With an increasing number of couples cohabiting rather than being married, and no standardisation of tax regulations for the two categories, it is inevitable anomalies will arise. The Irish Association of Pension Funds (IAPF) believes one such anomaly, to do with the double taxation of pension benefits, needs to be corrected immediately.
When a pension holder who is married dies, any pension provision that has been made for a dependent spouse is treated as part of the deceased spouse's estate. Because they are married, there is no Capital Acquisition Tax liability and the only tax liable on the pension income is income tax.
However, when the couple are cohabiting, any pension benefits left to the dependent partner are fully liable to CAT, says Mr Paul O'Faherty, chairman of the IAPF, because under CAT regulations the couple are classified under the "stranger" category. However, not only is any pension income liable to standard income tax, but the gross pension itself is capitalised and subject to full CAT rates.
Mr O'Faherty says: "Leaving aside whether married couples and couples who only live together should receive the same tax or legal treatment - that is a separate issue - what we are condemning is the double taxation which applies to pension benefits for dependent partners. It is iniquitous to require someone to pay income tax on a pension that has already been subject to full Capital Acquisition Tax and we are lobbying the Minister to have this rule amended."
Mr O'Faherty cites the following illustration: a pension member earning £20,000 a year dies. He has been cohabiting with his partner and under the rules of his pension scheme is allowed to leave her his death-in-service benefit worth £80,000 (i.e. four times his £20,000 salary) and the equivalent of a dependent spouse's pension worth £6,666 per year. The capitalised value of that pension is £100,000.
Under current CAT regulations his partner is classified as a "stranger" to him and has a tax-free allowance of just £12,370 to mitigate her inheritance. The death-in-service benefit and pension are worth a total of £180,000, leaving £167,630 which is subject to CAT.
The first £10,000 of this is taxed at 20 per cent; the next £30,000 at 30 per cent and the balance at 40 per cent. In total, her tax bill is £62,052 and she will still have to pay income tax on the annual pension. "She potentially could end up paying 86 per cent tax on the pension benefit," says Mr O'Faherty. Other jurisdictions have tackled this issue successfully and cohabiting couples - even of the same sex - are treated virtually the same as married ones for income and inheritance tax purposes. But even if the IAPF is successful in convincing the authorities to end the CAT liability on the capitalisation of pensions, a cohabiting partner will probably still end up paying CAT on lump sum death-in-service benefits, says Mr O'Faherty. Until the discrimination issue between married and unmarried couples is sorted out, this anomaly will remain.
