Pension Priorities: Getting the Balance Right?

Tim Callan, Brian Nolan and John R. Walsh

No BP2008/2, Papers from Economic and Social Research Institute (ESRI)

Abstract: The government's Green Paper highlights the question of whether tax incentives for pensions could be better targeted. At present, tax relief on pension contributions is offered at the full marginal rate, making the relief of greater value to those on higher incomes who pay at the top rate of tax. The Green Paper raises the question of whether tax relief should, instead, be paid at a single standardised rate for all taxpayers. Analysis by ESRI and UCD researchers shows that, under the current system, three quarters of the total value of tax relief on pension contributions goes to high income households (the richest 20%). They explore a policy option which involves standardisation of tax relief on pensions - along the lines of the standardisation of tax relief on mortgage interest introduced some years ago. Their analysis shows that if tax relief were standard-rated, this could raise substantial revenue - enough to finance an increase in the social welfare pension of the order of ?50 per week. This would greatly reduce the risk of poverty for elderly persons. There would, on the other hand, be substantial income losses, but these would be confined to the richest 20% of households. While a number of issues relating to this policy option require further analysis, these initial results indicate that further investigation of the balance between tax relief on pensions and direct expenditure on social-welfare pensions could pay substantial dividends.

Date: 2007-10
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