Please note the Report only sets out recommendations which the Government may or may not implement at some time in the future and some changes proposed may take years to implement, if ever.
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Reduced Cap on Tax Free Lump Sum
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Standard Fund Threshold
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Changes to Tax Relief – Matching Revenue Contribution
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Soft Mandatory Approach to Pensions
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Employer PRSI Relief
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Extension of ARF options
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Directors close to Retirement
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New SSIA style Retirement Savings Scheme
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Other Anomalies
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Other Changes
1.
Reduced Cap on Tax Free Lump Sum
At present the cap on amount of tax-free lump sum any individual can take is 25% of the Standard Fund Threshold (€5,418,085) which amounts to €1,354,521. This cap applies irrespective of whether the individual is entitled to take 25% of the fund or 1.5 times final salary.
The Report recommends that the current cap of €1,354,521 be reduced to €200,000 and any lump sum paid in excess of €200,000 should be taxed at standard rate of income tax.
2. Standard Fund Threshold
The Standard Fund Threshold was initially introduced in 2005 to limit the total capital value of pension benefits that individual can draw on in their lifetime from tax relieved pension arrangements. The earnings cap for pension tax relief for the 2008 tax year is €275,239 and for the current tax year is €150,000. The Report recommends that the Standard Fund Threshold should be correspondingly reduced, which could mean that in the future, the Standard Fund Threshold could be nearer to €3M instead of €5.4M.
3. Changes to Tax Relief – Matching Revenue Contribution
The Report proposes that the existing tax relief system is replaced by a single “matching” approach whereby Revenue will give a matching €1 for every €1.60 invested in a pension by a contributor. This would equate to tax relief of 38% as every €100 invested in the pension would cost the contributor €62. The age related earnings limits will continue to apply to limit the amount a contributor can invest.
The relief will be given at source in the same way as mortgage interest relief – where only the net amount is payable by the contributor.
In order to benefit from this matching contribution proposal the contributor must be someone with earned income which is potentially liable to tax.
3.1 Occupational Pension Schemes
The matching proposal would apply to all employee contributions. The Report has pointed out that the BIK exemption for employer contributions is unfair as it favours those in the higher tax bracket.
3.2 Personal Pensions and PRSAs
Personal pension and PRSA contributions would also be subject to the new matching contribution approach. Any employer contribution to a PRSA should be treated as a benefit-in-kind and for the employee it will in effect be an after-tax contribution and should qualify for the matching contribution from Revenue.
3.3 Kick-start Proposal
Building on the matching approach above, the Report has proposed that Revenue will give €1 for every €1 paid by a contributor within the first five years of such retirement savings being made. After the five year period, the Revenue will revert to giving €1 for every €1.60 contributed. It is envisaged that the lower paid who traditionally were only paying tax at standard rate or fell outside of the tax net would now have an incentive to save for retirement.
3.4 Payslip changes
At present there is a requirement to give details of pension contributions paid by or on behalf of an employee. The Report proposes that in future the Revenue’s matching amount should also be shown on a payslip, which should have a positive effect as regards pension funding.
The Report acknowledges that the matching contribution proposal is a change which may happen over the medium to long term.
4. Soft Mandatory Approach to Pensions
As you are aware all employers must provide a PRSA deduction facility unless they satisfy one of the exclusions for doing so. The proposed soft mandatory approach intends to build on that and requires employers to enroll their employees (over age 25 possibly) in a scheme. The employee will have the facility to opt out of the scheme later. The Report does not give any detail regarding the minimum contribution on enrollment, or the length of time before being allowed to opt out or the extent of any refunds allowable, etc.,
5. Employer PRSI Relief
At present an employer gets PRSI relief of 10.75% on any employee contribution paid via net pay. The Commission’s Report points out that this relief is only given as a result of the operation of net pay and is a “windfall” for the employer bearing in mind that there is no salary cap for employer’s PRSI. The Report concludes that it is arguable as to whether employer PRSI relief should continue.
6. Extension of ARF Options
The Report supports the widely held view that ARF options should be made available to all members of a DC occupational pension scheme.
7. Directors close to Retirement
The Report has drawn attention to what it describes as “unintended and inappropriate benefits” arising where a Director increases their salary and pension contribution levels to make provision at a late stage for their retirement. It recommends that legislation be changed to prevent this last minute funding.
