The legislation governing the tax treatment of pensions is contained in Part 30 of, and Schedules 23 to 23C to, the Taxes Consolidation Act 1997. In addition, the Revenue Pensions Manual gives general guidance on, among other things, how this legislation is to be applied.
Revenue rules in relation to "Increases of Pensions in Payment" are set out in Chapter 6.8 of the Revenue Pensions Manual. These rules allow a pension in the course of payment to be increased up to the level of the maximum approvable at retirement (after deducting the annuity value of any pension exchanged for a lump sum benefit or allocated to a spouse, civil partner or dependant). For example, depending on service, the maximum pension an individual can receive at normal retirement age is 2/3rds of final remuneration. However, if the rules of the pension scheme allow, an employee may elect to commute part of the pension for a lump sum. Any such election will cause the amount of the pension in payment to be reduced.
Guaranteed increases of a pension in payment under Chapter 6.8 of the Revenue Pensions Manual may be made by using either of the following formulae-
- a fixed increase of not more than 3% per annum compound, or
- an increase linked to the Consumer Price Index, or another similar agreed index.
The purpose of these rules is to maintain the real value of pension payments and consequently these rules allow for the real value of pensions in payment to be maintained over the course of a pensioner’s lifetime. The rules in question have been in existence for over 30 years.
I understand that in the past few days there have been reports to the effect that some pension providers are not "paying out" on what are known as 5pc escalators (that is, a fixed yearly increase of 5% in the amount of pension payments) in cases where the increase had been paid for at the time the pension was purchased.
I am informed by Revenue that it is currently engaging with the pensions industry in order to establish the facts surrounding this issue, the extent of the issue, and whether the practice is in line with pension tax legislation and with published Revenue practice in this area. Revenue’s enquiry will include the issues raised by the Deputy. However, as the enquiry has only started within the last few days, the details the Deputy has requested with regard to the number of individuals affected and the amounts involved is not yet available.
