Navigating SFT changes

Would love to hear some thoughts on my pension situation and possible next steps.

I’m 55 years old and expect to continue working for another 3-5 years. I don’t need any funds from my pension during this timeframe.

I have three pension savings accounts in Ireland (small pension sums in US and UK too but don’t want to complicate things here):

1. Previous employer DC account - €1.9m
2. Zurich single premium pension account (a number of once-off pension contributions while self-employed) - €300k
3. Zurich PRSA - €100k

My pension has been fully invested in equities and am now in the fortunate position of exceeding the current SFT of €2m. With the expected SFT increases in 2026-29 from the latest finance bill, I’d like to figure out the best strategy for these pension accounts so I can avoid the punitive 40% CET (Chargeable Excess Tax).

I’m no longer making pension contributions but continued growth in these funds may push the total over the (future) SFT threshold if I leave them as is.

I’m considering taking the €1.9m account now, withdrawing a 25% lump sum and investing the remainder in an ARF. And leaving the Zurich accounts in place, which can (hopefully) continue to grow and withdraw these in 2028/9 when the SFT is higher.

Questions I have:

• Is there any issue with withdrawal of pension accounts sequentially like this?
• Can later withdrawals avail of the higher SFT applied to the cumulative withdrawal amount?
• Anything else I should be aware of?
• Any alternatives I should consider?

I’m open to seeking professional pension/tax advice (haven’t figured out how to find someone suitably independent, recommendations welcome). Thought I’d float it here first to gather thoughts from the group.

Many thanks in advance for your help!

Bear in mind the significance of the €2.15M figure with regard to the current SFT of €2M.
I guess that the equivalent figures for the imminent increases in the SFT can easily be calculated.

chailatte said:

I’m considering taking the €1.9m account now, withdrawing a 25% lump sum and investing the remainder in an ARF. And leaving the Zurich accounts in place, which can (hopefully) continue to grow and withdraw these in 2028/9 when the SFT is higher.

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That looks like a sensible approach to me.

This article discusses the various strategies for addressing the SFT issue -

As an aside, you must really love your job if you are planning to continue working with that level of assets!

There is nothing wrong with doing that.

You will get the threshold applicable at the time of maturity. With a pension of €2.3m already, if markets continue doing well, your pensions will outgrow the increase rate, so you will always be overfunded. 5% annualised return will get you €2.8 in 5 years time. If there is a downturn to slow down the growth, your tax free cash may suffer.

Nothing wrong in maturing the big one now, taking the lump sum and transferring the remainder to an ARF so it can begin the investment journey again, without limits. There may even be scope to make additional contributions to bring you up to €2.8m...but if you leave it everything where it is, you may reach there anyway without an additional cost to you. That's the risk you're taking.

The big question is whether you have enough money to enjoy retirement!

Steven
http://www.bluewaterfp.ie (www.bluewaterfp.ie).

Steven Barrett said:

The big question is whether you have enough money to enjoy retirement!

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Isn't the big question if they will have enough retirement to spend the money?

Isn’t the problem that once you use the threshold now, you don’t get the benefit of the future uplifts?

I'll stand corrected but if you retire the €1.9m today and take the lump sum, have you not used up 95% of the SFT. Thus when the SFT increases you can only access 5% of the increase. By 2029 when the SFT increase by €800,000 the OP can only access 5% or €40,000.

Historical crystalisation events have to be revalued if the the SFT goes up so that €1.9m would be revalued at €2,660,000 in 2029

The real effective SFT in 2029 will be €2,950,000

There are some proposals under consideration that might help. There's a proposal to reduce the CET to 10% (unlikely). There's a proposal to allow DC savers to pay the tax over 20 years (more likely).

Gerard

www.prsa.ie

If @chailatte crystallises €1.9M now, then by 2029 s/he will be deemed to have crystallised 140% of this, or €2,660,000 in line with the increase of 140% on the SFT from €2M to €2.8M.

Regards,

Liam
www.FergA.com

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Thank you for responses so far, very much appreciated!

This is enlightening. I had presumed that maturing the first account would subtract an absolute euro amount from future SFT calcs, but there seems to be a view here that it would be a percentage consumed (or a pro-rated revaluation), which places it in a different light.

