A State-supported think-tank has questioned the level of tax relief given to people for saving for a pension.

An Economic and Social Research Institute (ESRI) paper found that high-income households are the big winners from the tax treatment of pension contributions.

It says cutting the tax relief for putting money into a pension should be considered.

However, pension experts said middle-income earners would be the big losers.

Most of the contributions that are paid into a pension by employers and staff get tax relief at the person's highest rate of tax.

This means those paying tax at 40pc get relief at that rate, but those on lower income, paying tax at 20pc, get lower levels of tax relief.

The tax relief means it costs a higher-rate income taxpayer roughly €60 for every €100 invested in a pension fund. It costs a 20pc taxpayer around €80 for every €100 invested.

The ESRI says the system could be changed by restricting tax relief on pension contributions to 20pc for everyone.

Alternatively, there could be the likes of a 30pc tax relief rate for everyone, the think-tank says.

The research found that moving to a system of a 20pc tax relief rate for all, or even a 30pc rate for all, would save the State up to €1bn a year.

This equates to half of the current cost of tax relief, according to one of the authors, Dr Karina Doorley.

High-income households would lose some of their gains from tax relief on pension contributions, while low-income households would not, the ESRI said.

Implicit in a lowering of the tax relief would be treating the large contributions made by the State to public-sector pensions as a benefit in kind, to be taxed.

Dr Doorley said that if individuals chose to reduce their contributions due to such a reform, this would have implications for their retirement income. "A key challenge for any reform to the pension regime is to provide incentives to save for retirement for low-income earners," Dr Doorley said.

This is not the first time the ESRI, which is partly funded by the Government, has called for a cutting of the tax relief on pension contributions.

Jerry Moriarty, chief executive of the Irish Association of Pension Funds (IAPF), which represents trustees in private sector schemes, said middle-income earners would be the main casualties if the tax reliefs were reduced.

Previous research by the IAPF found that lowering the tax relief would hit those earning just over the average industrial wage and middle-income earners.

The IAPF said that a reduction in relief on pension contributions would not be an attack on the wealthy, but 800,000 ordinary members of occupational pension schemes.

"Research shows that those most affected will be lower to middle-income workers on salaries from €40,000," Mr Moriarty said.

He said the ESRI report was very academic and didn't look at why there was tax relief in the first place, which was because it had been deemed reasonable to tax people on income when they received the benefit of it.

"By making retirement savings, individuals are agreeing to make savings that they will not be able to access until many years in the future.

"When they do receive that income in retirement, they then pay tax on that."

Mr Moriarty said it had long been acknowledged that we had too few people saving too little for retirement and any proposals that link retirement savings with reductions in current take-home pay were not going to solve that problem.

He said that the paper also quantified the "implicit" cost of public-sector pensions and attributed an overall cost as being 20pc of gross earnings (they then reduce that for employee contributions).

This most likely underestimates the overall cost as it is based on a 2007 report, and most people are aware of the increase in defined-benefit funding costs since then.

State agencies that are required to pay their parent departments in order to participate in the public-sector pension arrangements can pay up to 30pc of gross salaries, and the employee contributions are in addition to that.

Irish Independent