Michael McGrath (Cork South Central, Fianna Fail)
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Question 96: To ask the Minister for Finance the position regarding the taxation of lump sums paid to retiring public servants and his plans to introduce changes in this area. [25578/11]

Michael Noonan (Limerick City, Fine Gael)
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I am informed by the Revenue Commissioners that two separate tax treatments can apply depending on the nature of the lump sums paid to a retiring individual. (These rules apply equally to all employees – public and private sectors). Retirement lump sums paid under pension arrangements The following arrangements apply to retirement lump sums paid under Revenue approved pension arrangements: · Lump sum amounts up to €200,000 are paid free of tax. They are also paid free of USC. · The portion of a lump sum between €200,001 and €575,000 is taxed on a ring-fenced basis at 20%. (This means that no tax credits or other tax reliefs can be set against this portion of the lump sum.) No USC is chargeable. · Any amount of a lump sum in excess of €575,000 is taxed at the individual's marginal rate of tax (credits and other tax reliefs are available). In this instance, USC is chargeable on the excess. These amounts are lifetime amounts with prior lump sums aggregating with later lump sums. Termination lump sums If a termination payment is not taxable at an individual's marginal rate of tax under the general rules applying to the employment income of individuals, then the payment is generally subject to the taxation rules set out in section 123 of the Taxes Consolidation Act 1997. These rules tax termination payments that are not otherwise chargeable to income tax subject to a number of exemptions and reliefs. These exemptions and reliefs are set out in section 201 of, and Schedule 3 to, the Taxes Consolidation Act 1997.

The exemptions are - · A basic exemption from income tax of €10,160 plus €765 for every complete year of service; or · "Standard Capital Superannuation Benefit" (known as "SCSB"). This is an exemption equal to 1/15th of the individual's annual income (average of the last three years), for each year of employment less any tax-free lump sum which is received or receivable under any approved or statutory pension scheme.

It is open to the individual to choose whichever exemption is of most benefit.

The basic exemption from income tax as outlined above can be further increased by up to €10,000 if the individual is not a member of an occupational pension scheme. This enhancement can only be claimed if the individual has not made any claims in respect of a termination lump sum received in the previous 10 years.

These exemptions are subject to an overall lifetime tax-free limit of €200,000 with any amount received in excess of this amount subject to income tax at the individual's marginal rate of tax. USC also applies to the excess.

A further relief called "Top Slicing Relief" is available which reduces the marginal rate of tax on the taxable element of any termination lump sum to the average rate of income tax applying to that individual over the previous 3 tax years.

As the Deputy will know, a new single pension scheme for all new entrants to the public service is about to be legislated for. The new scheme brings public service pension terms more in line with private sector norms and makes a closer connection between the contribution levels and benefits received. It will change the calculation of benefits so that pensions are based on "career average" earnings rather than final salary on retirement. The minimum pension age for new public servants has also be increased from 65 to 66 and is linked to increases in the state pension age. As the new scheme is for new entrants, it will take some time before it has an impact on public servants retiring.