I was reading the following snippet from the “Examination of the Standard Fund Threshold” doc from Dr. Donal de Buitléir:

For defined contribution schemes and PRSAs the valuation (or capitalisation of the fund) for the purpose of the SFT regime is the market value of the assets in the individual’s fund or PRSA at the time their benefits are crystallised. This value, with the value of previously crystallised benefits, is compared to the SFT (or a PFT where relevant) and any excess is liable for CET.

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Is there an official resource that is explicit on this question to confirm whether a euro value or percentage would be used? Or is this something Revenue would need to give guidance on?

Thanks again for your input.

GSheehy said:

There are some proposals under consideration that might help. There's a proposal to reduce the CET to 10% (unlikely). There's a proposal to allow DC savers to pay the tax over 20 years (more likely).

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Isn't it the case that the Chargeable Excess Tax won't be reviewed until 2030?

In a statement today, the Department of Finance said the Chargeable Excess Tax (CET) will remain unchanged but will be reviewed in 2030.

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It’s certainly my understanding that it is a percentage rather than the absolute following a presentation by Aidan McLoughlin at ITC which made this point explicitly and he would be closer to Revenue on this point than me

chailatte said:

Is there an official resource that is explicit on this question to confirm whether a euro value or percentage would be used? Or is this something Revenue would need to give guidance on?

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The Revenue Pensions Manual hasn't updated the chapter that includes the SFT since April 2024 and so it doesn't have any guidance on the new rules. I'm sure it will be updated in due course. https://www.revenue.ie/en/tax-professionals/tdm/pensions/chapter-25.pdf

The detail of the SFT is in paragraph 4, schedule 23b of the TCA. No change to those rules which have been in place for quite some time. The details in that section of the Act cover future changes to the SFT as is the case from 2026.

Thank you very much for sharing the references above, that’s really helpful.

I’ve learnt two new acronyms:

• BCE = Benefit Crystallisation Event
• TCA = Taxes Consolidation Act

Snippet from the 2023 TCA:

in any other case (which by definition means a case where some but not all of the SFT (€2m) or PFT, as the case may be, has been used up by prior BCE’s) the amount of the SFT or PFT that is available at the time of the later (i.e. current) BCE, is the balance after deducting the amount of the prior BCE’s.

Meaning of previously used amount
Paragraph 5 provides that in determining “the previously used amount” for the purposes of calculating how much, if any, of the SFT or PFT is available at the time of a current BCE, the amount of each prior BCE must be adjusted in accordance with a formula. This ensures, in the context of a reduction in the SFT, that the value of a prior BCE can never be less than its capital value at the time it crystallised.

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Assuming that a percentage calculation would be used, I think this reduces the benefit of drawing down one account now as I had first intended.

These are the options as I see them:

1. Draw down the first account now and transfer to an ARF so that any further growth of this will not be subject to CET. Move the remaining accounts from equities into a lower risk asset class as the risk/reward ratio has changed when you include CET.
   
   
2. Leave all accounts as is, invested in global equities, allow them to grow and pay whatever CET is due at a later date. Seems like upside is constrained by CET while downside is unconstrained (as highlighted in Davy article kindly shared by @Sarenco earlier in the thread).
   
   
3. Move all accounts from equities to a lower risk asset class and draw them down at a future point when the SFT has increased and no CET to pay (though this feels like the tax tail wagging the dog and would limit growth potential).
   

Thinking option (1) still makes most sense, while welcoming any further thoughts...

Agree - option 1 looks like the best. Thanks for posting this thread as I'm watching it closely as likely to be in the same position in 3 to 4 years.

Given the likely percentage calculation (which was news to me), I think I would be inclined to go for Option 3 - go to cash and then retire all funds in 2026 when the SFT has increased sufficiently.

Bear in mind that the element of the lump sum that’s taxable @20% has now been fixed at €500k (it’s no longer 25% of the SFT) so any further growth is going to be heavily taxed at drawdown, leaving aside the CET.

Still, nice problem to have!

Sarenco said:

Given the likely percentage calculation (which was news to me), I think I would be inclined to go for Option 3 - go to cash and then retire all funds in 2026 when the SFT has increased sufficiently.

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Can you clarify what you mean by "sufficiently" here?
I'm probably missing something here?

The SFT will only have increased from €2M to €2.2M in 2026.
It's increasing by €200K p.a. over the four years 2026-2029.
So it will only be €2.8M from 2029.