Dáil Éireann Debate, Tuesday - 5 November 2013
233. Deputy Mary Lou McDonald asked the Minister for Finance if section 18 of the Finance (No. 2) Bill 2013 favours senior public servants; and if this legislative provision skews the rules to ensure high earning public servants are able to keep large pension entitlements amassed to date. [47065/13]
View answer234. Deputy Mary Lou McDonald asked the Minister for Finance if application of section 18 of the Finance (No. 2) Bill 2013 will result in senior public sector employees and high paid private sector employees in a defined benefit pension scheme being excluded from the standard funding threshold until 2054. [47066/13]
View answer235. Deputy Mary Lou McDonald asked the Minister for Finance if section 18 of the Finance (No. 2) Bill 2013 provides for a 70% super tax for private sector pensions that deliver income up to €60,000 per annum. [47067/13]
View answer236. Deputy Mary Lou McDonald asked the Minister for Finance if he will set out pension tax reliefs for public sector and private sector employees noting any difference between the two. [47068/13]
View answerI propose to take Questions Nos. 233 to 236, inclusive, together.
As occurred on the occasion of the introduction of the SFT regime in 2005, and again when the value of the SFT limit was reduced to €2.3m in 2010, the legislation contained in the Finance Bill provides for an individual who has pension rights on 1 January 2014 in excess of the new lower SFT limit of €2m, to claim a Personal Fund Threshold (PFT) from Revenue in order to protect or “grandfather” the value of those rights on that date. This is subject to a maximum PFT of €2.3m, and individuals with PFTs from 2005 or 2010 retain those PFTs.
As before, the pension fund protection or “grandfathering” provisions contained in the legislation reflect legal advice from the Attorney General. However, unlike previous occasions, the grandfathering arrangements this time around had to take cognisance not just of the reduction in the absolute level of the SFT from 1 January 2014, but also of the increase, from that date, in the factors for converting DB pension rights into capital value equivalents. It is for that reason, lest there be any suggestion that the changes had retrospective application, that DB rights accrued up to 1 January 2014 are to be capitalised at the existing valuation factor of 20, both for the purposes of determining if there is a PFT and for the purposes of placing a capital value on those rights at the time of retirement, where that takes place after 1 January 2014.
The changes and grandfathering arrangements outlined above apply, as appropriate, to both DB and defined contribution (DC) pension arrangements in both the private and public sectors. As regards DB pension arrangements, it is irrelevant whether an individual is a higher paid civil servant, a Minister or a highly paid member of a private sector DB scheme; the same SFT rules apply to all such arrangements.
Specifically, the new lower SFT limit will apply to both DC and DB arrangements. Those in DC pension arrangements can seek a PFT from Revenue if the capital value of their arrangements exceeds €2m on 1 January 2014, subject to a maximum PFT of €2.3m. If the value of their DC pension arrangements is below the SFT on 1 January 2014, their funds can continue to accumulate up to €2m through further tax-relieved pension contributions and fund growth, subject to the various annual contribution and earnings limits that apply, without any risk of a chargeable excess arising. Members of DB pension arrangements can equally aspire to a maximum “tax–relieved” fund of €2m. However, in the case of DB pension arrangements, members of such arrangements do not have individual “earmarked” funds (as is the case in DC arrangements) and this, coupled with the fact that pension benefits in such arrangements reflect a “benefit promise” based on salary and service, dictates that the capital value of pension rights arising under such arrangements has to be determined in some other way.
The SFT regime provides (and has always provided) a simple formula for this purpose. The formula essentially requires the annual amount of pension payable to an individual under the arrangement to be multiplied by a valuation or capitalisation factor in order to establish the capital value, both for PFT purposes and for the purposes of establishing the value of DB pension rights at the point of retirement. Up to now, a single valuation factor of 20 has been used for these purposes. In light, however, of the major criticism levelled at the existing SFT regime, that the fixed rate conversion factor of 20:1 was inequitable relative to DC pension arrangements given the higher market annuity rates that those with DC pension arrangements could face if they were to purchase annuities, I have moved to introduce higher age-related factors. This will substantially improve the equity between DC and DB arrangements and as between those who retire at younger ages and those who retire later in life. These are significant changes.
The value of DB pension rights accrued up to 1 January 2014 will, under the grandfathering requirements, be valued for the purposes of the SFT regime at the existing factor of 20. If the capital value so determined exceeds the new lower SFT limit of €2m, such individuals may seek a PFT from Revenue, subject to the overall limit of €2.3m referred to earlier. In such cases, additional pension benefits accrued after 1 January will be valued using the relevant higher age-related factor and will, as for DC arrangements, be fully exposed to chargeable excess tax. Where the capital value of DB rights is less than €2m on 1 January, such individuals may continue to accrue pension rights up to the SFT limit but those additional rights will be valued at the relevant higher age-related factor.
I am not clear on the relevance of the reference to 2054 in the Deputy’s questions. The revised SFT regime applies across the board with effect from 1 January 2014. As outlined above, however, whether, and the extent to which the new SFT regime will have tax consequences for an individual in a DC or DB pension arrangement will depend, among other things, on the value of his/her pension savings or entitlements on 1 January 2014, having regard to the grandfathering requirements and on the extent to which such individuals continue to contribute to their pension arrangements or to accrue additional pension benefits after that date. In any situation where the SFT or an individual’s PFT is exceeded, tax consequences will ensue.
On each occasion that an individual becomes entitled to receive a benefit under a pension arrangement for the first time (called a “benefit crystallisation event” or BCE) they use up part of their SFT or PFT, as the case may be. When the capital value of a BCE, either on its own or when aggregated with earlier BCEs, exceeds the SFT, or an individual’s PFT, the excess is subject to an immediate tax charge of 41%, which has to be paid upfront by the pension fund administrator and recovered from the individual. In addition, when the remainder of the excess is subsequently drawn down as a pension (or, for example, by way of a distribution from an Approved Retirement Fund or vested Personal Retirement Savings Account) it is also subject to tax at the individual’s marginal rate, thus giving rise to an effective income tax rate on a chargeable excess of some 65%, excluding any liability to USC and PRSI. In this way, the SFT regime addresses the problem of pension overfunding and excessive pension accrual by imposing a penal effective tax charge on the value of retirement benefits above set limits when they are drawn down, thus discouraging the building up of large pension funds in the first place or unwinding the tax advantage of such overfunding.
Finally, as regards pension tax reliefs for public sector and private sector employees, the position is that income tax relief is provided on pension contributions made by such employees at their marginal tax rate, subject to an annual earnings cap which operates in conjunction with age-related percentage limits. The maximum amount of annual tax-relieved pension contributions that an employee can make to pension arrangements is restricted on a graduated basis rising from 15% of their annual earnings up to age 30 to 40% of annual earnings at age 60 and over. This is subject to an overall earnings cap of €115,000 per annum above which no relief on pension contributions as a percentage of earnings is given. The relief and the annual tax-relieved contribution limits apply across-the-board to all employees, regardless of whether they work in the public or private sectors.
