Dáil debates
Tuesday, 7 December 2010
Financial Resolution No. 9: Income Tax
(b) the amount of €200,000 referred to in subparagraph (a) of this paragraph shall be reduced by an amount equal to the aggregate amounts exempted from income tax, including any deduction in computing the charge to income tax under paragraph 6 of Schedule 3 to that Act, in respect of all payments to which section 123 of that Act applied which were paid before or at the same time as the payment of the lump sum,
(d) where 2 or more payments in respect of which tax is chargeable by virtue of section 123 of that Act are made to or in respect of the same person in respect of the same office or employment, or in respect of different offices or employments, for the purposes of this Resolution this paragraph shall apply as if those payments were a single payment of an amount equal to that aggregate amount and the provisions of subparagraph (a) of this paragraph shall apply to that amount accordingly.
I propose to speak on Financial Resolutions Nos. 5 to 8 together as they relate to pensions and on Financial Resolution No. 9, which concerns a related area, the taxation of tax-free termination lump sums. Against the very difficult and challenging budgetary situation facing this country, and as outlined in the national recovery plan, the tax base must be broadened and tax expenditure must be curtailed or abolished. Given the continuing very significant costs of pensions tax reliefs, such reliefs cannot escape attention in that regard. The national recovery plan specifically mentioned a number of the pension-related changes the Government has committed to making, in 2011 and over the three remaining periods of the plan. The changes announced in the Budget Statement today deliver on the commitment as regards 2011.
Apart from contributing to curbing the overall tax expenditure, these changes will bring further equity to the system by impacting, for the most part, on higher earners. Deputies will recall that the Commission on Taxation recommended that a pension lump sum taken on retirement should be tax free up to €200,000 and taxed at the standard rate of income tax on any balance above that amount. The commission also recommended that the correlation between the maximum tax relieved pension fund that can be built up by an individual, known as the standard fund threshold, and the annual earnings limit for pension contribution purposes should be maintained. This correlation has been broken in recent years as the earning limits fell from €275,000 in 2008 to €150,000 in 2009, with no corresponding contraction in the standard fund threshold. The commission recommended that ex gratia termination lump sums should also be tax free up to €200,000 and that any amount in excess of this should be taxed.
As flagged in the national recovery plan and as specified in the budget speech today, it has been decided to act on the commission's recommendations. A further reduction in the earning limits for pension contribution purposes is being made and the rate at which the national distribution for approved retirement funds is to be calculated is to be increased. The elimination of employee PRSI and pension contributions in 2011 and the changes to employer PRSI relief on employee pension contributions, which were announced today, will be dealt with in the context of legislation with which my colleague the Minister for Social Protection will deal. The Financial Resolutions before us give legislative effect, therefore, to the following budget measures pending the passing into law of the finance Bill of 2011.
Financial Resolution No. 5 provides for the reduction in the earnings limit which, in conjunction with age-related percentage limits, governs the maximum amount of tax relieved contributions an individual can make in any one year to pension products. The limit is being reduced from €150,000 in the current year to €115,000 for 2011. Deputies may be aware that the pension tax legislation provides for an individual who pays a pension contribution after the end of a tax year but on or before the return filing date for that tax year to elect to have the contribution treated as if paid in the earlier year. Clearly, with the reduction of the earning limits for 2011, individuals may well be tempted to retrospectively maximise their tax relief for 2010 where they have not done so already by allocating contributions made next year to 2010. This would give rise to significant tax refunds in 2011 that we simply cannot afford. Accordingly, the resolution seeks to limit such exposure by deeming the earning limits for this year to be €115,000 as well as for the purpose of such elections.
Financial Resolution No. 6 provides for the reduction from €5.4 million to €2.3 million, with effect from today, in the limit on the maximum tax relieved pension fund that can be built up by an individual. This is known as the standard fund threshold. Individuals with pension rights in excess of this new lower standard fund threshold on budget day will be able to protect the capital value of those rights by claiming a personal fund threshold. Such transitional measures were also recommended by the Commission on Taxation to deal with circumstances where an individual's pension rights had already exceeded any revised lower limit. The legal advice to the Government was to the effect that the absence of such grandfathering arrangements, which also applied when the standard fund thresholds were first introduced on 7 December 2005, would be difficult to defend against constitutional and legal challenges. The personal fund threshold will be calculated on the aggregate of the capital value of pension benefits to which the individual has already become entitled since 7 December 2005 plus the capital value on budget day of any uncrystallised pension rights that the individual has - in other words, pension rights that the individual is building up but to which he has not yet become entitled. Where this amount exceeds the standard fund threshold of €2.3 million, that higher amount will be the individual's personal fund threshold.
