Is there a better way of dealing with the €2m cap on pension funds?

Brendan Burgess

Brendan Burgess

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The present system means that if I have €100k more than €2m in my fund on retirement, it will be immediately taxed at 40% reducing it to €60k within the fund. When I draw it down, I will pay 48% or €29k of the €60k. leaving me with €31k.

So the effective tax rate is, in round figures, 70%.

Would it not be fairer and simpler to just require that anything in excess of €2m is to be drawn down immediately on retirement and taxed at the person's marginal rate?

Alternatively, introduce age-related caps e.g. €500k at age 40, €1m at age 50 and not allow any further contributions if that cap is reached along the way?

Brendan
 
Don't like the alternative idea due to sequence of return risk on date of retirement (i.e. what if my 500k at 40 climbs to 2m but 25% gets wiped by a major crash the day before I formally retire?).

But I guess the point of chargeable excess tax is to tax the tax-efficient gain on the 100k in your example, so while your idea may seem fairer from an income perspective, the point is to prevent a bleed on income tax receipts by strongly discouraging over-contribution by higher earners pre-retirement.
 
conor_mc said:
while your idea may seem fairer from an income perspective, the point is to prevent a bleed on income tax receipts by strongly discouraging over-contribution by higher earners pre-retirement.
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And I agree with that objective.

But is the side effect not that employers continue contributing anyway, so they are getting taxed at 70%? And this is a disincentive to continue working.

Brendan
 
Brendan Burgess said:
And I agree with that objective.

But is the side effect not that employers continue contributing anyway, so they are getting taxed at 70%? And this is a disincentive to continue working.

Brendan
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Yep, it evidently is in the case of senior Gardai. But I guess there needs to be a line somewhere between, say, the highest paid civil servants in the land and a multi-millionaire business owner with several million in their pension pot. I'm not saying I agree totally with the system, but I also don't agree that someone who put in €2m from their company on their 50th birthday should retire 10 years later with an extra million or two in tax-free growth - even taxed at their marginal rate, they'd probably get their €2m plus inflation back tax-free (unless there'd been a GFC of dot.com scale crash). One has to ask if it's really beneficial for the state to support such a wealthy individual in such a generous way?
 
Brendan Burgess said:
Is that not a risk of any defined contribution system?
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Not quite. So for the avoidance of confusion, I was referring to the suggestion of a €500k cap at age 40, and so on. I certainly would be happier managing an upside risk (having to retire early with €2m in my back pocket to avoid chargeable excess tax) than a downside risk which leaves my retirement finances underwater.
 
conor_mc said:
I guess there needs to be a line somewhere between, say, the highest paid civil servants in the land and a multi-millionaire business owner with several million in their pension pot.
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That is why a cap at different ages would resolve this problem.

Alternatively, require that anything over €2m be withdrawn immediately and subject to full tax.

So if my pot hits €2.1m aged 60 while I am still working, then I have to draw down €100k immediately.
 
conor_mc said:
Yep, it evidently is in the case of senior Gardai. But I guess there needs to be a line somewhere between, say, the highest paid civil servants in the land and a multi-millionaire business owner with several million in their pension pot. I'm not saying I agree totally with the system, but I also don't agree that someone who put in €2m from their company on their 50th birthday should retire 10 years later with an extra million or two in tax-free growth - even taxed at their marginal rate, they'd probably get their €2m plus inflation back tax-free (unless there'd been a GFC of dot.com scale crash). One has to ask if it's really beneficial for the state to support such a wealthy individual in such a generous way?
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But the Senior Gardai or others in the Civil Service dont actually have a pension pot that they have paid into to the tune of 2 million . They do have very good pensions but no actual cash sum they could draw upon like someone who actually had 2 million in a pension pot . The system needs big reform in any case , why incentivise people to build up funds for their retirement when you then hammer them for drawing down the very same money when they retire .
 
CorkHome2022 said:
But the Senior Gardai or others in the Civil Service dont actually have a pension pot that they have paid into to the tune of 2 million .
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That is a really good point.

Why are Gardai retiring because of the €2m pension cap if they have a defined benefit scheme?
 
Isnt there a thing where you can use the 60k tax from the 500k lump sum to offset the chargeable excess over the 2m, meaning the 'real' limit is 2.2m?
 
Fibbernacci said:
Isnt there a thing where you can use the 60k tax from the 500k lump sum to offset the chargeable excess over the 2m, meaning the 'real' limit is 2.2m?
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Yes. I posted here about it before but my post seems to have been removed for some reason.

