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

[Brendan Burgess]

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

 

[conor_mc]

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.

 

[Brendan Burgess]

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.

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]

what if my 500k at 40 climbs to 2m but 25% gets wiped by a major crash the day before I formally retire?

Is that not a risk of any defined contribution system?