Michael Noonan (Limerick City, Fine Gael)

Approved retirement funds do not come within the scope of the pension levy regime. In common with annuities purchased by pension funds in the name of individuals who have retired, or by individuals from the proceeds of retirement annuity contracts or PRSAs, they are outside the scope of the regime. This is because such annuities and ARFs are not pension funds. An annuity is essentially a pension in payment, that is, a stream of income purchased by a pension fund or an individual from the proceeds of other pension products from a life assurance company for a capital sum generally at the point of a member's or individual's retirement. ARFs are essentially investment options into which the proceeds of certain pension arrangements can be invested, again generally on retirement. They are designed to provide a stream of income to their owners in retirement in the same way as annuities. Approved retirement funds were introduced as an alternative to annuities but with more flexibility and control for the beneficiaries over the funds involved. Unlike the assets of exempt approved pension funds, which have historically been allowed to cumulate on a tax free basis in the fund, the stream of income provided by way of annuity is already subject to a tax at the annuity holder's marginal rate. Drawdowns from ARFs are similarly taxed at the ARF owner's marginal tax rate.

Much of the value of the pension funds is attributable to the rolled up value of the tax relief to which I referred. The temporary levy on pension funds will allow recipients of this ongoing tax relief to make a contribution from their pension funds and other pension arrangements to assist those who are seeking employment.

I emphasise that if drawdowns are not made from the approved retirement fund, a notional or imputed drawdown amounting to 5% of the assets in the ARF is deemed to take place each year. The notional drawdown is liable to a tax at the ARF owner's marginal tax rate. Unlike the pension fund levy, which is temporary, the 5% notional distribution requirement, which was increased from 3% by Deputy Fleming's Government in the previous budget and implemented in the Finance Bill introduced in January of this year, is a permanent imposition.

To explain the position in simple terms, approved retirement funds are held by wealthy people, some of whom do not draw down from their ARF. If an individual does not draw down from his or her ARF, a drawdown of 5% of the fund is imputed each year and tax is applied. As I noted, the previous Government increased the imputed drawdown from 3% to 5% in last year's budget. The tax applied to the imputed drawdown is the marginal rate of the individual who holds the ARF plus the universal social levy and PRSI, giving a tax rate of 52%. When one does the sums - "the math" as Americans say - this amounts to the equivalent of a levy of 2.5% as opposed to the 0.6% levy on pension funds. According to the calculations done in the Department, the taxes applied to ARFs amount to the equivalent of a 2.5% permanent levy rather than one lasting for four years. It is not true, therefore, that holders of ARFs are not subject to tax or the proposed levy.

It is not the case that ARFs are not taxed. They are taxed in a different way and I do not want to mix up two tax systems by adding a levy to the notional drawdown which is taxed at the marginal rate of 52%. If the argument is made that ARFs are not sufficiently taxed, I am prepared to examine the matter in the forthcoming budget. Deputy Fleming's Government raised the notional drawdown from 3% to 5% in the previous budget. If I decide to act in this matter, I will do so by adjusting the existing tax formula.

There is a widely held perception that the option to access approved retirement funds or alternative approved minimum retirement funds on retirement is available to a wealthy chosen few. That is not the case. The previous Government extended the provisions in the Finance Act 2011 to all defined contribution pension arrangements in respect of the main benefits from such arrangements. Members of such schemes and defined benefit schemes always had the ARF option in respect of additional voluntary contributions to pension saving arrangements. Following the extension of this arrangement by the previous Government, it is no longer the exclusive option of the wealthy few.

The arguments advanced by Deputy Fleming have merit. This is, however, a complex matter as evidenced by the Deputy's contribution and my reply. I do not propose to accept the amendment as I am not prepared to apply the levy to approved retirement funds which are taxed in a different manner. I would like to do some further research on the incidence of tax and ARFs across the system before deciding to take further action in respect of taxing ARFs. I give the Deputy a commitment that in the preparation for the December budget and 2012 finance Bill, we will examine this issue to ascertain if any inequalities arise or if these types of schemes will bear more tax.

The Deputy also talked about whether the yield on the levy might increase in future. Money is going in and out of funds all the time, so it is hard to measure yield on pension funds in advance. Having had talks with the pension industry, I know it has many concerns which are wider than the levy. It has other issues about what rate of tax will apply to contributions going forward. I want to have further discussions with the industry about those matters. It would obviously be easier for me to meet some of the pension industry's concerns if the Deputy was correct in saying that there is an additional yield from the levy. I am not making a commitment to that but I am signalling that I am aware of some of the pension industry's concerns. If there is a big additional yield there are plenty of places to put it at present, but I would talk to the pension industry to see if anything can be done to alleviate the concerns they have in areas other than the levy.

The Deputy also mentioned putting a cap on the fund, but the Revenue Commissioners say that is not possible because they are not sure what the yield would be. One would therefore be trying to put a varying cap on a varying amount, but it is not technically possible to do that. I understand what the Deputy is saying, and we do not want to take more than is intended. If we take more than is intended, however, we will carefully examine what we will do with the additional yield, and we might be able to meet some of the concerns of the pension industry in other areas of that industry. I want to make it clear that is not a commitment, but the commitment is that I will examine the possibility.

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