Time to increase the Standard Fund threshold

You used to be able to have as big a pension pot as you wanted/ could afford. In 2005, a cap of €5 million was introduced. It was increased to €5,418,085 in 2008 before being reduced to €2.3 million in 2010 and then down to €2 million in 2014. It hasn’t changed since.

In December 2023, Minister Michael McGrath announced a review on the Standard Fund Threshold, the term used for the pension cap of €2 million. After not changing for 10 years, it needs to be inflation linked.

Inflation

Since the €2 million cap was introduced ten years ago, inflation has run at 1.97% per annum or 21.51% in simple terms. If the standard fund threshold was increased by the annualised inflation rate, it would be €2,430,827 today.

The average industrial wage has increased by 2.99% per annum or 34% over those ten years. If the Standard Fund Threshold was increased by the annualised increase in the average industrial wage, it would be €2,685,224 today.

Instead, the standard fund threshold is still €2 million. The real value is €1,645,529 if using the inflation rate or €1,489,633 if using the average industrial wage rate.

Exceeding the standard fund threshold

Not increasing the the limit on the standard fund threshold has a real impact on people’s ability to save for their retirement. Yes, €2 million is still a lot of money but as we have seen, the real value of it has decreased significantly. And salaries have increased a lot at the higher end and more and more people are being caught by the threshold. It is no longer the reserve of those perceived to be wealthy.

Exceeding the threshold results in a tax of 40% on the amount that has exceeded the limit and the remainder left over is then taxed under the PAYE system. So it is extremely expensive to exceed the limit. Public servants have the option of taking a reduced pension for 20 years to pay off the tax. While is a great facility to have, they will be in their 80’s when they get their full pension again. Even if still alive, most people are in the warmth and comfort stage of life at that age, so the higher pension isn’t of much use.

A hospital consultant joining the HSE pension scheme under the new contract now, by default, exceed the €2 million threshold. And they will continue to contribute to the scheme even after the value of their pension has exceeded the limit. There is nothing they can do about it.

Some schemes limit the pension that a member can receive on retirement so as not to exceed the threshold. Take the Aer Lingus scheme which caps the value of the pension payable at €2 million. For pilots who have to retire at age 60, that means the maximum pension they can receive is €66,667. A good pension yes, but a captain can be earning €200,000 a year when he retires. The scheme is designed to provide 66% of salary at retirement. Because of the cap, a captain at the top of the scale receives 33% of their final salary as a pension.

 

Minister McGrath wants to consider the impact of any changes to the standard fund threshold on the overall tax expenditure as well as the equity in treatment across taxpayer groups. As Ireland has a progressive tax system, higher earners pay the most tax and this will continue to be the case if they are receiving higher incomes in retirement. An effective tax rate of 72% is not equitable in any way for high earners who are trying to provide an income in retirement.

 

Steven Barrett

19 February 2024