Seanad debates

Wednesday, 28 February 2024

Nithe i dtosach suíonna - Commencement Matters

Pension Provisions

10:30 am

Photo of Martin HeydonMartin Heydon (Kildare South, Fine Gael) | Oireachtas source

I thank Senator Davitt for raising this issue. I understand the question relates to the standard fund threshold regime and how it applies to different types of pensions and, in particular, the defined benefit and defined contribution pension schemes.

As Senator Davitt is aware, Ireland operates an exempt tax system for the taxation of pension funds. This means the 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 liable for tax. In addition, there is a limit on the maximum pension that benefits from tax relief, the standard fund threshold, SFT.

The SFT regime, as set out in chapter 2C of Part 30 of the Taxes Consolidation Act 1997, sets a lifetime maximum for tax relieved pension funds. Where the value of pension and retirement or other events which crystallised the value of the pension is higher than the SFT, the excess is subject to additional tax. This additional tax is known as chargeable excess tax, CET, and is charged at a rate of 40%. The CET is paid on top of the normal income taxes paid at the marginal rate upon drawdown of the pension funds. The SFT was set at €5 million when it was introduced in 2004 but was subsequently reduced by €2.3 million in 2010. It was reduced further to €2 million in 2014 and remains at that level today. The SFT is part of the tax system that applies generally to everyone, all pension products or schemes and both the public and private sectors. Therefore, all pension funds are subject to the same €2 million limit.

However, due to differences between pension schemes, and in particular, the integral difference between defined benefit and defined contribution schemes, the method by which pensions are valued for the purposes of SFT is different for different schemes. The following contribution schemes provide retirement benefits based on the accumulated value of the contributions paid to a pension scheme by or on behalf of a member, including the investment returns earned on those contributions. For the defined contribution scheme, the value for the purposes of the SFT is simply the value of the assets in the fund at the time of crystallisation. This is also the case for personal retirement saving funds, known as PRSAs.

It is more complex to value a defined benefit scheme. Defined benefit schemes provide members with retirement benefits based on pre-defined formula that are set out in the rules of the scheme. Benefits are often based on a member’s salary close to retirement and the length of time they have been a member of the scheme. However, there is generally no individual fund that can be valued at the time the benefits are being taken. Instead, the pension is valued by multiplying the individual's annual pension by a valuation factor.

Up to 2014, there was a single valuation factor of 20, but in 2014, a more complex set of age-related valuation factors was introduced, which range from 37 at the age of 55 to 22 at the age of 70. These age-related factors were introduced to seek to reduce inequity in the valuation process between defined benefit and defined contribution schemes. Defined benefit schemes are more prevalent in the public sector, while defined contribution schemes are seen more often in the private sector.

There are other differences between the public and private sectors. For private individuals, it may be open to them to cease contributions to their pension when they are nearing the SFT. For public servants, this is not possible. However, public servants benefit from options available to spread the payment of any SFT over 20 years after retirement through the deduction of their pension.

In the last ten years, while the SFT has remained the same, there have been significant changes across a range of economic factors, such as consumer price, inflation and wage inflation. Therefore, the Minister of Finance has instigated an examination of the SFT regime which is currently under way. A public consultation on the issue was recently closed and the responses are being reviewed. The terms of reference of the examination note the importance of equity in treatment across taxpayer groups between public and private sector workers. The examination will report to the Minister for Finance in the summer.


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