-free lump sum, but must purchase an annuity using the balance of their savings within two years of retirement. In contrast, proprietary directors and the self-employed can invest the balance of their pension savings in an ARF and can then withdraw income from their ARF as and when they wish. Given that annuities have risen in cost recently, enabling DC members to purchase an ARF should result in increased value as well as increased flexibility for these individuals.

The report contains several other pensions related recommendations including:

• the amount an individual can take as a tax free lump sum at retirement should be capped at around €200,000 (with the balance subject to tax at the standard rate of income tax);
• a new SSIA-type pension scheme should be introduced with a view to providing a simple and attractive savings proposition to those on lower incomes; and
• the current tax relief rules should be reviewed to ensure that contributions and remuneration levels cannot be manipulated close to retirement to allow individuals to take advantage of unintended and inappropriate benefits.

The Minister for Finance, Brian Lenihan, has indicated that the commission’s more complex recommendations are likely to be phased in over several years. It is likely however that some of the simpler recommendations will be implemented this year.