Pension Fund Threshold Changes

On the 18th September 2024, the Department of Finance released recommendations following an independent review of the Standard Fund Threshold (SFT) and other pension limits. Here are the key takeaways from the proposed changes:

1. Standard Fund Threshold Increases: The SFT, currently set at €2 million, will rise progressively by €200,000 annually from 2026 until reaching €2.8 million by 2029. Starting in 2030, further increases will align with average weekly earnings.
2. Tax Free Lump Sums: Presently, retirees can withdraw 25% of their pension fund on retirement, with the first €200,000 being paid tax free, and the next €300,000 taxed at 20%. These figures will not rise in line with the proposed SFT increases.
3. Evaluation of Capitalisation Factors: For Defined Benefit (DB) schemes, new factors will apply to pensions based on characteristics like indexation and dependents’ benefits. These changes will primarily affect benefits accrued after 2014. This is likely to take some time to be implemented.
4. Chargeable Excess Tax (CET): The CET rate on funds exceeding the SFT will remain at 40%, although a review by 2030 could lower this rate. The possibility of spreading CET payments over 20 years is also under consideration. This facility is currently available to public sector and defined benefit pensions, but not to defined contribution arrangements.
5. Contribution Limits: It’s recommended to phase out the €115,000 annual earnings cap and age-based contribution percentages, potentially simplifying pension contributions for the self-employed and others with uneven income streams.

Summary

The increase in the SFT is welcome, and long overdue. Why it’s taking 5 years to implement fully is not clear, but there you go. It would also be welcome to see the salary cap of €115,000 being reviewed. At present, company directors and employees enjoy far higher funding limits than the self- employed sector and those in non-pensionable employment. This is an anomaly that should be addressed.

For people who have already retired benefits, the increase in the SFT is not straightforward however. Any retired benefits will be treated as a % of the SFT when they were retired. For example, if someone has already retired a pension fund of €2 million, they are deemed to have retired 100% of the SFT, and the new limits will be of no benefit to them. Individual advice is recommended in this area.

As ever, please contact us if you need to know more.

Shane Brennan
October 2024