Breathtakingly generous in time of economic austerity

ANALYSIS:The total pension bill works out at an average of more than €2.5 million if Ministers were members of private sector defined-contribution schemes

IN A time of austerity, it’s a breathtaking figure – €38,136,111, the price you would have to pay in the private sector to provide the pensions due to the 15 members of the current Government should they retire at the end of the current term of office in 2016.

That works out at an average of more than €2.5 million if Ministers were members of private sector defined-contribution schemes – where your pension is determined by how much you invest, how well it performs, and the level at which annuity rates are on offer when you retire.

For the five-year term of this Government alone, the cost of providing the €38,395 pension due each Minister is €1,216,610, assuming they are male and married.

The figure would vary slightly if female or unmarried/ widowed.

And all that is before taking any account of the lump sums to which retiring TDs and ministers are entitled.

To put it in context, two-thirds of the current Cabinet would in the private sector require pension pots in excess of the lifetime Revenue cap of €2.3 million to fund the pensions to which they will be due – one of them as young as 50 years of age.

The Revenue cap is in place to put some limit on the amount of relief that high earners can avail of and to address Revenue concerns that some people were using pension savings as a tax avoidance measure.

When originally introduced in 2005, the cap was €5 million. That was indexed and rose to €5.4 million in 2010. However, in the 2011 budget the figure was cut to €2.3 million.

Anyone with earnings above that level at the time the cap was introduced was obliged to notify Revenue.

Those doing so were assigned a personal fund threshold. This essentially was the level at which their pension fund stood on budget day.

Only 115 people across the State notified the Revenue that they had funds in excess of the €5 million – €5.4 million at the time it was in place. When the figure was lowered, 1,200 taxpayers sought personal-fund thresholds. Once the personal threshold is set, no more money can go into the pension.

Gauging how much is in your pension pot is easy when you have a defined contribution plan – the size of the fund is transparent. But what about defined-benefit schemes?

These offer to pay a set amount in retirement based normally on final salary and number of years served. You know the benefit but not the size of the pot.

To get around this, Revenue resorts to something it calls attributed value. This applies to the diminishing number of defined-benefit schemes in the private sector and to the public sector where defined benefit is the norm.

The outcome is broadly the same although the figures are worked slightly differently.

In the public service, this value is worked out by multiplying your salary by the number of years served, divided by 80 (because a maximum public service pension is 40/80ths of final salary). With accelerated pension schemes such as those for TDs, the number of years is divided by 40 as 20/40ths is the maximum pension achievable.

This sum is then multiplied by 20. Added to this is the gratuity to which public servants are entitled on retirement – a sum that amounts to a maximum of 1½ times final salary.

If this total figure exceeds €2.3 million, the excess is subject to onerous tax on retirement. Under the Revenue lifetime pension cap, any sum above the limit is taxed at 41 per cent before any pension is drawn down.

As you draw down the pension, it is then also taxed at your marginal rate (41 per cent if you have that big a pot) before accounting for PRSI and universal social charge.

Effectively, anything above the €2.3 million figure is taxed at about 70 per cent.

To work out an example of “attributed value”, take a politician retiring later this year with a final salary of €200,000 and a full 20 years’ service.

Their calculation is: (200,000 x 20/40) x 20 + (200,000 x 3 x 20/40). The 200,000 x 20/40ths (which is equal to half) is 100,000. This multiplied by 20 equals €2 million.

Adding in the gratuity – 200,000 multiplied by three is 600,00, which multiplied by 20/40ths is €300,000 – you get a final “attributed value” of €2.3 million, precisely equal to the cap.