THE current tax treatment of pensions blatantly discriminates against unmarried couples, the Irish Association of Pension Funds (IAPF) has told the Minister for Finance, Mr McCreevy.
In a pre-budget submission, the IAPF has called upon the Minister to remove "an anomaly" whereby partners in non-married relationships are liable to 20 per cent capital acquisitions tax (CAT) on pension benefits gained when one partner dies. This position is directly opposed to that of married couples in the same circumstances - under existing provisions, a husband or wife who receives a pension when the other spouse dies is not liable to CAT liability.
"It clearly is an anomaly," says IAPF chairman Mr John Feely. "And anomaly is the nicest way you can say it." According to Mr Feely, an increasing number of pension schemes allow a non-marital partner to qualify for pension benefits upon the death of the "member" partner.
Tax laws have not caught up with this position, however, with CAT liability arising on death, based on the aggregate of the capitalised value of any resulting pension and any lump-sum payment. Given that ongoing pension payments will also be subject to income tax, Mr Feely says that taxation is effectively being applied twice.
"This is a clear case of double taxation," he says. "Indeed, at the current levels of CAT and income tax, a pension paid in these circumstances could end up being taxed at a combined rate of 62 per cent."
The position becomes all the worse when the timing of CAT liability is taken into account, according to Mr Feely. Although the CAT falling due relates to anticipated future pension payments, it must be funded as a one-off lump sum.
Conceivably, says Mr Feely, this lump-sum payment could be so onerous as to persuade the surviving partner to refuse the pension benefit.
"If you took a £10,000 (€12,697) pension for a young person, the capital value could easily be £200,000, or 20 times the pension. At CAT of 20 per cent, that would add up to an instant liability of £40,000."
According to the IAPF submission, an amount such as this would not be at the disposal of most people without the sale of some assets or taking out a loan.
The argument for streamlining the position between married and unmarried couples becomes stronger, says Mr Feely, when it is placed in the context of other familial assets, particularly the family home.
As the law currently stands, an unmarried person who inherits a shared residence upon the death of his or her partner is not liable to CAT, as long as he or she can prove occupation of the premises for three years prior to the death.
Mr Brian Buggy, partner with Matheson Ormsby Prentice and member of the Association of Pension Lawyers in Ireland, suggests the Exchequer loss that would ensue from the changing the law was unlikely to be significant.
