Monday, January 10, 2011

Financial time bomb waiting to explode in the face of the next Government

A New Year and for some that new pay-packet awaits them at the end of the month.  Those without a pay-packet will probably be fully aware how deep the recent budget has dipped into their pockets already.   Many of those lucky enough to still have a job will be waiting with bated breath to feel how much lighter that pay-packet will be, however some workers will not be affected at all. Self Employed people will actually benefit. 

Over the past few weeks this issue has been discussed and debated over the airwaves and has been strenuously defended by  Fianna Fail Ministers saying “these are the very people who shelter much of their income in the form of pension contributions and this relief has been taken away”.   

They can sit back knowing that any payments they make into their pensions can be paid by their company and if by chance personal contributions are made at the moment, these can be redirected as company payments.  This is because under the Fianna Fail 4 Year Plan only personal payments will be hit and the real affect of this will become very apparent after the four year period when the final phase kicks in reducing personal relief to a maximum of 20% however any payments made by the employer will not be touched.    And these are the Fat Cats that this Government would have you believe will be affected by this changes.

This exemption granted on employer contributions could also potentially encourage a practice known as “Salary Sacrifice” which is frowned upon by the Revenue Commissioners however how will this be monitored.  It is also possible that future bonuses and pay rises will be taken as an employer contribution thus avoiding the tax charge and I would suspect that a vast amount of future schemes established will be on the basis of company payments only.  

Within days of the National Recovery Plan being announced, one of the top accountancy firms, PWC, said on their summary “In the light of pension restrictions Employers will need to reconsider their entire reward structure and assess how pensions can best be delivered to employees”.

One unexpected move in the Budget was the reduction to employer PRSI relief on employee contributions.  This was reported immediately after the budget as making it more expensive for employers to pay into pensions for them employees.  This in fact is incorrect.  The reduction in employer PRSI relief only applies to employee payments not employer.   Employers will continue to benefit from reduced PRSI because their staff personally save for their retirement. But what employers will find when some of their staff choose to cease their personal payments, the employer will lose their entire PRSI relief.  At least some staff will have this choice, not so in the public sector as pension contributions are mandatory. 
It is very difficult to make an accurate comparison between Public Sector pensions, the contribution rates differ, some can retire after 30 years, some even benefit from free added year.  Let’s just look at the Civil Service for now.  A decision was made in 1995 to alter the pension rules and anybody joining the service after April of that year was required to make actual direct contribution from their salary towards their pension benefits.  Payment into the Spouses and Children’s Scheme applies to all.  In addition they were required to pay an increased rate of PRSI.  However, to cover the additional costs for these staff member, their salaries were increased.  A post 1995 Civil Servants salary is calculated as being 20/19th of their pre 1995 counterparts.  Although the take home pay for the average Civil Servant was similar after all deduction, the actual direct pension contributions differed.  It is these direct pension contributions that will be hit by the reduction in Tax and PRSI relief under the Fianna Fail 4 Year Plan.  The average post 1995 Civil Servant will pay approximately 66% more in Tax and PRSI then their pre 1995 colleagues.  

As the Public versus Private Sector debate continues, this will now create a further issue of controversy. 

There are many ways this Government could have tackled the pension issue, in my opinion they choose the worst possible solution.  There is no element of fairness in these measures whatsoever and is a financial time bomb waiting to explode in the face of the next Government if not addressed.  There may be a number of inequities in the current system but restricting the relief in the manner they are proposing will not solve the problem, it will enhance it.   The measures have been designed by the top tier for the benefit of the top tier but will be paid for by the average worker.

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