Pension Fund Threshold – What you need to know…

This is a term you may have heard a lot more about recently as it has been getting a lot of coverage, particularly in the Business sections of most Sunday newspapers.

Well, what’s it all about?

As you should know by now, our job as Financial Planners is to the take complex ideas and explain them in simple terms. So, without going into too much technical detail ‘The Standard Fund Threshold’ is the maximum you can have in your pension fund before it becomes no longer tax efficient. Currently, this stands at €2,000,000. In most cases you won’t actually pay any additional tax unless your fund goes over €2,150,000.

We don’t need to go into what happens for funds over this amount right now, let’s just leave it at; you don’t want to go over the limit if it at all possible.

So why are we hearing so much about It of late?

Well, when originally introduced in 2005 it was set at €5 million and then reduced to €2 million in 2014, and has remained at that level since. As inflation has gone up dramatically over this time €2millon is not worth what is used to be, and this is making it harder for families to become financially independent and be less reliant on the state in retirement.

There has also been significant increase in public sector pay and pensions over this period and it now seems the government are struggling to fill some senior civil servant roles as they are likely to get hit with a big tax bill at retirement.

Is there any good news on this front?

Well, as a matter of fact there has been a lot of talk about reviewing and increasing the SFT of late due to the problems outlined above. KPMG recently outlined that if the SFT was increased with CPI since 2014 it would be over €3millon now. You can read the article here KPMG calls for increase in tax-free pension ceiling and lump sums – The Irish Times

On March 1^st, while speaking at the Irish Association of Pension Funds annual dinner, the Minister for Finance indicated his intention to make decisions in relation to the Standard Fund Threshold, following the review which is to be completed by the Summer, when he said:

“I look forward to considering the report and making the decisions this year I believe are appropriate and necessary to underpin our pensions system into the future.”

What should you do if you are approaching the SFT this year?

First of all you need to contact your Financial Advisor, and if you don’t have one you should contact a Certified Financial Planner and set up a meeting.

I would suggest for most people the best strategy is to hang tough and wait to see what comes in Budget 2024. If you are over the limit right now and you draw down your pension now you will have to pay an additional tax bill that may not apply early next year.

What if I go over the limit while I’m Waiting?

This would be a very common concern and the first point I would make is, if you go over the limit due to market growth, this isn’t the end of the world.

However, I would be looking at reducing/ceasing my pension contributions if possible for the next few months, you don’t want be pushed over the limit due to your own contributions.

One other thing you might want to consider is getting your Pension into a PRSA. This would allow you to draw down your pension pot in stages. There are other options available also, and the solutions for you will specific to you and your own circumstances.

And finally…

If this is an issue facing you right now, you need to get professional advice to guide you through the next few months. While an increase in the Standard Fund Threshold is a possibility, you need to ensure that your pension contracts are fully flexible to ensure you can adapt to any changes in legislation.

Please contact me if you would like to have an initial discussion about this issue.

Cian Callaghan

Private Client Manager

ccallaghan@metisireland.ie