More looting...this time in Leinster House

Article covered in Sunday Times yesterday....................

Our TDs and Senators have passed into law a section in the Finance Bill designed to artificially understate the value of their pension funds and senior civil service pension funds so that they avoid or minimise tax that would otherwise be payable.

For top civil servants, Ministers and TDs have, The value of a pension for tax purposes is in theory worked out be estimating what sum you would need to invest to generate an annual payment equal to that pension. If the end result is above €2.3 million, the pension is liable to tax at the top rate.

What they have done is very clever. They ditched the idea of actuarily working out the capitalised value and instead decided to apply an artificially low multiplier of 20 to the yearly pension figure. The multiplier should, according to actuaries, be closer to 40 in order to give a realistic valuation. By reckoning the capital value of their individual pension funds in this creative manner, most if not all of these bright hard working servants of the people manage to fall below the €2.3 million threshold and so avoid exposure to top rate income tax.

If my sums are right, this means they can take a pension up to around €110,000 and still not pay top rate tax.

Brady (Sunday Times) quotes the Department of Finance as crediting the Revenue with the idea, supposedly to keep things simple.

It is simple all right. Very simple.

Roy

I did not read the article, but if it said what you indicated ....its wrong. Any pension income is subject to income tax. And anyone drawing a pension of €110,000 p.a. (whether a Minister or not) will be on the top rate of tax.

The real issue here is that if the notional value of the pension (pension x 20) exceeds €2.3m (therefore a pension of €115,000) there is an additional tax hit at reirement equal to a lump sum of the excess over €2.3m x 41%. So if a minister was drawing a pension of say €130,000, the tax bill (paid by the Minister) would be €130,000 - €115,000 x 20 x 41% = €123,000 and the continuing pension would also be fully subject to tax in the normal way. So pension values in excess of €2.3 are subject to a double tax hit.

The point the article should be focussing on is whether a multiplier of 20:1 is correct (irrespective of the type of pension). It is true to say that adopting such a multiplier in the case of a typical Civil Service/Ministerial pension is generous. The actual capital value (if one were to buy such an annuity in the open market) would probably be between 33 and 40 times (depending on the age of retirement).

To be fair, the 20:1 multilpier applies to all Defined Benefit pensions (public and private sector alike). It does not take into account the actual type of pension, i.e. whether the pension has an attaching spouses pension, whether the pension is indexed in retirement or the actual age at retirement.

So how does/should that work for example for Dermot Ahern? He is surely a prime example of someone whose factor must be well in excess of 20 - he's only 55. After a first year paypot of €318K, he'll get €128K (75K ministers pension + 53K TD pension) pension thereafter. Will he have to pay this additional tax each year? Or does he escape because he retired before the cap was reduced to 2.3M? His pension costs are so large, he may have been in danger of breaching the old cap (I saw one estimate of his pension costs exceeding 5M...).
This really stinks. And while, yes, the rules apply to all DB schemes, TDs and ministers seem much more likely to retire early on good pensions than non-politicians.

The Sunday Times has a recent story that retiring Ministers would have their golden handshake payments taxed at 90% under the 'bankers bonuses' legislation. I heard no more about that, which led me to wonder are the Sunday Times always on the ball with such stories.

orka said:

So how does/should that work for example for Dermot Ahern? He is surely a prime example of someone whose factor must be well in excess of 20 - he's only 55. After a first year paypot of €318K, he'll get €128K (75K ministers pension + 53K TD pension) pension thereafter. Will he have to pay this additional tax each year? Or does he escape because he retired before the cap was reduced to 2.3M? His pension costs are so large, he may have been in danger of breaching the old cap (I saw one estimate of his pension costs exceeding 5M...).
This really stinks. And while, yes, the rules apply to all DB schemes, TDs and ministers seem much more likely to retire early on good pensions than non-politicians.

Click to expand...

meanwhile the other Aherne (the one who caused te REAL damage) has pension benefits estimated @ €7 MILLION so how much tax will he be paying? it's incredible that Revenue would adopt the line "well its simpler this way".

Roy

The new €2.3m cap (was €5.4m) came into effect from 7th December. If however an individual had a fund value in excess of €2.3m on 7th Dec or had accrued a pension entitlement (based on the 20:1 multiplier) in excess of €2.3, then they can seek Revenue approval for a Personal Fund Threshold of the higher amount. This means that such individuals would not be liable to the double taxation, on values up to the PFT but obviously would be liable to a double hit on any additional fund growth or accued pension entitlement after 7th December.