Judges want valid pension valuation and tax flexibility

ANALYSIS: A senior judge says he hopes the Government will address anomalies in the pension system, writes CAROL COULTER , Legal…

ANALYSIS:A senior judge says he hopes the Government will address anomalies in the pension system, writes CAROL COULTER, Legal Affairs Editor

JUDGES SAY they are not seeking exemption from tax liability on their pensions, but instead a realistic assessment of the pensions’ value, and flexibility in how tax liability is paid.

The concerns of the judiciary about their tax liability centre on the assessment of the value of the pension, given that judges retire at 70, and the requirement that the tax is paid immediately as a lump sum, according to a senior judge. On behalf of the judiciary, he said he hoped the Government would address the anomalies, but stressed the judiciary was not seeking any special treatment.

The issue will affect anyone in the public service earning over €200,000 a year, and those earning less but who, through a private pension built up in a previous career or through additional voluntary contributions ( AVCs), have an additional pension fund to their public service entitlement.

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Public service pensions are paid out of current expenditure, and the notional value of the fund is calculated by multiplying the pension by 20 and adding the value of the final lump sum paid to all public servants of 1½ times their salary. This in effect multiplies the pension by 23.

A judge is entitled to a full pension after 15 years, while a public servant must work for 40 years for a full pension. If he or she joined the public service at 20 or younger, they will be eligible for a full pension at 60. Judges retire at 70.

If for some reason a judge with a private pension drew it down since 2005, it is still regarded as part of the total fund and the tax is still due. This would mean the tax bill, due on retirement, would exceed the lump sum.

The multiplier used to calculate the value of the pension fund bears particularly heavily on judges who retire at 70 and who will be taxed in the same way as those senior executives in private business or public servants who might retire at 60 and who will enjoy 10 years’ more pension, according to the senior judge.

Another anomaly affecting all highly paid public servants is that they, in contrast to those with private pensions, will have to pay a substantial lump sum in tax on the day they retire, rather than pay it through a reduced pension over the lifetime of the pension.

A High Court judge will be due a pension of about €125,000 if he or she retires now, giving them a notional pension fund of about €2.8 million.

If the judge had been contributing to a private pension as a solicitor or barrister, and had built up €500,000 in a fund (worth a pension of about €25,000 a year) this would bring the value of the pension to €3.3 million – €1 million more than the threshold.

The judge would then be liable to pay €410,000 to the Revenue Commissioners on the day he or she retired. “You pay the tax on the day you retire on the assumption you are going to live for more than 20 years. You don’t get it back if you die,” he said.

“The life expectancy of a male at 70 is 12 years. So the actuarial value of the pension is nine or 10 times the value of the pension, rather than 20 times. Yet I will be paying exactly the same tax on it as a company executive who retires at 60 on the same pension.”

Another difference between applying the tax to public servants as opposed to private employees is that there is no pension fund out of which public servants are paid, he said. They are paid from public expenditure.

A private pension fund can pay any tax due from an individual beneficiary out of the fund, and the pension he or she is paid is reduced accordingly. However, because there is no actual pension fund for public servants, the public servant liable for the tax on the notional value of the pension must pay the lump sum on the day of retirement.

There is no facility for the person to receive a reduced pension in lieu of the taxation of the notional value of the pension.

If the multiplier was reduced to reflect the actual value of the pension, based on the actuarial life expectancy of a 70 year old, and if there was a facility to pay the tax that arose in the form of a reduced pension, the concerns would be satisfactorily addressed, he said.