NoRegretsCoyote
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The lump sum is a big feature of private sector DB schemes (still plenty around) and of course all public service pensions are DB.
It would be very hard to increase tax on one but not the other.
TSW Commission: The tax-free lump sum on retirement should be reduced
- Thread starter Brendan Burgess
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It would be very hard to increase tax on one but not the other.
Steven Barrett
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More so public sector pensions. Most private sector DB schemes have a reduction in the annuity if you take a LS or you can take it from AVC's. The public service is a very clear 1/80th of salary pension plus 3/80th lump sum. It would mean rewriting all trust schemes and rules. The public service would go nuts.
As Tommy said, most of this won't be implemented. If their recommendations are implemented, we will be an extremely well funded country. We'd pay so much tax that we'd have to have public services akin to the Nordic countries. Not sure the people we have in charge are capable of implementing a State like that!
I’m not proposing any alternative policy measures - I simply agree that folks should pay off their debts before they retire.
They shouldn’t get a sizeable tax break to do so IMO.
I don’t disagree but that’s a different issue.
We’re talking about whether the TFLS can be justified in circumstances where the old age dependency ratio is going to increase dramatically in the coming decades.
Are we going to just keeping lumping everything onto our kids?
T McGibney
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The tax break also serves as an incentive to people with current housing and family rearing commitments to keep putting money aside for their old age. Without it, the old age dependency issue you correctly cite below will at least arguably be a lot worse.
Gordon Gekko
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These people seem to miss something very obvious.
People and capital are mobile, especially towards the higher end.
And not all countries will go down the Sinn Fein IRA road of hammering the wealthy.
This Commission for Taxation rubbish all looks like it was written by Chairman Mao.
At the first sign of any of the above, people will just leave. They’ll go to other parts of Europe where successful people aren’t seen as pariahs and are actually welcomed.
People and capital are mobile, especially towards the higher end.
And not all countries will go down the Sinn Fein IRA road of hammering the wealthy.
This Commission for Taxation rubbish all looks like it was written by Chairman Mao.
At the first sign of any of the above, people will just leave. They’ll go to other parts of Europe where successful people aren’t seen as pariahs and are actually welcomed.
jasdpace@gmail.
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My understanding is that successive governments have been trying to motivate people to make provision for their old age. Reducing the TFLS would really be supportive of this objective in much the same way as Noonan's raid on pension funds, a decade or so ago, really bolstered faith in the system.
I think the Commission and those that support this recommendation should be applauded for seeing the big picture.
I think the Commission and those that support this recommendation should be applauded for seeing the big picture.
Steven Barrett
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What is getting rid of the TFLS going to achieve? More income for the revenue? But if the problem of reliance on the state pension isn't addressed, the issue won't be fixed. AE is the start of fixing this. It has been far too slow to implement and it'll be 10 years before it is fully up and running. It is a long term fix. Funny that public servants join their pension scheme from day 1 at 6.5% contribution but it will take 10 years for the private sector to get to that level...
Steven
http://www.bluewaterfp.ie (www.bluewaterfp.ie)
Brendan Burgess
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Agree fully.
The problem with most of these proposals and any proposals for reform is that people see an increase in tax as a penalty.
It would be better to say "We will abolish the tax-free lump sum, and with the additional tax revenue, reduce the top rate of Income Tax by 1%"
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Brendan Burgess
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Here is the reasoning from the full report
[After a discussion on whether tax relief on pension contributions should be changed...]
On balance, the Commission concluded that the existing approach of marginal relief was appropriate on the basis that such contributions represent a deferral of income. In addition such an approach is fair and equitable so long as pension income is fully taxed at the point of drawdown, and in the context of our recommendations on the Standard
Fund Threshold (see section 8.5.4).
8.5 COmmISSION PROPOSalS
8.5.1 Comprehensive implementation of ‘EET’
[EET is the description of a pension system which is Exempt, Exempt, Taxed. So the pension contribution is exempt from tax, the investment returns are exempt from tax but the drawdown is taxed]
Ireland is somewhat unusual in Europe in having substantial pension tax-free lump sums.146 In some countries lump sums are not permitted (Netherlands and Sweden, for example) while in others the amount of lump sum is linked to a proportion of the total pensions savings pot and it is taxed (UK, France and Belgium). Only Portugal, Malta and Ireland have some lump sum tax-free and Ireland is alone in having a monetary limit (€200,000 lifetime limit) rather than a percentage of overall final savings limit.
No beneficiary or costing data is available in the Department of Finance Tax Expenditure report for the cost of tax-free pension lump sums as it is not currently possible to disaggregate data from other non-pension lump sums. It should be noted that Revenue expenditure data from 2014 placed the annual cost of tax-free lump sums at €134
million at that time.
As can be seen from Table 17, different rules apply to the calculation of a lump sum entitlement depending on the savings vehicle, subject to an overall lifetime limit of €200,000 that encompasses all retirement lump sums paid to an individual on or after 7 December 2005. Furthermore, beneficial treatment is also provided for lump sum amounts between
€201,000 and €500,000, which are taxed at the standard rather than marginal tax rate. As indicated earlier, the exemption of significant elements of pension income from tax at the point of drawdown raises questions about the equity of the pension tax relief system as all other income from supplementary pensions is taxable at the marginal rate and subject to USC.
While the Commission recognises the role the provision of a tax-free lump sum can play in incentivising individuals to save for retirement, the Commission believes that the existing level of exemption is excessive and should be reduced. On equity grounds, the existence of a large tax-free lump sum threshold is inconsistent with the full implementation of an ‘EET’ system of tax relief and the ongoing
retention of marginal tax relief on pension contributions.
