Written answers

Wednesday, 6 April 2016

Department of Finance

Defined Benefit Pension Schemes

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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152. To ask the Minister for Finance why a person is not allowed to buy an approved retirement fund from a defined benefit scheme; if he will introduce changes in this area; and if he will make a statement on the matter. [5968/16]

Photo of Michael NoonanMichael Noonan (Limerick City, Fine Gael)
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Approved retirement funds (ARFs) were introduced in 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 arrangements. 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 or an approved minimum retirement fund (AMRF), subject to certain conditions.

ARFs and AMRFs are investment products into which the proceeds of certain pension funds of an individual can be invested at retirement. Beneficial ownership of the assets in an ARF/AMRF vests in the individual owner of the ARF/AMRF. An ARF/AMRF must be managed by a Qualifying Fund Manager and, as would be the case as a member or holder of a DC pension scheme or personal pension plan, the ARF/AMRF owner also bears the investment risk of the funds. Tax is not payable on the investment income or gains while the funds are invested in an ARF/AMRF. Distributions from an ARF or AMRF are taxable at the owner's marginal rate of tax and, in the case of ARFs, a certain percentage of the assets are imputed as distributed each year and taxed accordingly unless actual distributions equivalent to the imputed amount are made.

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 more recently, in Finance Act 2011, it was further extended to cover an employee's entire pension fund where the fund is a DC occupational pension scheme.

The ARF option does not apply to the main benefits paid from defined benefit (DB) pension schemes, generally, since it was never intended or considered a necessary requirement for such schemes. Among other reasons, this is because such schemes pay out a specified pension benefit to members on retirement based on their service and remuneration. Furthermore, unlike in DC pension arrangements, there are no individual funds or pension pots attributable to individual members of DB schemes and, as such, DB scheme members do not individually bear the investment risk of the scheme and are not required to make their own investment decisions. Accordingly, I see no reason to extend the ARF option to the main benefits payable from DB pension schemes.

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