# "Is it time to reduce the tax-free lump sum of €200k?"



## Brendan Burgess (17 Aug 2021)

Is it time to reduce the tax-free pension lump sum?
					

Some experts argue €200,000 limit overly favours high earners and costs exchequer too much




					www.irishtimes.com
				




_Some experts argue €200,000 limit overly favours high earners and costs exchequer too much_​


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## Gordon Gekko (17 Aug 2021)

A good way to incentivise people to transfer their pensions overseas…

The Exchequer is foregoing income tax on my pension contributions (but still getting USC and PRSI). However, without taking any risk on its own account, it will coin it on the ARF drawdowns and on the inheritance of the ARF.

These “experts” are nothing more than cosseted semi-state workers with cosy numbers flying kites here there and everywhere.


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## ClubMan (17 Aug 2021)

Gordon Gekko said:


> These “experts” are nothing more than cosseted semi-state workers with cosy numbers flying kites here there and everywhere.


I have no idea myself because the cited article is behind the Irish Times paywall.


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## PGF2016 (17 Aug 2021)

Gordon Gekko said:


> A good way to incentivise people to transfer their pensions overseas…


What do you mean by this? Will large numbers of teachers and guards suddenly start relocating to Spain because their tax free lump sum is lower than before?

Edit: looks like this doesn't apply to DB schemes so not relevant for teachers and guards?


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## Steven Barrett (17 Aug 2021)

Of course it overly favours higher earners who are able to fund higher pensions. That's logical. But these higher earners have also spent a lifetime paying higher tax too. 



Gordon Gekko said:


> These “experts” are nothing more than cosseted semi-state workers with cosy numbers flying kites here there and everywhere.


Who's lump sum under their DB pension scheme is below the €200,000 limit!


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## Steven Barrett (17 Aug 2021)

PGF2016 said:


> What do you mean by this? Will large numbers of teachers and guards suddenly start relocating to Spain because their tax free lump sum is lower than before?


No, transfer pensions to Malta to avoid the limits. Public servants can't transfer their pensions as there is no actual fund for their pension, it is taken from the exchequer each year.


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## mtk (17 Aug 2021)

Those propagating it are unaffected themselves it seems !
Quelle surprise!!


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## noproblem (17 Aug 2021)

The family know there's trouble when silly middle aged members start flying kites when there's no wind, apart from the wind they produce themselves.


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## Sarenco (17 Aug 2021)

I actually have some sympathy for the argument that we should consider dramatically lowering, or even abolishing, the TFLS.  

Let's be honest, it's hardly the most progressive or targeted incentive.


AAAContributor said:


> Both the ESRI economist and professor from UCD argue that reducing the lump sum could improve equitability, with the UCD professor proposing a limit of two-thirds the average earnings, so a limit of €30,000. ESRI also suggest alternative subsidies to the lump sum to better target lower and middle earners such as higher personal tax credits for those over the State pension age or a top-up to pension funds if and when the fund is annuitised.


I think the idea of replacing the TFLS (for all retirees, private and public sector) with higher personal tax credits for those over the State pension age is worth exploring.

It would certainly be more equitable than the current system, which disproportionately benefits higher earners.


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## NoRegretsCoyote (17 Aug 2021)

Public servants generally get 1.5x final salary on retirement as a lump sum. So a €200k threshold means public servants below €133k don't get taxed on their lump sum. In practice this is* nearly all *retiring public servants, the big exception class being medical consultants of course. 

Pulling the threshold down to even 150k would suck in some school principals, deputy county managers, senior HSE administrators, civil service principal officers, etc. Otherwise a noisy and grumpy class of worker, including all of those being asked to develop such a policy. So it doesn't seem very likely to me.


