Mary Harney (Dublin Mid West, Progressive Democrats)

I move:

(1) THAT, as respects the year of assessment 2005 and subsequent years of assessment, Part 30 of the Taxes Consolidation Act 1997 (No. 39 of 1997) be amended by inserting, in Chapter 4, the following after section 790A:

790AA.—(1)(a) In this section—

'administrator', in relation to a relevant pension arrangement, means the person or persons having the management of the arrangement, and in particular, but without prejudice to the generality of the foregoing, references to the administrator of a relevant pension arrangement include—

(i) an administrator, within the meaning of section 770(1),

(ii) a person mentioned in section 784, lawfully carrying on the business of granting annuities on human life, including the person mentioned in section 784(4A)(ii), and

(iii) a PRSA administrator, within the meaning of section 787A(1);

'excess lump sum' has the meaning assigned to it by paragraph (d);

'lump sum limit' means €1,250,000;

'relevant pension arrangement' means any one or more of the following—

(i) a retirement benefits scheme, within the meaning of section 771, for the time being approved by the Revenue Commissioners for the purposes of Chapter 1,

(ii) an annuity contract or a trust scheme or part of a trust scheme for the time being approved by the Revenue Commissioners under section 784,

(iii) a PRSA contract, within the meaning of section 787A, in respect of a PRSA product, within the meaning of that section,

(iv) a qualifying overseas pension plan within the meaning of Chapter 2B,

(v) a public service pension scheme within the meaning of section 1 of the Public Service Superannuation (Miscellaneous Provisions) Act 2004 (No. 7 of 2004),

(vi) a statutory scheme, within the meaning of section 770(1), other than a public service pension scheme referred to in paragraph (v);

'specified date' means 7 December 2005.

(b) (i) For the purposes of this section, a reference to a lump sum is a reference to a lump sum that is paid to an individual under the rules of a relevant pension arrangement by means of commutation of part of a pension or of part of an annuity or otherwise.

(ii) Without prejudice to the generality of subparagraph (i), the reference in that subparagraph to the commutation of part of a pension or of part of an annuity, shall, in a case where an individual opts in accordance with section 772(3A) or, as the case may be, section 784(2A), be construed as a reference to the commutation of part of the pension or, as the case may be, part of the annuity which would, but for the exercise of that option, be payable to the individual.

(c) For the purposes of this section, references to a lump sum that is paid to an individual include references to a lump sum that is obtained by, or given or made available to, an individual and references to a lump sum which was, or has, or had been paid to an individual shall be construed accordingly.

(d) For the purposes of this section, the excess lump sum, if any, in respect of a lump sum that is paid to an individual on or after the specified date (in this paragraph referred to as the 'current lump sum') shall be-

(i) where no other lump sum has been paid to the individual on or after the specified date, the amount by which the current lump sum exceeds the lump sum limit, and

(ii) where before the current lump sum was paid, one or more lump sums had been paid to an individual, on or after the specified date (in this paragraph referred to as 'the earlier lump sum'), then—

(I) where the amount of the earlier lump sum is less than the lump sum limit, the amount by which the aggregate of the amounts of the earlier lump sum and the current lump sum exceeds the lump sum limit, and

(II) where the amount of the earlier lump sum is equal to or greater than the lump sum limit, the amount of the current lump sum.

(e) For the purposes of paragraph (d)—

(i) a lump sum (in this subparagraph referred to as the first-mentioned lump sum) shall be treated as paid before another lump sum (in this subparagraph referred to as the second-mentioned lump sum) if the first-mentioned lump sum is paid before the second-mentioned lump sum on the same day, and

(ii) a lump sum shall not be treated as paid at the same time as one or more other lump sums and, where but for this subparagraph they would be so treated, the individual to whom the lump sums are paid shall decide on the order in which they are to be deemed to be paid.

