Commission on Taxation Report 

The Commission on Taxation and Welfare published its Report on September 14th. The Commission was established “to independently consider how best the taxation and welfare systems can support economic activity and promote increased employment and prosperity, while ensuring that there are sufficient resources available to meet the costs of public services and supports in the medium and longer term”.

One of the areas examined by the Commission was Taxes on Retirement Savings, which is covered in Chapter 8 of the Commission’s Report.

The Commission made a number of recommendations which are likely to guide policy over the coming years. Perhaps the most significant was that the Commission concluded that the existing approach of marginal relief was appropriate on the basis that such contributions represent a deferral of income. The Commission also stated that such an approach was fair and equitable so long as pension income was fully taxed at the point of drawdown and made some recommendations on this point.

The Commission highlighted the difficulties in data that clouded the understanding of pension tax expenditures. One example was the omission of any figures on the implicit cost of employer contributions to unfunded public sector pension schemes. The Commission also cautioned on the use of calculated costs that did not factor in behavioural assumptions.

The Commission stated that it supported the continued use of tax expenditures as a mechanism to enhance the provision of supplementary pensions in Ireland and its belief that such expenditures are justified on social and economic grounds. However, the Commission made a number of recommendations to ensure the full implementation of an EET system of tax relief and the ongoing retention of marginal tax relief on pension contributions. 

The Commission’s recommendations were:

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.

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.

The Commission recommends that Approved Retirement Fund (ARF) assets should be treated for inheritance tax purposes in the same way as other assets where inherited by anyone other than the individual’s spouse. Both Income Tax and Capital Acquisitions Tax should apply. This supports the ‘Exempt, Exempt, Taxed’ model and maintains equitable treatment in the system.

The Commission recommends the removal of age-related contribution rates to be replaced with a single annual contribution rate. The Commission also recommends the removal of the annual earnings cap on contributions subject to appropriate lifetime limits remaining in place.

The Commission recommends the periodic benchmarking of the Standard Fund Threshold to an appropriate and fair level of estimated retirement income.

The Commission recommends an urgent review of the availability of appropriate and adequate data on the cost and distribution of pension tax expenditures. The absence of good data significantly inhibits the regular and rigorous evaluation of these costly expenditures.

The Commission recommends that anomalies in the tax treatment of different retirement arrangements should be eliminated, as far as possible.

Overall, the Commission sets out a considered and balanced view on pensions. The recommendations are broadly in line with IAPF policy, particularly on the retention of marginal tax relief and also highlighting the need for better data and consideration of the behavioural aspects of any changes in policy.

Read the full report, executive summary, plain English and Gaeilge versions here.