An Analysis of Taxation Supports for Private Pension Provision in Ireland

Abstract

The size and distribution of the taxation supports for private pension provision has been a contentious issue. Research produced or commissioned by representative groups of the pensions industry in Ireland maintains that the tax supports are merely tax deferment, and the effective tax relief is lower  than the ‘headline’ relief on pension contributions. Research by the OECD, on the other hand, suggests that pension savings are essentially tax free to the majority of pension savers. This paper estimates the value of the favourable tax treatment to private pensions provision, expressed as a percentage of the original amount invested, and analyses how it varies with income level, gender, saving period, and other factors. The net effective tax relief on pension savings on each Euro invested in a private pension is estimated by comparing the increase in the present value of pension savings over the lifetime of the individual when compared to other savings. We report that the net effective relief is considerably higher than estimated by the widely cited industry research, and depends on the value of the pension fund at retirement. We identify three distinct groups of individuals in the current regime of incentivising pension savings: those on low incomes who are offered no incentive, the standard rate tax-payers where the net effective tax relief is about 25-30 per cent, and the higher rate tax-payers where the net effective relief is about 31-51 per cent. We argue that current regressive taxation supports for pension savings should be reformed, and reformed before the proposed imminent introduction of an auto-enrolment retirement saving scheme.