Written answers

Thursday, 25 September 2008

Department of Finance

Pension Provisions

5:00 pm

Photo of Tommy BroughanTommy Broughan (Dublin North East, Labour)
Link to this: Individually | In context

Question 71: To ask the Minister for Finance if he proposes to overhaul the framework for self administered pension trusts in order to reduce tax avoidance by some very high earners; his views on a regime in which significant tax-free pension entitlements can be drawn down from as early an age as 50; and if he will make a statement on the matter. [31316/08]

Photo of Brian Lenihan JnrBrian Lenihan Jnr (Dublin West, Fianna Fail)
Link to this: Individually | In context

I take it that the Deputy is referring to small self-administered pension schemes. I am advised by the Revenue Commissioners that such schemes are a particular type of occupational pension scheme in respect of which special Revenue Commissioners' requirements already apply as regards their approval for tax relief purposes, operation and supervision. The reason for the extra rules is to ensure that such schemes are established in a bona fide manner to provide retirement benefits and not for tax avoidance purposes. As regards their possible use in tax avoidance, a concern arises due to the fact that they are typically single member schemes with the member generally being a proprietary director. There is potential for a conflict of interest as the individual involved is normally the owner of the business, a trustee of the scheme and the scheme member. I have been informed by the Revenue Commissioners, that in light of this, they require all such schemes to appoint an experienced professional trustee, known as a "pensioner trustee" to act in a watchdog capacity and to ensure the scheme complies with the Revenue Commissioners' approval requirements. In addition, I am advised by the Revenue Commissioners that there are restrictions on the investment options available to such schemes.

Most occupational pension scheme rules, small self-administered or otherwise, provide for the event of early retirement. The Revenue Commissioners permit scheme rules which allow individuals to retire and commence benefits at anytime after the individual's 50th birthday. Early retirement may be either voluntary, enforced or due to ill health. The option to retire early will be subject to the terms and conditions of the scheme. It typically requires the consent of the employer or the scheme trustee. If early retirement is chosen, benefit restrictions apply. In addition, the Revenue Commissioners require an individual to cease service to commence benefits — he or she must cease to be an employee of the relevant employer. In the case of a 20% director, all links with the business must be severed, including the disposal of his or her shareholding in the company. Apart from an entitlement to take a tax-free lump sum which varies, depending on the circumstances of the individual scheme member, from one and a half times final remuneration to 25% of the value of the fund subject to an upper limit, all pension benefits are subject to taxation. This applies whether they are taken as pensions, annuities or distributions from approved retirement funds.

The Deputy is aware that my predecessor addressed the issue of excessive tax relieved pension benefits being built up in pension schemes in the 2006 Budget and Finance Act. This followed recommendations made in the Review of Tax Relief for Pension Provision carried out jointly by my Department and the Revenue Commissioners in 2005. Concerns in that regard had centred around the view that tax relief for pensions was skewed towards highly paid executives and those who own companies, on the basis that such individuals appear to have the capacity to have significant pension contributions made on their behalf by their employers into pension vehicles such as small self-administered pension schemes. As a result of the review, a number of significant changes were made to the pensions tax code. These included closing off excessive tax relieved funding for pensions through the imposition of a maximum allowable pension fund on retirement for tax purposes of €5 million, with punitive tax on amounts drawn down in pension benefits in excess of that sum; imposing a cumulative limit of 25% of this amount — €1.25 million — on the maximum tax-free lump sum that can be taken on retirement; and restricting the capacity of individuals to use Approved Retirement Funds as purely long-term tax-exempt vehicles by introducing the concept of an annual "notional distribution" from such funds which is taxable at the fund owner's marginal tax rate.

Comments

No comments

Log in or join to post a public comment.