Here is the bit from the full report
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.
