Why the overdue increase in pension threshold is welcome

Finance Minister Jack Chambers has raised the pension threshold to €2.8M by 2026, aiming to improve talent retention and tax issues.

In brief

• Finance Minister Jack Chambers announces the Standard Fund Threshold (SFT) for pensions will increase to €2.8 million by 2026.
• The increase addresses public and private sector recruitment challenges and high effective tax rates on top earners.
• Despite the rise, the maximum tax-free lump sum remains at €200,000, and the Chargeable Excess Tax (CET) stays at 40%.
  

The announcement by Finance Minister Jack Chambers that the Standard Fund Threshold (SFT) for pensions is to increase from €2 million to €2.8 million in increments of €200,000 over four years starting in 2026 is very welcome.

The SFT had become an obstacle to recruitment and retention in the public service, as highlighted in the recent difficulties encountered by the Garda Siochana in the appointment of a Deputy Commissioner. Potential candidates for the job indicated that they were close to or at the SFT, meaning that taking the job and extending their service with the Garda would expose them to a Chargeable Excess Tax (CET) of 40% on the amount above the SFT.

It had also become an issue for private sector organisations with Ibec pointing out that when USC and PRSI are included, the result is an effective tax rate on income above the SFT of up to 72%. The impact on retention of top talent and entrepreneurs on this island can only be guessed at.

The upward revision is long overdue in light of increases to salaries and living costs since the threshold was reduced to €2 million in 2014. Unfortunately, it has been mischaracterised by some commentators as giving better-off people an increase in “tax free income”.

That is far from the case. Income tax is payable on the pension drawn down from the fund and the maximum allowable tax-free lump sum will remain at €200,000 and will not rise in line with the SFT. There will also be no change to the additional €300,000 in retirement lump sums which is taxable at the standard tax rate of 20%.

It should also be noted that the decision is broadly in line with the findings of the de Buitléir report commissioned by former Finance Minister Michael McGrath at the end of 2023. The report recommended an increase to €2.8 million in line with increases in the CSO’s quarterly average Earnings Hours and Employment Costs Survey (EHECS) as well as breaking the legislative link between the threshold and the taxation of pension lump sums.

The Minister did decide to depart from the report’s recommendations in respect to the level of the Chargeable Excess Tax (CET) payable on the amount above the SFT when a crystallisation event occurs. Such events include when an individual takes a pension, annuity or retirement lump sum, exercises an ARF option, a payment or transfer is made to an overseas pension arrangement, and so on.

The report advised that this be reduced from its current level of 40% to 10% but the Minister has decided to leave it unchanged.

People should be cautious about increasing their pension pot beyond the current threshold in anticipation of the increases coming into effect before a crystallisation event occurs for them.  At this stage, the Minister of Finance’s proposal is merely a plan and is dependent on the outcome of the upcoming general election and any budgets and Finance Bills introduced by the newly elected Government after that.

In the meantime, individuals at or near the threshold should continue to take appropriate steps to avoid having to pay the current punitive level of CET.