Maureen O'Sullivan (Dublin Central, Independent)
Link to this: Individually | In context

Question 151: To ask the Minister for Finance his estimate of the aggregate cost, for the whole of 2012, expressed in tax expenditure terms, of the tax free lump sums that will be drawn down in 2012 by retiring civil and public servants; and if he will make a statement on the matter. [10710/12]

Michael Noonan (Limerick City, Fine Gael)
Link to this: Individually | In context

The following are the current arrangements which apply in relation to the taxation of retirement lump sums paid under Revenue approved pension arrangements. These arrangements apply in both the public and private sectors and were introduced in Budget and Finance Act 2011:

· Retirement lump sum amounts up to €200,000 are paid free of tax. They are also paid free of the Universal Social Charge (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 under Schedule

E and collected under the PAYE system (credits and other tax reliefs are

available). In this instance, USC is also chargeable on the excess.

These amounts are lifetime amounts with prior lump sums taken since 7 December 2005 aggregating with later lump sums.

The Deputy's question asks for an estimate of the cost for 2012, in tax expenditure terms, of the tax-free retirement lump sums that will be paid this year on the assumption, presumably, that the amounts paid below the tax-free lifetime limit of €200,000 would otherwise be taxed at the standard rate of income tax. As there is no general requirement for data on the number or value of retirement lump sums below the €200,000 limit to be returned to my Department or to the Revenue Commissioners, I am not in a position to provide definitive figures in response to the question.

However, as an indication and based on very broad assumptions about the numbers and average remuneration levels across the public service and assuming annual retirement trends of about 2.5%, it is estimated that the annual cost in tax foregone of not applying tax at the standard rate to tax-free retirement lump sums in the public service would be about €100 million per annum.

While the tax treatment of retirement lump sums apply in both the public and private sectors, I should point out 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.