The Department of Social and Family Affairs published the National Pensions
Framework today, 3 March. There is no immediate change to taxation or
pensions legislation as a result of this publication; it sets out a framework for
the future provision of pensions. The framework is scheduled to be
implemented over a five year period and the principal changes envisaged
• Mandatory approach to pension scheme membership
• Effective tax relief on personal pension contributions at 33%
• Approved Retirement Funds (ARFs) for all members of Defined
Contributions (DC) schemes
• Tax Free Lump Sum – €200,000 cap
• Increasing the state pension age
• New public service pension scheme
Pensions are complex with a myriad of different arrangements. PwC believes
this is a factor in people’s inertia in engaging in the process and making a
pension savings commitment.
There is a danger that the new mandatory scheme may be seen as a further
complexity and indeed a financial burden. On the other hand, the availability of
ARFs to all members of DC schemes is to be welcomed, as it offers greater
flexibility on retirement.
Mandatory approach to pension scheme membership By 2014 the framework envisages a new regime for employees who are not currently members of adequate employer sponsored pension schemes. The measures will impact those earning between approximately €18,000 and €50,000 and the mandatory contributions to the pension schemes will be • 4% of pay by the employee • 2% by the employer and • 2% by direct state top-up Whilst an employee may opt out
of this scheme they will be automatically re-enrolled every 2 years. Even if the employee opts
out of their contributions the employer will still be required to pay 2%.
There will be a once off bonus top-up by the state after 5 years of continued membership.
The state contribution of 2% is akin to tax relief at 33% of contributions.
The exact workings of the scheme need to be finalised and may be cumbersome and
complex to administer. The 4% contribution may be seen as an additional tax by employees and
the 2% contribution will be seen as an additional payroll cost by employers.
Effective tax relief on personal pension contributions at 33% The framework proposes that
personal contributions to pension schemes will be matched by a state top-up
payment, equivalent to 33% tax relief similar to the arrangement
under the new mandatory pension scheme referred to above.
This carries forward a recommendation made in the Commission on Taxation report
of last autumn. This is good news for low income earners who pay no tax or pay tax at the
standard rate only but bad news for marginal rate taxpayers who currently get tax relief at 41% plus levies etc. As personal contributions to pensions will no longer be relieved ‘at source’
through payroll, the new system will lead to increased PRSI costs for employees and employers.
These changes are likely to take a number of years to implement and in the meantime top rate
taxpayers should continue to maximise their personal pension contributions before the reduced
rates take effect. On a positive note the framework sees no need to adjust the tax treatment
of employer contributions made on behalf of employees. This presents an opportunity for
employers to ensure that their reward packages optimise the attractiveness and flexibility of
employer pension contributions.