Jack Chambers (Dublin West, Fianna Fail) | Oireachtas source

I thank Senator Gavan for submitting these recommendations and I will respond to them.

Recommendation No. 6 relates to the changes to PRSAs introduced in section 12. The section amends the Taxes Consolidation Act 1997 to introduce limits on the tax relief available for employer contributions to personal retirement savings accounts and pan-European pension products. Prior to 31 December 2022, where the combined contributions by an employer and an employee to a PRSA did not exceed the employee’s annual percentage limit, the contributions were relieved from tax. Where the combined contributions exceeded the relevant employee’s annual percentage limit, however, the amount above the limit was treated as a taxable benefit-in-kind in the hands of the employee. The employer was entitled to a tax deduction for this contribution. As Senators will be aware, section 22 of the Finance Act 2022 changed the treatment of employer contributions to PRSAs with effect from 1 January 2023. Following the change, an employer contribution to a PRSA is not treated as a BIK for the employee, and therefore there is no tax liability for the employee arising from an employer contribution to a PRSA. The change was introduced in order to implement a recommendation from the 2020 report of the interdepartmental pension reform and taxation group. Unlike occupational pension schemes, PRSAs are personal pension products and employer contributions are not required. Also, an individual’s PRSA is not subject to the two thirds final salary funding limit that is imposed on employee benefits from occupational pension schemes. It was clear that the removal of BIK for employer contributions would result in PRSAs having less restrictions on employer contributions, albeit still subject to the overall tax relieved limit of the standard fund threshold.

Some alternative options to the changes made in Finance Act 2022 were explored at the time, but they proved too complex and difficult to implement in practice. Revenue has actively monitored developments in this area and identified a number of cases that gave rise to concerns where the employer contributions to PRSAs are significantly higher than the salary associated with the employment and, in most of these cases, the employee for whom the contribution was made had a connection to the employer. It would appear these cases show signs of behaviour that is not in keeping with the policy intent of the Finance Act 2022. The change introduced in this year’s Bill aims to address these concerns by imposing a limit on the size of the employer contributions to a PRSA that are not considered a BIK. For the purpose of simplicity, a single limit of 100% of the relevant employee’s salary will apply to employer contributions to a PRSA. Any contributions above the limit will be considered a BIK for the employee and be subject to tax. The tax treatment of pan-European personal pension products, introduced in 2022, mirrors that of a PRSA. Therefore, the changes outlined will also apply to PEPPs. I am advised there are currently no PEPP providers and hence no PEPPs available in Ireland.

Recommendation No. 8 relates to the standard fund threshold. It sets the maximum amount available for a tax-relieved pension at retirement. Where a pension exceeds the standard fund threshold, it is subject to an upfront, ring-fenced income tax charge, known as a chargeable excess tax, at 40%. This forms part of the taxation framework for pensions that applies to all pensions in the public and private sector. This was reviewed by Dr. Donal de Buitléir at the end of 2023 and we received a report during the summer. The report makes a number of recommendations to modernise and update the SFT giving rise to changes in the pensions landscape and the impact of wage growth since 2014. The report considers the level of the SFT, the rate of tax payable and the method of valuing benefits for the application of the SFT regime, and makes a significant number of recommendations for change in these areas. The Bill amends three specific aspects of the scheme and we have set out the context on that in September around the scale changes to the scheme out over the next number of years. This is not for 2025 but from 2026 onwards. I have previously set out the detail on that.

The final recommendation relates to the report on the comparative State supports received in the auto-enrolment savings scheme compared with individuals making contributions to an occupational pension scheme who benefit from tax relief for those pension contributions at the higher rate. The design and operation of the auto-enrolment scheme is a matter in the first instance for the Minister for Social Protection, who designed this scheme with co-operation across Government. The provisions relating to auto-enrolment in this Finance Bill are simply putting in place the taxation provisions that will apply to all stages of the auto-enrolment system, in line with the design developed by the Minister for Social Protection and introduced through the Automatic Enrolment Retirement Savings System Act 2024.As I said, all of the detail on that has been published previously.

Recommendations Nos. 15 and 36 propose the publication of a report on pension tax reliefs. On the tax treatment of supplementary pensions, as Senators are aware, Ireland operates an exempt-exempt taxed, EET, system. This means that contributions to pensions are exempted from income tax, and pension fund gains are exempted from tax, but income from pension drawdown is then liable for tax. I am very cognisant of the importance of retirement savings. Overall, the policy objective for pensions is to encourage individuals to save for retirement to meet a target level of supplementary pension coverage and an income replacement target, and to assist in preventing an over-reliance on State support for people in later life. The policy lever of tax relief is important in supporting this objective.

The interdepartmental pensions reform and taxation group was tasked with a number of actions relating to the pensions roadmap. Its report was published in November 2020. The Commission on Taxation and Welfare also made recommendations on the pension landscape more generally, some of which relate to the standard fund threshold. A number of the changes proposed in the report would result in more tax being levied at retirement, while others would increase the relief available for pension contributions. There is potential for increased costs to the Exchequer from some of the recommendations. We have recommendations from both these reports. Again, there is ongoing review of those recommendations in the context of decisions for the future. I have set out the detail of the standard fund threshold.

The Department of Finance's Report on Tax Expenditures and Revenue's Cost of Tax Expenditures publication contain information on the cost to the Exchequer of tax expenditures, including tax relief for pension contributions. In 2020, the most recent year for which this figure is available, the cost of tax relief for employee pension contributions was €1.154 billion. In 2022, the cost of tax relief for employers’ contributions to approved superannuation schemes was €323 million, while the cost of the exemption employers’ contributions from employee BIK was €956 million. These are significant costs but they are important in encouraging savings for retirement. In addition, consideration of this cost in isolation does not give a full picture of the overall cost of pensions tax expenditures.

The publication of the income tax insights 2023 report, published by Revenue in April 2024, provided some analysis of the pension contributions made in 2023 by income level and gender. It notes that 1.08 million employees made pension contributions at some point in 2023. This represented 33% of all employees. Pension contributions by employees and employers totalled €4 billion and €3.8 billion respectively in 2023. These include occupational pension-retirement benefit schemes, additional voluntary contributions, PRSAs and retirement annuity contracts. Those with higher incomes make greater contributions to their pension, while the average share of income set aside as pension contribution across the income ranges varies between 3% and almost 7%, which is below the maximum age-related percentage thresholds that apply to pension contributions.

When considering this information, the reality is that when we discuss the cost of pensions the holistic picture of the overall costs of all three prongs of the EET approach are not considered. Chapter 6 of the recent independent examination of the standard fund threshold considered this in detail, noting that the current EET pension regime provides for a deferral, rather than an exemption, of tax on pensions. While pension contributions and pension fund gains are exempt from tax, the income from pensions is liable to income tax when it is drawn down. In effect, this system acts as a means to average lifetime income before paying tax on pension income in retirement. Where data is available, we report the cost of tax relief provided for pension contributions. However, in many cases, due to data constraints, we do not have the data on the cost of some exemptions from tax, such as the growth of pension funds.

The examination recommends further work in this area to be able to give a more accurate picture of the cost of pension tax expenditures, as I mentioned. We have asked officials to establish an implementation group to consider how this can be achieved, as well as other recommendations referenced in the SFT examination. Given the information already published in relation to pensions, the consideration of the issue of the cost of pension tax expenditures in the recent examination of the SFT, and the intention for further work on improving the information available, I do not believe a further report is necessary at this time.