# How do the €60,000 cap and the €2m cap work?



## Brendan Burgess (29 Oct 2013)

This article refers to a 70% surcharge 

How is it implemented? 

If a 40 year old has a pension which is worth €2m and it grows beyond that, is the fund itself taxed? 

What are the implications for defined contribution schemes and AVCs to Defined Benefit Schemes? 

Brendan


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## Brendan Burgess (29 Oct 2013)

OK, I see that we had extensive discussion of this back in 2011. 

*The new Pension Fund Cap -down from €5.4m to €2.3m - raises some interesting points*

I presume that these principles have not changed? 

Funds which at the time were worth around €2.3m are probably worth a lot more now if they were invested in equities. So this growth will be taxed at 70%. 

Has there been no campaign on this? It looks like a bigger and unfairer issue to me than the pensions levy. 

Brendan


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## Conan (29 Oct 2013)

The taxation of any excess over the Fund Cap (€2m from January) happens at retirement. Very simply, a tax hit of 41% applies to the excess on retirement (paid by the fund administrator directly to Revenue). And then when the member draws down any of the residual, it is taxed again at marginal rate (currently 41% + USC = 48%).
So if at retirement the fund value was say €2.1m, then an immediate tax hit of 41% of €100,000 is levied. This leaves a net €59,000 , but when this is drawndown as income it is taxed in the normal way.
So in effect the total tax on the excess of €100,000 is as follows:
- €100,000 X 41% = €41,000 (leaving €59,000)
- € 59,000 x 48% = €28,320 
- Total Tax = €69,320 

Therefore one must avoid (if possible) exceeding the Cap. So if say a 50 year old currenly has a DC Fund (perhaps including AVCs) of say €1,500,000, then growth of over 3% p.a. over the remaining 10 years will result in the fund value exceeding €2m. This may result in the client seeking a low risk investment (and thus low return) for the 10 years to go and ceasing all future contributions. 
On the other hand some individuals who might be close to the Cap and still cannot retire (60 being the earliest drawdwon date) may find themselves exceeding the cap whether they like it or not.
So it is essential that any individual whose has funds which might run up against the cap, that they review their contributions (perhaps cease future contributions) and/or derisk their investment strategy (since taking investment risk will not be adequately rewarded). 
As I have posted on another thread, the €2m cap applies immediately to DC members (even in respect of prior accrued funds) whereas the new DB multipliers only apply to future accrual for DB members.


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## Brendan Burgess (29 Oct 2013)

Conan 

That is great, thanks.

1) Is there no provision for someone who built up an excess before the limits were introduced? 

2) How do the DB multipliers work?   

3) Was the figure of €60,000 mentioned somewhere recently? What is its significance?


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## Brendan Burgess (29 Oct 2013)

“In line with the commitment I made in budget 2013 to restrict the  subsidisation by taxpayers of pensions that deliver income up to €60,000  per annum, I am reducing the Standard Fund [broken link removed] from €2.3 million to €2 million from the 1st of January 2014,”

So the €2m is designed to produce a pension of €60,000, but the €60,000 itself has no significance?


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## ashambles (29 Oct 2013)

The 60k figure is partly explained here http://www.irishtimes.com/business/...ew-levy-and-tighter-rules-on-relief-1.1561617



> Under the new rules a person retiring from a defined benefit scheme at the age of 60 with a pension of €60,000 per annum thereafter would calculate their benefits at 60,000 * 30 = €1.8 million. Including their €180,000 lump sum, their pension would be just under the €2 million threshold at €1.98 million.


The more realistic valuation and multipliers for early retirement pensions are welcome though too late to catch the majority of the wealthier government retirees.  

On the DC side even for high earners building a fund of 2m is challenging since you can only get tax relief to 115k. 

40 years of around 25% contributions of 115k is 1.15m. Growth and inflation may help someone to exceed 2m but if so the cap will be raised because the DoF senior officials are affected by that cap, this is one cap that will follow inflation.


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## Conan (29 Oct 2013)

Brendan,
Anyone who had a fund value in excess of the reduced cap could apply for a Personal Fund Threshold equal to that value at the date of reducing (say 1st Jan). The problem however is that for an individual under age 60 (and cannot therefore retire the benefits) growth alone would result in a hit for the double taxation. 

In relation to the point made by ashambles, it is true to say that going forward it will be impossible for a self-employed to built up a fund of €2m with the earnings cap of €115,000. However a company employee/director is only limited to the €115,000 in respect of personal contributions. The Company can also contribute and their contribution is not limited to a % of €115,000.

What is really unfair in how the €2m limit was introduced is that it applies immediately, irrespective of the fact that much of the fund was accumulated over past years. In comparison, DB members are only valued on their pension using the higher multipliers for pensions accrued after Jan 2014. So in reality the 20:1 multiplier will continue to apply to Senior Civil Servants (for example) for the bulk of their pension entitlement. Therefore a self employed or employee in a DC scheme who say retires in 2014 will be restricted to a Fund of €2m (I.e. A pension of circa €60,000 x 30) whereas a Senior Civil Servant, who continues to benefit from the 20:1 multiplier can retire on a pension of say €90,000 p.a. plus a lump sum of €200,000.

So for example, you could have a situation whereby a DC member, trying to make good provision for his retirement, had accumulated a fund of say €2m by age 55 (based on the rules that applied over the years) but now finds that not alone it is not worth investing any further contributions, but that even this will not prevent him from being hit with the double tax because investment growth alone will bring him over the €2m. So the new rules apply immediately to the DC member but will take many years to really impact the DB member.

Hardly parity of esteem!


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## Nermal (29 Oct 2013)

If one had a DB and DC benefits, does the 2M threshold apply individually to each or to the sum of both?


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## Conan (29 Oct 2013)

The sum of both. So, DB x 20 + DC = Total notional value


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## Starting Out (30 Oct 2013)

Possibly stupid question - does the state pension come into the calculations at all in terms of the SFT? Or is this treated completely separately? I don't see any reference to it being comprehended in the calculations so presume it's completely separate but would like to hear any other opinions.

I can't post links but I found the two documents handy on the revenue &  budget.gov.ie websites for complimenting Conan's points. I was skeptical it could possible have an effective tax rate of 65% before USC & PRSI were comprehended but lo and behold...

1. Changes to the Standard Fund Threshold Regime (SFT) 
2. Taxation Annexes to the Summary of 2014 Budget Measures (Annex B)


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## Conan (30 Oct 2013)

Starting Out,
No, the State Social Welfare pension is not included. The new limits apply only to privately funded pensions.


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## Starting Out (30 Oct 2013)

Thank you.


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