Dáil Éireann Debate, Tuesday - 7 December 2010
77 Deputy Richard Bruton asked the Minister for Finance whether the pension ceiling of €150,000, soon to be reduced to €115,000, applies to public servants making additional voluntary contributions under pension schemes; if it applies to persons who are in a position to fund a pension through a limited company structure; and if he will make a statement on the matter. [46505/10]
Amharc ar fhreagraThe annual earnings limit which (along with age-related percentage limits) determine the maximum tax-relievable contributions for pension purposes that an individual taxpayer can make in any year is being set at €115,000 for 2011 as compared with the limit of €150,000 for 2010. The annual earnings and age-related percentage limits apply to all contributions made by an employee, whether in the public or private sector, to an occupational pension scheme, including additional voluntary contributions, and to contributions made by individuals to personal pension plan arrangements such as Retirement Annuity Contracts (RACs) and Personal Retirement Savings Accounts (PRSAs). These limits do not apply to employer contributions except in the case of PRSAs.
While contribution-based controls have historically applied in the case of RACs and PRSAs, controls based on maximum allowable benefits apply in the case of occupational pension schemes. The main control that applies in that regard is that the maximum retirement benefit that can be funded for a scheme member cannot exceed two-thirds of the individual's final remuneration. A separate life-time tax relieved pension fund limit (the Standard Fund Threshold or SFT) currently set at €5.4 million is also in place and where the capital value of a two-thirds pension would otherwise exceed that amount a punitive tax charge applies to the excess. The SFT applies regardless of the type of pension fund arrangement and, as mentioned in the National Recovery Plan, the SFT is being reduced. Details of the reduction will be outlined in today's Budget documentation.
78 Deputy Richard Bruton asked the Minister for Finance if the plan to gradually reduce the pension relief from 41% to 20% will have the perverse effect of reducing tax earnings in the short term by encouraging persons to maximise their pension contributions in the coming years; and if he will make a statement on the matter. [46506/10]
Amharc ar fhreagraThe full year saving from reducing income tax relief to the standard rate on contributions by employees and individuals to supplementary pension saving is estimated at about €500 million. As indicated in the National Recovery Plan 2011-2014, this estimate does not take account of the behavioural impact which would be likely to result from a change of this magnitude. The Deputy posits the view, in this regard, that a gradual reduction in the tax relief will encourage individuals to maximise their pension contributions in the coming years thus reducing the savings to the Exchequer. On the other hand, alternative views have been expressed to the effect that as pension savings and the tax relief arrangements for those savings represent deferred income and deferred taxation, the proposed changes in tax relief may discourage pension savings. The argument in this case is that individuals liable to tax at the higher income tax rate, including those on modest incomes, may consider that it would not be in their interest to continue to make contributions at a gradually reducing rate of tax relief if there is a risk that the pension income they will ultimately secure from those contributions might be taxed at a higher rate, notwithstanding that this would not be the outcome for many of those affected. Clearly it is difficult to predict what the behavioural impact of the changes is likely to be.
The National Recovery Plan recognises the potential disincentive effect on supplementary pension provision and for this reason the Government has indicated its willingness to engage with the pensions industry to examine potential alternative approaches to securing the quantum of savings from pension tax expenditures set out in the Plan.
