Navigating SFT changes

can anyone explain the benefit of growing over the €2M versus moving to an ARF once the lump sum is maxed if you are paying tax at the top rate?
 
yellowmoose said:
can anyone explain the benefit of growing over the €2M versus moving to an ARF once the lump sum is maxed if you are paying tax at the top rate?
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Key Post - Should you contribute to a pension fund if you are in danger of breaching the €2m limit?

What is the Standard Fund Threshold? In summary, it's the €2m cap placed on the public or private sector pension benefits that an individual can accumulate in Ireland over his or her lifetime. If the individual breaches the SFT, at the point the offending pension benefits are retired, he or she...
www.askaboutmoney.com
 
ClubMan said:

Key Post - Should you contribute to a pension fund if you are in danger of breaching the €2m limit?

What is the Standard Fund Threshold? In summary, it's the €2m cap placed on the public or private sector pension benefits that an individual can accumulate in Ireland over his or her lifetime. If the individual breaches the SFT, at the point the offending pension benefits are retired, he or she...
www.askaboutmoney.com
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maybe that could be updated for the newly-created area of one's pension fund which is above the 500k tax-efficient % threshold but below the CET threshold
 
ClubMan said:
Can you clarify what you mean by "sufficiently" here?
I'm probably missing something here?
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Well, the OP currently has pension pots with a value of €2.3m and I’m suggesting going to cash.

You’re right, the SFT will “only” be €2.2m in 2026 but don’t forget the credit for tax paid on the lump sum. So at that stage the OP could retire the pensions without any CET.
 
yellowmoose said:
maybe that could be updated for the newly-created area of one's pension fund which is above the 500k tax-efficient % threshold but below the CET threshold
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I don’t think it makes sense to make further contributions to a pension once it reaches €2m because of the new €500k ceiling.

Drawdowns are taxed at the marginal rate of income tax, plus USC, plus PRSI (until you are awarded the State pension or turn 70), whereas contributions are only relieved from income tax.
 
Drawdowns are taxed at the marginal rate of income tax, plus USC, plus PRSI (until you are awarded the State pension or turn 70), whereas contributions are only relieved from income tax
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I would think at this level the fund will be increasing through growth rather than new contributions
 
Well, I don’t think it makes sense to maintain an aggressive asset allocation once a pension pot reaches €2m, given the taxation of drawdowns.
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so keep in all cash/low risk? is there any point - would it be better to convert to ARF, banking the lump sum, and let it grow there?

my suspicion is that the new rules are designed to satisfy the guards/consultants problem of the overall SFT limit without making it any practical use to defined contribution fund holders
 
yellowmoose said:
…would it be better to convert to ARF, banking the lump sum, and let it grow there?
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In general, yes, that would be the right approach. But the OP is over the current SFT.
yellowmoose said:
my suspicion is that the new rules are designed to satisfy the guards/consultants problem of the overall SFT limit without making it any practical use to defined contribution fund holders
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I think that’s definitely the case.
 
Another strategy which I’ve used to good effect is that a PRSA can be split when drawing down benefits. We call this phased retirement.

Given your age, you have 20 years before you are required to retire a PRSA at age 75.

So you could consolidate everything into a suitably flexible and accommodating PRSA (would need a certificate of benefit comparison for the occupational scheme) keep investing sensibly and contributing to claim tax relief on contributions.

Then when you finish work you could partially retire just part of the PRSA. Let’s say that is in the tax year 2026 for the sake of argument.

Say, 800k on the first bite giving you 25% as a lump sum which is 200k tax free and leaving you with €600k in a vested PRSA from which you could draw a taxable income as required.

You would have drawn down 800k against the the available SFT of €2.2m in that tax year so 36.36% of your overall lifetime allowance.

The balance would be an “unvested” PRSA with additional lump sums of 25% of its value always available and tax deferred growth within the increasing SFT.

Note that in the event of death an unvested PRSA is paid out as a return of fund with no tax as it is not (currently) a BCE.

You could keep taking bites off of the unvested part as you need extra funds with the next 300k in lump sums taxed at 20%.

Once you go above 500k in lump sums the revenue manual says that additional lump sums are taxed at your marginal rate of income tax.

Once you pass the SFT, yes you will have to pay an additional 40% surcharge but if you manage it correctly you have 20 years to exhaust the vested prsas so your taxable income at age 75 might just be the state pension giving a relatively light tax rate on the imputed distributions you would eventually have to take.

I’ve run scenarios for clients where the tax post 75 is the 40% excess tax charge plus an average tax rate of 10%. Not the worst outcome for 20 years of tax deferred growth.


Another mistake people frequently make here is to only draw down income up to the 40% band because anything above this is effectively “wasted” in tax or they “don’t need it”

But this doesn’t take into account the progressive nature of income tax with its allowances reliefs and exemptions.

For example if a 67 year old next year has a state pension of €15,000 and draws down €85,000 from the pension, their total deductions (income tax and USC) would be €29,799 according to the PWC income tax calculator.

An effective average tax rate of under 30% isn’t bad for pension contributions which received 40% relief on the way in.