However, that is subject to not exceeding the existing standard fund threshold of €5.4 million which would have been the maximum tax relief pension fund such individuals would have been able to build up before today. As before, a personal fund threshold will have to be claimed from the Revenue Commissioners by way of a notification and certification procedure. An individual who already has a personal fund threshold under the old regime will be able to retain it.
The resolution also ensures that the standard capitalisation factor for use in determining the value of defined benefit pension rights, for the purposes of estimating an individual's personal fund threshold and for the purposes of valuing pension rights when eventually drawn down, is to be 20 as before.
Financial Resolution No. 7 provides for an increase in the annual notional distribution for approved retirement funds which is calculated on the value of assets in an approved retirement fund as of 31 December each year. The amount of the notional distribution will be 5% of the value as compared to 3% as currently provided for. This new rate will apply to asset values at 31 December 2010.
Financial Resolution No. 8 provides for the taxation of pension lump sums above €200,000 with effect from 1 January next year. This resolution replaces the existing provision in the Taxes Consolidation Act of 1997 which already places a lifetime limit on the amount of tax free pension lump sum that can be taken by an individual from 7 December 2005. This limit was set at 25% of the old standard fund threshold and amounts to €1.3 million.
Under the new approach the maximum lifetime pension tax free sum will be €200,000 as from 1 January 2011. Amounts in excess of this tax free limit will be subject to tax in two stages. The portion between €200,000 and €575,000 will be taxed at the standard rate of 20% while any portion above that will be taxed at the individual's marginal rate of tax. The figure of €575,000 represents 25% of the new lower standard fund threshold of €2.3 million mentioned earlier and retains the link to the old approach. The standard rate charges effectively ring-fence to ensure that no reliefs, allowances or deductions may be set or made against that portion of a lump sum subject to that charge.
It should be appreciated that tax free retirement lump sums taken on or after 7 December 2005 when the original limit was introduced will count towards using up the new tax free amount. In other words, if an individual has already taken tax free retirement lump sums of €200,000 or more since 7 December 2005, any further retirement lump sum paid to the individual on or after 1 January 2011 will be taxable. There is no question of those individuals somehow getting an additional tax free amount. These earlier lump sums will also count towards determining how much of a lump sum paid on or after 1 January 2011 is to be charged at the standard or marginal rate as appropriate.
It is also important to note that this is a lifetime limit and therefore it will apply to a single lump sum or where an individual is in receipt of lump sums from more than one pension product to the aggregate of those lump sums. The restriction applies to all pension arrangements including occupational pension schemes, retirement annuity contracts, PRSAs, public sector and statutory schemes. As before, there are certain exclusions from the pension lump sum tax charge. It will not apply, for example, to lump sum death-in-service benefits paid to widows.
Resolution No. 9 sets out the basis for the imposition of a lifetime limit on exempt ex gratia lump sum payments made primarily in respect of termination of employment as recommended by the Commission on Taxation. With effect from 1 January 2011, where an individual is in receipt of an ex gratia payment from their employer the aggregate amount which can be paid tax free will be €200,000, taking into consideration the tax free elements of any previous payment that individual had received. This restriction will have no relevance to the majority of employees. Its impact will primarily be confined to those in receipt of large ex gratia payments. I commend the resolutions to the House.
8:00 am
Damien English (Meath West, Fine Gael)
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I again register our objection to taking four or five resolutions together. It is not necessary to do that and it means that when we are in a position to agree on something with the Government, as with some of these, we cannot vote for it because we do not agree with lumping the resolutions together.
We have a serious problem with Resolution No. 5, which I will address, but I want to first comment on Resolutions Nos. 8 and 9. While the tax changes to the lump sum are welcome, most people have a problem with the lump sum itself, especially when they see the figures being paid out to retiring Ministers and various top civil servants. That is something not addressed in this budget bar through the tax system. The wrong message is going out on that but that is a separate discussion we can have during the debate on the entire budget. People become very annoyed when they see those lump sums being paid out at a time when they are struggling.
As a party we have a concern with Resolution No. 5. We proposed many changes to the pensions area in our alternative budget published last Friday. Some of them are very good but we tried to tackle the overall pension fund in a different way to individual people contributing into it. My concern is that this measure limits the amount of money a person can put into his or her pension fund in certain years. Fine Gael's proposal was to allow a person accumulate a fund that will give him or her an annual maximum pension of approximately €60,000 a year. We would discourage above that figure but we said we would facilitate a person accumulating enough of a fund to have a pension of €60,000 a year. That means that if a person is late starting to contribute to a fund he or she might not get a chance to accumulate enough money for that payment. The Government is preventing that.
