The new Pension Fund Cap -down from €5.4m to €2.3m - raises some interesting points:

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Conan

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The new pension fund cap -down from €5.4m to €2.3m - raises some interesting points:
  1. Whilst €2,3m sounds a lot (and it is if you won it on the Lotto) in pension terms it equates to a pension of circa €70,000 (with an attaching widows pension and inflation-proofing). Whilst €70k is not chicken-feed, its hardly a kings ransom.
  2. From recent press details, a number of Government Ministers will be retiring on pensions of over €120k. This equates to a capital value of circa €4m.
  3. But perhaps the most unfair element of the new cap is how it impacts on individuals who might (in the good times) have built up a fund of say €2.3m to date. Because pension funding is a long term exercise, some individuals, based on the tax rules at the time, have accumulated a fund of say €2.3m to date but are still a few years off retiring. Based on my understanding of how the new cap will work, these individuals will now have to stop any future contributions but will still be hit with a double tax (41% on the excess over €2.3m and circa 50% on the pension in payment) on any investment growth from now. Whatever about effectively capping future contributions, for any investment growth to be double taxed seems unfair. In such cases the client has no choice but to leave the funds in place until they retire, so hitting any growth with an effective tax rate of 70% is surely penal.
For many individuals seeking to fund their retirement, they established structures based on Government tax policy. To now effectively double tax individuals who followed Government policy is surely a breach of contract (or at least a breach of reasonable expectations).
Whilst those affected by the cap might be prevented from contributing further, I think that any investment growth from now to retirement should not be treated as being liable to double taxation.
 
Hi Conan

The people who can earn a pension of €70k a year should not get any further tax relief. They can save through a non-pension vehicle. The tax saved can be used to encourage the lower and medium paid to start schemes.

If the cap works as you describe, it is wrong and should be changed. I would have thought a progressive cap would be more appropriate - €250,000 at age 30; €1m at age 40 etc.

I would have thought it would be fairer to let the fund grow tax-free and at retirement tax any surplus over €2.3m at the marginal rate of tax.

Brendan
 
Brendan Burgess said:
I would have thought it would be fairer to let the fund grow tax-free and at retirement tax any surplus over €2.3m at the marginal rate of tax.
Click to expand...

Hi Brendan

Actually, that is what happens. But the balance is then also subject to marginal rate tax. So someone with €3.3m will pay €410k tax on retirement and will then pay taxes and levies of around 50% on the remaining €590k when they draw it down.

There are transitional arrangements in place that allow someone who currently has more than €2.3m accumulated to apply to have a "Personal Fund Threshold" equal to their current value, but any investment growth they earn on this money between now and retirement will be subject to double taxation as outlined above.
 
Homer/Brendan,
My point is that someone who today has accumulated say €2.3m under the current rules (well short of the old €5.4m cap) but has say 5 years to go to retirement will be hit on the double even if they cease all future contributions (merely because any investment growth will bring them above the €2.3m cap).
This is in effect changing the rules retrospectively. From a fairness perspective it should be the case that any individual who was previously working within the old rules but who now ceases all future contributions should not be hit purely because investment growth now brings them above the €2.3m or their PFT.
 
Hi Conan

I was agreeing with the point you made. My final sentence read "any investment growth they earn on this money between now and retirement will be subject to double taxation as outlined above."

Regards
Homer
 
This raises the possibility of a client approaching a pension consultant and asking them "Can you recommend a fund for me that will achieve 0% growth over the next 10 years?" Now that I think about it, I can think of quite a few funds with a track record of doing just that. :D

Joking aside, I presume that anyone in this position would be well-advised to completely de-risk their pension fund as the double taxation will simply wipe out any risk premium they might have otherwise expected.
 
LDFerguson said:
Joking aside, I presume that anyone in this position would be well-advised to completely de-risk their pension fund as the double taxation will simply wipe out any risk premium they might have otherwise expected.
Click to expand...

There is a strong argument for de-risking on the grounds that the risk equation is no longer symmetrical - excess gains will be taxed at the penal rate, losses will only get tax relief at the normal rate.
 
Has there been any update/clarification on this situation regarding the tax implications of exceeding the pension cap?

I notice that the judges have raised this issue in the most recent Irish Times and outline how they believe they will face a large, up-front tax bill upon retirement. (They are not the only people affected by this!)
(See Irish Times - Saturday 7th May - 2 articles by Carol Coulter - I can't post links here)

I have some questions...

  • While it is possible to de-risk something like AVCs, how do you de-risk your pension fund where your employers makes a contribution, and you still have at least 5 years before retirement?
  • Should you consider quitting your job in an effort to minimise your pension growth, and in an effort to minimize your potential tax liability?
  • How do you think Revenue will behave towards people who have a substantial tax liability? Is there a possibility to pay this in instalments or will they really demand that tax up front (a tax bill on a pension you might never receive if you die relatively young!
  • What happens if your pension fund is already in difficulty? Could you end up paying a tax bill on a pension fund that goes bust soon after you retire? Would Revenue have to refund you then?
Yes, I am talking about a specific personal case here, but the point applies broadly, to the judges and others whose pension fund will, over time, exceed the €2.3 million cap. Is anyone 'working/lobbying' to sort this out?

