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

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

conor_mc said:

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

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Is that not a risk of any defined contribution system?

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.