Michael McGrath (Cork South Central, Fianna Fail)
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Question 72: To ask the Minister for Finance the estimated annual saving to the Exchequer from reducing the maximum tax free retirement lump sum from €200,000 to €150,000. [33923/11]

Michael Noonan (Limerick City, Fine Gael)
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The following arrangements currently apply to retirement lump sums paid under pension arrangements approved by the Revenue Commissioners. 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.

I assume from the Deputy's question that he is proposing that retirement lump sums in excess of €150,000 be taxed as outlined above. As there is no general requirement for data on the number of persons who are receiving payments of retirement lump sums of less than €200,000 to be returned to my Department or to the Revenue Commissioners, I am not in a position to provide definitive figures on the Exchequer impact of reducing the tax-free retirement lump sum amount from €200,000 to €150,000

As an exercise that might provide some indication of the scale of the savings involved, it is estimated that just over 3,000 individuals in the public service would be on salaries of over €100,000 and less than €133,500 which, under existing pension scheme arrangements generally applying across the public service, would deliver retirement lump sums of between €150,000 and €200,000. If it is assumed that these individuals would retire in line with retirement trends from the public service in a normal year (about 2.5%), then the additional tax yield from taxing lump sums in excess of €150,000 at 20% could be less than €0.5 m in a full year.

I have no data on which to provide a similar estimate in relation to the private sector. I should point out, however, that one significant difference between public sector and private sector pension schemes is that private sector schemes invariably allow scheme members the option of commuting part of their pension fund for a tax-free lump sum. This option is not available to members of public sector schemes. Depending on the impact of any tax charge on retirement lump sums, the option to commute part of a pension fund may no longer be exercised by private sector pension scheme members or may be exercised in a manner that reduces the value of the lump sum taken to minimise or avoid any immediate tax charge.