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Pension Provisions

Dáil Éireann Debate, Tuesday - 3 December 2013

Tuesday, 3 December 2013

Questions (82, 83)

Noel Grealish

Question:

82. Deputy Noel Grealish asked the Minister for Finance the reason the new valuation basis for pensions is not applied to all pensions rather than just those which are payable post 1 January 2014; the reason that particular date was chosen; and if he will make a statement on the matter. [51796/13]

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Noel Grealish

Question:

83. Deputy Noel Grealish asked the Minister for Finance the tax saving to the State if the €60,000 cap on pensions was applied to all pensions rather than excluding those pre-31 December, 2013; and if he will make a statement on the matter. [51797/13]

View answer

Written answers

I propose to take Questions Nos. 82 and 83 together.

Regarding the start date for the changes I am making to the SFT regime, I indicated in my 2013 Budget Statement that changes would be introduced in 2014 to give effect to the commitment in the Programme for Government to cap taxpayers’ subsidies for pension schemes that deliver pension income of more than €60,000 per annum. 1 January is a natural starting point for the changes, coinciding as it does with the start of the 2014 tax year.

I should clarify, in the first instance, that the change to age-related valuation factors used to place a value on Defined Benefit pension rights for the purpose of the SFT regime apply to pension benefits accrued after 1 January 2014 and not by reference to the value of pensions paid after that date. The application of the new age-related valuation factors to Defined Benefit pension rights accrued after 1 January 2014, reflects legal advice which I received to the effect that pension savings and pension rights accrued up to that date should be protected. On foot of that advice, and 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 (the level of the current SFT) and individuals with PFTs from 2005 or 2010 retain those PFTs. The ability to claim a PFT applies to affected individuals with Defined Benefit or Defined Contribution pension rights or who have a combination of both.

However, unlike previous occasions, the protection or “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 from €2.3m to €2m, but also of the increase, from that date, in the valuation factors used for converting Defined Benefit pension rights into capital value equivalents for the purposes of the SFT regime. It is for that reason, lest there be any suggestion that the changes had retrospective application, that such 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 placing a capital value on those rights at the time of retirement, where that takes place after 1 January 2014.

The estimated yield of €120 million from the proposed changes to the SFT regime is based to a significant degree on assumed behavioural impacts. The yield is expected to arise in two ways. Firstly and mainly, 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 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. Given the range of variable assumptions on which the estimate of the yield from the current changes is based, I do not consider that a reliable estimate of yield could be provided on foot of the hypothetical assumption contained in the question.

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