The agreement reached with the EU/IMF in 2011 included implicit commitments to deliver full year savings of €940m in tax relief in the broad pension area in the period to 2014. Budget and Finance Act 2011 contained measures estimated to deliver about €290m of savings in this area (in full year terms). The measures included: removal of employee PRSI relief and the application of the USC to employee pension contributions; removal of employee PRSI relief and the application of the USC to the public service pension-related deduction; reduction by 50% in employer PRSI relief on employee pension contributions; reduction in the annual earnings limit for determining maximum allowable pension contributions for pension purposes from €150,000 to €115,000 per annum; reduction in the maximum allowable pension fund on retirement to €2.3 million from 7 December 2010; increase from 3% to 5% in the annual imputed distribution applying to the value of Approved Retirement Fund (ARF) assets; reduction in the lifetime limit of tax-free retirement lump sums to €200,000 with tax applying to amounts in excess of this amount on a staged basis.
Further to these measures, Finance (No. 2) Act 2011 introduced the pension fund levy which raised over €460 million. When taken with the Budget and Finance Act 2011 measures, this represents an overall full year contribution of €750 million from the pensions sector coming into 2012. In addition, in Budget and Finance Act 2012, further changes were made to the tax arrangements in the pensions area (including the removal of the remaining employer PRSI relief on employee pension contributions and an increase from 5% to 6% in the annual imputed distribution from higher value ARFs). These changes are estimated to yield about €95 million in a full year.
In my Budget 2012 speech, I made the point that while the EU/IMF Programme included a commitment to move to standard rate tax relief on pension contributions I did not propose to do this or to make changes to the existing marginal rate relief at this time. I indicated that further reform of the incentive regime for supplementary pension provision will be required to make the system sustainable and more equitable over the long term and that my Department and the Revenue Commissioners would consult with the various stakeholders on this issue. That process is ongoing.