This welcome provision extends further the amount of relief by which an eligible employee can obtain a tax deduction from the costs of acquiring shares in the employer's company. Relief is increased from £3,000 to £5,000. However, as I understand it, this relief only applies to a public limited company. Why not to a private limited company? As the Irish economy changes, more employers are coming to realise that the traditional attitude of "us and them" is no longer the way to do business. In bigger companies many employers feel it only right to give their long standing employees, who have contributed to the success of the firm, a stake in the operation. Why not extend this relief to private sector companies as well? It could only be done up to a limit of 24 per cent in the case of a private limited company, otherwise the company would be a public company, so it could be ring fenced and would not be abused. This would be in the spirit which I know the Minister from his time in the Department of Enterprise and Employment would like to develop. Employees would be regarded more as stakeholders. Why not extend the relief to that particular category as well? I will make another point when the Minister replies to that.
SECTION 12.
I welcome Deputy McCreevy's contribution. I was also of the assumption that shares under this section had to be quoted shares. I am informed by my officials that the shares must be new ordinary shares issued in a company which is resident and incorporated in the State and is a trading or holding company, so there is no restriction on it. One must presume that the incentive for somebody to pay for shares for which there is no market and for which there are no buyers or sellers would be pretty minimal. It would be necessary to get private companies to develop a limited market for shares, as the legislation as it stands simply alters the thresholds. I will come back with clarification on Report Stage.
A very unusual situation can develop. If one is an employee, one can end up getting shares from three different sources under State schemes. One can get them under this particular scheme for the purchase of shares in a company. There are two other methods under which one can get them as well. If one was an Irish Life employee at the time they went public, one could end up with shares under that guise also. There is another way of getting them as well on which some relief is given. If one sells shares out of any of these three categories, they will be deemed to have been shares bought under this scheme. They are the rules at present. I cannot remember the third way it is possible to get shares; there is another scheme in existence. However, if you dispose of them, no matter what shares they were, they are deemed to be ones under this scheme and the relief is clawed back. Perhaps the Minister would consider this matter on Report Stage and come up with something.
To facilitate us, Deputy, you might give us a little more information on what you are talking about with regard to the three categories.
I cannot remember the third category.
Chairman
Amendments No. 15 and 18 may be taken together by agreement.
I move amendment No. 15:
In page 19, before section 13, but in Chapter I, to insert the following new section:
13. As respects the year of assessment 1996-97 and subsequent years of assessment, the Income Tax Act, 1967, is hereby amended——
(a) in section 236, by the substitution of the following subsection for subsection (1A) (inserted by the Finance Act, 1978):
‘(1A) Subject to the provisions of this section, the amount which may be deducted or set off in any year of assessment (whether in respect of one or more qualifying premiums and whether or not including premiums in respect of a contract approved under section 235A) shall not be more than——
(a) in the case of an individual who at any time during the year of assessment was of the age of 55 years or upwards, 20 per cent., and
(b) in any other case, 15 per cent.,
of the individual's net relevant earnings for that year and the amount to be deducted shall to the greatest extent possible include qualifying premiums in respect of contracts approved under section 235A.',
and
(b) by the deletion of Schedule 5.".
The amendment proposes to increase to different degrees, that is between the Minister for Finance's amendment and that in the names of Deputies Coughlan and McCreevy, the relief available to self-employed taxpayers and employees in non-pensionable employment to provide for their retirement. Under the existing law such persons may get tax relief on annual pension contributions up to 15 per cent of their net relevant earnings. Any annuity payable may be commuted to a tax free lump sum not exceeding one quarter of the value of the annuity.
There have been, as Deputies will recall, repeated representations in recent years to increase this 15 per cent. In brief, these representations have been based on the premise that the rate is insufficient to allow for adequate pension provision, particularly in the case of those who commence contributions some years into their working life. When the rate was struck it was in the context that provision would be made over a normal working life of 40 years, which can extend to the age of 70. In that context, the relief is still very much adequate. Furthermore, in the case of the self-employed, unlike employees, retirement does not necessarily entail cessation of employment or income from that source and there may be saleable assets and accumulated capital in the business to supplement income in retirement.
