How to increase the allowable size of your pension pot

The maximum pension pot anyone is allowed to have is €2 million. If you go over that, you get hit with some pretty penal taxes which can leave a bitter taste (you’ll be talking about the massive tax bill you got on retiring for the rest of your life). But not everyone is entitled to have a pension pot of €2 million. There are rules on how you calculate the size of your pension based on income and years service.

Calculating the value of the maximum pension

Although most people are in defined contribution schemes these days, Revenue calculations are still based on the defined benefit model. You are allowed a maximum pension of 2/3 final salary at normal retirement age. The normal retirement age is the age given in the pension scheme. The scheme rules also defines pensionable salary, which is usually your basic salary. Revenue rules allow you to include other things like overtime, bonus, BIK, car allowance etc.

Example, Roisin earns €75,000 with health insurance of €5,000 and an annual bonus of €20,000. She is a member of the company’s defined contribution scheme and will have have 25 years service at age 65.

Using the uplifted scale, the maximum pension Roisin can have at retirement is:

€100,000 * 2/3 = €66,667.

To calculate the value of this pension, we use capitalisation tables provided by the Revenue. For retirement at age 65, the value of her maximum pension of €66,667 is multiplied by a factor of 26, giving it a value of €1,733,333.

Fudging the figures

Roisin has been a diligent saver all her life. She started contributing to a pension when she got her first job and always knew the importance of  employer contributions to help her fund for her retirement. She has saved so well that her pension is nearing the €2 million threshold. She doesn’t want a situation where her pension is overfunded and she will not receive all the money she has saved.

That is where she can fudge the figures a bit to increase the cost of her pension of €66,667. Instead of using the capitalisation tables, she can use current annuity rates. If you are within 3 years of the normal retirement age or are retiring, the Revenue allows you to use current annuity rates that are available in the market.

With annuity rates so low, this is increases the cost. You can increase the cost further by:

  1. Index linking the annuity
  2. Guaranteed payment period of 10 years
  3. Spouse’s pension of 100% of your own pension

We ran an annuity quote Roisin. A pension of €66,667, index linked at 3%, guaranteed to be paid for 10 years and Roisin’s husband will also get a pension of €66,667 if she predeceases him. We got an annuity rate of 1.91%, which means the cost of her maximum pension is now €3,492,272.

With the pension threshold of €2 million, Roisin can fund for that cap without her pension being overfunded.


Steven Barrett

29 November 2021