Key Post Should you contribute to a pension fund if you are in danger of breaching the €2m limit?

Gordon Gekko

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What is the Standard Fund Threshold? In summary, it's the €2m cap placed on the public or private sector pension benefits that an individual can accumulate in Ireland over his or her lifetime.

If the individual breaches the SFT, at the point the offending pension benefits are retired, he or she is subject to a penalty tax (Chargeable Excess Tax) on the surplus amount.

The issue I'd like to focus on is how individuals should plan their investments in the context of the SFT.

Breaching the SFT isn't a particularly attractive proposition (or is it; we'll come to that later). Say your benefits are worth €3m; the State rides in and grabs 40% of your €1m excess (€400k). You then get your lump sum (€500k, net €440k), with the balance (€2.1m) moving into your ARF/AMRF.

(I've restricted the discussion to DC schemes and ignored the annuity route.)

The €1m excess is therefore taxed once at 40% and then taxed again as it is withdrawn from the ARF. People often talk about an effective rate of 70%, although I have reservations about the logic of that.

It therefore creates a conundrum for a person who cannot access his/her benefits and who will breach €2m/€2.15m (a quirk effectively makes the cap €2.15m but for the purposes of the discussion, let's call it €2m).

So what should that person do?

- Aim to breach €2m in the hope that the SFT rises?
- Aim to get to €2m and then switch to cash because the risk/reward is so unattractive?
- Aim to breach €2m, convert €2m to cash and take high risk/high payoff bets with any excess?
- Grow their pension without a care in the world, because (using the €1m example) a €400k penalty is fair value for having €600k invested in a tax-free environment for circa 30 years.

It's an interesting topic in my view.
 

Gordon Gekko

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Fund size€3m
Less chargeable excess tax(€0.4m)40% * €1m (€3m – SFT of €2m)
Less lump sum(€0.5m)€200k tax-free; €300k@20% = €60k
Tax credit€ 60kThe €60k can be set off against the Chargeable Excess Tax
Left in ARF€2.16m
 
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SBarrett

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Hi Gordon

There's a tax credit in there somewhere regarding the tax paid on the lump sum and the tax paid on chargeable excess. I'll have to root it out as I can't remember exactly how it works. I'll be back to you on it.

Steven
www.bluewaterfp.ie
 

Gordon Gekko

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Hi Gordon

There's a tax credit in there somewhere regarding the tax paid on the lump sum and the tax paid on chargeable excess. I'll have to root it out as I can't remember exactly how it works. I'll be back to you on it.

Steven
www.bluewaterfp.ie
I referred to that (€2.15m as the €60k on the lump sum goes against the 40% on the €150k).
 

Brendan Burgess

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Hi Gordon

I have just come across this excellent post and made it a Key Post and edited the title?

I have also inserted a table in the second post using your figures. Have I got it right?

Have your thoughts developed since?

It seems clear to me that as you approach retirement if your fund is near the €2m you should not make any further contributions.

It's a lot less clear about what to do if you have a €1m fund at aged 50.

Brendan
 

Gordon Gekko

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Sure.

Everyone talks about €2m.

But if you have €2.15m, you end up with a 40% chargeable excess tax liability on that €150k excess, i.e. €60k.

However, separately, on your €500k lump sum, you pay €60k of income tax (€200k tax-free, €300k taxed at 20%).

The €60k on the lump sum is available as a credit against the €60k of chargeable excess tax.

So no chargeable excess tax.

Makes the threshold €2.15m in reality which is handy additional headroom for marginal cases.
 

Gordon Gekko

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Well if you take €500k out, you’re left with €1.5m in your ARF/AMRF, with a minimum of 4% forced out of the ARF each year from age 61 plus an optional 4% from the AMRF.

So €60k gross basically.

You can take more, but that too is taxable.

The risk with the ARF is that it runs out.
 

Fergal19

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It makes sense to turn down the investment risk once you reach the limit for the reasons outlined above however should you still contribute to a pension if you are above the limit?

Say you had 100k in a company that had to be put in a pension or taken as salary. Id be inclined still to put into the pension. What would you do?
 

