Targeted examination of the Standard Fund Threshold regime

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Dr Strangelove

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The Minister for Finance, Michael McGrath, T.D., has today (14th December) announced the commencement of a targeted review of the Standard Fund Threshold (SFT) regime. The examination is being led by an independent expert, Dr. Donal de Buitléir, with support from the Department of Finance.

The first step in the examination is a public consultation which opens shortly and runs until 26 January 2024. More details on how to participate in the consultation are available on the Department of Finance website Public Consultation on the Standard Fund Threshold

Terms of reference:

The targeted examination will consider the following:

1. The recommendations of the Commission on Taxation that the Standard Fund Threshold (SFT) be benchmarked at "an appropriate and fair level of estimated retirement income."
2. The relevance of the rationale for the SFT in the context of the current pension landscape and the factors that may impact the SFT's role as a limit on tax-relieved pensions.
3. The impact of any change to the SFT on the overall tax expenditure associated with pension provision and its associated distribution, emphasizing the need for equity in treatment across taxpayer groups and between public and private sector workers.
4. The current calibration of the SFT, including potential impacts on net pension at retirement and consequential effects on recruitment and retention in the public and private sector.
5. The rate at which the SFT should be set, considering economic factors such as changes in the Consumer Price Index and wage inflation since 2014, the cost of the tax expenditure and its distribution, and compliance with the Department's Guidelines for Tax Expenditure Evaluation.
6. The operation of the SFT regime, including the inputs and valuation factors that form part of the methodology and the chargeable excess tax.
7. Options for payment of Chargeable Excess Tax when it arises.
8.Options for simplifying the SFT regime
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The terms of reference are quite broad and I don't quite see what is being pushed either way.

The tax system should strongly support pension accumulation but basic principles of equity suggest this shouldn't be unlimited. So I support the principle of an SFT, albeit a high one.

The factors governing how the SFT is calculated for public servants do need a second look though. There are high-earning public servants in their 50s who will retire early as a result and this is a big waste of human capital. Perhaps in the private sector too.

I think the relevant valuation factor needs to be updated more frequently as interest rates change, ideally with some kind of reference to market rates.

I hope they carry out some kind of analysis of how many public and private sector employees are due to be hit by the SFT at its current level as there is far too much reliance on anecdote in this debate.
 
Gordon Gekko said:
There shouldn’t be any differentiation between public and private sector workers.
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In principle I agree.

However there is an inequity already. Take a 55 year old private sector worker on track to breach the SFT. He can simply stop contributing to a pension fund. A public sector worker in the same situation cannot stop contributions except by resigning. Likewise there can be a reluctance to even take a promotion close to retirement as the effective tax on the pay increase can be punitive.

Many people with private sector DB schemes simply don't understand how this works.
 
Dr Strangelove said:
In principle I agree.

However there is an inequity already. Take a 55 year old private sector worker on track to breach the SFT. He can simply stop contributing to a pension fund. A public sector worker in the same situation cannot stop contributions except by resigning. Likewise there can be a reluctance to even take a promotion close to retirement as the effective tax on the pay increase can be punitive.

Many people with private sector DB schemes simply don't understand how this works.
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One of the greatest inequities lies in the (still) undervaluing of the capital value of public sector pensions.

Nevermind the ability to pay any Chargeable Excess Tax over 20 years at 0% interest and with the debt dying with you if the Grim Reaper shows up.
 
I didn’t see this coming - interesting development.

I wonder is the Minister thinking ahead to possible coalition talks with SF after the next general election and wants to be able to point to something to rebuff their demands to reduce the SFT?

It’s worth bearing in mind that the SFT was originally introduced to put a brake on business owners putting serious sums out of the reach of the taxman and using pensions as an estate planning tool.

The current SFT now seems to be causing issues for certain higher paid public servants (Garda top brass, certain hospital consultants, etc.), which indicates how incredibly generous their pensions are in the first place.

I think any reasonable person would agree that there should be some upper limit on the amount that can be salted away in a pension fund.

My own view is that the current €2m limit is about the right level. I certainly don’t think it should be reduced and perhaps it should be index linked.

I certainly don’t think the current multipliers for valuing DB schemes underestimate their true capital value.
 
Gordon Gekko said:
with the debt dying with you if the Grim Reaper shows up.
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So estates should be taxed on benefits that were never paid in life?

Sorry Gordon that’s a daft idea.

Sarenco said:
The current SFT now seems to be causing issues for certain higher paid public servants (Garda top brass, certain hospital consultants, etc.), which indicates how incredibly generous their pensions are in the first place.
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Yes I think that’s at least part of the motivation for the review. PS careers with short accrual (AGS, prison officers) really do have absurdly generous pensions. Hospital consultants do at least have to work 40 years for a full pension which can be hard to achieve with work abroad and longer training needed to qualify.
 
Gordon Gekko said:
Or allow both types to pay it on the drip.
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But with a DC private scheme there is a fund that can be liquidated to pay the tax up front. With a public (or indeed private) DB scheme there isn't.

If you allowed private DC claimants to pay in instalments then basically it would be a loan from the state to someone with millions in realisable assets. Why should the state be lending in these circumstances?

As I said, a lot of people with DC private pensions just don't understand DB public ones...
 
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A basic question. Is there a formula to calculate the value of a public sector pension at retirement ? How is the chargeable excess calculated if fund is over 2 million ?
 
Dr Strangelove said:
But with a DC private scheme there is a fund that can be liquidated to pay the tax up front. With a public (or indeed private) DB scheme there isn't.

If you allowed private DC claimants to pay in instalments then basically it would be a loan from the state to someone with millions in realisable assets. Why should the state be lending in these circumstances?

As I said, a lot of people with DC private pensions just don't understand DB public ones...
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I think they do actually. They just don’t understand why or how the cosseted public sector get away with what they get away with!
 
Dr Strangelove said:
Hospital consultants do at least have to work 40 years for a full pension which can be hard to achieve with work abroad and longer training needed to qualify.
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I have think the “problem” that a lot of hospital consultants have is that they often have both a DB state pension and a DC private pension, which sees them coming up against the SFT in their 50’s.
 
The Sunday Times had an interesting stat today that the average number of taxpayers that paid 40% excess tax over the last 6 years was 174.

That would suggest that the number of public sector workers that are impacted by the SFT really is tiny.
 
Sarenco said:
The Sunday Times had an interesting stat today that the average number of taxpayers that paid 40% excess tax over the last 6 years was 174.

That would suggest that the number of public sector workers that are impacted by the SFT really is tiny.
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It will increase as wages have increased but the threshold didn't. Hospital consultant's salaries didn't increase under their previous deal and then they agreed the High Court settlement a few years ago and their salaries increased a lot and continue to grow, pushing them all beyond the €2m.

I think an index linked increase is a fair change.
 
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