Seán Barrett (Dún Laoghaire, Fine Gael)
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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.

Martin Mansergh (Tipperary South, Fianna Fail)
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I thank Deputy Barrett for raising this issue. Approved retirement funds, ARFs, are funds managed by a qualifying fund manager into which an individual can invest the proceeds of their pension fund when they retire. Income and gains of an ARF are exempt from tax and social insurance within the fund. Any amounts withdrawn from an ARF are referred to as a distribution, which is treated as income from an employment. It is subject to income tax and the fund manager must operate PAYE and PRSI as appropriate.

Approved retirement funds are not pension schemes and are instead treated as assets. The account owner has control over when and how much they can withdraw at any time, unlike, for example, an occupational pension where a person receives a defined amount of money on a weekly or monthly basis. On this basis, withdrawals from approved retirement funds are liable for PRSI at class S.

Pension annuities provide a secure means of converting savings into pension income and avoid the danger that pensioners could exhaust their pension savings in their lifetime. In general, PRSI is not due on any payment received by way of a pension income. Retirement annuity contracts are long-term savings accounts designed to assist individuals to save for their retirement. Employees who are not members of a pension scheme, or individuals who are self-employed, may claim tax relief against earned income. Annuities payable under a retirement annuity contract are, therefore, regarded as excepted emoluments for PRSI purposes.

There has been no recent change to the legislation in this area. Rather, the Department of Social Protection recently clarified to relevant qualifying fund managers that distributions from approved retirement funds fall within the charge to PRSI. As Deputies will be aware, current pensions policy is being developed under the national pensions framework. The aim of the framework is to deliver security, equity, choice and clarity for the individual, the employer and the State. It also aims to increase pension coverage, particularly among low to middle income groups, and to ensure that State support for pensions is equitable and sustainable. The framework identifies the need for incentives to be targeted to strike a balance between encouraging pension coverage and considerations of equity and cost effectiveness. In this context, a review of the interaction between social insurance and pension structures is being undertaken.