A further worry is that the current Programme for Government promises to reduce pension caps even further (to approx €60,000 per annum pension.) If this comes into effect, you would expect more middle-income people to be affected.

I can supply further details if people are interested in addressing this issue?
 
I would like to clarify my understanding of the rate of tax on growth in excess of the €2.3m

Say the fund is €2.4 m.

Excess over €2.3m| €100,000
Tax on retirement |€41,000
balance in pension fund|€59,000
Tax on drawdown - say 50%|€29,000
Net payment| €30,000
So the effective rate of tax is 70% on any growth over €2.3m

Now if they can take 25% of the growth tax free, which I presume that most can?

Excess over €2.3m| €100,000
Tax on retirement |€41,000
balance in pension fund|€59,000
25% tax free|€15,000
Taxable at 50%|44,000
Tax on drawdown - say 50%|€22,000
Total tax|€ 63,000
Net payment| €37,000

Effective tax rate is 63%
 
Hi Brendan. Your first example is correct however when the new SFT was introduced there was also an ammendment to how TFLS are treated e.g.

Max SFT of 2.3m with max 25% lump sum = 575K

25% lump sum is treated for tax porposes as follows first 200K is tax free with the residual sum up to 375K being taxed @ 20%.

In the case of someone that has a Personal Fund Threshold (PFT) as an example of say 4m, the following treatment would apply

4m*25%= 1m

First 200K tax free =200K
Next 375K @20% =300K
Next 425K @41%+USC@8%+PRSI@4% =204K

Total Lump Sum after charges 704K

Effective tax rate of 29.6% obiously the ETR would be more or less depending on the size of the pension fund. The biggest issue is that anyone that exceeds the SFT is facing double taxation where the excess over 2.3 is taxed within the pension fund @ 41% but is also taxed at 41% when the pension is drawn down from a ARF Thats a staggering 82% tax!
 
Hi Baracuda

Thanks for that.

I had forgotten about the 20% tax on the bit over €200k.

I had not realised that there was a limit of €575k.

So in effect, there is no tax-free lump sum or 20% taxed lump sum on growth over €2.3m.

So the effective tax rate on any growth over €2.3m is 70%


Brendan
 
Was reading an article over the weekend and it fits in quite nicely to this thread regarding the tax treatment of lumpsums.

It would appear that when the recent legislation was passed into law http://www.charteredaccountants.ie/taxsource/1997/en/act/pub/0039/sec0790AA.html contradicts several sections of the Taxes Consolidation Act 1997 on the tax treatment of TFLS/lumpsums a few examples below. (and I qoute directly)

Take, for example, someone who matured a​


€
190,000 Personal Pension Plan in 2008 and
took ​
​

€47,500 then as a tax free lump sum and
after transferring ​
​

€63,500 to an AMRF took the
balance of ​
​

€79,000 as a lump sum liable to PAYE
at marginal rate.
The question now is what tax free lump sum
limit has this individual left, if he or she now
matures another Personal Pension Plan or PRSA?
Initially you might think the answer is
​
​
€​

​

200,000 less the €47,500 previous tax free
lump sum taken, i.e. the individual can take
another ​
​

€152,500 tax free.
However in fact his or her remaining tax free
lump sum limit by dent of S790AA is actually:
​
​
€​

​

200,000 – €47,500 – €79,000 = €73,500,
i.e. all previous ‘lump sums’ paid to the individual
since 7th December 2005 count.
So the legislation is not confined to ‘tax free’
lump sums as such, but also counts and catches
prior taxable lump sums received. The legislation
may not have intended to catch prior taxable lump​
sums, but as framed currently it does.

This is the negative side of the legislation but the following may be the more positive side of it though

The position of vested PRSAs and the taxation of
‘lump sums’ paid from PRSAs is also unclear.
Let’s say someone has a PRSA valued at
€​

​

800,000; takes 25%, i.e. €200,000 as a tax
free lump sum (having not taken a lump sum
previously from any pension arrangement) and
leaves the balance of ​
​

€600,000 in the PRSA.
The following year they opt to take ​
​

€100,000
from their vested PRSA. The question is ...what
tax is due on this ​
​

€100,000 withdrawal? There
are two different answers:
• Section 787G(1)(a), TCA 1997 which deals
with the taxation of payments from a PRSA,
states that the ​
​

€100,000 is subject to PAYE at
marginal rate + USC, but
• Section 790AA suggest that as a lump
sum paid to the individual it is subject to
standard rate income tax only being within the​
€375,000 standard rate band for lump sums.