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## Steven Barrett (17 Aug 2021)

NoRegretsCoyote said:


> Public servants generally get 1.5x final salary on retirement as a lump sum. So a €200k threshold means public servants below €133k don't get taxed on their lump sum. In practice this is* nearly all *retiring public servants, the big exception class being medical consultants of course.
> 
> Pulling the threshold down to even 150k would suck in some school principals, deputy county managers, senior HSE administrators, civil service principal officers, etc. Otherwise a noisy and grumpy class of worker, including all of those being asked to develop such a policy. So it doesn't seem very likely to me.


Anyone above principal officer in the civil service would get caught too. There's obviously not a huge amount of these and they also have opportunities for lucrative consultancy roles after their life in the civil service. Medical consultants go over the €2m threshold almost automatically these days, which is incredibly unfair to tell someone they have to join a mandatory DB scheme, which through no fault of their own will breach the pension limits and they'll get handed a tax bill when they retire. 


Sarenco said:


> I actually have some sympathy for the argument that we should consider dramatically lowering, or even abolishing, the TFLS.
> 
> Let's be honest, it's hardly the most progressive or targeted incentive.
> 
> ...


Pensioners are the best looked after demographic in this country. I would find it more palatable to give tax breaks to young families paying for massively expensive creche fees on top of their mortgage. By way of default, granny and granddad wouldn't be doing as much child minding, so they would benefit that way.   

Steven
www.bluewaterfp.ie


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## Woogie (17 Aug 2021)

As a personal finance novice currently in the process of wrapping my head around pensions/investments etc., one of the things that I find really puzzling is the Irish Government's approach in terms of seemingly throwing up barriers down every avenue that one might pursue for wealth building. Surely it would be of long term benefit to the country if people were independently wealthy in retirement, thus removing any burden upon the state. 
It's as if the Revenue want to tax you before you've even made the money - i.e. deemed disposal. Places like the US seem to have some very straightforward vehicles for the average Joe to fund on a monthly basis with excellent incentives attached - and why shouldn't working hard all your life and saving your money to be self sufficient be rewarded? 
Is it simply the case that governments are short sighted and just want tax in hand asap rather than taking a long-term view (beyond their own careers perhaps)? Or am I missing something?


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## ClubMan (17 Aug 2021)

Woogie said:


> Places like the US seem to have some very straightforward vehicles for the average Joe to fund on a monthly basis with excellent incentives attached


So do we - they're called shares.

And far from putting barriers in the way of people investing in pensions the powers that be provide very very attractive tax breaks!


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## time to plan (17 Aug 2021)

Woogie said:


> As a personal finance novice currently in the process of wrapping my head around pensions/investments etc., one of the things that I find really puzzling is the Irish Government's approach in terms of seemingly throwing up barriers down every avenue that one might pursue for wealth building. Surely it would be of long term benefit to the country if people were independently wealthy in retirement, thus removing any burden upon the state.
> It's as if the Revenue want to tax you before you've even made the money - i.e. deemed disposal. Places like the US seem to have some very straightforward vehicles for the average Joe to fund on a monthly basis with excellent incentives attached - and why shouldn't working hard all your life and saving your money to be self sufficient be rewarded?
> Is it simply the case that governments are short sighted and just want tax in hand asap rather than taking a long-term view (beyond their own careers perhaps)? Or am I missing something?


If the long-term benefit of the country is your yardstick, maybe it would be better is wealthy pensioners were less wealthy (but still comfortable) and there was more tax money available to pay down the national debt or meet some other spending priority.


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## Woogie (17 Aug 2021)

time to plan said:


> If the long-term benefit of the country is your yardstick, maybe it would be better is wealthy pensioners were less wealthy (but still comfortable) and there was more tax money available to pay down the national debt or meet some other spending priority.


True, there needs to be a balance. Having said that I’d have serious reservations about how a significant amount of taxpayer money is spent but thats a whole other debate. From an investment point of view I think something like the Roth IRA that they have in the states where you can invest after tax income and it will grow tax free makes a lot of sense to encourage people to invest more if they have already maxed their pension contributions. In that case the govt. gets my income tax and I get a bonus for investing some of my take home pay without being taxed a second time.


