Brian Stanley (Laois-Offaly, Sinn Fein)
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Question 61: To ask the Minister for Finance if his attention has been drawn to a rule regarding private pensions that would allow a person who has not yet reached 65 years and who has in excess of €20,000 in a pension fund can only draw down the first quarter which is tax free but may not draw down the remainder if the total remaining figure is in excess of €20,000 but may drawn down the remainder if it is less that this sum; his plans to change this rule; and if he will make a statement on the matter. [22083/11]

Michael Noonan (Limerick City, Fine Gael)
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While the purpose of approved pension arrangements is to provide for an income in retirement, I am advised by the Revenue Commissioners that, in some cases, the member's entitlements under an occupational pension scheme may be too small to justify the pension set up costs (e.g. purchase of an annuity). Revenue recognises the difficulty this can cause and will allow full commutation of the pension (that is, the payment of the pension in one sum) in certain circumstances. Firstly, full commutation of a pension is permitted by Revenue on what is referred to as "triviality" grounds where the aggregate benefits payable to an individual from the scheme in respect of the employment does not exceed the value of a pension of €330 per annum. The full amount of the pension commutation sum is subject to tax at a rate of 10%.

Full commutation of a pension is also allowed by Revenue where, following the payment of any tax-free lump sum, the total of all remaining funds from all sources available for pension benefits is less than €20,000. In a defined benefit scheme, the pension benefit is converted to a fund value using the scheme's commutation factor to determine if it is within the €20,000 limit. This treatment is subject to the agreement of both the scheme beneficiary and the trustees and the resulting payment is treated like any other pension payment for the purposes of tax and is taxed under normal tax rules. The above option applies to all pension scheme members including holders of Buy Out Bonds, as an alternative to annuity purchase.

In the case of Retirement Annuity Contracts (RACs) and Personal Retirement Savings Accounts (PRSAs), as an alternative to purchasing an annuity, the holders of such pension plans can, under the Approved Retirement Fund regime, exercise an option to take the remainder of their pension fund (after taking the 25% lump sum) as taxable cash (or invest in an ARF), subject to conditions. The conditions are that the holder is over 75 years of age or, failing that, that they have a guaranteed level of pension income (€18,000 per annum at present) actually in payment for life at the time the decision to effect the cash (or ARF) option is exercised. Where the specified income test is not met, then an Approved Minimum Retirement Fund (AMRF) must be chosen into which a "set aside" amount must be invested from the pension fund (€119,800 at present) or the remainder of the pension fund, after taking the tax-free lump sum, if less than the "set aside" amount. However, in line with the full commutation option available to occupational pension scheme members and Buy out Bond holders referred to earlier, if all remaining funds available to the RAC/PRSA holder from all sources for pension benefits is less than €20,000 and it is not possible to establish an AMRF, the full commutation option may be used.

These arrangements are allowed for under discretionary powers given to Revenue under section 772(4) of the Taxes Consolidation Act 1997 and are published in the Revenue Pensions Manual (Chapter 7). I am advised by the Revenue Commissioners that the €20,000 limit is reviewed from time to time and was last increased (from €15,000) in 2007.