Terence Flanagan (Dublin North East, Independent)
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120. To ask the Minister for Finance the changes made to the standard and personal funding threshold for pensions over the past five years; and if he will make a statement on the matter. [49288/14]

Michael McGrath (Cork South Central, Fianna Fail)
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122. To ask the Minister for Finance the number of taxpayers who were impacted in 2014 by restriction on tax relief on contributions to large pension pots outlined in budget 2014; and if he will make a statement on the matter. [49290/14]

Terence Flanagan (Dublin North East, Independent)
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148. To ask the Minister for Finance if the public sector is being treated the same as the private sector regarding standard funding thresholds and personal funding thresholds for pensions; and if he will make a statement on the matter. [49389/14]

Michael Noonan (Limerick City, Fine Gael)
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I propose to take Questions Nos. 120, 122 and 148 together.

I assume the Deputies' questions relate to the Standard Fund Threshold (SFT) regime which deals with the maximum allowable pension fund at retirement for tax purposes.

The SFT regime was introduced with effect from 7 December 2005 and is designed to address the problem of pension overfunding and excessive pension accrual by placing a limit on the total capital value of pension benefits that an individual can draw-down in their lifetime. Where the limit is exceeded, a significant tax charge is imposed on the excess when the benefits are drawn down. In this way, the SFT acts to discourage the building up of large pension funds in the first place, or unwinds the tax advantage of such overfunding, by clawing back, through the significant tax charge, the tax relief granted.

The SFT legislation provides that where an individual has pension rights in excess of the SFT limit (at the relevant dates) he or she could claim a Personal Fund Threshold (PFT) from Revenue in order to protect or "grandfather" the value of those rights on that date.

The attached schedule sets out in summary form the principal changes made to the SFT regime since its inception. For convenience, the changes are set out on a Finance Act basis.

The SFT regime and the various changes to the regime outlined in the Schedule apply, generally, to all private and public sector pension schemes and pension arrangements, with the exception of the encashment option and the specific public sector related reimbursement options.

As regards the encashment option, I introduced this measure 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 such 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. 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.

As regards the reimbursement options, as mentioned above public servants cannot prevent a chargeable excess arising and the significant tax charge that ensues, as they have no means of ceasing to accrue benefits under their schemes. It was for that reason that I introduced in Finance Act 2012 a more flexible reimbursement option for public servants affected by chargeable excess tax and extended it in Finance (No.2) Act 2013. I should stress that these reimbursement options do not remove or reduce the tax liability arising on a chargeable excess but provide more flexible options for the recovery of the tax liability by the pension scheme administrator. These options involve effectively spreading the recovery of the tax, paid up front by the public service pension administrator, over a longer period.

As regards the number of individuals that may be affected by the changes to the Standard SFT regime introduced from 1 January 2014, it is difficult to be definitive about this issue. Among other reasons, this is because the changes are likely to have both direct impacts and indirect behavioural impacts. The direct impacts will be on individuals whose pension savings or entitlements were in excess of the reduced SFT on 1 January 2014 and who have to apply for a PFT certificate. There will also be direct effects on those individuals whose pension savings or entitlements were below the threshold on 1 January 2014 but, with future contributions or accruals, may exceed the threshold in time. For both of these groups where the SFT or PFT is exceeded at the point of retirement, chargeable excess tax will arise. However, the changes are also likely to mean that individuals (generally in the private sector) who may otherwise be affected by the amendments to the SFT, and who have the flexibility to do so, may change behaviour and opt out of additional pension saving or pension accrual, in circumstances where they can obtain compensatory payments from their employer, in order to avoid breaching the SFT or their PFT. Overall, it is estimated that the changes could potentially impact, both directly and indirectly, on up to 10,000 individuals in the short to medium term.

Schedule

Principal changes to the Standard Fund Threshold since inception

Finance Act 2011

- The original SFT limit of €5 million, which through indexation had increased to c. €5.4m, was reduced to €2.3m with effect from 7 December 2010.

- Individuals with pension rights in excess of the new lower SFT on 7 December 2010 could claim a PFT (not exceeding the old SFT of €5.4m) from Revenue in order to protect or "grandfather" the value of those rights on that date. 

Finance Act 2012

- An "encashment" option was introduced with effect from 8 February 2012, to address particular difficulties arising from the reduction in the SFT limit to €2.3m in Finance Act 2011, for individuals with dual private sector and public sector pension arrangements. The encashment option provides a one-off opportunity for individuals who meet the conditions to encash their private 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 sector pension crystallises. The exercise of the option attracts tax at the point of encashment at the higher income tax rate on a ring-fenced basis plus USC. No tax-free lump sum is available in respect of the pension rights encashed.

- Provision was made to address an unintended "double taxation" anomaly whereby tax at the standard rate arises on a retirement lump sum (in excess of the tax-free limit of €200,000) paid to an individual under a pension arrangement at the same time as tax arises on a chargeable excess in relation to that individual (the amount of which will have been influenced by the lump sum). With effect from 8 February 2012 a pension scheme administrator is required to offset the tax on the lump sum against the chargeable excess tax.

- A more structured and flexible regime was introduced for the reimbursement of public sector pension scheme administrators for chargeable excess tax paid "up-front" by the administrator as  follows:

- the amount of reimbursement from the lump sum is limited to a maximum of 50% of the value of the lump sum, or a higher percentage if agreed between the individual and the administrator.

- the balance, if any, of the amount to be reimbursed is to be recovered from the gross annual pension payable to the individual over a period to be agreed between the individual and the administrator up to a maximum of 10 years, or

- by the discharge of the outstanding balance by way of a payment by the individual to the administrator (e.g. from own resources or by way of a distribution from an ARF beneficially owned by the individual), or

- by a combination of a reduction in pension and payment of a sum by the individual.

Finance (No.2) Act 2013

- The value of the SFT was reduced, with effect from 1 January 2014, from €2.3m to €2m,

- Individuals with pension rights in excess of the new lower SFT on 1 January 2014 can claim a PFT (not exceeding the old SFT of €2.3m) from Revenue in order to protect or "grandfather" the value of those rights on that date.

- The valuation factor to be used for establishing the capital value of defined benefit pension rights at the point of retirement, where this takes place after 1 January 2014, was changed from the standard valuation factor of 20 applying up to that date, to a range of higher age related valuation factors that vary with the individual's age at the point at which the pension rights are drawn down (ranging from a factor of 37 where the individual is aged 50 or under to a factor of 22 where the individual is aged 70 or over).

- In calculating the capital value of a defined benefit pension at the point of retirement, transitional arrangements were introduced to provide for a "split" calculation where part of the pension had already been accrued at 1 January 2014 so that the part accrued up to that date will be valued at a factor of 20 and the part accrued after that date valued at the appropriate higher age-related valuation factor,

- The reimbursement options, introduced in Finance Act 2012, for public servants affected by chargeable excess tax were amended and extended to reduce the amount that can be recovered upfront from the net retirement lump sum payable to the individual to a maximum of 20% of the net lump sum (down from 50%) and to provide the option of reimbursement of the pension fund administrator by way of a reduction in the gross pension payable over a period not exceeding 20 years.

Finance Bill 2014

- Amendments made to the SFT legislation to deal with issues arising in relation to pension fund cases involving Pension Adjustment Orders (PAOs by providing that, where chargeable excess tax arises in relation to pension scheme or pension plan benefits that are subject to a PAO, the tax will be apportioned by the scheme administrator, having regard to the terms of the PAO, so that both the member and non-member spouse/partner share the tax charge equitably.