Since 1988, the self-employed have been brought into the PRSI system, thereby giving them entitlement to old age and widow's pensions. Therefore, I see in these circumstances no justification for the substantial across the board increase proposed by Deputies McCreevy and Coughlan, which is considerably in excess of what is currently available in the UK. However, I do have sympathy for the position of individuals who may not be in a position, for various reasons including financial, to make provision for their pensions until they are late into their working careers. It is in that context that I brought forward the amendment to extend the 15 per cent figure to 20 per cent for persons of 55 years of age and over.
With regard to the second leg of the Deputies' amendment, the relief is constructed on the basis that it is relieved on the way in, allowed to grow on a tax free basis and must be subject to taxation on its way out. As a concession, one quarter of the accumulated tax free fund may be taken in the form of a tax free lump sum instead of a taxable annuity. To provide, as suggested by the two Deputies, that the entire fund could be taken in the form of a tax free lump sum is totally contrary to the construction of the relief, as I have just outlined, and is totally unacceptable. It would also be inequitable as compared to employees, whose right to a lump sum of one and a half times a year's salary, taking the normal computation of factors into account, is directly analogous to the one quarter of total funds in the case of the self-employed.
Accordingly, I am not in a position for those reasons to accept Deputy McCreevy's and Coughlan's proposed amendment but I am recommending my own amendment to the House.
Deputy McCreevy should be given marks for trying.
I want to apologise to Deputy Coughlan. Although the Minister referred to her and her name was on the list of amendments sent in, it seems to have disappeared from this amendment. However, the Minister rightly gave her credit.
I welcome what the Minister has done — it would only be fair to do this. I would like to think what Deputy Coughlan and I proposed has inspired him to change the pension rules. The Minister has changed his view on this matter and this is a worthwhile step for him to take. The 15 per cent net relevant earnings rule has lasted for many years. There is more flexibility on this matter in other countries.
This matter refers to the question of people having to provide for their retirement and, like other countries, we will also have to address it. There are two problems in this regard. The first is on the State social welfare side while the other is related to State employees' funded pensions. In the case of ordinary employees and those who run their own businesses, we must further consider giving some type of incentive for people to provide additional amounts on top of the State pension scheme in the future. This must happen in a few years time. Some good proposals and studies have been put forward over the last few years in particular.
We have stuck with the 15 per cent net relevant earnings rule and taking one quarter of the total fund as a lump sum for a long period of time. There are anomalies under the present system for the self-employed. Employees and directors of companies can put as much money as they like into their pension schemes; the company will even get tax relief. However, the self-employed are stuck with the 15 per cent relevant earnings rule.
The older people get, the more money they should be putting into their pension funds and the changes that come about during the next and subsequent years should reflect that. One should be allowed different threshold reliefs as one gets older. For example, if a 45 year old self-employed person has not provided for his retirement, he should be allowed to put in up to 40 per cent of his net relevant earnings for the next 15 years to catch up to the 20 year period when he did nothing about it. There would be no considerable net cost to the State because the amount of money that will go into the pension funds will be spent in other forms of investment. I say this in the full knowledge that when these ideas come forward to the Department of Finance and other Government Departments, they are put before people who have State paid pension schemes ——
For which we pay.
All T.D's pay 6 per cent of their salaries into a pension scheme. I am conscious that State employees do not fund their own pension schemes. When ideas like this come forward, they do not realise or appreciate what is happening in the private sector. I could talk about this topic for ages but I welcome what the Minister has done. I hope to correspond with him on this and I hope our amendment prompted him to do it.
In time, flexibility must be built into the overall pension fund. The present rule is that a person can put one quarter of their net earnings into a pension fund and the rest must go towards buying annuities. People are now living longer and, with the best will in the world, the State will not be able to provide adequate health care facilities for everybody as they get older unless they start providing for it themselves. Some flexibility will have to be built into the pension funds to allow the total amount of money in one's pension fund to be put to other uses. This is now the time to address the topic because it may be too late to do so in the first decade of the next millennium.
I am glad the Minister made the concession that 20 per cent of the net relevant earnings of people aged 55 years of age or upwards can be put into their pension funds. It is a step in the right direction and is the first time such a step has been made since this relief was first introduced. I congratulate the Minister for this and I hope our amendment inspired him to take this action. There may have been considerable resistance to it but I welcome the Minister's courage in going ahead because it will pay off.
I agree with Deputy McCreevy's long term concerns. Another useful flexibility that could be brought into the system is one which would allow people to arrive at the 15 per cent figure over a number of years — an averaging provision. As we all know, incomes can go up or down in trades like architecture or law. It is only fair that one should be able, over a period of years, to achieve a fair equality in a fluctuating income situation.
