Standard Fund Threshold Calculations

[Flybytheseat]

Hoping someone knowledgeable can help me out with the calculation of the SFT €2M rule. I have a DC pension fund and a small DB pension with a couple of AVCs associated with it. I am divorced and under the divorce terms a Pension Adjustment Order was implemented by my main DC fund so they have hived off about €350K of my fund into a sub account for my ex-wife. I have no access to this sub account and dont know the exact current value. My questions are:

1. Does the sub account with >€350K for my ex wife count in my SFT calculation ?
2. How is a DB fund evaluated for SFT ? Is it annual pension entitlement x 24 ?
3. I've read that the SFT €2M limit is in reality €2.15M. Can someone explain this and how to ensure that I don't pay penal taxes on an SFT of €2.15M ?

Many thanks in advance - will help me decide my level of future contributions as though I've a number of years left to go I don't want to breach the limit. Will also help me work out at what age I should retire as will give me a picture as to when accumulating more assets in a pension vehicle no longer makes any sense.

 

[AAAContributor]

1. Does the sub account with >€350K for my ex wife count in my SFT calculation ?

Yes. If there is a certain portion of your DC fund ear-marked for your former spouse, then according to Paragraph 7 of the relevant Revenue guidance:

"when determining capital values for PFT and BCE purposes, PAOs must be ignored, with the calculations carried out as if no PAO had been made."

2. How is a DB fund evaluated for SFT ? Is it annual pension entitlement x 24 ?

Paragraph 4 of the above guidance deals with this, specifically Example 7.

A defined benefit is valued for SFT purposes based on the amount of pension accrued at 1 Jan 2014 (if any) multiplied by a factor of 20, and the balance multiplied by a factor dependent on the age at which the benefit is taken where the factors are taken from a table here (a factor of 24 if accessed at age 67, a factor of 30 if accessed at age 60 etc).

3. I've read that the SFT €2M limit is in reality €2.15M. Can someone explain this

A 'Chargeable Excess Tax' (CET) is payable at a rate of 40% on the value of a pension fund above the current SFT level of €2,000,000.

However, there is a tax credit for any tax paid at 20% on the pension lump sum which can be set against any CET. See here.

For example, if there is a DC fund of €2m and 25% (€500,000) is taken as a lump sum, €200,000 of the lump sum will be tax free and the amount between €200,000 and €500,000 (known as the 'Standard Chargeable Amount' SCA) is taxed at 20% (i.e., therefore tax payable on the lump sum = €60,000).

This €60,000 in tax paid on the lump sum boosts the effective Standard Fund Threshold to €2.15m (i.e. €2,000,000 + (€60,000 / 0.40)).

For example, if the DC fund is €2,150,000 on the nose at the point of crystallisation:

- the CET = [(€2,150,000 - €2,000,000) x 40%] = €60,000
- the tax paid on the lump sum @ 20% = €60,000
- a tax credit for the tax paid on the lump sum is allowed against the CET,
- therefore, there is no net CET payable,
- therefore a €2.15m fund can be accumulated before a net CET charge kicks in.

Note that the above example is for a DC fund. If the capital value of an individual's pension benefits equals €2.15m and is made up of DC & DB arrangements, then the individual may not get a full tax credit of €60k against any CET if their lump sum < €500k.

how to ensure that I don't pay penal taxes on an SFT of €2.15M ?

You'd need to provide exact figures for your pension arrangements and proposed contributions. Any financial adviser will be able to assist you.

It's worth noting that there is a review of the SFT currently underway with a report due back to the Minister for Finance in the summer:

Minister McGrath announces the commencement of the targeted examination of the Standard Fund Threshold regime

www.gov.ie

 

[Flybytheseat]

Thanks…very well answered and very clear. Much appreciated. I feel a bit aggrieved that I’m taxed on a sub fund that I have no knowledge of the value of but perhaps that’s for any pension lobbyists. I’ll certainly be putting to my DC provider that they should give me visibility into the value of the sub account. Thanks again for the very succinct and informative response.

 

[Dave Vanian]

Thanks…very well answered and very clear. Much appreciated. I feel a bit aggrieved that I’m taxed on a sub fund that I have no knowledge of the value of but perhaps that’s for any pension lobbyists. I’ll certainly be putting to my DC provider that they should give me visibility into the value of the sub account. Thanks again for the very succinct and informative response.

"Section 787R(2A) TCA sets out how the apportionment is to be made between the parties and who is liable for the respective shares of the tax in such situations. It also provides, in cases where a non-member spouse/civil partner has availed of a transfer amount to provide an independent benefit in a separate scheme, for a process of certification by the administrator of the member’s scheme, of the amount of the non-member‘s share of the tax, to the administrator of the non-member spouse/civil partner‘s scheme etc. In addition, the section provides for notification of the amount of the non-member’s share of the tax to the non-member."

Given that the amounts involved are large and this is a fairly complicated area, I'd recommend that you get advice from a Financial Broker who has a lot of experience in dealing with PAOs.