Michael McGrath (Cork South Central, Fianna Fail) | Oireachtas source

I thank Senator Ruane for the recommendation. As Senators are aware, Ireland operates an exempt, exempt, tax, EET, system. This means that contributions to pensions are exempted from income tax, subject to age-related percentage and income limitations. Pension fund gains are exempted from income tax, but income from pension drawdown is taxed.Data is available in relation to the Exchequer cost of tax relief for pensions. This data is publicly available and included in Revenue's publication on the cost of tax expenditures, as well as in the Department of Finance report on tax expenditures, which was published with the budget earlier this year.

With regard to a distributional analysis, I am advised by Revenue that prior to the introduction of real-time reporting, that is, PAYE modernisation, in January 2019, pension contributions were reported to Revenue at an employer level rather than an employee level. As the Seanad is aware, while there were some delays in the processing and publication of the data following the implementation of the new system, Revenue has been publishing data and some more detailed analysis on its website as it becomes available.

The Department of Finance report on tax expenditures and the Revenue cost of tax expenditures publication both contain information on the cost to the Exchequer of tax expenditures, including tax relief for pension contributions. In 2020, the cost associated with tax relief for employee pension contributions was €1.154 billion. This is a significant cost but it is an important part of encouraging savings for retirement.

Revenue informs me that over 1 million employees made pension contributions at some point in 2022. In 2022, pension contributions made through employments for employees and employers totalled €3.6 billion and €2.6 billion, respectively. These include contributions to occupational pensions, additional voluntary contributions, AVCs, contributions to personal retirement savings accounts, PRSAs, and contributions to retirement annuity contracts. Those with higher incomes make greater contributions to their pension, but the average share of income set aside as a pension contribution is relatively consistent across the income ranges, typically between 3% and just under 7%, and below the maximum age-related percentage thresholds which apply to pension contributions.

I am, however, aware of the importance of additional data in this area. The interdepartmental pensions reform and taxation group, which reported in November 2020, was tasked with a number of actions relating to the pensions roadmap, including proposals aimed at simplifying and harmonising the supplementary pension landscape and an assessment of the cost of State support for pension savings. The actions identified in the report are being worked through. The report notes that the tax treatment of pensions represents one of the largest Exchequer tax expenditures. However, in common with other countries operating EET systems, the exact cost of this is difficult to quantify due to the general nature of tax expenditures and also specific pension-related challenges, such as limited data availability on some features of the pension regime in Ireland. It is, therefore, challenging to capture the exact data needed to comprehensively analyse the varying types of pension relief.

The group's report recommended further consideration in the area of pensions to specify and collect the necessary data to support policy analysis. In addition, the Commission on Taxation and Welfare has identified improving the data available on pension contributions as a necessary action. The group has collected data that is available, identified data constraints in this area and will propose options on how these could be addressed. There is, as already outlined, data available and published by Revenue relating to pension contributions. The same level of information is not available to Revenue in respect of the cost of tax relief provided as pensions savings grow and at drawdown due to the nature of these phases of a pension and how the tax relief is provided. The group is continuing to consider these aspects of the data challenge and where actions fall to the Department on foot of these recommendations, my Department will be working to implement any necessary changes.

In terms of gender analysis, my Department is incorporating equality budgeting into the budgetary process. In terms of pensions specifically, the interdepartmental group report published in 2020 considered the issue of gender. The report noted that the key drivers of pension coverage and adequacy for women relate to labour market factors. The combination of reduced working hours and breaks in employment due to caring duties can have significant implications for women's duration of working life and lifetime earnings and limit the capacity to maximise the size of the final pension fund for women who do contribute to a supplementary pension. The Commission on Taxation and Welfare also notes that it took equality impacts, including gender, into account in its considerations and recommendations.

In terms of a move to a flat rate of 30% for income tax relief on pensions contributions, this point was considered by the Commission on Taxation and Welfare in the context of its report published last year.The Commission noted that, while marginal rate relief is seen by some as costly and favouring those on higher incomes, others point to the deferred tax implicit in our EET system, which means tax will be paid on draw down. While there may be merit in moving all contributors to the same rate from an equity perspective, a number of concerns arise. These include the overall cost and deadweight associated with moving to a higher rate of relief; the disincentive effect that might result if contributors were standardised to a rate below their marginal rate of tax; and the impact such a change might have on supplementary pension provision. On balance, the Commission concluded that the existing approach of marginal relief was appropriate on the basis that such contributions represent a deferral of income.

Finally, I note that an examination of the standard fund threshold regime is taking place. The standard fund threshold, SFT, sets a limit on the level of pension at retirement that will benefit from tax relief. This examination, which will be led by an independent expert, will include a public consultation to allow all interested parties to share their perspective on this important part of the tax treatment of supplementary pensions and I encourage Senators to participate in the consultation. Given that work is already under way to examine the SFT and to consider how the data available on tax reliefs for pensions can be improved and that more granular information is now available following PAYE Modernisation, a further report is necessary at this time.

Recommendation put and declared lost.