David1234

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It makes sense to turn down the investment risk once you reach the limit for the reasons outlined above however should you still contribute to a pension if you are above the limit?

Say you had 100k in a company that had to be put in a pension or taken as salary. Id be inclined still to put into the pension. What would you do?
I would be inclined to take the €48,000 Net now as opposed to putting in €100,000 into a pension pot that has gone over the cap. You will automatically be taxed 40% on it and have further tax on drawdown. Over simplification of it but if you were to take all your pension minus the taxes at the earliest possibility you would end up with about €36,000 on the €100k you put in
 

Gordon Gekko

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It makes sense to turn down the investment risk once you reach the limit for the reasons outlined above however should you still contribute to a pension if you are above the limit?

Say you had 100k in a company that had to be put in a pension or taken as salary. Id be inclined still to put into the pension. What would you do?
I’d hire my wife on a salary that is reasonable and put the €100k into a pension for her.

Every individual has his or her own €2.15m threshold.
 

SPC100

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I think with €1m at age 50, I’d keep contributing with a view to getting to €2.00m/€2.15m and then switching to cash (and ceasing contributions).

I think the trick is to get into an ARF as soon as you hit €2m if possible.
Can you expand on why to get it into an ARF asap?

And thank you for creating this valuable thread!
 

Gordon Gekko

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Can you expand on why to get it into an ARF asap?

And thank you for creating this valuable thread!
Hi,

Well it’s primarily because everything above €2.15m is subject to 40% penalty tax and still trapped inside a pension structure.

So if I’m threatening the threshold, it makes a lot of sense for me to move into an ARF where I get 25% of the value and the other 75% can grow unencumbered.
 

SPC100

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Thanks!

But, the ARF has the drag factor of the imputed distribution (currently 4% or 5% depending on age) but your ARF could (depending on sequence of returns and returns) grow back to over the 2million without suffering from SFT.

It appears the only other point to be aware of is that you might jump to a 6% imputed distribution
"The imputed distribution at all ages over 60 is 6% for those with ARF assets and vested PRSAs worth over €2 million." from https://www.pensionsauthority.ie/en/LifeCycle/Tax/Tax_on_AMRF_ARFs/

I wonder are there any cases where the imputed distributions could fare worse than the penal tax.
 

Brendan Burgess

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OK

I have tidied up this important thread to remove some of the distractions.

It's clear that once you breach the €2.15m you should not contribute any further.

You should take 25% of it and put the balance into an ARF. What is the earliest age you can do that?

What if your employer is still contributing to the scheme? Do you try to negotiate with them to pay you the pension contribution as gross salary instead?

What if you have €1m at age 50 and plan to retire at age 65?

A 5% return without any further contributions will bring you to €2m at age 65.

Should you just pause any further contributions to see how things go?

The fund might crash in value over 5 years, and so you might start maxing your contributions again.

What if you have €1.8m at age 63 and the stock market is depressed?

It could easily jump 20% in two years and you end up with penal tax on the surplus.

Or it could fall by 20% and leave you with unused scope for tax-relief.

Brendan
 
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Gordon Gekko

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50 is the earliest that you can “ARF”, but it necessitates leaving the related employment and for a company owner it means selling one’s shares.
 

Sarenco

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What if you have €1m at age 50 and plan to retire at age 65?
I would have thought that the appropriate approach would be to keep contributing to the fund as before, perhaps gradually lowering the allocation to equities somewhat.

If you find yourself in the fortunate position of hitting the €2.15m mark early, you can simply go to cash until you are in a position to take the 25% lump sum and transfer the balance to an ARF (which you can invest however you see fit).

I really don't see this as a major problem.
 

Conan

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And if an Employer is contributing, then it probably makes sense to keep accumulating even if this exceeds the €2.15m.
 

Gordon Gekko

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And if an Employer is contributing, then it probably makes sense to keep accumulating even if this exceeds the €2.15m.
I wouldn’t have thought so. Better to just take extra salary, if your employer allows it.
 
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