Dáil Éireann Debate, Wednesday - 3 October 2012
61. Deputy Pearse Doherty asked the Minister for Finance the amount of money that would be raised in a full year by reducing the tax exemption for lump sum pension payments to the level of the average industrial wage with the balance taxed at the marginal rates of income tax; and if he will make a statement on the matter. [42329/12]
View answerThe following arrangements currently apply to retirement lump sums paid under pension arrangements approved by the Revenue Commissioners. Lump sum amounts up to €200,000 are paid free of tax. They are also paid free of USC. The portion of a lump sum between €200,001 and €575,000 is taxed on a ring-fenced basis at 20%. This means that no tax credits or other tax reliefs can be set against this portion of the lump sum. No USC is chargeable. Any amount of a lump sum in excess of €575,000 is taxed at the individual’s marginal rate of tax (credits and other tax reliefs are available). In this instance, USC is chargeable on the excess. These amounts are lifetime amounts with prior lump sums aggregating with later lump sums. Based on certain assumptions the average annual industrial wage is estimated at about €31,000 in 2011. As there is no general requirement for data on retirement lump sums of less than €200,000 to be returned to my Department or to the Revenue Commissioners, I am not in a position to provide definitive figures on the Exchequer impact of reducing the tax-free retirement lump sum amount from €200,000 to €31,000. Furthermore, details of the marginal rate of income tax an individual would pay on a taxable lump sum pension payment in the scenario outlined in the Deputy’s question are not available.
As an exercise that might provide some indication of the scale of the savings involved, it is estimated that just over 268,000 individuals in the public service would be on salaries of over €20,750 and less than €133,500 which, under existing pension scheme arrangements generally applying across the public service, would deliver retirement lump sums of between €31,000 and €200,000. If it is assumed that these individuals would retire in line with retirement trends from the public service in a normal year (about 2.5%), then the additional tax yield from taxing lump sums in excess of €31,000 at 20% could be approximately €100 million in a full year. In this example the additional tax yield from taxing lump sum payments in excess of €31,000 at 41% could be approximately €200 million.
I have no data on which to provide a similar estimate in relation to the private sector. I should point out that one significant difference between public sector and private sector pension schemes is that private sector schemes invariably allow scheme members the option of commuting part of their pension fund for a tax-free lump sum. This option is not available to members of public sector schemes. Depending on the impact of any tax charge on retirement lump sums, the option to commute part of a pension fund may no longer be exercised by private sector pension scheme members or may be exercised in a manner that reduces the value of the lump sum taken to minimise or avoid any immediate tax charge.
