Róisín Shortall (Dublin North West, Labour)
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Question 204: To ask the Minister for Finance the action he has taken on foot of each of the conclusions reached in Section G, Volume III of the Review of Tax Schemes report contained in budget 2006; the anomalies identified in the report that have since been addressed in legislation; and if he will make a statement on the matter. [33832/08]

Brian Lenihan Jnr (Dublin West, Fianna Fail)
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I take it that the Deputy is referring to the review of Tax Relief for Pensions Provision carried out jointly by the Revenue Commissioners and the Department of Finance in 2005, the report of which was published in 2006 as part of Volume III of the Budget 2006 Review of Tax Schemes — Internal Reviews of Certain Tax Schemes.

The main conclusions reached in the Review are set out in paragraph 15 of Part IV of the report and are appended to this reply.

In an effort to address the issues raised in the conclusions, the Review put forward, in paragraph 16, a number of options for change. Following consideration of these options, the then Minister for Finance and now Taoiseach, Mr Brian Cowen TD decided, in the interest of creating greater equity in the pensions tax relief system and to address the particular problems identified, to make a number of significant changes in relation to the tax regime for both pensions and Approved Retirement Funds in the 2006 Budget and Finance Act. The changes involved:

closing off excessive tax relieved funding for pensions through the imposition of a maximum allowable pension fund on retirement for tax purposes of €5m, with punitive tax on amounts drawn down in pension benefits in excess of that sum;

imposing a cumulative limit of 25% of this amount (€1.25m) on the maximum tax-free lump sum that can be taken on retirement; and

restricting the capacity of individuals to use Approved Retirement Funds (ARFs) as purely long-term tax-exempt vehicles by introducing the concept of an annual "notional distribution" from ARFs which is taxable at the ARF owner's marginal tax rate.

The combined impact of the above changes addressed, to a large degree, the concerns raised in the Review.

The fact that employer contributions to occupational pension schemes are not included within the employee age-related percentage limits and the overall earnings cap on pension contributions, was identified as an anomaly in the Review and considered among the options for change (Option 1, paragraph 16.2). However, the Review identified difficulties with such a course of action and rather than change the treatment of employer contributions, it was considered that the imposition of the limit on the maximum allowable tax relieved pension fund would be as effective, without giving rise to the difficulties identified in the Review.

Appendix: Conclusions of Review of Tax Relief for Pensions Provision

Current tax reliefs appear to be too generous in relation to individuals whose employers are in a position to make substantial tax deductible contributions to their schemes without any earnings cap or age related % limits applying, particularly in circumstances where the individuals themselves are in a position to influence the level of employer contributions.

While the rationale for granting tax relief on pension contributions is to ensure that individuals save for retirement, are not a burden on the state and can acquire a pension that takes some cognisance of their pre-retirement earning levels and lifestyle, the current regime which allows an individual to create a pension fund over a very short period with a closing value well within maximum benefit limits of c. €100 million, to take 25% of that as a tax free lump sum and place the remaining 75% in a tax exempt ARF, must be a matter of concern.

The current regime of relief may be perceived to be inequitable in so far as more generous reliefs are available to those in occupational pension schemes (having regard to the absence of age-related % limits and an earnings cap on employer contributions) as compared with the self-employed using RACs or those relying on PRSAs.

The "maximum benefits" rule of a pension of two thirds final remuneration appears to be ineffective in the absence of an absolute cap on the "salary" to which the 2/3rds rule is applied.

The 3 year average rule for determining final remuneration may allow an increase in earnings in the run up to retirement to maximise the final remuneration figure on which maximum benefits are calculated.

The ability to take a tax free lump sum of 25% of the value of the accumulated pension fund may be too generous when the value of the funds is substantial.

The introduction of the ARF option in 1999, while meeting the goals of choice, control and flexibility, has (based on the available evidence to date) largely not been used to fund an income stream in retirement.

The introduction of the ARF option would seem to be encouraging certain individuals to build up very substantial pension funds with a view to placing the funds long-term in tax-exempt environment of the ARF.

The introduction of the ARF regime may have undermined the "EET" system of pension taxation insofar as an individual with sufficient independent means can benefit from exempt contributions to a pension fund, gross roll up in respect of the income and gains of the fund, exempt transfer to and further gross roll up in an ARF and limited, if any, taxation on transfer on death.