(2) Subject to subsection (4)—

(a) where a lump sum is paid to an individual on or after the specified date, the excess lump sum, if any, shall be regarded as a payment to the individual of emoluments to which Schedule E applies, and, accordingly, the provisions of Chapter 4 of Part 42 shall apply to any such payment, and

(b) the administrator of a relevant pension arrangement shall deduct tax from the payment at the higher rate for the year of assessment in which the payment is made unless the administrator has received from the Revenue Commissioners a certificate of tax credits and standard rate cut-off point or a tax deduction card for that year in respect of the individual referred to in paragraph (a).

(3) Subsection (2) of section 787G shall apply in respect of any income tax, being income tax deducted from an excess lump sum by virtue of subsection (2) of this section, by an administrator of a relevant pension arrangement of a kind described in paragraph (iii) of the definition of relevant pension arrangement in subsection (1)(a), as it applies to income tax referred to in subsection (2) of section 787G.

(4) Where a lump sum is paid to an individual, on or after the specified date, under the rules of a relevant pension arrangement of a kind described in paragraph (iv) of the definition of relevant pension arrangement in subsection (1)(a), the excess lump sum, if any, shall be charged to tax under Case IV of Schedule D for the year of assessment in which the lump sum is paid to that individual.

(5) Subsections (2) and (4) shall not apply to a lump sum that is paid to a widow or widower, children, dependants or personal representatives of a deceased individual.

(6) Section 781 shall have effect notwithstanding the provisions of this section.".

(2) IT is hereby declared that it is expedient in the public interest that this Resolution shall have statutory effect under the provisions of the Provisional Collection of Taxes Act 1927 (No. 7 of 1927).

The State encourages individuals to supplement the State pension with private pension arrangements by offering generous tax relief on private pension provision. Tax relief is available for contributions by individuals and employers to a pension fund and the growth in the pension fund is also tax exempt. The cost of these reliefs is not insignificant. The Revenue Commissioners have estimated the cost of tax relief for pension funding as being of the order of €3 billion.

Current rules provide for a maximum tax-free pension lump sum of either 1.5 times final remuneration or 25% of the pension fund, depending on the type of pension arrangement involved or the individual's position as a proprietary director. However, to date there has been no absolute monetary cap on the amount of tax-relieved pension savings that can be built up in a pension fund and therefore no absolute cap on the amount that can be taken as a lump sum from a pension, totally tax-free. Tax equity would dictate that there should be a limit on the extent to which the Exchequer should be expected to fund savings towards an individual's retirement through the tax system and, as part of that, towards the provision of a tax-free lump sum.

It is proposed, therefore, to apply an absolute cap of €1,250,000 on the tax-free lump sum from a pension taken on, or after, today. The figure of €1,250,000 derives from 25% of the proposed new maximum tax relievable pension fund of €5 million mentioned in the Budget Statement by the Minister for Finance. While this maximum fund limit may seem high, it needs to be appreciated that the fund required to produce a pension is many multiples of the annual pension that comes into payment. It can be anywhere from 20 to 30 times more, depending on the individual's circumstances.

The lump sum restriction will apply to all pension arrangements, such as occupational pension schemes, retirement annuity contracts, PRSAs, public sector and statutory schemes. The limit will apply both individually to lump sums payable under each of these pension products and in respect of the aggregate of lump sum benefits paid to a single individual from more than one such product. In effect, this means that under the new rules the maximum tax-free lump sum will be the lower of 1.5 times final remuneration, or 25% of the fund, and the new limit of €1,250,000. The restriction will not apply to "death-in-service" type payments made, for example, to a surviving spouse. Lump sums taken prior to budget day will, of course, be unaffected by the change. Any lump sums taken in excess of the new absolute limit will be subject to taxation at the individual's marginal income tax rate. It is tentatively estimated that this measure will generate a saving to the Exchequer in the region of €5 million or more in 2006.

The limit on lump sums of 25% of the new maximum fund of €5 million will have no impact whatsoever for the generality of taxpayers. It is likely that only a small number of high earners, such as higher paid employees and proprietary directors, will be affected. The measure reflects Revenue data indicating that very large tax-free lump sums were being taken by some. I commend the resolution to the House.

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