Michael McGrath (Cork South Central, Fianna Fail)
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Question 253: To ask the Minister for Finance if he will respond to a query regarding the policy towards approved retirement funds (details supplied). [1108/09]

Brian Lenihan Jnr (Dublin West, Fianna Fail)
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An ARF (Annual Retirement Fund) is an alternative to a retirement annuity allowing certain individuals considerable flexibility and freedom in relation to the drawing down of benefits from their pension plans. The purpose of the ARF is to provide an income stream in retirement and, in common with annuity income, draw-downs from ARFs are subject to taxation at the ARF owner's marginal rate of income tax. This was always the intention.

The 2006 Budget and Finance Act introduced an imputed or notional distribution of 3% of the value of the assets of an ARF on 31 December each year with the notional amount taxed at the ARF owner's marginal income tax rate. The level of imputed distribution at 3% is not excessive, especially since ARFs are supposed to provide an income stream in retirement for their owners and generous tax relief is provided on the contributions to, and growth of, pension funds from which ARFs are funded. It is not unreasonable that there has to be an expectation that the benefits from these funds will be subject to tax at some point. Funds actually drawn down by ARF owners are credited against the imputed distribution in that year to arrive at a net imputed amount, if any, for that year.

The notional drawdown was introduced because an internal review of tax relief for pensions provision undertaken by my Department and the Revenue Commissioners in 2005 (which was published in 2006) 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 is designed to encourage the use of ARFs as intended.

As a transitional measure, the 3% rate is being 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 applies to ARF's 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. This provision does not impact on Approved Minimum Retirement Funds (AMRFs). Given the rationale for the introduction of the measure, I have no plans at this time to make changes to the imputed distribution arrangements for ARFs.