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Tax Code

Dáil Éireann Debate, Tuesday - 5 November 2013

Tuesday, 5 November 2013

Questions (248, 249, 250)

Róisín Shortall

Question:

248. Deputy Róisín Shortall asked the Minister for Finance the estimated number of persons who will be affected by the change to the SFT regime in 2014; and the basis for the estimate of a yield of €120 million from this measure. [47131/13]

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Róisín Shortall

Question:

249. Deputy Róisín Shortall asked the Minister for Finance the impact of the proposed budget 2014 changes to pension tax relief for persons who have already achieved a pension pot of €2 million; and if he will confirm that no further tax relief will apply to additional pension contributions in these cases. [47132/13]

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Róisín Shortall

Question:

250. Deputy Róisín Shortall asked the Minister for Finance the reason he chose to change the SFT rather than capping pension tax relief in view of the fact that the approach he proposes will discriminate in favour of high earning public servants; his views from the point of view of tax treatment; and if he will make a statement on the matter. [47133/13]

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Written answers

I propose to take Questions Nos. 248 to 250, inclusive, together.

It is difficult to be definitive about the number of individuals that may be affected by the changes to the Standard Fund Threshold (SFT) regime. Among other reasons, this is because the changes are likely to have both direct impacts and indirect behavioural impacts. The direct impacts will be on individuals whose pension savings or entitlements will be in excess of the reduced SFT on 1 January 2014 (and who may seek a Personal Fund Threshold (PFT)) and those whose pension savings or entitlements may be below the threshold on that date but, with future contributions or accruals, may exceed the threshold in time. For both of these groups where the SFT or PFT is exceeded at the point of retirement, chargeable excess tax will arise. However, the changes are also likely to mean that individuals (generally in the private sector) who may otherwise be affected by the amendments to the SFT, and who have the flexibility to do so, may change behaviour and opt out of additional pension saving or pension accrual, in circumstances where they can obtain compensatory payments from their employer, in order to avoid breaching the SFT or their PFT. Overall, the changes could potentially impact, both directly and indirectly, on up to 10,000 individuals in the short to medium term.

The estimated yield from the changes to the SFT regime is expected to arise in two main ways. Firstly, from the cessation of tax-relieved contributions to pension saving from those employees and individuals in the private sector affected in the short to medium term by the changes and secondly by the conversion, to some degree, of employer pension contributions and pension promises in respect of those employed individuals into compensatory current taxable remuneration. In addition, some of the yield will also arise from affected individuals who remain in pension arrangements and continue to contribute to them or accrue benefits under them, and will take the form of chargeable excess tax payable at retirement where their SFT or Personal Fund Threshold (PFT), as appropriate, is exceeded. This increased tax will effectively claw back any tax subsidy which helped fund the excess over the SFT or PFT.

An individual who has pension savings or pension rights on 1 January 2014 in excess of the new lower SFT limit of €2 million may 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 (i.e. the value of the current SFT). For such an individual, any further pension contributions or pension accrual will give rise to a chargeable excess in due course. If the value of an individual’s pension arrangements is below the SFT on 1 January 2014, they can continue to accumulate up to €2 million through further tax-relieved pension contributions and/or pension accrual (subject to the various annual pension contribution and earnings limits that apply) without any risk of a chargeable excess arising.

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.

The changes and pension fund protection arrangements outlined above apply, as appropriate, to both defined benefit (DB) and defined contribution (DC) pension arrangements in both the private and public sectors. In that regard, I reject the intimation in one of the questions that the approach of changing the SFT regime was chosen because it discriminated in favour of high earning public servants. Various alternative options for restricting taxpayer subsidies to large pensions, including input controls on contributions, were considered and rejected. While not perfect, output controls such as the existing maximum allowable pension fund at retirement for tax purposes (the SFT) are arguably just as effective at capping taxpayer subsidies and curbing excessive tax relieved pension savings. Moreover, the SFT approach has the added advantage of amending a system that is already in place and familiar to pension and tax practitioners alike and while the changes I am making will unavoidably add complexity to the existing system, it is in my view much less complicated than what a further separate input control approach would have involved.

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