I welcome this brave step forward. We are all well aware of demographic trends and that there will be great pressure on the State pension scheme in years to come. I hope this is a first step towards what is needed. As Deputy McDowell said, the setting up of an averaging provision should be seriously examined for many professions.
I welcome the response from the Deputies opposite. I am afraid Deputy McCreevy cannot claim credit for inspiring this idea, but he is entitled to share some of the awareness of the need to do something; I do not claim exclusivity in that regard.
A number of matters are driving this issue. We have not yet decided where we need to go; we are only starting. The pattern of employment, the nature of having a job for life and a contract for permanent employment is changing. Many of our generation would have left college and entered into regular full time employment in their early 20s but the present generation is not so doing, and it is not through any choice of theirs. They are getting part time contracts or contracts of a short duration and in many cases will not get into contracted employment of a long duration until their early 30s. Schoolteachers previously went straight into full time employment, permanently in many cases, they are not doing so now until their late 20s. So the nature of the labour market is changing from that point of view and the pensions industry is slow to respond to that in designing products which reflect that variability of employment.
Second, people's earnings can fluctuate. The classical peak of somebody who would build up an expertise and, therefore, a better market price, bigger volume and high earnings usual matched by their outgoings from a family point of view, which would then taper off and become good earnings is also changing quite rapidly. Some people have a number of very good years because they are expert in a particular area. When the area moves on, they are unable to move on with it for whatever reason.
There is a new category which we have not really seen, that is, the sports person. If the show business person is wise, he or she has bought proprietary rights either to their songs or recordings and earnings from which can continue long after the person stops singing or dancing. The same does not apply to football players. I have had the sadness of meeting a professional boxer in my constituency who is no longer young and is now very poor. Once upon a time, he was a big earner but no accountant at that time could have said, "listen, you can build a nest egg for yourself with a lot of this money and some tax assistance". Unfortunately, the person in question is now on social welfare whereas had he had this facility, the accountancy advice and the willingness to so invest, that is, the three aspects combined, then he could have made provision for himself.
It would appear that the labour market is changing irrevocably. We need to have the flexibility to address some of the issues. For Deputy Michael McDowell's information, there is some provision for——
Carry forward?
——but it is pretty limited.
I see this as the first step and it is confined to over 55s. There may be need to look at how somebody, such as a sports person — virtually all sports are turning professional now, including rugby — who knows they will have a high earning capability for four, five or six years, can be sensible with that money.
What the pension funds do with their money is the other side of the equation, that is, how the fund is invested, because there is a large flow of tax-free income into Irish pension funds which amounts to nearly £16 billion. Much of it is being invested properly and legally abroad but we must find new ways to attract it to the Irish domestic economy.
A working group which consists of the Department, the fund managers and the Irish Association of Pension Funds is examining how we can get better retained value in the Irish economy from pension fund investments. We must encourage more people to make greater pension provision and make the taxation system as variable and flexible as the labour market has become with regard to employment. That is what is behind this amendment.
I move amendment No. 16:
In page 19, before section 13, but in Chapter I, to insert the following new section:
14.-As respects the years of assessment 1996-97 and subsequent years of assessment, section 2 of the Finance Act, 1969, is hereby amended, in paragraph (a) of subsection (2), by the substitution of the following subparagraph for subparagraph (i):
(i) who is——
(I) resident in the State and is not resident elsewhere, or
(II) ordinarily resident and domiciled in the State and is not resident elsewhere, and'.".
As the Ministers well knows, anything which would tamper with Mr. Haughey's section 2 of the Finance Act, 1969——
This is a clarification.
——would be severely resisted by me of all Members of the House.
No; this amendment grounds it and makes it more clear. It removes anomalies between domicile and resident and secures the entitlement. It is not a restriction. It is a confirmation that you can be working all around the world singing your heart off and still be domiciled in Ireland.
I am sure Mr. Haughey will be very pleased.
Chairman
I must rule amendment No. 17 in the name of Deputy McCreevy out of order on the basis that it involves a potential charge on the revenue.
Are we taking sections 1 to 12 now and then breaking for lunch?
Chairman
The order is that we conclude those sections not later than 1.30 p.m. but we may continue.
I would prefer if we had the break now.
On a point of information, I wish to inform the committee that I will be absent for about two hours this afternoon and my colleague, Minister Coveney, will be present.