Lack of Action to Address Pensions a Significant Oversight
Failure to address pensions was a significant oversight of Budget 2019.
The Roadmap for Pensions Reform — published earlier this year — outlines how the State contributory model is likely to have a €400m deficit within the next 50 years.
While all budgets will, undoubtedly, have limited fiscal space within which to operate, based on our experience at Mazars, we believe that business owners, self-employed and PAYE workers would have welcomed, and reacted positively to, budgetary measures aimed at tackling this looming deficit.
The ticking pension time bomb is an issue which is being kicked down the road and the Government proposal to tackle the deficit in 2022 is inadequate. Automatic pension enrolment was introduced by the UK on a phased basis in 2012. The generally shared view is that it has been a success.
While the UK is in the process of seeking to extend its scope to those working in the sharing economy, for Ireland to wait until at least 2022 to commence is worrying.
The State pension has the potential to replace health as the big drain on exchequer funds. With only 35% of private sector workers having personal pensions, the absence of private financial security will leave the State shouldering the responsibility. It is our experience that those with private pensions are open to making contributions. However, their decisions on contribution amounts are influenced by tax policy.
Private pensions are associated with the wealthy. Steps taken by successive governments to curtail relief and increase pension taxation have aided this perception. In my opinion, we need the implementation of a national awareness campaign to highlight the benefit for employees of having a personal pension.
A basic understanding of pensions is the 2018 equivalent of not understanding what a tracker mortgage is.
Investment property can be a nest egg for many. The high capital gains tax (CGT) rate of 33% can discourage landlords to sell, as the rate is considered punitive. Given that the current CGT rate is one of the highest in the OECD, it is hard to disagree.
Facilitating access to trapped wealth would help to ease dependence on State support. A reduced rate of 20% CGT could be more palatable to investors.
Rather than this being a free-for-all, access to a reduced CGT rate could be limited to those with total retirement assets of a specified amount.
If addressed in the correct manner, a reduced CGT rate could not only provide landlords with a pension nest egg, but create access to higher quality housing stock. Exchequer receipts would be aided by stamp duty and Vat on redevelopment works.
This budget and successive ones should take steps to incentivise employees and employers to fund personal pensions. Measures could include doubling corporate tax deduction in respect of employer contributions; increasing the income contribution limit for self-employed; and introducing contributions deductible for USC calculation purposes.
This article first appeared in the Irish Examiner 10th October 2019 .