In the current climate it is quite common for self-employed people to stop paying into their pension fund for several years because they just cannot make the contributions. They cannot even pay a wage, other than cashing in other investments and so on to survive. In a few years time when Fine Gael is in government, the country has recovered and those in self-employment have a chance to earn more money, they will be discouraged from putting money into their pension fund to pay out a pension to which they are entitled based on their years of work. This measure is unfair in that regard. It is penalising the wrong person.
The Government must realise the times in which we now live. Not everybody in business made money in the good times but certainly in recent years many people in business could not pay into their pension fund. They should be allowed to pay extra in years to come but they will not be able to do that because this measure will restrict them in that it will not be worth their while. It is a pity the Minister has lumped these resolutions together because we will oppose this one.
Róisín Shortall (Dublin North West, Labour)
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I welcome the fact that finally the Government has recognised a need to do something on the pensions front. For years it has been in denial about the fact that our pensions system was more about facilitating tax avoidance than encouraging pension provision. The way in which it operates, as the Minister and her officials will be aware, has been inequitable. That is the reality. A total of €3 billion has been spent per year on tax relief on pensions and the vast bulk of that has gone to the top 20% of earners.
Side by side with that outrage, as I would regard it, almost 50% of workers do not have any private pension provision and therefore as a policy it was ineffective while the manner in which it operated was inequitable. I welcome these first steps in implementing reform in this area, but overall the Minister is not going anywhere near far enough.
The Labour Party, in its pension proposals, has estimated that it would be possible to save a minimum of €400 million in the coming year, and possibly up to €600 million, if there was a proper root and branch reform of the pensions tax relief system. That could be done in a way that would not impact on people with incomes of up to €100,000. We could ensure that there was still a major incentive for people on middle and modest incomes to make pension provision but, unfortunately, the Government has chosen to take a different route.
I find it extraordinary that in each of these five measures the Minister has a costing and a figure for each one of those. The Labour Party is extremely concerned that we have spent the past three years trying to get costings from the Minister for Finance, the Department of Finance and the Revenue Commissioners for different aspects of our pension provision and on every single occasion we have been refused and told that no figures were available. The reply to my last parliamentary question a few weeks ago denied that figures were available anywhere. I was told the Department was now approaching the pensions industry to try to get some estimates.
The Minister was not in a position to provide figures to the Labour Party in spite of the fact that a service was offered that she would cost our pre-budget proposals, and today she could come up with figures for each one of those measures. How did that come about? If she was unable to provide those figures last week and was unable to provide them over the past three years when we have been asking for them, can we believe these figures now? Are they accurate and how is it that the Government can just come up with them suddenly?
In respect of the individual proposals, we will not oppose the annual earnings limit but it could have been done in a much better way. We should take our example from what is happening in the UK where a cap is being introduced on the total amount of tax relief that can be claimed, whether the contribution is made by the employee or the employer. That is the weakness in these proposals and in the proposals signalled in the four year plan. All the Minister is talking about doing is limiting the employee contributions. The really big money, as the Minister well knows, is in the employer contributions and it makes no sense to exclude those from any new limits. Let us stop codding ourselves on what is happening in the pensions area. Why does the Government continue to facilitate persons in jobs where their employers can fund their pensions generously and what is the rationale for not applying the same kind of limits to employer contributions as employee contributions?
On Financial Resolution No. 6, the maximum allowable pension funds, the Minister proposes to reduce the maximum standard fund threshold from the current €5.4 million to €2.3 million. It is a move in the right direction, but why has the Minister not gone further? A fund of €2.3 million will entitle a person to a pension of €100,000. I see no justification for taxpayers subsidising pensions for persons who end up with a pension of €100,000 at a time when the Minister introduced the universal social charge, which will impose additional taxes on persons on modest pensions. Pensioners with an income of under €40,000 will now be hit for an additional €2,000 through the universal charge and through the tax changes, and yet the Minister is saying it is acceptable that somebody would be subsidised to the tune of the top rate of tax relief to enable him or her to have a pension of €100,000. There is no justification or rationale for that. The Labour Party favours reducing the total fund to €1.6 million.
Financial Resolution No. 7 is a reasonable proposal and we do not have a difficulty with that. On Financial Resolutions Nos. 8 and 9 on the retirement lump sum, my party agrees with reducing the lump sum. The current lump sum of €1.3 million, that the wealthiest in society are entitled to take without paying a single cent of tax, is indefensible. It is an outrageous amount of money. There is no justification, socially or economically, for having such a regime. It is about time that lump sum was lowered. In recent years when we have had to take such austerity measures and when there is such hardship being caused to persons on low incomes, how can the Minister defend a situation where the wealthiest are walking off with €1.3 million tax free on retirement? It is scandalous that it was ever the case and it is scandalous that the Minister has allowed it to continue up to now.
