There is general relief among the various pensions stakeholders – employers, employees and trustees – that Budget 2012 has not affected pensions provision as greatly as had been feared.

There had been significant concern, in the run-up to Budget 2012, about potential measures that would adversely affect pension schemes and discourage retirement savings. In particular, the National Recovery Plan agreed with the EU/IMF had provided for income tax relief on pension contributions to be reduced from the marginal rate to the standard rate, while the Programme for Government had provided for a further reduction in the maximum allowable tax-relieved pension of €115,000 to €60,000 per annum.  Neither of these two measures has been introduced.

Reduction in Employer PRSI relief

The only Budget measure directly affecting employee benefit provision is that, from 2012, employers will not receive any PRSI relief on pension contributions made by their employees.  Prior to 2011, employers paid PRSI at 10.75% on employees’ earnings net of any employee-paid pension contributions; in 2011, employer PRSI relief was reduced to 50% of employee contributions.  The full removal of employer PRSI relief in Budget 2012 was not unexpected.   

Potential future changes

The Minister for Finance did, however, sound a word of warning about potential future changes.  In his Budget speech, he referred to the commitment in the EU/IMF Programme to standard-rate tax relief on pension contributions and, having said that he did not propose to implement this measure "at this time", he went on to state that "the incentive regime for supplementary pension provision will have to be reformed to make the system sustainable and more equitable over the long term".  He indicated that consultation on this will take place with the various stakeholders next year and will include consideration as to "what degree pension funds might invest more in Ireland rather than abroad".

ARFs and Vested PRSAs

In 2011, the annual imputed distribution applicable to all ARFs held by persons over 60 years of age was set at 5%. In effect, such ARF holders were obliged to draw 5% of the fund value down as income every year. The 5% figure will remain for most ARFs, but, as a result of Budget 2012, where the combined value of an individual’s ARFs exceeds €2m, the required level of drawdown will rise to 6%.

Up to now, a route for avoiding the imputed distribution (as applied to ARFs) has been to transfer pensions to a PRSA, take a 25% lump sum from that PRSA, and leave the balance as a “vested” PRSA. This loophole has now been closed: holders of vested PRSAs will share with holders of ARFs the effective requirement to draw an income of 5% per annum of the fund value. The higher 6% rate will apply where the combined value of vested PRSAs exceeds €2m.

A change is also being made to the treatment of the proceeds of an ARF on the holder’s death.  Where a child of the ARF holder is over 21 and inherits the proceeds of the ARF, the rate of tax applicable will be 30%. Previously the standard rate of income tax (currently 20%) applied. 

Employers’ statutory redundancy rebate

With effect from 1 January 2012, employers will only be able to claim a rebate of 15% of the statutory redundancy payment being made to employees leaving service through redundancy.  This is down significantly from the current level of 60%.

Health and sickness

The charges for private beds in public hospitals are to increase yet again.  This is likely to result in a further significant increase in private health insurance premiums.

For employees, the existing tax exemption for the first 36 days of Illness Benefit and Occupational Injury Benefit is to be removed. 

In addition, the Minister for Social Protection is to bring forward proposals next year to deal with absenteeism in both the public and private sectors.  She is to engage in discussions with the relevant stakeholders and will also invite submissions from the public. 

Other changes

Some other changes in the Budget are:

• Capital gains tax will be increased from 25% to 30% for disposals after 6 December 2011.  
   
• The rate of capital acquisitions tax will also increase to 30%.
   
• Deposit interest retention tax (DIRT) will increase from 27% to 30% on annual interest payments, and from 30% to 33% on other payments. Exit taxes on life assurance policies and investment funds will similarly increase to 33%.