Brian Walsh (Galway West, Independent)
Link to this: Individually | In context | Oireachtas source

64. To ask the Minister for Finance if provision will be made to allow a person (details supplied) in County Galway to draw down that person's pension in a defined benefit fund as an approved retirement fund; if legislation will be introduced to afford this flexibility in similar cases; and if he will make a statement on the matter. [17029/15]

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

By way of background, approved retirement funds (ARFs) were introduced by Finance Act 1999 to provide control, flexibility and choice to holders of personal pensions and to proprietary director members of occupational pension schemes in relation to the drawing down of benefits from their pension plans. Prior to that Act, any person taking a pension from a Defined Contribution (DC) scheme or a Retirement Annuity Contract had no choice but to purchase an annuity with their remaining pension pot after drawing down the permissible tax-free retirement lump sum. The ARF arrangement extended the options at retirement so that, in addition to the annuity option, the balance of a pension fund could be taken in cash (subject to tax, as appropriate) or be invested in an ARF, subject to certain conditions.

The ARF option was extended, in Finance Act 2000, to the part of an employee's occupational pension fund built up from Additional Voluntary Contributions (AVCs) and most recently, in Finance Act 2011, it was further extended to cover an employee's entire pension fund where the fund is a defined contribution (DC) occupational pension scheme. The 2011 extension which applied with effect from 6 February 2011 (the date of passing of the Act), was in respect of DC schemes approved by the Revenue Commissioners, on or after that date, under Chapter 1 of Part 30 of the Taxes Consolidation Act 1997. Where DC occupational pension schemes had been approved by Revenue prior to that date, the legislation provided that the extension of the ARF option in such cases was conditional on the scheme rules being amended to allow a scheme member exercise the option. Last year, I agreed to a proposal that the Revenue Commissioners will allow access to the ARF option for all holders of BOBs, the values in which have been transferred from DC schemes, regardless of the date of transfer.

The 2011 Finance Act, did not, however, extend the ARF option to the main scheme benefits of defined benefit (DB) occupational schemes as this option was not intended for DB scheme benefits, generally.

I am advised by the Revenue Commissioners, that pension retirement bonds, otherwise known as Buy-out-Bonds (BOBs), are single premium insurance policies effected by the trustees of an occupational pension scheme on behalf of a scheme member, as an alternative to providing a preserved retirement benefit under the scheme for that member. They are used in circumstances where a scheme member is leaving service and opts for a transfer value, on the wind-up of a scheme or where pension splitting arises in the context of a Pension Adjustment Order. BOBs are approved by the Commissioners on a generic, rather than on an individual basis, in the form of a standard bond policy document, under Chapter 1 of Part 30 of the TCA 1997 as DC products. However, in the view of the Commissioners, BOBs are not occupational pension savings vehicles in the normally accepted sense for example, an individual with a BOB cannot make contributions to the BOB. Rather, they are a specialist pension vehicle to deal with the specific situations described above.

I am further advised by the Commissioners that it has always been a condition of approval of generic BOB policies that the benefits to be provided to an individual under such policies be subject to the same restrictions and conditions that applied to the occupational pension scheme from which the transfer to the BOB originated. This includes access to the ARF option. The entitlement to the ARF option, in effect, travels with the transfer value paid into the bond and the fact that the BOB is considered a DC pension product does not, of itself, give entitlement to the ARF option from the BOB as of right. Thus, prior to the Finance Act 2011 changes, the ARF option only applied to benefits under a BOB where the bond holder could have availed of the option under the originating occupational pension scheme, e.g. that the bond holder was a proprietary director before leaving service or that part of the originating transfer represented AVCs. There was no alteration in this position insofar as BOBs originating from DB schemes is concerned following the Finance Act 2011 and more recent administrative changes.

In the details supplied with the question it is mentioned that the individual in question is not able to take a 25% tax free lump sum from his BOB. I am advised by the Revenue Commissioners that the benefits that can be taken from a BOB must reflect the rules of the original retirement benefit scheme (in this case a defined benefit pension scheme) from which the fund value originated. In this case the rules relating to the underlying DB scheme that apply to the BOB that the person concerned purchased do not allow the person to take 25% of the value of the BOB as a tax free lump sum. In a DB pension scheme the maximum tax free lump sum a member is permitted to take is 1.5 times final remuneration, or a lower proportion if the member has completed less than 20 years service with the employer.

Finally the issues around allowing access to the ARF option for BOBs whose values have transferred from DB pension schemes are broader than the tax policy considerations for which I have responsibility and are matters of general pension policy for which my colleague, the Tanaiste and Minister for Social Protection, Ms Joan Burton TD, has responsibility. I understand that both the Tanaiste and the Pensions Authority have concerns that the extension of the ARF option as being suggested could have fundamental implications for the DB model and potentially impact both on the Funding Standard and on the benefit promise to DB scheme members.  However, I further understand that the issue of ARF access for BOBs originating from DB schemes will be considered by the Tanaiste's Department in the context of a review of personal pension vehicles aimed at rationalising provision in this area, which review will be undertaken this year.