I welcome the fact that the Minister is talking about now reducing that maximum tax-free lump sum to €200,000. I still think it is too high. It should come down below €150,000. That would be reasonable still.
I refer to the Minister's proposals for the transitional arrangements for persons who currently have funds in excess of the new threshold being proposed where he is allowing them to take a tax-free lump sum. He is changing this tonight - we are voting on it shortly - but the Minister will still continue to allow persons who have bigger funds to withdraw tax-free lump sums of €575,000. There is no justification-----
Séamus Kirk (Louth, Ceann Comhairle)
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I am anxious to accommodate Deputy Morgan.
Róisín Shortall (Dublin North West, Labour)
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-----for allowing that additional generosity. There is no basis for doing that.
However, the worst aspect of Financial Resolutions Nos. 8 and 9 is that they do not take effect until 1 January. Essentially, the Minister is telling those wealthy individuals to,-----
Ruairi Quinn (Dublin South East, Labour)
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Move their money fast.
Róisín Shortall (Dublin North West, Labour)
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-----move their money fast. They have three weeks to take €1.3 million tax-free and run. At a time when people cannot afford to put food on the table for their children and people are having their electricity cut off and cannot afford to heat their homes, the Minister is telling the wealthiest people coming up to Christmas to take the money and run, and the Government is prepared to allow them to take €1.3 million tax-free. It is a scandal. It is a disgrace that the Tánaiste should allow that transpire.
Arthur Morgan (Louth, Sinn Fein)
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I will be brief because I appreciate that others want to get in as well.
On Financial Resolution No. 5, my party would like to see the pension cap reduced. We propose its reduction to €100,000. I note the Minister has provided for €115,000 here. We also propose standardising pension tax reliefs, which, unfortunately, is not in this document.
On Financial Resolution No. 6, the Minister is allowing for a maximum pension fund on retirement for tax purposes to be set a €2.3 million. I suppose €2.3 million is not bad, really, when one measures it against the Minister's expectation that somebody can survive on €186 per week on jobseeker's allowance. Given the evidence, I remain to be convinced on a fair society.
On retirement lump sums cap of €200,000, I note that has come down substantially in recent years. Not that long ago it was €500,000. There has been a significant move here but, in fairness, it should have been lower.
Mary Coughlan (Donegal South West, Fianna Fail)
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There is a different of perspective on a number of these issues that have been raised. In Fine Gael, there is a view that the sum, which will be €2.3 million and which was previously €5.4 million, might not even be adequate to deal with-----
Róisín Shortall (Dublin North West, Labour)
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Address the points made. We know the policies.
Mary Coughlan (Donegal South West, Fianna Fail)
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Deputy English raised this issue and he is entitled to an answer.
Deputy English's view was that perhaps this would be more restrictive on persons who at a later stage in life may not be in a position to get an adequate pension.
Damien English (Meath West, Fine Gael)
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If they lost a couple of years.
Mary Coughlan (Donegal South West, Fianna Fail)
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I suppose our perspective is that it was €5.4 million and it is now moved down to €2.3 million, and there would be adequate space in that for persons-----
Damien English (Meath West, Fine Gael)
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No. It was the yearly amount.
Mary Coughlan (Donegal South West, Fianna Fail)
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-----to address their financial needs, which, perhaps, is an opposing point which Deputy Shortall would have.
Deputy Shortall is correct in stating that this is a progressive tax measure being introduced into pension legislation. We now see a €200,000 limit as opposed to what was there heretofore. Anything over and above that will be taxable.
She raised an issue on others who have an established right to the money that they have accumulated. The legal advice to the Department of Finance is that these persons have their provision grandfathered and they have established a legal right to their entitlement.
Róisín Shortall (Dublin North West, Labour)
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Why does that not apply to public sector pensioners? The Tánaiste seems to think it was all right to dip into public sector pensions.
Séamus Kirk (Louth, Ceann Comhairle)
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Allow the Tánaiste continue.
Mary Coughlan (Donegal South West, Fianna Fail)
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After that, the changes will take place.
On the other issue Deputy Shortall raised, which is the employer's contribution, which is an argument which has been traditionally made by many on applying limits to the employer contribution, which would prevent the funding of certain individual pensions, there are issues being considered by the Department at present. It is under consideration.
Ruairi Quinn (Dublin South East, Labour)
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Are these legal issues?
