Brian Cowen (Laois-Offaly, Fianna Fail)

Prior to the budget, funds were being built up on a fully tax allowable basis and were capable of being distributed tax free or of attracting a long-term tax deferral. Now, however, there is a limit on the size of the fund which can be built up and on the size of the retirement lump sum which can be taken tax free, and there is no longer an option to use ARF structures for long-term tax deferrals. The new fund limit must be seen in this light.

Arriving at such a figure is a matter of judgment; some will think it fine, others that it is either too generous or too restrictive. One must consider that the return on annuity yields is running at approximately 3% or 4%. That is taxable in the hands of the pensioner at his or her marginal rate. The 3% enforced distribution per annum from the ARF corresponds to this annuity figure.

Given increased longevity rates a pension fund of €5 million less a lump sum of €1.25 million, or one quarter of €5 million, would give a male retiring at age 60 an annual pension of approximately €110,000 for life, which is significantly less than Senator McDowell's estimate of €200,000. A male retiring at age 65 would receive an annual pension of approximately €135,000. Based on the most recent Central Statistics Office data, the average life expectancy in 2001 for a male aged 60 was 19.2 years and for a male retiring at age 65 was 15.4 years.

There is a general consensus now that life expectancy will continue to improve and the CSO assumes that by 2030, average life expectancy for a male aged 60 will be approximately 25 years. The annual pension of €110,000 is not a large amount in that respect, given that almost 87,000 persons have a gross income of over €100,000 per annum now. That is where the judgment call lay. We had to take account of the need for an adequate pension and to what extent we would assist in providing that through our pension relief system. Thereafter, if people wish to add to that fund they can do so without the support of the tax system. It is not an exact science but it is necessary to determine the level of incentive one should provide, to provide for a deferred tax payment, as Senator Jim Walsh said.

In response to Senator Terry, the ability to take 25% of the fund tax free is not new. It is a long-standing benefit and this Finance Bill is the first ever to put a cap on the tax free lump sum. It may not be a sufficiently stringent restriction for some but it is more progress than was made by any previous Administration and should be acknowledged as such. There is the question of people's entitlement to make that judgment, namely, whether they want to take out the 25%, as most do, or decide that they will live for another 25 years. That has been part of the carrot approach to encouraging people into private pension provision.

We are attending to the wider question of how to popularise the national pension review, with supplementary pension provision beyond statutory entitlement for ordinary workers. That report, which was issued before Christmas, was a work in progress and was acknowledged as such by the chief executive. The Government must take account of many considerations before deciding on the ultimate long-term policy. I advocate popularising pensions to all income groups.

The special savings investment account, SSIA, was a precursor to the general pension review for pensions policy. It provides people with €1 for €3, up to a maximum contribution of €2,000 to €2,500 by the State, for a maximum €7,500 from their SSIA proceeds to put into pension provision in order to begin a process of contribution in this area. The next logical step is to build on the benefits that people will have derived from the SSIA experience because one should seek to incentivise people, particularly those on the standard tax rate to consider this as a means of continuing a habit taken up by over 1.2 million account holders, as a result of the initiative of my predecessor, Mr. McCreevy. The Opposition regarded this as too generous but that is what informed my thinking on the sum.

These are significant changes for the better compared with the past situation. The fund limit of €5 million should be seen in the light not only of being limited but of reducing the opportunities to avoid or defer tax within the fund. Whether one could have picked a limit lower than €5 million is a matter of balance and judgment.

Increased longevity is a great bonus for those who live in the modern developed world but combined with low interest rates and modern lifestyle aspirations it gives rise to the need for the accrual of surprisingly large pension funds to provide for retirement. If a male enters a scheme for an index-linked pension, plus 50% widow cover, he will receive an annual pension of €110,000 for life on retiring at age 60. Some people might find that relatively low but that is because of the yield now available from such annuities.

I have moved to close off the real abuses of the system. I have left plenty of leeway for individuals to make a good living, provide for a good pension and be in a position to put money in to our economy throughout their retirement because the tax will paid. Even if it goes into the ARF, the notional system of assessment ensures that those who use the pension relief would make a contribution during their retirement to the economy, although they have retired from active participation in it.

People who have been hoarding this provision as a result of my decisions in these areas can and should expect to pay their share of tax on their pensions when the time comes. I will keep the situation under review so that any new abuses can be closed off should any emerge.