There are two main components to the pensions system in Ireland, a flat rate social welfare pension that provides a basic payment and a supplementary component on a voluntary basis that provides an earnings related component. Expenditure on means tested social welfare pensions is estimated at €725 million in 2004. The State encourages persons to supplement the State pension with private pension provision by offering tax relief on such pension provision.
The cost of tax relief for private pension funding for 2000-01 has been estimated by the Revenue Commissioners at €2,615 million. This covers tax relief on contributions by employers, employees and self employed and the exemption from income and gains in the pension fund. However, as a quid pro quo for these reliefs, tax arises when the income is withdrawn from the pension fund in retirement. Furthermore, there are limits on the tax relief in the form of a cap on the level of earnings that qualifies for relief and a limit on the pension benefits payable. It should be noted that these costs are very tentative and that efforts are being made to improve information on the cost of tax relief for pensions.
A large part of the tax foregone relates to the working age group while the non-contributory pension costs relate to those over 66 years, which is a different group.
The national pensions policy initiative, NPPI, report in 1998 recommended that the existing tax relief regime for pension contributions should not be diluted. This structure of taxation treatment for pensions is long standing and has helped a significant portion of the labour force to arrange supplementary pensions thereby lessening the pressures on the Exchequer to fund pension needs. This approach, though long standing in Ireland and some other countries, is now gaining wider emphasis in other EU countries.
While the tax relief arrangements for pensions are kept under review and considered in the context of annual budgets and finance Bills, I do not envisage that it would be desirable to move from the current policy of encouraging pension provision through tax relief for private pension provision, given the ageing population and the Government policy of increasing pension coverage.