Mary Coughlan (Donegal South West, Fianna Fail)
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No. This issue is being considered by the Department and the Minister in the context of the finance Bill which will be prepared for later on. The overarching message from these measures is that those who have acquired and who would prefer to acquire larger lump sums tax-free will not do so. We are now setting a threshold of €200,000.
Róisín Shortall (Dublin North West, Labour)
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It is a bit late in the day.
Mary Coughlan (Donegal South West, Fianna Fail)
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We are also preventing situations whereby people obtained large ex gratia payments which were not taxed. This matter has also been addressed. Many of the concerns raised in providing an equity argument in the context of pension legislation are now being addressed in these resolutions being put to the House.
Séamus Kirk (Louth, Ceann Comhairle)
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We need to move on and make a decision. As 30 minutes have now elapsed I am required to put the question in accordance with an order of the Dáil of this day.
The Dail Divided:
For the motion: 82 (Bertie Ahern, Dermot Ahern, Michael Ahern, Noel Ahern, Barry Andrews, Chris Andrews, Seán Ardagh, Bobby Aylward, Joe Behan, Niall Blaney, Áine Brady, Cyprian Brady, Johnny Brady, John Browne, Thomas Byrne, Dara Calleary, Pat Carey, Niall Collins, Margaret Conlon, Seán Connick, Mary Coughlan, Brian Cowen, John Cregan, Ciarán Cuffe, John Curran, Noel Dempsey, Jimmy Devins, Timmy Dooley, Frank Fahey, Michael Finneran, Michael Fitzpatrick, Seán Fleming, Beverley Flynn, Paul Gogarty, John Gormley, Mary Hanafin, Mary Harney, Seán Haughey, Jackie Healy-Rae, Máire Hoctor, Billy Kelleher, Peter Kelly, Brendan Kenneally, Michael Kennedy, Tony Killeen, Michael Kitt, Tom Kitt, Conor Lenihan, Michael Lowry, Tom McEllistrim, Mattie McGrath, Michael McGrath, John McGuinness, Martin Mansergh, Micheál Martin, John Moloney, Michael Moynihan, Michael Mulcahy, M J Nolan, Éamon Ó Cuív, Seán Ó Fearghaíl, Darragh O'Brien, Charlie O'Connor, Willie O'Dea, John O'Donoghue, Noel O'Flynn, Rory O'Hanlon, Batt O'Keeffe, Ned O'Keeffe, Mary O'Rourke, Christy O'Sullivan, Peter Power, Seán Power, Dick Roche, Eamon Ryan, Trevor Sargent, Eamon Scanlon, Brendan Smith, Noel Treacy, Mary Wallace, Mary White, Michael Woods)
Against the motion: 78 (Bernard Allen, James Bannon, Seán Barrett, Pat Breen, Tommy Broughan, Richard Bruton, Ulick Burke, Joan Burton, Catherine Byrne, Joe Carey, Deirdre Clune, Paul Connaughton, Noel Coonan, Joe Costello, Simon Coveney, Seymour Crawford, Michael Creed, Lucinda Creighton, Michael D'Arcy, John Deasy, Jimmy Deenihan, Pearse Doherty, Andrew Doyle, Bernard Durkan, Damien English, Olwyn Enright, Frank Feighan, Martin Ferris, Charles Flanagan, Terence Flanagan, Eamon Gilmore, Noel Grealish, Brian Hayes, Tom Hayes, Michael D Higgins, Phil Hogan, Brendan Howlin, Paul Kehoe, Enda Kenny, Ciarán Lynch, Kathleen Lynch, Pádraic McCormack, Shane McEntee, Dinny McGinley, Finian McGrath, Joe McHugh, Liz McManus, Olivia Mitchell, Arthur Morgan, Denis Naughten, Dan Neville, Caoimhghín Ó Caoláin, Aengus Ó Snodaigh, Kieran O'Donnell, Fergus O'Dowd, Jim O'Keeffe, John O'Mahony, Brian O'Shea, Jan O'Sullivan, Maureen O'Sullivan, Willie Penrose, John Perry, Ruairi Quinn, Pat Rabbitte, James Reilly, Michael Ring, Alan Shatter, Tom Sheahan, P J Sheehan, Seán Sherlock, Róisín Shortall, Emmet Stagg, David Stanton, Billy Timmins, Joanna Tuffy, Mary Upton, Leo Varadkar, Jack Wall)
Tellers: Tá, Deputies John Cregan and John Curran; Níl, Deputies Emmet Stagg and Paul Kehoe
Question declared carried
Mary Harney (Dublin Mid West, Independent)
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I move the following financial resolutions: