Report - Pension SFT increase coming

[Steven Barrett]

It is a positive move. Someone on €130,000, retiring at 60 on €65,000 pension and 1.5 lump sum gets hit with a €58,000 tax bill. While they had decent earnings and a good pension, I don't think they would be consider high earners.

Salaries have increased substantially since 2014 and the pension threshold needs to keep up with it. And if you think this is just another benefit for the rich, by keeping it at €2 million, more and more "ordinary workers" will end up with massive tax bills when they retire. As we have seen with the Gardai, the pension cap is costing them in that the most senior Gardai don't want promotions. There is something wrong when you are losing your best people this way. It is an easy fix.

Interestingly, the lump sum payment isn't being increased. This is fine, the threshold was the area that needed to be addressed.

 

[ashambles]

According to Pearse Doherty 254 pensions were above 2m last year, assume he meant private pensions. https://www.irishtimes.com/politics...plated-pensions-of-elite-says-pearse-doherty/

Obviously there are some people ensuring their pensions stays under the limit and the majority of pensions are not close to being drawn down.

However at a guess there are 500,000+ private pensions, clearly for the vast majority the SFT is not an immediate problem.

In my view hitting a simple inflation adjusted 2m let alone 2.8m with average to twice average income requires consistent high personal contributions over 40+ years, a chunk of luck in fund selection, very low fees (only recently becoming available) and generous employer contributions. Most won't get anywhere close.

 

[yellowmoose]

Interestingly, the lump sum payment isn't being increased. This is fine, the threshold was the area that needed to be addressed.

Was that in the press reports of the cabinet discussions or just the advisory report? Why do you think the SFT should be inflation-adjusted but the lump sum shouldn't? Isn't inflation universal?

 

[Gordon Gekko]

According to Pearse Doherty 254 pensions were above 2m last year, assume he meant private pensions. https://www.irishtimes.com/politics...plated-pensions-of-elite-says-pearse-doherty/

Obviously there are some people ensuring their pensions stays under the limit and the majority of pensions are not close to being drawn down.

However at a guess there are 500,000+ private pensions, clearly for the vast majority the SFT is not an immediate problem.

In my view hitting a simple inflation adjusted 2m let alone 2.8m with average to twice average income requires consistent high personal contributions over 40+ years, a chunk of luck in fund selection, very low fees (only recently becoming available) and generous employer contributions. Most won't get anywhere close.

I presume that’s 254 people with private pensions who paid Chargeable Excess Tax. Not surprising. The amount of people who haven’t yet triggered the tax or who are stuck at €2m would be much larger.

 

[Dr Strangelove]

Someone on €130,000,

I don't think they would be consider high earners.

Average full-time earnings economy-wide are about €55k.

I’d estimate that no more than 5% of public service workers make it to career end with that kind of salary. Generally these people are those with highest skills and it doesn’t make sense for them to retire early or resist career progression.

So I am in favour of reforming the SFT, but let’s not kid ourselves that it impacts large numbers of people.

 

[Dr Strangelove]

Why do you think the SFT should be inflation-adjusted but the lump sum shouldn't? Isn't inflation universal?

Donal de Buitléar is a very smart guy.

The SFT means some of a pension pot is taxed punitively. The TFLS means that another part is not taxed at all. This is hardly efficient and probably not equitable.


In de Buitléar’s report the SFT would be indexed to inflation. Meanwhile he is quietly suggesting that the TFLS be eroded by inflation over time.

Over time this would mean the whole pension pot being taxed at closer to the same rate.

 

[yellowmoose]

Donal de Buitléar is a very smart guy.

The SFT means some of a pension pot is taxed punitively. The TFLS means that another part is not taxed at all. This is hardly efficient and probably not equitable.


In de Buitléar’s report the SFT would be indexed to inflation. Meanwhile he is quietly suggesting that the TFLS be eroded by inflation over time.

Over time this would mean the whole pension pot being taxed at closer to the same rate.

i imagine the tfls was envisaged to allow retirees to pay off outstanding debts eg mortgage. I dont see why those debts wouldnt increase generally along with inflation.

 

[ClubMan]

i imagine the tfls was envisaged to allow retirees to pay off outstanding debts eg mortgage. I dont see why those debts wouldnt increase generally along with inflation.

In the past and when it was designed in I suspect that this wasn't so much of an issue - even if it may be more relevant today? Does anybody know the origin story for the TFLS? I always thought it was an odd thing. In the past many people probably wouldn't have had a pressing need for a retirement tax free windfall. Whatever about a want. And when the fundamental idea of a pension is to provide an ongoing income in later life, to erode the pot by taking a quarter of it as a tax free lump sum seems a little counterintuitive. Was it designed in to encourage people to save through their pension in the first place?

 

[Steven Barrett]

Was that in the press reports of the cabinet discussions or just the advisory report? Why do you think the SFT should be inflation-adjusted but the lump sum shouldn't? Isn't inflation universal?

i imagine the tfls was envisaged to allow retirees to pay off outstanding debts eg mortgage. I dont see why those debts wouldnt increase generally along with inflation.

Debts by their very nature are not inflationary. The debt gets smaller over time. As it is based on the original amount taken out, the real value of the debt decreases over time as salaries increase.

