John Lyons (Dublin North West, Labour)
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To ask the Minister for Finance the total annual saving to the Exchequer of reducing tax relief on pension contributions including the public service pension related deduction from the marginal rate to the standard rate of income tax; of a reduction in the Standard Fund Threshold from €2.3m to €622,500; of a reduction in the annual earnings limit for determining maximum allowable pension contributions for pension purposes from €115,000 to €75,000 per annum; and a reduction in the maximum tax-free lump sum payment allowable at retirement to €122,500. [41397/12]

Michael Noonan (Limerick City, Fine Gael)
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The following is the information requested insofar as it is available. Any estimates provided are calculated on the basis that each change mentioned in the question is taken in isolation. Reducing tax relief on pension contributions to the standard rate.

I assume the Deputy is referring to individual pension contributions, the tax relief on which is allowed at the taxpayer’s marginal tax rate — the standard or higher rate of income tax as appropriate in each case. A breakdown of the cost of tax relief on employee contributions to occupational pension schemes is not available by income tax rate, as tax returns by employers to the Revenue Commissioners of employee contributions to such schemes are aggregated at employer level. An historical breakdown is available by tax rate of the tax relief claimed on contributions to personal pension plans — retirement annuity contracts and personal retirement savings accounts — by the self-employed and others, to the extent that the contributions have been included in the personal tax returns of those taxpayers.

There is, therefore, no statistical basis for providing definitive figures. However, by making certain assumptions about the available information, it is estimated that the full-year yield to the Exchequer from confining tax relief to the standard rate of 20% in respect of pension contributions to occupational pension schemes, retirement annuity contracts and personal retirement savings accounts and confining tax relief for the Public Service pension related deduction to the standard rate of 20% would be approximately €560 million.

Reducing the Standard Fund Threshold from €2.3m to €622,500

The Standard Fund Threshold (SFT) is the maximum allowable pension fund on retirement for tax purposes which was introduced in Budget and Finance Act 2006 to prevent over-funding of pensions through tax-relieved arrangements. The SFT was reduced in Budget and Finance Act 2011 by over 50% to a level of €2.3 million with effect from 7 December 2010 with transitional arrangements to protect the capital values of the pension rights of individuals where these exceeded the reduced SFT on that date.

There is currently no underlying data available to my Department or to the Revenue Commissioners on which to base reliable estimates of the savings from a further reduction in the SFT to the level indicated in the question. Information on the numbers and values of individual pension funds or on individual accrued benefits are not generally required to be supplied to the Revenue Commissioners by the administrators of pension schemes and personal pension arrangements. For these reasons, the estimated savings included in respect the Budget and Finance Act 2011 change in the SFT were quite conservative, based as they were, on incomplete data and using very broad assumptions.

My Department has been engaging with representatives of the pensions industry with a view, among other things, to gathering private pensions-related data which may be of value into the future in estimating the costs of potential changes in the pensions’ tax area. These engagements are ongoing.

Reducing the annual earnings limit from €115,000 to €75,000

I assume that the Deputy is referring to the current annual earnings cap of €115,000 which operates to limit the level of tax-relieved personal pension contributions in any one year. The annual earnings cap acts, in conjunction with age-related percentage limits of annual earnings, to put a ceiling on the annual amount of tax relief an individual taxpayer can obtain on pension contributions. A breakdown of the cost of tax relief on employee contributions to occupational pension schemes is not available by income tax rate, as tax returns by employers to the Revenue Commissioners of employee contributions to such schemes are aggregated at employer level. An historical breakdown is available by tax rate of the tax relief claimed on contributions to personal pension plans — Retirement Annuity Contracts (RACs) and Personal Retirement Savings Accounts (PRSAs) — by the self-employed and others, to the extent that the contributions have been included in the personal tax returns of those taxpayers. There is, therefore, only a limited statistical basis for providing definitive figures.

However, by making certain assumptions about the available information, the Revenue Commissioners inform me that the combined estimated full year yield to the Exchequer from reducing the current annual earnings cap of €115,000 to €75,000 in respect of individual contributions to occupational pension schemes, RACs and PRSAs would be about €113 million.

Reducing the maximum tax-free lump sum payment allowable at retirement to €122,500

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 €122,500 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 €122,500.

As an exercise that might provide some indication of the scale of the savings involved, it is estimated that just under 10,500 individuals in the public service would be on salaries of over €82,000 and less than €133,500 which, under existing pension scheme arrangements generally applying across the public service, would deliver retirement lump sums of between €122,500 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 €122,500 at 20% could be approximately €2m 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.