Report - Pension SFT increase coming

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yellowmoose

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www.independent.ie

First increase in threshold for tax relief on pensions in more than 20 years approved by Cabinet

Finance Minister Jack Chambers is set to significantly increase the threshold for tax relief on pensions.
www.independent.ie www.independent.ie

Finance Minister Jack Chambers is set to significantly increase the threshold for tax relief on pensions.
There is currently a threshold of €2m on the overall value of a pension fund that a person can get tax relief on.
Mr Chambers has received Cabinet approval to increase this by €200,000 annually for every year up until 2029.
 
some further details:

www.irishtimes.com

Pension tax relief rises to cover pots of up to €2.8m by 2029 under Cabinet plans

Limit had caused problems for filling senior Garda and civil service roles
www.irishtimes.com www.irishtimes.com

Retirees will be able to get tax relief on up to €2.8 million in a pension pot under plans being considered by cabinet on Wednesday morning.

The government is considering a proposal from Minister for Finance Jack Chambers to gradually increase the figure - which currently is limited to €2 million - by €200,000 a year until 2029, starting in 2026 and culminating in 2029.
 
They need to increase it to stop all the senior Gardaí from retiring early.
 
the report looks like cover for reducing the defined benefit multiple used to calculate the sft so senior guards will be happy and they don't need to increase the sft much for the less important defined contribution workers.

the report also advised upping to 2.8m right away as today's equivalent of the 2014 limit
 
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Probably an unpopular opinion, but this just seems like a massive tax break for the rich.

Personally, I would prefer if they gave higher rate tax relief to standard rate tax payers.
 
Calico said:
Probably an unpopular opinion, but this just seems like a massive tax break for the rich.

Personally, I would prefer if they gave higher rate tax relief to standard rate tax payers.
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It's because higher paid State employees are being hit because the nominal value of their pension is exceeding the standard fund threshold of €2 million. That's why so many senior Gardaí have retired and why so many are refusing promotions. The permanent Government of the country is changing the rules because they don't suit them.
 
The indo article is inaccurate as states funds over the SFT are taxed at 40% when in fact they are taxed much higher than that. Doesn't say much for the quality of journalism.
 
For my understanding

It currently set at €2 million

if your pension exceeds this limit, you will be taxed at a rate of 40% on the amount over €2 million.

So This means, for example, if your pension is worth €2.5 million, you would pay 40% tax on the €500,000 excess, resulting in a tax bill of €200,000.???

That leaves 2.3million left

when you withdraw funds 2.3million from your pension, the first €200,000 can be taken tax-free.

The next €300,000 (from €200,001 to €500,000) is taxed at 20%, and any amount above that is taxed at your marginal rate.

This can lead to an effective tax rate of up to 70% when considering both the CET and the taxes on withdrawals

**So the excess charge over 2million really is like a penalty for having that much money locked away???

People still need to pay usc and tax on the drawdown amounts

Is this what it is?

If so, What's the logic behind this tax (it is to stop hoarding wealth and get money back to the government??

I'm just trying to wrap my head around this news and stay up to date
 
cally1990 said:
For my understanding

It currently set at €2 million

if your pension exceeds this limit, you will be taxed at a rate of 40% on the amount over €2 million.

So This means, for example, if your pension is worth €2.5 million, you would pay 40% tax on the €500,000 excess, resulting in a tax bill of €200,000.???

That leaves 2.3million left

when you withdraw funds 2.3million from your pension, the first €200,000 can be taken tax-free.

The next €300,000 (from €200,001 to €500,000) is taxed at 20%, and any amount above that is taxed at your marginal rate.

This can lead to an effective tax rate of up to 70% when considering both the CET and the taxes on withdrawals

**So the excess charge over 2million really is like a penalty for having that much money locked away???

People still need to pay usc and tax on the drawdown amounts

Is this what it is?

If so, What's the logic behind this tax (it is to stop hoarding wealth and get money back to the government??

I'm just trying to wrap my head around this news and stay up to date
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The de facto situation with regard to taxation of a fund over the SFT (of €2M) is outlined here:

Chargeable excess tax

This page describes chargeable excess tax
www.revenue.ie www.revenue.ie
 
Yes the SFT was created with the intention to stop people excessively funding pensions as a wealth management strategy. But €2m isn't quite as much as it was 10 years ago.

Interestingly the report also calls for scrapping of the annual €115k limit on pension tax relief but no response today from the government on this one.
 
What is the maths for someone on a state salary still working and looking at a pension pot in excess of 2 million? As in, is it lifetimes earnings or retirement salary. Excuse my ignorance, but it sounds like a very big pot, and from comments above it appears to apply to a significant enough pool of people to warrant new legislation.
 
cally1990 said:
For my understanding

It currently set at €2 million

if your pension exceeds this limit, you will be taxed at a rate of 40% on the amount over €2 million.

