Taxation of Auto Enrolment scheme detailed in Finance Bill

Brendan Burgess

Brendan Burgess

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Finance Bill change ‘bombshell’ leaves auto-enrolment scheme with tax sting

People who are signed into the new mandatory pension scheme could be facing a tax sting after changes made in the Finance Bill.
www.independent.ie www.independent.ie

Under the Finance Bill, they will be entitled to 25pc of this pot tax free, up to a limit of €200,000, which applies to all pension schemes.

But the remaining 75pc will be paid as a lump sum through the PAYE system.

But it's only a temporary measure. Other options will be made available in time.

The Department of Finance acknowledged that under the Automatic Enrolment Retirement Savings System Act 2024 there is only one option for drawdown – a lump sum with maximum 25pc of fund tax free.

But it said that in the first few years auto-enrolment pots will be small and “therefore the level of taxation as set out in the query would be unlikely to apply”.

It said that while a lump-sum drawdown is currently the only option, the Department of Social Protection has indicated that as the scheme develops more retirement products, such as annuities, will be developed and available to retiring employees.
 
Yes Boss, I noticed that. This is a change from the AE Act which indicate that the temporary position would be that the full lump sum payment would be a TFLS*. I think they thought it through and realised that it would be highly controversial to introduce the 25% factor at a later date.
It also appears from the Finance Act that death benefits will be subject to PAYE,
But the real and immediate issue is that it will be nonsensical for 40% taxpayers to stay in AE as if their employer set up a conventional scheme the would get twice the contribution tax subsidy compared to AE with no difference on retirement.

*Note that the TFLS is tax free up to €200k, 20% taxed on the next €300k and the balance subject to PAYE.
 
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Taxed... Sure are we not already paying tax on the money going in to it. AE was going to be like an SSIA they said. I don't remember paying tax on my SSIA few bob.
 
Towger said:
Taxed... Sure are we not already paying tax on the money going in to it. AE was going to be like an SSIA they said. I don't remember paying tax on my SSIA few bob.
Click to expand...
Yes, indeed. There has been much talk from the DSP and latterly Minister Humphreys about the SSIA comparison. And even a month ago after Minister H got her AE Act passed it appeared that the benefits would be 100% taken in tax free lump sum form. But then comes the Budget and the Finance Act where DOF rule the roost. It is hard to avoid the suspicion that DOF wiped DSP's eyes on this one, which reminds one of Fintan O'Toole's opinion piece where he pointed out dysfunctionality between Coalition departments.
Now of course SSIA's had their investment income or interest subject to tax. AE savings share with other pension arrangements that investment income is tax free. Not a big deal for the 5 year SSIA but very significant for a 40 year pension savings.
For non taxpayers and standard rate taxpayers there is the further bonus that benefits will be taxed at less than the tax subsidy upfront. It is not so clear for the 40% taxpayer. This is a separate point to these latter being better off in a conventional arrangement.
 
Towger said:
Taxed... Sure are we not already paying tax on the money going in to it. AE was going to be like an SSIA they said. I don't remember paying tax on my SSIA few bob.
Click to expand...
Post tax income going in, and exit tax charged on the way out
 
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