Cormac Devlin (Dún Laoghaire, Fianna Fail)
Link to this: Individually | In context

218. To ask the Minister for Finance if he will consider amending the Revenue rules governing approved retirement funds (ARFs) to permit holders of small ARFs valued under €200,000 to top up the fund's cash balance solely for the purpose of meeting trustee liquidity requirements; and if he will make a statement on the matter. [27664/25]

Paschal Donohoe (Dublin Central, Fine Gael)
Link to this: Individually | In context

I am informed by Revenue that an approved retirement fund (ARF) is a post-retirement investment vehicle from which the proceeds of a pension fund can be paid into at retirement. ARFs are managed by a Qualified Fund Manager (QFM) who acts as the administrator for the fund. The ARF holder may draw down from their ARF at will, subject to income tax under Schedule E in the year of assessment.

The legislation governing ARFs prevents “top up” contributions being made into ARFs. Section 784B(1) Taxes Consolidation Act 1997 (TCA) sets out the conditions for approval of an ARF. Paragraph (b) states that assets in an ARF shall only consist of assets transferred to the fund on the retirement of an ARF holder, where the holder has chosen the “ARF option” in section 784(2A) TCA; assets previously held in another ARF in the name of the individual or the individual’s deceased spouse or civil partner; or assets derived from such assets (that is, income or gains from investment of the ARF assets). This means that any additional contribution into the ARF, such as is suggested above, is not permitted. This is by design as the ARF is intended to be a vehicle for the proceeds of pension products.

The question of ARF liquidity may arise because of the “imputed distribution regime”, which is provided for in section 790D TCA. This is a notional annual distribution from the ARF of between 4% and 6%, depending on the ARF holder’s age and the value of their fund. The imputed distribution amount is taxed at the ARF holder's marginal income tax rate. Funds actually drawn down by ARF owners are credited against the imputed distribution to arrive at a net imputed amount, if any, for the year. However, where no funds are drawn down in the relevant year of assessment, the ARF holder is still liable to pay tax on the notional drawdown.

The imputed distribution regime was introduced in Finance Act 2006 following an internal review of tax relief for pension provision, undertaken by the Department of Finance and Revenue in 2005. This review found that the ARF option was largely not being used as intended – that is, to fund an income stream in retirement - but was instead being used to build up funds or assets in a tax-free environment over the long-term. The imputed distribution measure was implemented to encourage the use of ARFs as intended.

It is a matter for the ARF holder in conjunction with her or his QFM to ensure there are sufficient liquid assets in the ARF to pay distributions to the ARF holder and pay the tax due under Schedule E or, where no actual distribution is made, to pay the tax due under Schedule E on an imputed distribution.

I have no plans to change these arrangements at present. However, these provisions, along with other pension taxation measures, are kept under review.