Tom Parlon (Laois-Offaly, Progressive Democrats)

I thank the Senator for raising the issue. The statutory maximum benefits which an individual is entitled to draw down from his or her pension scheme at normal retirement age is limited to two-thirds of his or her final remuneration on retirement. Senators will be aware the Minister for Finance, Deputy Cowen, introduced a limit of €5 million this year on the maximum value of pension benefits an individual can draw down in his or her lifetime from tax-relieved pension schemes where the benefits come into payment for the first time on or after 7 December 2005. This is known as the standard fund threshold and will be indexed from next year onwards. Where the capital value of the benefits exceed this amount, a significant up-front tax charge arises on the excess. I emphasise this limit is targeted at high earners and will not impact on the generality of those retiring.

In general, pension scheme rules provide for part of a member's accrued pension to be exchanged or commuted in return for a tax-free lump sum. The maximum tax-free lump sum which may be achieved at normal retirement age by a scheme member is generally one and a half times final remuneration. In certain cases where the member can avail of the approved retirement fund option, such as proprietary directors, the lump sum taken can be 25% of the value of the pension fund. Senators will be also aware the Minister for Finance introduced a cap of €1.25 million on the overall tax free lump sum which can be taken from 7 December 2005 onwards. This was also aimed at high earners. From 2007, the lump sum limit will be 25% of the standard fund threshold.

While private sector occupational pension schemes generally provide members with the tax-free lump sum option, it is a matter for the pension scheme member, or the holder of a personal pension plan such as a personal retirement savings account, PRSA, or a retirement annuity contract, to decide to exercise the right to a tax-free lump sum. Instead, he or she may choose to take all of his or her entitlement as a pension or annuity which would be liable to tax at the pensioner's marginal income tax rate. The option to invest in an approved retirement fund or approved minimum retirement fund, as appropriate, may be also available to the holder of a PRSA or retirement annuity contract.

I understand the tax-free lump sum option has been always viewed as a major attraction in incentivising private pension provision. However, the suggestion appears to be that we should pay people in some way not to draw it down. The Government wants to encourage people who have not yet made arrangements for pension provision or who wish to improve their existing arrangements to do so, particularly older people in the workforce and those on lower incomes. The Minister for Finance introduced measures in this year's budget and Finance Act to help people in these categories commence or improve their pension arrangements.

The pensions incentive tax credits scheme introduced in the 2006 Finance Act provides an incentive for eligible SSIA holders on lower incomes to reinvest all or part of their net SSIA proceeds after maturity into an approved pension product, including a personal retirement savings account. It is primarily a savings scheme and is designed for lower income people saving for retirement. The incentive involves a tax credit of €1 for every €3 of SSIA proceeds reinvested, up to a maximum of €2,500 credit for an investment of €7,500. An additional tax credit involves a percentage of the tax deducted from the SSIA on maturity. Where an SSIA holder avails of the pensions incentive tax credits scheme, it is not possible to claim any other tax relief for amounts invested up to and including €7,500. Tax relief can be claimed, however, on amounts in excess of €7,500 transferred from a matured SSIA to an approved pension product, subject to the standard limits.

Aside from the pensions incentive tax credits scheme, generous incentives already exist for taxpayers investing in pensions. The State encourages individuals to supplement the State pension with private pension arrangements by offering generous tax reliefs on contributions to pension schemes, subject to limits related to age. The tax relief arrangements for private pension provision are long-standing. They have helped a significant proportion of the workforce provide for supplementary pensions, thus reducing the pressure on the Exchequer to fund pension needs. In this year's budget and Finance Bill, the Minister for Finance increased the age-based tax relief for contributions to all pension products for those aged 55 years or over.

More than half of people in employment are covered by pension arrangements beyond the State pension and, while this proportion has not changed much, the absolute numbers covered have increased in recent years. However, the Government is not complacent about the significant issues facing us in the pensions area. This year, the Minister for Social and Family Affairs, Deputy Brennan, published two major reports from the Pensions Board which focused and encouraged debate on these issues. The issues include the adequacy of post-retirement income particularly for those on lower rates of pay, the extent of the coverage of supplementary provision across the working population and the cost, economic impact and sustainability arising from any changes which may be considered.

The Government is committed to the publication of a Green Paper on pensions policy. The Green Paper, into which the Department of Finance, among others, will have an input, will outline the major policy choices and challenges facing us in the pensions area. The Government is also committed to responding to consultations arising from the Green Paper with a framework for addressing the pensions agenda over the long term.