Written answers

Tuesday, 19 July 2016

Department of Finance

Pension Provisions

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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194. To ask the Minister for Finance the reason the minimum imputed distribution from an approved retirement fund is set at 5% per annum; his views on whether this places an undue burden on persons making long-term financial plans including possibly the provision of nursing home care; and if he will make a statement on the matter. [22436/16]

Photo of Michael NoonanMichael Noonan (Limerick City, Fine Gael)
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Approved Retirement Funds (ARFs) are part of the flexible options at retirement introduced in Finance Act 1999 to provide control, flexibility and choice to the holders of personal pension plans and proprietary director members of occupational pension schemes in relation to the drawdown of their retirement benefits. 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 retirement lump sum. These flexible options at retirement have since been extended to the benefits taken by any individual from DC pension arrangements, generally.

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 Finance Act 2014, however, I reduced the 5% rate to 4% for ARF owners who are under the age of 70 (and where the value of assets in the ARF is €2 million or less). 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 implied suggestion in the question that the imputed distribution arrangements for ARFs should not apply in order to facilitate financial planning. 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, nonetheless represent an alternative to the traditional pay-out phase of a taxable annuity for those who choose that option. Pension fund assets are not taxed on transfer to an ARF. The ARF benefits from gross roll-up and so it is only right that tax is applied 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.

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