The 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.
As there is no general requirement for data on the number of persons who are receiving payments of 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 the tax-free retirement lump sums allowed. Based on broad assumptions and an extrapolation of certain available data, it is estimated that the additional tax yield from taxing lump sums of up to €200,000 at 20% in respect of the public service could be about €85 million in a full year. I have no data on which to provide a similar estimate in relation to the private sector. I should point out, however, 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. The option of receiving benefits in the form of pension only 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.