I have asked the large cases department in revenue how they would treat examples like the above and will update when I get an official response as I am sure this would be an urgent matter for advisors and pension holders alike
​
​
​
​

​
 
This has got me thinking. If you had a situation where someone had hit their PFT and was still young with many years to retirement what should the advice be. Further Pension contributions would seem pointless but what about the fund. Should they not just invest the existing money in capital guaranteed stuff and build up as big a pot as possible and take the tax hit. After all the capital is guaranteed and they are potentially adding circa 3% per 10% gain so why not if nothing is at risk
 
The posts in this thread are now almost 3 months old :
Has there been any further clarification from either revenue or the taxation/ pensions advice community regarding the circumstance where people have funded to a level whereby in the future any growth in their existing investments will put them over the PFT of €23.3m and liable to double taxation on that amount : As a 52 yr old who has heavily funded an AVC as an add on to a DB pension and am just hiting the €2.3m limit I am trying to get my head around how I can mange my way out of this : I assume that there is no basis for taking money prematurely out of an AVC ( albeit paying retrospective tax once off) so it can be invested else where and avoid the overall fund growing with the excess incurring double taxation. (Apologies if my terminology is not accurate)

Additionally if as expected the PFT is reduced further making the problem worse , other than stopping AVC contributions completely is there anything one should do now to avoid the problems with excess funding?
 
adrigole,
Unfortunately nothing has changed in relation to this problem. If you are aged 52 and currently have a fund value close to the €2.3m PFT, then you are snookered. The only advice (general advice) I can give is:
  • Cease all future personal contributions. (May not be possible if you are in some occupational pension schemes)
  • If you are in a DC scheme, you should cease all employer contributions (you may need to negotiate an alternative use of such contributions going forward)
  • If you are in a DB scheme (remember that the PFT value is based on service accrued to Dec 2010) you need to estimate whether your eventual benefit will exceed the PFT (i.e. pension x 20 plus AVC fund)
  • If in a DB scheme you also need to consider whether the scheme is fully funded and whether you might actually get the full promised benefit
  • Desrisk your investment strategy (taking risk will not be rerwarded and you must avoid losing any PFT in the future)
  • If the PFT is reduced further (€1.5m is being suggested) then presumably a form of grandfathering will apply to those currently between €1.5m and €2.3m (as before)
As I have stated elsewhere on this site, I believe that the implementation of this pensions policy is grossly unfair in that it is effectively backdating a tax change. Some of those who invested in their retirement funding (and are locked in until retirement) based on the previous set of rules can now be double taxed on the excess over the PFT, with no way of avoiding such penal taxation.

Such limits, whether €2.3m (which would actually buy an annuity of about €70,000 in the open market) or €1.5m stand in contrast with the benefits being paid to senior public servants and failed politicians who are jumping ship on pension packages which would be valued at over €6m if proper valuation metrics were applied (not the 20:1 factor used to value DB pensions). End of rant.
 
Conan said:
currently have a fund value close to the €2.3m PFT, then you are snookered.
Click to expand...
We must have different understandings of 'snookered'. I always thought of it as a negative, bad situation. How does having a large retirement pot at a relatively young age become a bad situation?
 
Complainer,
Without wishing to be pedantic, "snookered" means being in a situation that is difficult (sometimes impossible) to get out of e.g. the white ball is surrounded by coloured balls and you cannot hit a red ball.

So you are over €2.3m, you cannot yet access the fund (being aged 52), you cannot avoid being double taxed on the excess over €2.3 even though you played by the rules in building up the €2.3m. I think "snookered" describes it accurately.
 
Conan said:
Complainer,
Without wishing to be pedantic, "snookered" means being in a situation that is difficult (sometimes impossible) to get out of e.g. the white ball is surrounded by coloured balls and you cannot hit a red ball.

So you are over €2.3m, you cannot yet access the fund (being aged 52), you cannot avoid being double taxed on the excess over €2.3 even though you played by the rules in building up the €2.3m. I think "snookered" describes it accurately.
Click to expand...

I don't what is so difficult/impossible about;
- stopping making further contributions to pension
- invest your spare money elsewhere, without available of the pension tax relief
- if you're lucky enough to have some growth in your pension, that you'll be taxed fairly heavily on that growth.

Hardly the sky falling in, given the current state of the country.
 
Complainer,
You are missing my point. Somebody decided to build up a pension fund based on the rules which allowed for a Fund cap of €5m. Say by aged 52 (as per previous poster) the fund was worth €2.3m. The Gov't then come along and reduce the fund cap to €2.3m. So yes they stop funding. But since they cannot access the fund until age 60 (or maybe aged 65) they thus cannot avoid being double taxed.
We may argue over the size of the fund cap (whether €5m, €2.3 or perhaps €1.5m). But my point is that the rules have been changed retrospectively and this client is "snookered" in that they cannot access the funds and cannot avoid being double taxed, even if they cease all future contributions.
My original point was that if the cap is reduced, those over the new cap should be allowed to benefit from any investment growth without double taxation, remembering that the cash when drawn down will be taxed as income in the normal fashion.
 
Can I clarify a couple of things?

- Are there generally fixed retirement ages with such funds? I know of some wealthy people with self-managed pensions who managed to get access to their funds long before 60+.

- When you mentioned that 'grandfathering' may well apply to any further cap reductions as before, what exactly does this mean.
 
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