New pensions levy and more read our take on the measures here
The commitment announced in last year’s budget to restrict tax support to pensions that deliver an income of up to €60,000pa has been implemented through a reduction in the Standard Fund Threshold (SFT) from €2.3 million to €2.0 million with effect from January 2014.
- The multiplier of 20 that applied in assessing Defined Benefit (DB) pensions against the SFT will be increased for pensions built up from 2014 to a level, depending on the age at which the pension commences, between 22 (age 70) and 37 (age 50). For those retiring below age 55, the maximum tax effective DB pension will ultimately be lower than €60,000.
- The maximum tax advantaged pension lump sum will reduce from €575,000 to €500,000 of which the first €200,000 is tax free and the balance taxed at 20%.
- A new pension levy of 0.15% of pension assets will apply in 2014 and 2015. This is on top of the existing pension levy of 0.6% of pension assets which will also apply in 2014.
- On a positive note, the Minister reminded us that the marginal rate tax relief for pension contributions has been maintained.
Who will be affected?
All private sector pension fund assets will be subject to the new Pension levy.
- The impact of the reduced SFT and higher multiplier will bite on a gradual basis for those with prospective pensions above €60,000 as the 20:1 multiplier is retained for that part of the pension built up prior to 2014 (as will existing PFT thresholds)
When? What to do now?
The key measures will take effect from January 2014.Therefore, individuals with Defined Contributions (SC) pension assets above €2 million who are in a position to do so, should consider crystallizing their pension assets prior to 2014 in order to benefit from the current level of tax advantaged lump sums and to avoid the new pension levy.
- Otherwise, those with accrued pension assets above €2 million, or with an accrued DB pension benefit above €60,000pa, should apply for a Personal Fund Threshold once the legislation is published in the Finance Bill to protect the accrued benefits up to a maximum of €2.3 million.
- Other higher earning individuals will need to reconsider the appropriateness of any further AVC contributions and or the value of future pension benefit accrual. Employers will also need to reconsider the effectiveness of their pension arrangements for higher paid employees and may need to make amendments or alternative arrangements.
Given the clear statement of intention in last year’s budget to cap tax support for pensions of up to €60,000pa, the implementation mechanism outlined in this year’s budget is to be broadly seen as a pragmatic and workable mechanism. The rebalancing of the treatment across DB and DC pension arrangements to make it more equitable is to be welcomed.
- The introduction of a new pension levy is clearly not a welcome development and a reversal of previously stated policy to end the levy in 2014. It also could be a very open ended exposure for pension assets as despite the Minister saying that it would apply for 2014 and 2015, he also stated that its purpose is to “help fund the Jobs Initiative and to make provision for potential state liabilities which may emerge from pre-existing or future pension fund difficulties”.
- The overlapping of the pension levies for 2014 is also most unwelcome - there will now be a tax take of 0.75% of pension assets in 2014, at a time of generally low investment returns. This will undermine individuals’ confidence in retirement savings as pensions are increasingly subject to double taxation during the investment accumulation period and ultimate drawdown. Government policy has clearly been stated as to increase participation levels in private pension arrangements, but this action will help undermine that goal.