Thursday, 22 March 2012
Finance Bill 2012 (Certified Money Bill): Committee and Remaining Stages
Michael Noonan (Minister, Department of Finance; Limerick City, Fine Gael)
I thank Senator Reilly for not pressing her amendment. Senators are aware of the concept of the standard fund threshold, SFT, the maximum pension pot allowable for tax relief. It was introduced as a deterrent to prevent overfunding of supplementary pension provisions from tax relief sources and there are penal tax consequences where benefits are taken from pension funds exceeding the standard funds threshold or the personal funds threshold, PFT, where applicable. There is an immediate ring-fenced tax charge of 41% on chargeable excesses over the value of the SFT or PFT. Furthermore, the remaining amount is taxed at the individual’s marginal rate when taken as a retirement benefit. All of this could result in an overall effective income tax charge of over 65% on the chargeable excess, excluding other charges.
The SFT regime operates as it is intended to do in the private sector to deter overfunding of pensions as individuals have the flexibility, which they generally exercise, to cease contributing or accruing benefits under pension arrangements in order to avoid exceeding the SFT or PFT. The situation is different for individuals in public sector pension schemes as they cannot opt out of schemes and have no control over their accrual of public sector entitlements, other than to leave their jobs. By continuing in their posts, a significant chargeable excess and tax liability could arise for certain individuals at the point at which they retire from the public sector scheme. This situation is unlikely to arise in the private sector.
In public sector schemes, there is generally no actual pension fund available out of which the tax liability can be met. This Bill proposes to deal with the difficulties created for affected individuals in public sector schemes into two ways and it is useful for this purpose to distinguish between individuals with public sector pensions only and those with both public sector arrangements and private sector pension arrangements. The first measure provides for a more equitable, structured and flexible reimbursement by the retiree of the tax arising on chargeable excess as a result of the breaching of the SFT or PFT. This tax must be paid upfront by the pension administrator.
In summary, this reimbursement can now be effected by a reduction in the net retirement lump sum payable to the individual from the public sector scheme by recoupment directly from the individual, by recovery from the gross public sector pension over a period or by a combination of these approaches. Where an individual’s public sector pension benefits exceed the SFT or the individual’s PFT, a tax liability will arise on the excess. That liability is not in any way reduced by the new reimbursement procedures just outlined.
The second measure is designed to deal with difficulties experienced by those who have both public sector and private sector pension arrangements. This is particularly relevant for individuals who have moved to the public sector from the private sector, having already legitimately built up pension savings, and who find that the combination of those savings and their required membership of a public sector pension scheme will give rise or add considerably to a chargeable excess over which they have no control.
Given that individuals with dual private and public sector pension arrangements cannot cease accruing benefits under their public sector scheme, the second measure provides an option for such individuals to encash some or all of their private sector pension savings from the age of 60 and to repay the tax relief historically provided on those savings, in other words, to treat the savings as if they had never been made for pension purposes.
The effect of this is to prevent the private sector pension benefits from aggregating with the public sector benefits when the latter are eventually drawn down, which would otherwise result in a sizeable proportion of the public sector benefit being exposed to a tax as a chargeable excess. Where the encashment option is taken, a ring-fenced charge of 41% of income and 4% universal social charge will apply to the entirety of the private sector pension savings so encashed and the private pension savings encashed under this option will not then count towards standard fund threshold, SFT, or an individual’s personal fund threshold, PFT.
The aim of the encashment option is to afford affected individuals some of the flexibility already available to individuals in the private sector who have private sector pensions only and can cease contributions through accrual of pension benefits so as to prevent the breaching of the maximum pension fund thresholds in the first place.
I emphasise again that where an individual’s public sector pension benefits on their own exceed the SFT or the individual’s PFT, a tax liability will arise on the excess and that liability cannot be eliminated or reduced in any way by the use of the encashment option. In such situations the encashment option prevents the chargeable excess being increased even further. I think the Senator gets the drift of the section.