Ruairi Quinn (Dublin South East, Labour)
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Question 112: To ask the Minister for Finance his plans to reform the rules whereby holders of approved retirement funds are compelled to take 3% per annum of their accumulated fund and pay tax on it at the highest marginal rate, in view of the deterioration in value of pension funds in the past 18 months and the desire of ARF holders to defer drawing down funds until such time as the value of their investment improves; and if he will make a statement on the matter. [22441/09]

Brian Lenihan Jnr (Dublin West, Fianna Fail)
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An ARF (Approved Retirement Fund) is an investment vehicle into which certain individuals can invest the proceeds of their pension plans. An ARF offers such individuals considerable flexibility and freedom as regards when they draw income in retirement and acts, in that regard, as an alternative to a retirement annuity which provides a regular income stream for life. 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 in 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 considered excessive, given that ARFs are intended 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 the proceeds of which are invested in ARFs.

The notional distribution was introduced following an internal review of tax relief for pensions provision undertaken by my Department and the Revenue Commissioners in 2005 (published in 2006) which 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 planned. It is not unreasonable that there should 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 a year to arrive at a net imputed amount, if any, for that year, although there is no compulsion to draw funds from the ARF so long as the tax due on the notional distribution is paid.

The 3% rate was phased in over a transitional period commencing in 2007, with 1% applying in 2007, 2% in 2008 and the full 3% in 2009 and each subsequent year. The new regime applies 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. 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.