Terence Flanagan (Dublin North East, Independent)
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80. To ask the Minister for Finance the position regarding the provision in the Finance Bill 2012 which allows early access to pensions for certain public servants; if he will list the categories of public servants to which this applies (details supplied); and if he will make a statement on the matter. [51764/13]

Michael Noonan (Limerick City, Fine Gael)
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I take it that the Deputy is referring to the encashment option provided for by section 787TA of the Taxes Consolidation Act 1997 which was inserted into that Act by section 18(7)(b) of the Finance Act 2012. In that regard, I would like to clarify that the encashment option confers no rights on public servants to early access to pension benefits. The encashment option operates in the context of the Standard Fund Threshold (SFT) regime, which places a life-time limit on an individual’s tax–relieved pension benefits. The SFT regime is designed to discourage over-funding of pension savings by such means. It addresses the problem of pension overfunding and excessive pension accrual by imposing a penal tax charge on the value of retirement benefits above set limits when they are drawn down. In this way, it acts to deter the building up of large pension funds in the first place or unwinds the tax advantage of such overfunding by clawing back, through the penal tax charge, the tax relief granted. Among other changes to the SFT regime being introduced by Finance (No.2) Bill 2013, is a reduction in the value of the life-time limit from its current level of €2.3 million to €2 million, with effect from 1 January 2014.

The encashment option was introduced to deal with particular difficulties that individuals with both private and public service pension arrangements would otherwise face from the operation of the SFT regime. An individual in the private sector is generally able to prevent or minimise any breaching of the SFT, or a Personal Fund Threshold (PFT), if he or she has one, by ceasing to contribute to, or accrue benefits under, a pension scheme. However, affected individuals in the public service have no control over their accrual of public service pension entitlements and, as a result, significant chargeable excesses could arise on the public service pension entitlement at retirement in certain circumstances. This is the case where such individuals have built up substantial private sector pension savings before taking up a public service career.

Because the SFT regime operates by aggregating the capital value of pension benefits taken over time, where such private sector benefits are drawn down first their capital value would aggregate with the capital value of the public service pension rights when subsequently drawn down, resulting in, as mentioned, very significant chargeable excesses and penal tax charges on the public service pension which the affected individual would be powerless to abate.

Concerns were expressed that this could have a significant disincentive effect for some people to remain in the public service or hinder the future recruitment into the public service of exceptionally well-qualified people from the private sector.

To deal with this, I introduced a once–off opportunity for individuals who meet the qualifying conditions, to encash their private sector pension rights, in whole or in part, from age 60, with a view to preventing or minimising the chargeable excess that would otherwise arise when the public service pension crystallises. The private sector pension rights concerned would invariably be personal pensions which would be accessible from age 60 in any event (so there is no issue of early access). The exercise of the option attracts tax at the point of encashment on the full value of the rights at a ring-fenced rate of 41% plus USC of 4%. This is aimed at broadly neutralising the tax relief that such individuals enjoyed when building up their private pension funds. No tax-free lump sum is available from the pension scheme where the encashment option is exercised and it is the pension scheme administrator who is primarily responsible for deducting and remitting the “encashment tax” to Revenue.

The qualifying conditions can be summarised as follows. Firstly, the individual must, on 8 February 2012 (the date of publication of the 2012 Finance Bill), be a “relevant individual”, meaning that he or she must;

- Be a member of both a private sector and public service pension scheme, or

- Be a member of a public service pension scheme and have drawn down their private sector pensions in the period 7 December 2005 to 7 February 2012, or

- Be a member of a private sector scheme on, or after, 7 February 2012 and subsequently become a member of a public service scheme, and

- Remain an active member of the public service scheme until their retirement date.

Secondly, the combined capital value of the pension scheme savings, both private and public, must be likely to exceed the SFT, or the individuals PFT, if they have one, in circumstances where the intention is that the public service pension benefits will be crystallised or drawn down last (i.e. after all the private sector pensions benefits have been drawn down). It is this sequence of cashing in the private sector benefits first that would place the individual in a position whereby a chargeable excess would fall mostly, or entirely, on the public service pension. In extreme situations, where an individual, on taking up a pensionable post in the public service, had already built up private sector pension savings equal to the SFT, or the individual’s PFT, every euro of public service pension accrued would be subject to chargeable excess tax of 41% in addition to the tax on the pension at the individual’s marginal rate when paid out.

It is important to note, that in no case can the exercise of the encashment option reduce the chargeable excess tax due on an individual’s public service pension benefits if the capital value of those benefits on their own exceeds the SFT or the individual’s PFT.

The option came into effect from 8 February 2012 (the date of publication of Finance Bill 2012) with transitional arrangements for affected individuals who may have drawn down their private sector pensions before that date but remained members of a public service scheme on or after that date.