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## gianni (18 Aug 2021)

Steven Barrett said:


> Who's lump sum under their DB pension scheme is below the €200,000 limit!


In the civil service, the vast majority. 

An assistant secretary salary tops out at €162K, after 40yrs service a lump of €243K is payable. All other grades, after 40yrs, will get less than 200k lump sum.


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## NoRegretsCoyote (18 Aug 2021)

Gordon Gekko said:


> it will coin it on the ARF drawdowns and on the inheritance of the ARF.



Fair enough on ARF inheritance where there is a 30% tax. 

But take a typical pensioner with a full state pension and drawing down €15k a year from ARF. They are paying about 8% tax on total income. Hard to call this "coining it".  Even someone with a large ARF drawing down €30k on top of a state pension is only paying about a 16% average tax rate.

This is why pension investment makes such good sense in Ireland. Generally you will get relief at the higher income tax rate during your working life but pay most of your tax at the lower income tax rate in retirement.


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## fayf (18 Aug 2021)

I can’t see any dramatic changes happening immediately, pension changes happen slowly, but the system has to be viable for the long term, and also be seen to be fair & equitable.

From a social equity point of view,i’d take a guess that those who reach or exceed the 200k TFLS amount, is likely applicable, to less than 15% of those with Private Pensions, and more likely, less than that. Is that fair, no its probably not. Giving such a small minority % of those with private pensions, such a tax advantage, doesn't sound socially equitable to me.

An adjustment to the TFLS ceiling amount to : x times the average industrial wage, of say 5OK, might be a fairer way to deal with this. Eg 2 times x 50k, so 100k. That sounds like a lot fairer than the existing system.

I accept there is also a potential arguement to be made for those wealthier people who have planned accordingly for their retirement, made sarcrifices, and earn bigger salaries, but the reality is, a tiny minority, are benefitting from such a generous TFLS, and our tax authorities are foregoing significant taxation as a result - all for a relatively small cohort of people.


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## AJAM (18 Aug 2021)

It erodes trust in a government, if they say, "Save for 30 years and we promise you can take up to 200K of that tax free" then, decades later, they renege on that promise.
It further erodes trust if the reason for them reneging is not because they can't afford it, not because there's some fiscal crisis, not because they need the money to build a school or pay for medicine, but because somebody "feels" that 200K is too much.


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## ClubMan (18 Aug 2021)

They eroded trust already with the pension levy.  









						Tax on pension assets
					

Tax is generally not charged on the investment income or capital gains earned by pension funds...



					www.pensionsauthority.ie


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## AJAM (18 Aug 2021)

ClubMan said:


> They eroded trust already with the pension levy.


That was a straight-up heist. But at least there was an actual (close to existential) crisis to justify it.

Also, if it really only effects a tiny minority of people, then by simple math, it can't be significant source of tax revenue!

I'm not claiming my maths are right here but as a rough, back of  the envelope, calculation
From this quote on RTE.ie ""The number of retired people in Ireland increased by almost a fifth between 2011 and 2016 to 545,407." We can assume 90,901 added over 5 years, so 18,180 per year. But that ignores deaths, so from CSO we had 7,398 deaths in Quarter 4 2020. So assume roughly 29,000 deaths per year, implies roughly 47,000 people retire in Ireland each year. Only half will have private pensions - 23,500
If the 200K limit affects 1% of those it would be 235 people. 

If you decrease the limit from 200K to 150K, that would be 20% tax on 50K = 10K
10,000 from 235 people = 2.35 Million which is roughly what the government spent on their fancy new printer.

Now I've made a few assumptions there, so I'm sure the figure is wrong, but ballpark, it's not big money!


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## Zenith63 (18 Aug 2021)

Woogie said:


> From an investment point of view I think something like the Roth IRA that they have in the states where you can invest after tax income and it will grow tax free makes a lot of sense to encourage people to invest more if they have already maxed their pension contributions. In that case the govt. gets my income tax and I get a bonus for investing some of my take home pay without being taxed a second time.


