Finian McGrath (Dublin North Central, Independent)
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182. To ask the Minister for Finance his views on correspondence (details supplied) regarding the pension levy and tax relief; and if he will make a statement on the matter. [46230/13]

Michael Noonan (Limerick City, Fine Gael)
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In Budget 2013, I made a number of commitments in relation to the tax provisions affecting supplementary pension provision. I said that tax relief on pension contributions would continue at the marginal rate of tax. In addition, I gave an undertaking that the 0.6% pension fund levy would not be renewed after 2014. I considered that I was in a position to make these significant commitments on foot, among other things, of proposals in late 2012 from the pensions sector for changes to the Standard Fund Threshold (SFT) regime, as an alternative to standard rating of pension tax relief, which it was claimed would yield savings and tax revenues in the region of €400 million. Pending further analysis of this claim, I included a much lower figure of €250 million in the Budget 2013 arithmetic. That analysis has since revealed significant downside risks to the achievement of even this lower level of yield or savings. The estimate of the yield from the changes to the SFT regime which I announced in last week’s Budget is €120 million. These changes differ in some respects from those proposed by the pensions sector and reflect, on legal advice, the requirement to protect pension rights at the date of change. In addition, valuation factors to place a value on Defined Benefit pensions for SFT purposes will vary with the age at which the pensions are drawn down thereby improving equity within the regime.

I would not categorise my engagement with the pensions sector on this matter as a “bargain”, in the manner suggested by the details supplied with the Deputy’s question. However, the assessment that the changes to the SFT regime required to deliver on the Budget 2013 commitment to cap taxpayer subsidies to higher value pensions would have a considerably lower yield than originally put forward, meant that the achievement of the overall budgetary objectives (including the continuation of the reduced VAT rate for the tourism sector as part of the continued commitment to the Jobs Initiative ) necessitated the imposition of the additional 0.15% pension fund levy for 2014 and 2015.

As regards the restriction of tax relief on health contributions, the position is as I stated in my Budget day speech, that from 16 October 2013, tax relief for medical insurance premiums will be restricted to the first €1,000 per adult and the first €500 per child insured. Any portion of premium paid in excess of these ceilings will no longer qualify for tax relief.

The cost of Income Tax relief in respect of medical insurance has increased significantly in recent years, at €404 million in 2011, €448 million in 2012 and is estimated to be €500 million in 2013. Despite the increasing cost of the relief, the numbers insured are estimated to have reduced by approximately 170,000 over the same period, while at the same time the level of medical cover has decreased on some policies. Against this background the increase in costs is unsustainable.

The Revenue Commissioners estimate, based on 2012 data, the most up to date data available, that up to 577,000 policy holders, which equates to just under 53% of all policies, may be affected by this measure. However, I should point out that many will only be affected marginally, depending on the cost of the policies that individuals purchase. In addition, individuals can of course opt for less expensive policies and therefore avoid the impact of this measure entirely.

The new ceilings will ensure some continuing support via the tax system for those who purchase medical insurance policies, while reducing Exchequer exposure to more expensive policies.

It should be noted that the Commission on Taxation in its 2009 report recommended the retention of medical insurance relief but that it should be limited. The introduction of an upper ceiling on the amount of medical insurance premiums that will qualify for tax relief achieves this recommendation.