Recommendation
8.1 The Commission recommends more comprehensive implementation of the ‘Exempt, Exempt, Taxed’ model of pension provision including recommending a meaningful reduction in the overall level of tax-free lump sum available from its current level (worth over 4 times average earnings). Marginal tax rates should apply on all lump sums over the tax-free threshold.
Furthermore, the Commission also notes that there are scenarios where some individuals may receive a tax-free lump sum on departure from employment of up to €200,000 while also benefiting from a tax-free pension lump sum to the same amount. While the tax relief available on an ex-gratia lump sum may be reduced by the value of the pension lump sum from the occupational pension scheme associated with the job from which they are terminated, lump sums derived from PRSAs, RACs and other pension schemes are not currently included. The Commission suggests that such anomalies can be addressed through the introduction of a single lifetime limit to include both pension lump sums and any ex-gratia termination payments received.
Recommendation
8.2 The Commission recommends that there should be a single tax-free lump sum lifetime limit to include both pension lump sums and any ex-gratia termination payments received.
[After a discussion on whether tax relief on pension contributions should be changed...]
On balance, the Commission concluded that the existing approach of marginal relief was appropriate on the basis that such contributions represent a deferral of income. In addition such an approach is fair and equitable so long as pension income is fully taxed at the point of drawdown, and in the context of our recommendations on the Standard
Fund Threshold (see section 8.5.4).
8.5 COmmISSION PROPOSalS
8.5.1 Comprehensive implementation of ‘EET’
[EET is the description of a pension system which is Exempt, Exempt, Taxed. So the pension contribution is exempt from tax, the investment returns are exempt from tax but the drawdown is taxed]
Ireland is somewhat unusual in Europe in having substantial pension tax-free lump sums.146 In some countries lump sums are not permitted (Netherlands and Sweden, for example) while in others the amount of lump sum is linked to a proportion of the total pensions savings pot and it is taxed (UK, France and Belgium). Only Portugal, Malta and Ireland have some lump sum tax-free and Ireland is alone in having a monetary limit (€200,000 lifetime limit) rather than a percentage of overall final savings limit.
No beneficiary or costing data is available in the Department of Finance Tax Expenditure report for the cost of tax-free pension lump sums as it is not currently possible to disaggregate data from other non-pension lump sums. It should be noted that Revenue expenditure data from 2014 placed the annual cost of tax-free lump sums at €134
million at that time.
As can be seen from Table 17, different rules apply to the calculation of a lump sum entitlement depending on the savings vehicle, subject to an overall lifetime limit of €200,000 that encompasses all retirement lump sums paid to an individual on or after 7 December 2005. Furthermore, beneficial treatment is also provided for lump sum amounts between
€201,000 and €500,000, which are taxed at the standard rather than marginal tax rate. As indicated earlier, the exemption of significant elements of pension income from tax at the point of drawdown raises questions about the equity of the pension tax relief system as all other income from supplementary pensions is taxable at the marginal rate and subject to USC.
While the Commission recognises the role the provision of a tax-free lump sum can play in incentivising individuals to save for retirement, the Commission believes that the existing level of exemption is excessive and should be reduced. On equity grounds, the existence of a large tax-free lump sum threshold is inconsistent with the full implementation of an ‘EET’ system of tax relief and the ongoing
retention of marginal tax relief on pension contributions.
Recommendation
8.1 The Commission recommends more comprehensive implementation of the ‘Exempt, Exempt, Taxed’ model of pension provision including recommending a meaningful reduction in the overall level of tax-free lump sum available from its current level (worth over 4 times average earnings). Marginal tax rates should apply on all lump sums over the tax-free threshold.
Furthermore, the Commission also notes that there are scenarios where some individuals may receive a tax-free lump sum on departure from employment of up to €200,000 while also benefiting from a tax-free pension lump sum to the same amount. While the tax relief available on an ex-gratia lump sum may be reduced by the value of the pension lump sum from the occupational pension scheme associated with the job from which they are terminated, lump sums derived from PRSAs, RACs and other pension schemes are not currently included. The Commission suggests that such anomalies can be addressed through the introduction of a single lifetime limit to include both pension lump sums and any ex-gratia termination payments received.
Recommendation
8.2 The Commission recommends that there should be a single tax-free lump sum lifetime limit to include both pension lump sums and any ex-gratia termination payments received.
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Can anyone tell me what scenarios these are?
I thought the most an employer could give a retiring employee tax free was around €10k plus €765 per year of employment.
I don't wish to be cynical but this report is only about additional tax generation with no corresponding reduction in tax on labour.
T McGibney
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See https://www.citizensinformation.ie/..._retirement/retirement_lump_sum_taxation.html
The €10k plus €765 per year of employment refers to ex-gratia payments only.
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T McGibney
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Granted, but it will most certainly have an impact on old age dependency.
A ratio is merely a statistic.
So death, injury or disability. While technically true describing that as a "departure from employment" is a bit of a misrepresentation. They are going after the gimped and crippled. It's about time!
There are currently around 4.5 people of working age for every older person.
By 2050, that is projected to reduce to 2 people of working age for every older person.
That is going to have a profound impact on the funding of State services and the choices we make in that regard.
T McGibney
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That was my initial reaction too, hence my deletion of the first draft of that comment. But in fairness that €200k limit also applies to statutory redundancy. So if you're CEO of a major corporate on €1.5m a year with 40 years service when made redundant, you won't get the full 80 weeks pay equivalent tax-free.So death, injury or disability. While technically true describing that as a "departure from employment" is a bit of a misrepresentation. They are going after the gimped and crippled. It's about time!
By the way, it escapes me why the State seeks to levy taxation on any settlement of over €2m for being killed or maimed at work.