The total amount you can have tax-free in a pension (€2m) is already fabulously generous, anybody with that amount is at the top of the wealth distribution curve.  So rather than allowing further tax free savings mechanisms, perhaps allowing people access the existing mechanism (pensions) at the time of their life that suits them income-wise, rather than enforcing obscure age-related limits would be quicker/cheaper/easier to implement than ISA/IRA schemes?


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## kinnjohn (18 Aug 2021)

ClubMan said:


> They eroded trust already with the pension levy.
> 
> 
> 
> ...


Are you forgetting the first proposal was to put a levy on pension fees The nice people in the Industry lobbied the government of the day  and got it changed to the pension pot at the bottom of the cycle,


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## Steven Barrett (18 Aug 2021)

Woogie said:


> As a personal finance novice currently in the process of wrapping my head around pensions/investments etc., one of the things that I find really puzzling is the Irish Government's approach in terms of seemingly throwing up barriers down every avenue that one might pursue for wealth building. Surely it would be of long term benefit to the country if people were independently wealthy in retirement, thus removing any burden upon the state.
> It's as if the Revenue want to tax you before you've even made the money - i.e. deemed disposal. Places like the US seem to have some very straightforward vehicles for the average Joe to fund on a monthly basis with excellent incentives attached - and why shouldn't working hard all your life and saving your money to be self sufficient be rewarded?
> Is it simply the case that governments are short sighted and just want tax in hand asap rather than taking a long-term view (beyond their own careers perhaps)? Or am I missing something?


Florida and Texas have no state income tax either. Why hasn't everyone moved there? 

Different countries have different tax rules. You can't just pick the best bits. If you are, why not also look at kids finishing college with hundreds of thousands of college debt (which they owe to the government) or if you get sick and don't have insurance, getting treatment can bankrupt you. Or you have very few employee rights and can be fired immediately with no redundancy payments. The grass isn't always greener on the other side.


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## noproblem (18 Aug 2021)

Steven Barrett said:


> Florida and Texas have no state income tax either. Why hasn't everyone moved there?
> 
> Different countries have different tax rules. You can't just pick the best bits. If you are, why not also look at kids finishing college with hundreds of thousands of college debt (which they owe to the government) or if you get sick and don't have insurance, getting treatment can bankrupt you. Or you have very few employee rights and can be fired immediately with no redundancy payments. The grass isn't always greener on the other side.


Might not be always greener, but it's damn nice watching some individuals finding that out the hard way


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## NoRegretsCoyote (18 Aug 2021)

AJAM said:


> If you decrease the limit from 200K to 150K, that would be 20% tax on 50K = 10K


I think your assumptions are a bit off but, yes, the median pension fund at retirement is well below €800k. It is only the wealthy few who can fully take advantage of the TFLS .

If the Exchequer wanted to raise significant meaningful amounts they would need would need to reduce it to at least €100k, probably even lower.

As @Sarenco says, you could only do this in conjunction with the overall personal income tax regime for retired people. In my view it is generous enough already though.


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## thunderin_eejit (18 Aug 2021)

I think these sort of discussions, or even ideas being floated, are incredibly damaging for confidence in pension saving. We seem to think it's acceptable to have continuous fiddling with pension rules, despite these being products which may have a 30 or 40 year lifespan. We are also asking people to lock funds away without the ability to remove those funds if the rules change. As was said above the pension levy could at least be argued to be an emergency measure, but any significant changes to other pension rules just because the government of the day thinks it is a good idea should be discouraged, or else flagged well in advance (decades).

There's plenty of people who have made plans for the TFA - and often this is to fund significant expenditure such as clearing mortgages or funding deposits for kids etc. You can debate whether or not it is a good idea (and I think it is a huge selling point in favour of pension saving), but these sort of discussions are inevitably going to fuel distrust in pensions and long-term savings.


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