Richard Bruton (Dublin North Central, Fine Gael)
Link to this: Individually | In context

Question 150: To ask the Minister for Finance the way the tax on the approved retirement funds which is commencing in 2007 will operate; and if tax paid on actual withdrawals will be deemed a credit against this new levy. [39862/06]

Brian Cowen (Laois-Offaly, Fianna Fail)
Link to this: Individually | In context

The 2006 Budget and Finance Act introduced an imputed or notional distribution of 3% of the value of the assets of an Approved Retirement Fund (ARF) on 31 December each year, which notional amount will be taxed at the ARF owner's marginal income tax rate. Funds actually drawn down by ARF owners will be credited against the imputed distribution in that year to arrive at a net imputed amount, if any, for that year.

As a transitional measure, the 3% rate will be phased in over the period 2007 to 2009, with 1% applying in 2007, 2% in 2008 and the full 3% in 2009 and each subsequent year. The new regime will apply to ARFs created on or after 6 April 2000 where the ARF holder is 60 years of age or over for the whole of a tax year. The new provisions do not impact on Approved Minimum Retirement Funds (AMRFs).

This measure was introduced because the internal review of tax relief for pensions provision undertaken by my Department and the Revenue Commissioners last year (and which was published earlier this year) found that the ARF option was largely not being used, as intended, to fund an income stream in retirement but instead was being used to build up funds in a tax-free environment over the long-term. The imputed distribution measure will encourage the use of ARFs as intended.

I am advised by the Revenue Commissioners that they have recently commenced discussions with pension industry representative bodies with a view to clarifying the detailed operational aspects of the new provisions. The broad operational features of the new provisions can, however, be summarised as follows:

The qualifying fund manager (QFM) will be required to value the assets in the ARF or ARFs (where there is more than one ARF beneficially owned by the same individual and managed by the same QFM) on 31 December in each year commencing in 2007.

The QFM will determine the amount of the notional distribution, called the "specified amount" in the legislation, by applying the appropriate percentage rate to this value (1% for 2007 rising to the full 3% for 2009 and thereafter).

The QFM may deduct the value of any actual distributions made from the ARF or ARFs, and any actual distributions made from an AMRF beneficially owned by the same individual, to arrive at the net notional distribution, if any, to be subject to tax.

The notional distribution, if any, is deemed to arise in January of the year following the year of assessment in respect of which it has been determined (e.g. the notional distribution calculated for 2007 will be regarded as arising in January 2008).

Where an individual is the beneficial owner of more than one ARF which are not all managed by the same QFM, he may nominate one of the QFMs to meet his overall obligations under the new provisions.

In the above circumstances, the other QFMs are required to certify to the nominee within 14 days of the end of the year of assessment, the value of the assets in the ARF or ARFs managed by them and the amount(s) of any actual distributions made from those ARFs (and from any AMRF managed by them) in that year.

The nominee will then calculate the notional distribution as if all of the ARFs were managed by the nominee and as if all of the actual distributions were made by the nominee to arrive at the overall net notional distribution, if any.

Richard Bruton (Dublin North Central, Fine Gael)
Link to this: Individually | In context

Question 151: To ask the Minister for Finance the maximum percentage of income which can be put into a pension fund in 2007 by an employee themselves; and the maximum that can be put in by a firm on behalf of a director. [39863/06]

Brian Cowen (Laois-Offaly, Fianna Fail)
Link to this: Individually | In context

I take it that the Deputy is referring to the position in relation to occupational pension schemes. In that regard, I am informed by the Revenue Commissioners that the maximum annual tax relieved contribution that an employee, including a director, may make towards his or her pension scheme is determined by the individual's age and the level of his or her remuneration, subject to an overall earnings cap which currently stands at €254,000. The age related percentage limits are as follows:

In 2006 the maximum tax relievable contribution based on the overall earnings cap of €254,000 would be €101,000 i.e. €254,000 x 40%. For 2007, I am not in a position to state what the equivalent maximum tax relievable contribution will be as the earnings cap is to be increased with effect from 1 January 2007 in line with an earnings index which I will be announcing next month.

Contributions to an occupational pension scheme made by an employer on behalf of an employee, whether a director or not, are not affected by the age related percentage limits or earnings cap that apply in relation to employee contributions. However, the annual employer contribution must not be of such an amount that, if the contribution were to be continued throughout the lifetime of the scheme, it would lead to over-funding. In that regard, the overall tax relieved pension fund which can be created by both employer and employee contributions is limited, in the first instance, to a fund capable of providing the statutory maximum pension benefits of 2/3rds of the employee's final remuneration, subject to the further restriction with effect from 7 December 2005, that the capital value of those benefits may not exceed the "standard fund threshold" of €5 million. As a transitional measure, a higher limit may apply where the value of an individual's pension fund exceeded €5million on 7 December 2005 (the "personal fund threshold"). Both the standard fund threshold of €5 million and the personal fund threshold, where one applies, will also be indexed in line with the earnings factor referred to above from 2007 onwards.