There is a clear issue with more and more people in public service jobs exceeding the SFT. The issue with not being able to recruit Gardai to crucial roles is a massive issue and actually has an impact on the security of this country. This issue has to be fixed. The tax free lump sum isn't an issue and receiving €440,000 as a lump sum with an effective tax rate of 12% is enough.

 

[David_Dublin]

It is a positive move. Someone on €130,000, retiring at 60 on €65,000 pension and 1.5 lump sum gets hit with a €58,000 tax bill. While they had decent earnings and a good pension, I don't think they would be consider high earners.

Salaries have increased substantially since 2014 and the pension threshold needs to keep up with it. And if you think this is just another benefit for the rich, by keeping it at €2 million, more and more "ordinary workers" will end up with massive tax bills when they retire. As we have seen with the Gardai, the pension cap is costing them in that the most senior Gardai don't want promotions. There is something wrong when you are losing your best people this way. It is an easy fix.

Interestingly, the lump sum payment isn't being increased. This is fine, the threshold was the area that needed to be addressed.

So they get a lump sum of 1.5 times salary and they have 65k annual pension forever....I really don't see the issue with them having to pay tax on the lump sum.

It's probably been pointed out before, but someone in the private sector would have to have a seriously big pension pot to fund that type of guaranteed benefit pension.

 

[yellowmoose]

Debts by their very nature are not inflationary. The debt gets smaller over time. As it is based on the original amount taken out, the real value of the debt decreases over time as salaries increase.

I meant different debts for different people. Someone retiring and having to pay off, for example, an outstanding mortgage in 2024 will have a bigger debt than someone living in an identical house who retired in 2014. If the lump sum limit was considered appropriate in 2014 it would no longer be in 2024

 

[Dr Strangelove]

Does anybody know the origin story for the TFLS?

AFAIK it was to ensure parity between private and public sector schemes.

The latter gives a TFLS of 1.5x salary on retirement. I assume this was estimated as being equal to 25% of a notional pension fund.

 

[TRS30]

Am I right, that is the pot was €1m at retirement, you can take €200K tax free and €50 at 20%?

 

[ClubMan]

Am I right, that is the pot was €1m at retirement, you can take €200K tax free and €50 at 20%?

Yes (I presume you meant €50K).

Taxation of retirement lump-sums

This page outlines the taxation of an excess lump-sum

www.revenue.ie

Taxation of retirement lump-sums​

You can receive a tax free lifetime limit of €200,000 on retirement lump sums from all sources. The amount between €200,001 and €500,000 is taxable at the standard rate of tax (20%). Any amount in excess of €500,000 is taxed under Pay As You Earn (PAYE) at the marginal tax rate (40%).

 

[Purple]

Am I right, that is the pot was €1m at retirement, you can take €200K tax free and €50 at 20%?

The remaining €300k of the first €500k, after you've taken €200k tax free.
The effective tax rate on the first half a million is 12%.

 

[Sarenco]

I wonder are they going to tweak the taxation of retirement lump-sums.

Currently the first €200k is tax-free, amounts between €201k and €500k are taxable at the standard rate of income tax and anything over €500k is taxable at your marginal income tax rate.

Will the €500k figure remain or will it rise in line with the increases to the SFT?

If that €500k figure doesn’t increase, then I am struggling to see the benefit of continuing to contribute to a pension once it hits €2m. Contributions are relieved @40% but drawdowns at that level will inevitably be taxed @40%, plus USC, plus PRSI (if under 66).

 

[ClubMan]

If that €500k figure doesn’t increase, then I am struggling to see the benefit of continuing to contribute to a pension once it hits €2m.

Even that would be progress, no?

Key Post - My pension pot has reached €800k - should I stop contributing ?

I am starting a new role in a company that does not have a pension scheme. They will offer a PRSA as they are legally obliged to do but they is no offer of contribution. I am aged 51 and I have other pensions that mean that all my future income will be at the higher rate of tax. Am I correct in...

www.askaboutmoney.com

 

[Purple]

I wonder are they going to tweak the taxation of retirement lump-sums.

Currently the first €200k is tax-free, amounts between €201k and €500k are taxable at the standard rate of income tax and anything over €500k is taxable at your marginal income tax rate.

Will the €500k figure remain or will it rise in line with the increases to the SFT?

If that €500k figure doesn’t increase, then I am struggling to see the benefit of continuing to contribute to a pension once it hits €2m. Contributions are relieved @40% but drawdowns at that level will inevitably be taxed @40%, plus USC, plus PRSI (if under 66).

But you get the growth on the full amount you put in. Your gain is compounded.

 

[Sarenco]

But you get the growth on the full amount you put in. Your gain is compounded.

Yes, there is that consideration.

But I still wouldn’t continue to contribute if it was relieved @40% on the way in and taxed @52% on the way out.

Would you?

 

[ClubMan]

relieved @40% on the way in and taxed @52% on the way out.

Is the excess over €500K also subject to PRSI and/or USC or just income tax?

Edit: seems to be subject to USC but not PRSI?

... while the balance in excess of €500,000 is taxable at the higher rate of tax (currently 40%) and is also chargeable to USC.