Paschal Donohoe (Dublin Central, Fine Gael) | Oireachtas source

In terms of the tax treatment of supplementary pensions, Ireland operates an exempt, exempt, tax system, similar to the majority of other OECD countries. This means that pensions are exempt from income tax and pension fund gains are exempt from income tax but income from pension drawdown is taxed. In my view, we should seek to make overall progress in the area of pensions provision in a manner that is well considered and comprehensive. That broad approach is what has informed recent action in this area, including the roadmap for pensions reform 2018-2023 which, in turn, led to the work of the interdepartmental pensions reform and taxation group and the separate work of the Pensions Commission.

As the committee may be aware, the interdepartmental group was tasked with a number of actions relating to the pensions roadmap, including proposals aimed at simplifying and harmonising the supplementary pension landscape and an assessment of the cost of State support for pension savings. The resultant report was published on my Department’s website in November 2020.

As regards the Exchequer cost of State support for supplementary pensions, the report noted that, in common with most developed countries, fiscal support for private pension saving exists in Ireland. This support is provided by way of tax relief, with its inclusion in the Irish tax code predating the foundation of the State. It observed that, in providing incentives, states are motivated by the policy objective of increasing aggregate savings or encouraging citizens to provide for their retirement by deferring a sufficient amount of income and consumption today to provide for their later years. This is based on an assumption that individuals require an incentive to lock up savings until they retire, given that alternative saving vehicles allow ongoing access.

The report noted that the tax treatment of pensions represents one of the largest tax expenditures. It is challenging to capture the exact data needed to comprehensively analysis the varying forms of pension relief. However, that said, where such data are available on the Exchequer cost of tax relief for pensions, these data are publicly available and included in Revenue’s publication on the cost of tax expenditures. The latest data available is in respect of 2018.

With regard to a distributional analysis, I am advised by Revenue that prior to the introduction of real-time reporting on 1 January 2019, pension contributions were reported to Revenue at an employer level rather than an employee level. I am further advised that data from tax returns of PAYE and self-assessed individuals for 2019 are still being processed and consolidated by Revenue. Once this work is completed, analysis can be carried out, reconciling taxpayers to a taxpayer unit basis and accounting for all income sources and pension contributions made. This analysis, which is necessary to estimate a cost associated with employee pension contributions at a taxpayer unit level, is anticipated to be completed in the coming months.

Overall, the policy objective for tax relief for pensions is to encourage individuals to save for retirement, to meet a target level of supplementary pension coverage and an income replacement target, and to assist in preventing an over-reliance on State support for people in later life.

This is particularly important due to the future demographic pressures facing the State. On this, the science is clear. The fall in the birth rate in recent decades means there will be fewer and fewer people joining the workforce while increases in longevity mean that more and more will be relying on pension payments. This shift in the demographic structure of the population will put increasing pressure on the State pension system and pose a challenge to the sustainability of our public finances.

The Pensions Commission produced a report, the Report of the Commission on Pensions, in October. It lays out the challenges that we face and why the need for sustainability is so important.

Having regard to everything I have just detailed and the published data currently available in respect of the cost of pensions tax relief, with a further publication imminent, I do not believe that a further report is necessary for now. For this reason, I do not propose to accept the amendment.