Chargeable excess tax

This page describes chargeable excess tax
www.revenue.ie www.revenue.ie
It seems a bit confusing the way that Revenue describe this - the first and second sentences seem to be at odds with each other:
There are no reliefs, allowances or deductions allowed to be set against the chargeable excess tax. However, the tax paid at 20% on the amount between €200,001 and €500,000 may be set against the chargeable excess tax.
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So 20% of up to €300k = €60k can be set against the chargeable excess tax.
 
CorkHome2022 said:
But the Senior Gardai or others in the Civil Service dont actually have a pension pot that they have paid into to the tune of 2 million . They do have very good pensions but no actual cash sum they could draw upon like someone who actually had 2 million in a pension pot . The system needs big reform in any case , why incentivise people to build up funds for their retirement when you then hammer them for drawing down the very same money when they retire .
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DB situation aside from the states perspective I presume the relief given to encourage people to put money for their retirement and make them less dependent on the state.

There’s a point where they will have enough money that they will be more than sorted for retirement, two million is what they have gone with.

Why continue to give people tax relief? I image the state would prefer if it was being spent day to day.
 
Gordon Gekko said:
The threshold is really €2.15m, yes.
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I couldn't see this immediately so had to figure it out. I think that this is the situation?
  1. Pension pot at retirement = €2.15m
  2. Tax free lump sum = €200k
  3. Additional lump sum taken = €300k
  4. Total lump sum taken = €500k
  5. Tax on additional lump sum = €300k x 20% = €60k
  6. Chargeable excess tax on pension pot over €2m = €150k x 40% = €60k
  7. But 5 can be offset against 6 giving a tax neutral position assuming that step 3 is executed
  8. So the effective SFT is €2.15m (again assuming that step 3 is executed)
 
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ClubMan said:
I couldn't see this immediately so had to figure it out. I think that this is the situation?
  1. Pension pot at retirement = €2.15m
  2. Tax free lump sum = €200k
  3. Additional lump sum taken = €300k
  4. Total lump sum taken = €500k
  5. Tax on additional lump sum = €300k x 20% = €60k
  6. Chargeable excess tax on pension pot over €2m = €150k x 40% = €60k
  7. But 5 can be offset against 6 giving a tax neutral position assuming that step 3 is executed
  8. So the effective SFT is €2.15m (again assuming that step 3 is executed)
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Spot on.
 
conor_mc said:
Don't like the alternative idea due to sequence of return risk on date of retirement (i.e. what if my 500k at 40 climbs to 2m but 25% gets wiped by a major crash the day before I formally retire?).

But I guess the point of chargeable excess tax is to tax the tax-efficient gain on the 100k in your example, so while your idea may seem fairer from an income perspective, the point is to prevent a bleed on income tax receipts by strongly discouraging over-contribution by higher earners pre-retirement.
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There's €2m in the pension!! And we are talking about excess of €2m. If there is a crash, the policyholder has just received €440,000 in cash too that they can use to subsidise the reduced income that they are going to receive. I have also found that those with €2m in DC pensions usually have other assets in addition to their pensions.

The big issue is DB pensions, civil servants specifically with no option of opting out of the scheme. It has been an issue with hospital consultants since their High Court settlement on pay. The Gardai have brought it to the fore by not applying for the top jobs and us losing the best Gardai at the top ranks.

The capitalisation factors used for DB pension is under review. Don't be surprised to see them reduced down from the current numbers.


Steven
http://www.bluewaterfp.ie (www.bluewaterfp.ie)
 
Steven Barrett said:
There's €2m in the pension!! And we are talking about excess of €2m. If there is a crash, the policyholder has just received €440,000 in cash too that they can use to subsidise the reduced income that they are going to receive. I have also found that those with €2m in DC pensions usually have other assets in addition to their pensions.

The big issue is DB pensions, civil servants specifically with no option of opting out of the scheme. It has been an issue with hospital consultants since their High Court settlement on pay. The Gardai have brought it to the fore by not applying for the top jobs and us losing the best Gardai at the top ranks.

The capitalisation factors used for DB pension is under review. Don't be surprised to see them reduced down from the current numbers.


Steven
http://www.bluewaterfp.ie (www.bluewaterfp.ie)
Click to expand...

An Irish solution to an Irish problem.
 
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