Terence Flanagan (Dublin North East, Independent)
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297. To ask the Minister for Finance the position regarding approved retirement funds in respect of a person (details supplied) in Dublin 13; and if he will make a statement on the matter. [20386/15]

Michael Noonan (Limerick City, Fine Gael)
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The Deputy's correspondent raises an issue relating to the imputed distribution of the value of assets in an ARF.

An imputed distribution of the value of assets in an ARF was introduced because an internal review of tax relief for pensions provision undertaken by my Department and the Revenue Commissioners in 2005 found that the ARF option was largely not being used as intended to fund an income stream in retirement but was, instead, being used to build up funds in a tax-free environment over the long term.

In an effort to counteract this, Budget and Finance Act 2006 introduced, with effect from 2007, an imputed or notional distribution of 3% of the value of the assets of an ARF on 31 December each year (subsequently changed to 30 November each year). The notional distribution arrangement only applies where the ARF owner is 60 years or over for the whole of a tax year. The notional distribution was phased in over the period 2007 to 2009, with 1% applying in 2007, 2% in 2008 and the full 3% from 2009.

The notional amount is taxed at the ARF owner's marginal income tax rate. Funds actually drawn down by ARF owners are credited against the imputed distribution in that year to arrive at a net imputed amount, if any, for the year. Budget and Finance Act 2011 increased the rate of the notional distribution to 5% of the value of the assets of an ARF, while Finance Act 2012 further increased the rate to 6% in respect of ARFs with values over €2 million. In last year's Finance Act, however, I reduced the 5% rate to 4% for ARF owners  who are under the age of 70. This reduction in the imputed distribution rate is intended to reduce the risk that individuals in the age group 60 to 70 years might outlive the funds in their ARFs.

An important point to note is that, while most ARF owners take actual draw downs at least equal to the notional distribution rate, there is no obligation on them to do so. The requirement in the legislation is not a statutory minimum drawdown condition. The only requirement is that tax is paid from the ARF on the notional drawdown amount, whether it is drawn down or not.

I do not accept the suggestion in the details supplied with this question that the tax on the notional distribution is a tax on capital gains. We operate what is known as an EET system of pension taxation, whereby contributions to pension arrangements and the build up of the pension assets in the pension fund are both  tax-exempt, while pensions are taxed as income in the pay-out phase.  ARFs, although they are post-retirement investment vehicles and not pension funds per se, none the less  benefit from gross roll-up, which effectively extends the tax exempt fund phase and it is only right that  this deferred taxation is "collected" at the point when the ARF owner accesses his or her funds. As already mentioned the imputed distribution regime was introduced to encourage ARFs to be used as intended, that is, to provide an ongoing income stream in retirement as a flexible alternative to annuities.  

I have no plans at this time to further amend the imputed distribution arrangements for ARFs but will bear concerns such as those of the Deputy's correspondent in mind when considering the matter in the future.