8. New SSIA style Retirement Savings Scheme
A new long term savings plan is proposed along the lines of the SSIA scheme which will run in parallel with existing retirement savings products. The proposed features of the new retirement savings scheme are set out in the table below:
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Target Audience
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Middle to low income earners,
Unemployed,
Anyone who has opted out of doing a PRSA/pension for whatever reason,
Not available to employees who are in a DB scheme.
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Matching Proposal
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Revenue will put in €1 for every €2 invested
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Contribution Levels
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Minimum of €120 per annum,
Maximum of €2,200 per annum
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Employer Input
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Employer is given access to the scheme and provide a payroll deduction facility
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Investment Options
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A range of options including deposits, investing in shares, funds and unit trusts. A default option should apply.
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Access to funds
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Restricted access in certain circumstances e.g. buying a principal private dwelling of serious illness but there would be a corresponding claw back o the Revenue’s matching contribution on the amount withdrawn. The National Treasury Management Agency might have a role in the fund management.
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Tax on Funds
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The investment growth on the total amount invested including Revenue’s matching contribution amount would be subject to an annual tax at the standard rate or else the fund would be allowed to grow tax-free until draw down where an exit tax type approach would be applied.
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9. Other Anomalies
The Report also recommends that NRAs on personal pensions, PRSAs and occupational pension schemes should be consistent. It recommends that the NRA on an occupational pension scheme should therefore be between 60 and 75.
Another anomaly that they identify as a barrier to starting a pension is the difference that exists in drawing tax-free lump sum benefits from a personal pension/PRSA and an occupational pension scheme. The Report does not make any specific recommendation on this.
At present all employees (including proprietary directors) can claim PRSI relief on pension contributions. Self employed individuals are not entitled to PRSI relief. The Report recommends that PRSI relief should also apply in respect of self-employed pension contributions. However if the matching contribution proposal is implemented this change would not be relevant.
10. Other Changes
10.1 Shares
At present stamp duty of 1% applies to share transfers. The Report has recommended that stamp duty on all share transactions should be reduced to zero.
Currently an individual who buys shares in a company will pay tax at their marginal rate on the dividends received. The recommendation is that DIRT tax is paid on dividends in the future.
10.2. PRSI and Health Levy
The Report recommends that the whole PRSI system be reviewed and a similar PRSI base should apply to employees and the self employed and there should be a single rate of charge which should apply to both.
The employee PRSI ceiling should be abolished on a phased basis and employees should be subject to PRSI on unearned income such as investment income and rental income.
The health levy should be integrated into the income tax system.
10.3. Social Welfare Benefits
Almost all social welfare benefits should be subject to taxation and provision should be put in place for the Department of Social Welfare to deduct tax at source. If introduced, there will be a child tax credit applied in respect of child benefit for those in the lower half of the income scale.
10.4. Taxation of Property
An annual property tax on all residential homes should be introduced. The tax should be based on the value of the land or site value and not on the building or improvements that are on the land.
10.5 Carbon Tax
The Report recommends that a carbon tax on fossil fuels be introduced and should apply to energy products released for consumption in Ireland.
10.6 Tax relief on Trade Union Subscriptions
Report recommends that income tax relief for trade union subscriptions be discontinued.
10.7 Ex Gratia Payments
Income tax relief for ex-gratia termination payments should continue but the total exempt amount should be limited to €200,000 and both the Standard Capital Superannuation Benefit and Top Slicing relief should be simplified.
Ex-gratia termination payments related to death or disability should be subject to a limit in relation to the tax-free amount permissible.
10.8 Capital Gains
The reintroduction of indexation relief against capital gains tax has been recommended.
This publication is intended only as a general guide and not as a detailed analysis. In the interests of brevity and clarity, detailed information may have been omitted which may be directly relevant to an individual’s or an organisation’s circumstances. It should not be used as a substitute for appropriate professional advice. The information is provided "as is" without warranties of any kind, express or implied, including accuracy, timeliness and completeness. In no event shall Tab Financial Services or its employees be liable for any direct, indirect, incidental, special, exemplary, punitive, consequential or other damages whatsoever (including but not limited to, liability for loss of use, data or profits), arising out of or in connection with the information provided in this publication.