Paschal Donohoe (Dublin Central, Fine Gael)

I thank the Deputies. I will speak to both amendments as they both relate to the standard fund threshold, which sets the maximum amount for tax-relieved pension at retirement.

Where a pension exceeds the SFT, the excess over the threshold is subject to an upfront, ring-fenced income tax charge at 40%. The SFT forms part of the taxation framework for pensions that applies to all pensions in the public and private sector. It has remained unchanged since 2014. In that context, it is timely to consider the review of it.

In December 2023 an independent expert, Dr. Donal de Buitléir, was appointed to carry out a targeted review of the SFT regime. The report makes a number of recommendations to modernise and update the operation of the SFT, which reflects developments in the pensions landscape and the impact of wage growth since 2014. It considers the level of the SFT, the rate of tax payable and the method of valuing benefits for the application of the SFT regime and makes significant recommendations for reform in these areas. It also makes several recommendations regarding the operation of the regime in relation to encashment, pension adjustment orders and the reporting of chargeable excess tax, CET, as well as for changes in the methodology for estimating the cost of pension tax expenditures. In relation to the level of the SFT, the report recommends that the current value of the SFT be increased in line with the increase in the earnings, hours and employment costs surveys, with most recent data suggesting a new level of €2.8 million. It also recommends ongoing automatic adjustment of the SFT in line with future earnings increases. In addition, the report proposes that the link between the SFT and the amount of a lump sum that is taxable at the standard rate of tax should be removed.

The Finance Act 2024 modified three specified aspects of the regime, the first two of which were designed to implement the recommendations in relation the level of the SFT while the third was a technical change. The first revision provided for increases in the SFT to €2.2 million in 2026, €2.4 million in 2027, €2.6 million in 2028 and €2.8 million in 2029. After that, the level of the SFT will increase in line with earnings growth between 2025 and 2029. From 2031 there will be an automatic adjustment in line with earnings growth. In a year which shows a decrease in average earnings, the SFT will remain the same as the previous year. The first increase in the level of the SFT will be for the year of assessment 2026, when the SFT will be raised to €2.2 million.

The objective of these reforms was to put in place a more equitable treatment between public and private sector pensions and to ensure that the SFT regime reflects wage growth since it was last reviewed in 2014. It is important to acknowledge that the CET is an additional tax levied on top of the normal income tax, USC and possibly PRSI that apply when a pension is drawn down.

The second revision provided that the threshold for the higher rate of taxation to apply to a pension lump sum is €500,000 rather than a proportion of the standard fund threshold. This means that the threshold will not increase as the level of the SFT rises.

Finally, Finance Act 2024 addressed an anomaly with respect to the application of the SFT where an individual has more than one PRSA, to put beyond doubt that such transfers from a PRSA which is not a vested PRSA, to a vested PRSA, are considered a benefit crystallisation event, BCE, and will, therefore, be subject to the SFT.

Deputy Brennan has proposed that the current table of age-related valuation factors in schedule 23B to the Taxes Consolidation Act be replaced with a table of new and lower valuation factors which correspond to those proposed in Dr. de Buitléir’s report. As was outlined by the Minister for Finance at the time the report was published in September 2024, the Government agreed that an independent evaluation of the proposed valuation factors which apply to defined benefit pensions be carried out by the Society of Actuaries, SOA. The SOA subsequently undertook this independent evaluation and indicated that the proposed valuation factors were appropriate.

However, as I said before, budgets are about choices. As indicated on budget day, the purpose of budget 2026 is to boost our economic resilience and to keep our public finances safe. In this context, the scope for significant personal tax changes is limited, thus explaining why from an equity perspective I am not bringing forward further changes to the SFT regime in this year’s Finance Bill. I am open to considering the future application of the recommendations. In this regard, an implementation group has been convened to consider further Dr. de Buitléir’s report. It is chaired by the Department of Finance with representatives from Revenue Commissioners, the Department of Justice, Home Affairs and Migration, the Department of Social Protection and the Department of public expenditure. The group has commenced its examination of the recommendations and will report in quarter 2 of 2026. At that point, I will consider further the impact of the recommendations with a view to deciding how they can best be addressed in the context of broader considerations. Given the work of the interdepartmental evaluation group and taking into consideration that Finance Act 2024 provided for a graduated increase in the SFT which will commence in 2026, I am not in a position to accept this recommendation.

Deputies Doherty and Farrell then proposed that I prepare a report on the costs of increasing the SFT to €2.8 million and that it be prepared and laid before the Dáil. There are difficulties in relation to the costing of changes to the SFT. Information on the numbers and values of individual pension funds or on individual accrued benefits in pension schemes are not generally required to be supplied to the Revenue Commissioners. There is, therefore, no underlying data or methodology available to Revenue on which to base reliable estimates of the full cost that would arise specifically from a change to the SFT. However, in the context of the examination of the SFT and my intention to implement the recommendations in relation to increasing the SFT, my officials examined the issue of examining the impact of changes to the SFT using only the available information about previous payments of chargeable excess tax. Indicative estimated costs were prepared and they were shared with Deputy Doherty and others in the House in response to parliamentary questions on this matter, most recently on 21 October. Using this model, the indicative estimated costing of increasing the standard fund threshold proposed by the Government is as follows: for 2026, an indicative cost of €10.5 million; for 2027 an indicative cost of €14.5 million; the following year an indicative cost of €8 million; and for 2029 an indicative cost of €5 million.

While the change in the SFT for 2030 is not set and will depend on the change in earnings over the period 2025 to 2029, an estimated cost of €0.5 million has been included in the costing for this change. However, I accept that these estimated costs do not take account of behavioural changes and are based on a reduction of the current CET yield. Any assessment of behavioural changes would be speculative but I accept they are there. I am not convinced of the value of doing such an exercise.

I have also shared with the House through responses to parliamentary questions the fact that we do not have exact figures regarding the number of individuals who have paid CET. In addition, the data that is available is currently being verified and it is not possible to provide exact figures for the numbers who have paid CET and the amounts paid. I would note that the information that is available indicates that there were over 200 returns of CET through RevPay in 2023. However, I am advised that pension administrators sometimes make bulk payments and therefore some payments may relate to more than one taxpayer. This figure would also not include situations where the retirement benefit exceeded the SFT in those years but where the chargeable excess tax due was reduced to nil by being offset against tax paid on a retirement lump sum. The amount of CET reported in 2023 was €39.6 million.

It is also not possible to provide an estimate of the number of people that will benefit from the increases in the SFT.

The numbers of the SFT mean there are many variables that affect the value of retirement benefits when it is being compared to the SFT, and the valuation will depend on the individual's circumstances. Individuals can choose to retire at a range of ages and for a variety of reasons, therefore it is not possible to forecast how many will retire in 2029, with an SFT of between €2 million and €2.8 million, and not possible to provide a figure regarding the number of taxpayers who might benefit from this change, which is why I believe a report at this point would not be useful and which is why I will not accept the amendment. I should indicate that in any changes to this area it is not possible to ring-fence the SFT to certain workers or cohorts. I have examined that matter and any changes in this area would apply to all workers who are in this situation.