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Topical Issue Debate - Pension Funds

Thursday, 9 February 2012

Dáil Éireann Debate
Vol. 755 No. 1

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Deputy Mary Mitchell O’Connor: Information on Mary Mitchell O'Connor Zoom on Mary Mitchell O'Connor My purpose in raising this matter is to argue for the need to allow a certain cohort of people to unlock part of their pension funds. This would allow for [72]a more humane and flexible system, reflecting the reality of life for many people who are under financial duress.

I draw the Minister of State’s attention to three core areas. They are additional voluntary contributions, AVCs, private pension schemes and section 19 of the Finance Act 2011. It is important that widespread early draw-down of defined benefit and defined contribution schemes be avoided. However, there are currently significant funds in additional voluntary contributions and other personal pension schemes that are suitable for early draw-down. According to IBEC, it has been estimated that funds in additional voluntary schemes amount to roughly €4 billion. Many of the people who paid into such schemes were in a very privileged position during the boom and, wisely, chose to save some of their bonus payments and additional income. Now, many of these people have high personal debt and are struggling to meet financial commitments.

In January 2011, more than 40,000 borrowers were in arrears of three months or more, and another estimated 40,000 home owners were at risk of arrears. A report published in 2011 cites the significant effects on people’s physical and mental health of stress, worry and inability to plan for, or control, their future. By allowing access to such funds the Government would provide an essential lifeline to many families.

I draw attention to the substantial wealth stock in personal pension schemes. IBEC estimates money in these funds to be in the region of €15 billion. Many of the people who contributed to them over the past decade were self-employed small business owners. Many are in negative equity or in serious financial trouble. These groups should be allowed a once-off draw-down of a limited amount from accrued funds to be accessed now and to remove the link to retirement.

I draw the Minister of State’s attention to section 19 of the Finance Act.

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It essentially forces individuals with an average pension fund of €200,000 to €250,000 either to purchase an annuity, contrary to the whole concept of ARFs, or lock the majority of the fund away until they reach the ripe old age of 75 years. Basically, it increased the guaranteed income requirement from one times the State old age pension to 1.5 times the pension, that is, €12,000 to €18,000 per annum and increased the amount of the pension to be locked away from €63,500 to €119,800. Therefore, on retirement with a fund of €200,000, 25% will be taken tax free. Of the €150,000 that remains, €120,000 will be locked away for a further ten years, with no access to the pensioner, who will somehow survive on a fund of €30,000.

I ask the Minister of State to consider the drawdown of the AVC contributions, a partial once-off drawdown of the private pension scheme and section 19 of the Finance Act.

Minister of State at the Department of Jobs, Enterprise and Innovation (Deputy John Perry): Information on John Perry Zoom on John Perry I thank the Deputy for raising this very important issue. I am taking the matter on behalf of the Minister for Social Protection.

Pensions are a long-term investment aimed at ensuring people have an adequate income in retirement. Government policy supports this aspiration through generous tax reliefs and we are currently reforming the pension system to ensure its future sustainability.

Early withdrawals of pension savings are not permitted or desirable for several reasons. The principal reason is that funds, and the associated tax relief on contributions, are designed to support people in later life to ensure they have an adequate income. This requires pensions to be long-term vehicles based on the principle that savings will be locked away until retirement.

Allowing access to pension savings before retirement or pension age would be a significant change to pension policy and the basis of pension savings in Ireland. At the request of the [73]Economic Management Council, the issue has been considered in detail by an interdepartmental ad hoc group, chaired by the Department of Social Protection. The group concluded that the principle of pension savings being locked away until pension age should be maintained, and it reported this to the EMC. The interdepartmental group on mortgage arrears also examined the issue of early access to pensions and did not recommend such an approach.

The idea of allowing people to access their pension savings early to pay off mortgage debt or to increase their spending power may seem attractive, particularly at the moment. However, the resulting reduction in pension savings could have significant negative consequences in the long term and in particular it fails to address the group who may be most affected by personal debt or mortgage arrears. Younger people are unlikely to have significant pension savings and where their pension scheme has incurred losses, as many have over the past number of years, early withdrawal of funds would mean very poor value for money. There is no guarantee the funds could be repaid or that people could make up these losses. Where people are close to retirement, an early withdrawal of funds could significantly diminish the pension they receive as they may not have time before retirement age to fill the gap left by such a withdrawal.

Only 51% of people in employment aged 20 to 69 have pension coverage. This relatively low rate of pension coverage is a concern. The programme for Government includes a commitment to reforming the pension system progressively to achieve universal coverage, with particular focus on lower-paid workers. Therefore, a national employment pensions scheme based on an automatic enrolment approach is being developed. Allowing people access to their pension savings before pension age would run totally counter to the policy of encouraging more people to save more for their retirement.

There are no proposals at the moment to amend the legislation to provide for early access to pension funds.

Deputy Mary Mitchell O’Connor: Information on Mary Mitchell O'Connor Zoom on Mary Mitchell O'Connor I thank the Minister of State but I would still ask him to look at this. The Irish Brokers Association gave a presentation yesterday to the Joint Committee on Jobs, Social Protection and Education and argued very strongly for the case of pension funds being released on a once off basis. It also argued that the Government should take a 20% tax and to put all of that money back into our economy.

I also mentioned AVCs, additional voluntary contributions, which are over and above pensions that were saved. Many people bought AVCs during the boom when they were paid bonuses and so on. I also ask the Minister to look at section 19 of the Finance Act. I got a tax consultant to look at it and she felt it is a very unfair part of the Act. I think a review of that section would help many distressed mortgage holders and many people in business who are in trouble. It would also provide a huge boost to our economy if that money was to come back in. I know it has not happened, but the Irish Brokers Association pointed out that it has happened in California, so I ask the Minister of State to look at that model.

Deputy John Perry: Information on John Perry Zoom on John Perry The EMC concluded that principal pension savings that are locked away should be maintained and it reported this to the Government. The interdepartmental group on mortgage arrears also examined this. There is a temptation to open this up and I can see the benefits in the short term. However, this was given a major examination by the EMC.

The implications of section 19 of the Finance Act can be raised with the Minister for Finance. It is a big concern that only 51% in employment aged between 20 and 69 have pension coverage, so clearly there are many people under pressure who would not have the facility of a pension. That is the concern of the Government. Bringing a universal concept to that area would be a very wise investment for later years.

[74]From the reply given by the Minister, Deputy Burton, no consideration is being given at the moment to the Deputy’s proposals. However, the Deputy can raise them with the Minister for Social Protection and the Minister for Finance and I have no doubt they will reply to her.

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