I watched Prime Time last Tuesday when they talked about the Pension Levy (why is everything called a levy these days? Isn’t it a tax?). With the massive pension problem looming in the future, it will be difficult to rely on the Old Age Pension, the need for private pension funding is greater than it has ever been if people want to have some sort of life in retirement.
When the pension levy was introduced first, it was supposed to be 0.6% of your fund value for 4 years. Minister Noonan insisted that he would keep his promise in Budget 2013 and then repeated this in Budget 2014. While doing this, he added a NEW pension levy from 2014 of 0.15%, meaning that this year, every private pension holder will have 0.75% of their fund taken from them in government tax.
Say you are 40 years of age and have already saved a pension of €80,000, contribute €10,000 a year and your fund grows by 4% each year. Under the current pension levy of 0.75%, the government will take €57,000 in taxes from your pension fund before you get to draw it down. Because that is money that is not invested and growing, it will mean a drop in your pension fund of €79,400.
If they do keep their promise and only tax the pension funds by 0.15% from 2015 onwards, they will take €12,600 from your pension fund, meaning your fund falls by €18,000 at retirement.
So, what is the future for pensions? Given that we still get up to 41% of every €100 invested paid by the State, it is still the most tax efficient method of saving for retirement. All the other options have been taxed so much they aren’t that attractive either.