Seán Barrett (Dún Laoghaire, Fine Gael)

A former Minister for Finance, Charlie McCreevy, during his reign made some changes to the manner in which the self-employed and company directors could contribute towards a pension fund, which were welcome. The changes made allowed a self-employed person on reaching retirement age to take 25% of the fund built up in cash and the balance to be used to purchase an annuity or to be invested in an approved retirement fund from which the person could draw down an income for the remainder of his or her life. The important difference this made from the State's point of view is that under the approved retirement fund scenario the State is guaranteed that all income - even after death an account is taken of those who would inherit the balance of fund - will be taxed by way of PAYE. I will compare that scenario to that of a person who takes out an annuity, for example, a person with a fund of, say, €500,000 at retirement and who takes 25% of it and uses the balance to purchase an annuity or a retirement fund. With an annuity, one would normally get a guarantee for five years, but if one died in the sixth year, one's fund would cease and the money in the fund would belong to the insurance company. With an approved retirement fund, however, if one died in the sixth year, the remainder of the fund would be passed on as part of one's estate but any income or moneys taken from that fund would be taxed by way of PAYE. Therefore, the State is benefiting by people choosing a retirement fund as distinct from an annuity.

Everything was fine until recently. A circular was issued, which stated ARFs are not pension schemes and are instead retirement funds and withdrawals from ARFs are liable for PRSI at Class S. This is an extraordinary change. For example, if a person has an annuity of, say, 20,000 a year, which is his or her income, and another person has the same income from a retirement fund, the person with the retirement fund has to pay PRSI at Class S while the person with the annuity does not pay any PRSI, which is the way it should be. Such people should not have to pay PRSI because they have retired and they are not entitled to any benefits under it. The relevant information states that Class S is paid by self-employed people such as farmers, certain company directors, people who run their own businesses and people with income from investments, rents and maintenance and it lists the benefits to which a person is entitled.

Why was this sudden change made? It is grossly unfair to people who have chosen the route of investing in an ARF, from which they derive the same income they could get from an annuity, that they are to be charged PRSI at the full rate under Class S. Such a deduction is a substantial amount of money to be taken from a retired person who is depending on this payment for his or her income.

I thank the Ceann Comhairle for allowing me to raise this matter. I sincerely hope that the Minister of State has some news for me. I raised it on Committee Stage of the Finance Bill when I was informed it would be investigated. However, I have not heard anything, hence the reason for raising it. It is important to stress that it is in the State's interest that the retirement funds remain in place because we are guaranteed that all of the money that goes into this will come back in PAYE and tax as against the annuity, from which one might only get a few year's tax. I ask that the Minister would take note and arrange to revert to the procedures in place before this circular was issued. There is no justification for a position whereby somebody who is retired and receiving an income from a retirement fund should be asked to pay PRSI class S, which does not entitle them to benefits which could accrue through the payment of class S because they are not in a position to avail of them.

See this speech in context