So This means, for example, if your pension is worth €2.5 million, you would pay 40% tax on the €500,000 excess, resulting in a tax bill of €200,000.???

That leaves 2.3million left

when you withdraw funds 2.3million from your pension, the first €200,000 can be taken tax-free.

The next €300,000 (from €200,001 to €500,000) is taxed at 20%, and any amount above that is taxed at your marginal rate.

This can lead to an effective tax rate of up to 70% when considering both the CET and the taxes on withdrawals

**So the excess charge over 2million really is like a penalty for having that much money locked away???

People still need to pay usc and tax on the drawdown amounts

Is this what it is?

If so, What's the logic behind this tax (it is to stop hoarding wealth and get money back to the government??

I'm just trying to wrap my head around this news and stay up to date
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The rumours I heard was that there was a number of massive pensions funds which were getting a bit too much tax relief in the opinion of the government. A €100m pension fund in the story I was told. €25m taken as a tax free lump sum, and the ARF never touched, meaning the government were left waiting quite a while to recoup the tax deferred through tax relief.

Since then, we've had SFT, a limit of tax free lump sums and imputed distributions on ARFs to ensure this (possibly made up) situation can't happen again.
 
David_Dublin said:
What is the maths for someone on a state salary still working and looking at a pension pot in excess of 2 million? As in, is it lifetimes earnings or retirement salary. Excuse my ignorance, but it sounds like a very big pot, and from comments above it appears to apply to a significant enough pool of people to warrant new legislation.
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For DB schemes, such as the government give their employees, capitalisation factors are used to calculate an equivalent fund value. For a single male retiring at 60, the factor is 30. Dividing the SFT of €2m by 30 gives a pension of €66,667. Since the maximum allowable pension is ⅔ of final salary, this person would be earning €100,000 of we assume they started in the civil service at age 20. There's quite a few in there on more than this, particularly for the top roles like Garda commissioner. A top guard could easily find themselves in a position where they would be better off quitting rather than getting a promotion or even just staying in their current job, so as to avoid a tax bill on their pension which would wipe out most or all of their income in the meantime.
 
So within such DB schemes if someone has a €2m pension pot and retires on €66,667 and they die within a short couple of years, what happens to the rest of the pot? If married, their spouse may get say 50% of it for life but then again they may hardly come close to drawing down €1m in total.
Is it just a nominal value to arrive at €66,667 then treated similarly to a private sector DB scheme or closer to a DC scheme where the fund forms part of the person's estate?
 
Obairchrua said:
So within such DB schemes if someone has a €2m pension pot and retires on €66,667 and they die within a short couple of years, what happens to the rest of the pot? If married, their spouse may get say 50% of it for life but then again they may hardly come close to drawing down €1m in total.
Is it just a nominal value to arrive at €66,667 then treated similarly to a private sector DB scheme or closer to a DC scheme where the fund forms part of the person's estate?
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Well, for the government pensions nothing happens be wise there is no pot. If there's a spouse or dependants there'll be a pension paid to them.

For private DB schemes, there is a fund. If the member dies the fund (after windows pension etc) is retained by the fund and used to pay other members' benefits. At a very simple level, the actuaries look at expected investment returns and expected mortality rates to determine how much the employer needs to contribute. Members dying is all part of the plan.
 
So when I read about some senior Gardai and some Govt employees having a pension pot of €2m it is only a figure used to determine their final pension - similar to a private sector retiree saying their €66,667 pension is worth €2m but in effect both will operate the same way?
 
Public sector employees get favourable treatment. Say a senior public servant retires on a €100,000 pension. And say the applicable multiple is 30. That’s worth €3m. There’s a 40% penalty upfront, so he or she owes €400,000. But it can be paid from the pension income over 20 years with no interest and if the pensioner dies in the interim, the debt dies with him or her.

A private sector employee with €3m in his or her fund has the €400,000 penalty taken straightaway.
 
Fortune said:
The rumours I heard was that there was a number of massive pensions funds which were getting a bit too much tax relief in the opinion of the government. A €100m pension fund in the story I was told. €25m taken as a tax free lump sum, and the ARF never touched, meaning the government were left waiting quite a while to recoup the tax deferred through tax relief.

Since then, we've had SFT, a limit of tax free lump sums and imputed distributions on ARFs to ensure this (possibly made up) situation can't happen again.
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Interesting. Reminiscent of how Peter Thiel wound up with over $5B in his Roth IRA that he'll be able to draw down tax-free at 60.
 
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