The new pension fund cap -down from €5.4m to €2.3m - raises some interesting points:
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.
- 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.
- 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.
- 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.
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.