No marriage equality for pensions (Part 2)

In a previous blog we saw how Revenue severely restricts the ability of divorcees to fund for a pension for the second family. Since there is no such restriction for the first family, I said that the Law discriminates against divorcees. In effect, 20 years after the enactment of the 15th Amendment to the Constitution which allowed divorce, the State still sanctions discrimination against divorced couples in the area of pensions.

EXCESS FUND TAX

Despite Ireland’s record in favour of equality, Finance Act 2007 confirmed that second families can be treated differently to families of the first marriage.

Finance Act 2007 introduced an excess fund tax on certain pension funds, taxing the excess over threshold at an effective rate at up to 70%. The tax was  imposed to discourage growth of pension funds above the threshold.

In the context of a Pension Adjustment Order granted under the terms of a divorce, the rule makes it clear that this excessive rate of tax applies in such a way that it in particular circumstances punishes the second family of the pensioner, not the first.

CASE STUDY

Joe is a member of a defined benefit pension established by his employer. Joe has full service and on retirement at age 65 he can look forward to an annual pension of €60,000.

Joe is recently divorced from his wife, Jane. The couple’s 2 children live with Jane. As part of the divorce settlement a Pension Adjustment Order granted 100% of the value of the fund to Jane.

Under Revenue rules, the capitalisation factor for Joe’s pension brings him up to the maximum allowable threshold.

However, under the Pension Adjustment Order it is Jane and not Joe who receives the annual pension of €60,000. In spite of this, the pension does not affect Jane’s ability to make further contributions and get tax relief for them. Assuming Revenue pension funding rules permit it Jane can potentially accumulate up to €2m in additional pension benefits without triggering excess fund tax.

Conversely, every cent Joe puts aside for his new situation is, by a disapproving State, taxed at 70%.

But Modern Day Ireland?

The law in this area was introduced with Finance Act 2007 and one would think that post the marriage equality referendum the view on divorce had softened in Merrion Street. So, we asked the Minister. His reply is the subject of my next blog.

Tommy Nielsen, ITC Consulting

*Please note this content is the view of the author and not of Independent Trustee Company


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