Seanad debates

Thursday, 9 November 2006

Adjournment Matter

Pension Provisions.

4:00 am

Sheila Terry (Fine Gael)
Link to this: Individually | In context

Five minutes should be long enough for the Minister of State, Deputy Parlon, to catch his breath. I thank him for coming to the House to reply to this matter. I urge the Minister for Finance to consider providing incentives for private sector workers to leave their pension funds intact by forgoing the 25% tax-free lump sum, thus ensuring a higher income stream in retirement.

I am pleased that at last we are hearing more from the Government on the provision of adequate pensions. At the weekend, one newspaper had a headline to the effect that the Taoiseach had promised a budget boost for pensioners. That is welcome. Today at a Labour Relations Commission conference in Croke Park he described the practice of some companies of reducing pension benefits as a tension point for workers. He stated he did not believe the pension issue was affecting the viability of companies, especially in profitable sectors. However, he did acknowledge that some firms in the manufacturing sector could be under pressure.

I welcome the fact that at last I seem to be getting somewhere on this issue. Perhaps the Government has begun to realise the pensions issue relates to pensioners today and those about to become pensioners. We should not be as concerned as we have been, and as the Pensions Board is, with pensions of people in 25 or 50 years. We should be concerned about those in difficulty today.

It is illogical to compel people to pay into a pension fund throughout their working lives and then penalise them for leaving it intact. The Government encourages people to withdraw 25% of their pensions in a tax-free lump sum. We want to ensure pensioners will have an adequate income. I cannot understand why we encourage people to draw down 25% of their funds which are tax free.

I want people to enjoy tax free benefits as much as possible. Why not give the same tax benefit to leave the fund intact? Removing the lump sum reduces the pension fund by 33%. If we want people to live comfortably during retirement, we should encourage them to leave pension funds intact.

Well-documented figures show the majority of pensioners today survive on the State pension. The private sector pension makes up an extremely small portion of retirement pensions. Will the Minister consider using the budget to give the same tax incentive now given to people withdrawing the 25% lump sum to those who opt to leave it in situ? It would do pensioners and the State a service by providing an adequate income.

The pensions industry is behind this drive as it suits it to give out a tax-free lump sum. It makes a killing on the exchange rate it uses when exchanging the tax-free lump sum for pensions. According to statements made by the IAPF chairman and the Pensions Ombudsman, the pensions industry makes a profit of up to 233% on people opting for a tax-free lump sum. This enormous profit is taken by the industry when the uninformed pensioner is consigned to a grossly reduced pension. That same pension decreases in value as the person gets older. Many difficulties must be addressed. If the Minister of State takes this on board it would help increase the income stream of pensioners.

Tom Parlon (Laois-Offaly, Progressive Democrats)
Link to this: Individually | In context

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.

Sheila Terry (Fine Gael)
Link to this: Individually | In context

Will the Minister of State tell the person who wrote this reply on his behalf that the last paragraph on the first page is the only one which refers to my question? It states, "the suggestion now appears to be that we should pay people, in some way, not to draw it down." The way that paragraph is worded is extremely disingenuous. I am asking that the same tax incentive be given to people who leave the lump sum in place as to those who draw it down. If we give a tax incentive to a person who draws it down, why not give it to a person who decides to leave it in place? I would like that message to go back to the Minister.

The way the reply is worded is disingenuous. However, with regard to pensions, that type of response from the Department of Finance is common.

I thank the Minister of State for his reply.

The Seanad adjourned at 4.10 p.m. until2.30 p.m. on Wednesday, 15 November 2006.