TAOISEACH ENDA Kenny yesterday confirmed that retirement income held in flexible pension accounts will not be liable to the pension levy.
Mr Kenny said Approved Retirement Funds (ARFs) into which mostly wealthy people have moved their pension funds on retirement for tax efficiency and estate planning purposes were not considered pension funds.
A statement from the Department of Finance said ARFs were “closest in nature and are an alternative to an annuity”. It noted that both are taxed at a pensioner’s marginal income tax rate.
Annuities – insurance policies that guarantee a certain annual income – are also exempt from the levy.
However, most defined benefit schemes have in the past decade opted to pay “annuities” to their pensioners from within the fund rather than buying an annuity from an insurance company because of the increasingly high cost involved.
Pensions paid in this way are subject to the charge. And because the 0.6 per cent levy is charged to the underlying pension fund assets rather than the actual pension paid, the effect on the income of pensioners paid in this way will be exacerbated. According to figures provided by the Irish Association of Pension Funds, a €10,000 pension from a defined benefit pension scheme would require an underlying “reserve” of 15 times this to reflect the likely lifespan of the pensioner in actuarial terms.
Applying the 0.6 per cent charge to this reserve fund yields a levy of €900 which, if passed directly to the pensioner amounts to a 9 per cent cut in their pension. Pensioners paid in this way also pay income tax at their marginal rate – like their peers in ARFs and on formal annuities.
The Government expects to raise €470 million a year over each of the next four years – almost €1.9 billion in total – with the levy which is targeted at the assets in all funded private sector pension schemes.
Ministers have justified the proposal by pointing to the generous tax relief available to pension savings in recent years.
Pension industry sources continued yesterday to challenge the Government’s decision to target private sector pension funds.
Fionán O’Sullivan, director at IFG Corporate Pensions, said politicians should have first targeted their own pensions “which bestow unjustly generous benefits to themselves, even by international standards. He said: “commitments were made at election time to deal with minister’s ludicrous pension benefits, but no such changes have been addressed to date”.
Siptu president Jack O’Connor said the possibility of wealthy people availing of a loophole to “avoid” the levy would destroy the prospect of it being accepted by broader society.
In the Dáil yesterday, the Minister for Finance Michael Noonan said the idea of a levy on pension funds had been suggested by the industry itself, in return for retaining tax relief on contributions.
The precise working of the levy will remain unclear until the supplementary Finance Bill is published next Thursday.