Any surplus income can be given away under the annual small gifts exemption of €3000 meaning that effectively the draw down can pass to the next generation at the same effective tax rate as would be paid by an adult beneficiary inheriting an ARF. The difference being they get the use of the money now rather than decades in the future and the gift isn’t using any of the CAT A exemption.

Marc Westlake CFP®, TEP, EFP, APFS, QFA

E:marc.westlake@everlake.ie
 
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yellowmoose said:
maybe that could be updated for the newly-created area of one's pension fund which is above the 500k tax-efficient % threshold but below the CET threshold
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Doesn't it deal with that already? Hence the current tax neutral case of the €2.15M pot (rising from 2026)? Or maybe I'm not understanding precisely what you mean? (It hasn't been updated for any budget 2025 changes but I don't think that these matter until 2026?).
 
Marc said:
Another strategy which I’ve used to good effect is that a PRSA can be split when drawing down benefits. We call this phased retirement.

Given your age, you have 20 years before you are required to retire a PRSA at age 75.

So you could consolidate everything into a suitably flexible and accommodating PRSA (would need a certificate of benefit comparison for the occupational scheme) keep investing sensibly and contributing to claim tax relief on contributions.

Then when you finish work you could partially retire just part of the PRSA. Let’s say that is in the tax year 2026 for the sake of argument.

Say, 800k on the first bite giving you 25% as a lump sum which is 200k tax free and leaving you with €600k in a vested PRSA from which you could draw a taxable income as required.

You would have drawn down 800k against the the available SFT of €2.2m in that tax year so 36.36% of your overall lifetime allowance.

The balance would be an “unvested” PRSA with additional lump sums available and tax deferred growth within the increasing SFT.

Note that in the event of death an unvested PRSA is paid out as a return of fund with no tax as it is not (currently) a BCE.

You could keep taking bites off of the unvested part as you need extra funds with the next 300k in lump sums taxed at 20%.

Once you go above 500k in lump sums the revenue manual says that additional lump sums are taxed at a “marginal” rate of 40%. They do not seem to be adding on USC (currently) leaving a modest arbitrage opportunity while you are within the SFT.

Once you pass the SFT, yes you will have to pay an additional 40% surcharge but if you manage it correctly you have 20 years to exhaust the vested prsas so your taxable income at age 75 might just be the state pension giving a relatively light tax rate on the imputed distributions you would eventually have to take.

I’ve run scenarios for clients where the tax post 75 is the 40% excess tax charge plus an average tax rate of 10%. Not the worst outcome for 20 years of tax deferred growth.
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I've started doing something along these lines this year. I had very little income this year so I split off a chunk of my PRSA into a separate contract and drew down just enough to use up my tax credits giving me just under €30K in total free of income tax (small amount of USC and the side benefit of 52 class S PRSI contributions getting me closer to the 2080 goal) along with the corresponding tax free lump sum of about €10K. I don't have an extravagant lifestyle so this, along with other non pension savings/investments where necessary, is more than enough for my expenditure. I will have a little bit more unearned/passive income from another source next year but still use the same approach to top things up to at least use up my tax credits which would otherwise get "lost". I may work again at some stage but at the moment I'm definitely in no rush for a variety of reasons...
 
Marc said:
You could keep taking bites off of the unvested part as you need extra funds with the next 300k in lump sums taxed at 20%.
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I don't understand this. Surely the unvested PRSA vests once you start drawing lump sums from it. Should this instead read vested part ?
 
Flybytheseat said:
I don't understand this. Surely the unvested PRSA vests once you start drawing lump sums from it. Should this instead read vested part ?
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For vested PRSA read ARF

So you have a PRSA which is pre BCE and an “ARF” which is post BCE

The lump sums are paid from the PRSA not the ARF and are always 25% of the value of the PRSA.
 
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ClubMan said:
Doesn't it deal with that already? Hence the current tax neutral case of the €2.15M pot (rising from 2026)? Or maybe I'm not understanding precisely what you mean? (It hasn't been updated for any budget 2025 changes but I don't think that these matter until 2026?
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yes, I mean planning for 2026 and beyond where the SFT rises but the €2.15M tax free/reduced limit does not.
 
if you transfer from an occupational scheme into a PRSA and you retire from that employment and retire the PRSA are you then restricted from working elsewhere (even part time)? Was there something about being "economically inactive" once you retire a PRSA?
 
Access to OPS - From 50 onwards where employment has terminated and all links with the employer linked to the scheme are severed, otherwise scheme NRA (lowest possible 60)

Access to PRSA - Between 50 – 60 where employment has ended and member is no longer economically active (retired from all employments). Age 60 otherwise.
 
GSheehy said:
Access to OPS - From 50 onwards where employment has terminated and all links with the employer linked to the scheme are severed, otherwise scheme NRA (lowest possible 60)

Access to PRSA - Between 50 – 60 where employment has ended and member is no longer economically active (retired from all employments). Age 60 otherwise.
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thanks. That might be a factor for someone who wants to retire from main employment before 60 and do some part time consultancy.
 
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