The maximum pension pot you could have was €5,418,085 at one point. It was drastically cut to €2.3 million two years later before reducing to €2 million in 2014. Despite everything else going up over the last 10 years, the pension threshold didn’t. The result is that is brought a lot of people over the pension threshold. Don’t just think it is rich people that this impacted on. Career public servants who have progressed up the ranks found themselves in a position that another promotion would see their pension go over the €2 million cap. And going over the limit was punitive, a 40% tax on the amount over the threshold. The remaining 60% was then taxed under PAYE, so it was taxed again.
Ahead of the Budget 2025 and after an article in the Irish Independent, Minister Chambers confirmed that there will be an increase and confirmed what it will be (remember the days when the Budget used to be top secret?!).
Starting in 2026, the pension threshold will increase by €200,000 a year until 2029, resulting in a maximum pension of €2.8 million. After that, the standard threshold will increase in line wage growth.
Not only is the initial increase welcome, but also the plan to increase the threshold after the initial increases in line with wage growth. By keeping it static as they have, more and more people were being caught by the threshold, so this is a good move.
There will be no change to the pension lump sum however. It will be calculated under the current method. That is 25% of the value of the fund up to a maximum fund of €2 million. Of that amount, the first €200,000 is tax free and the next €300,000 is taxed at 20%. If you accumulate a fund of €2.8m, you will still get €440,000 lump sum net.
This is fair enough. The aim of the changes is to reduce the number of people being heavily taxed for exceeding the threshold. Someone with a fund of €2.8 million could pay tax of up to €509,600 (63.7%) on the €800,000 excess under current rules. They should be thankful they are saving the 40% excess tax (€320,000).
There will also be an independent review of how different pensions are valued. At present, there is a capitalisation factor used in calculating the value of a defined benefit pension. For example, for someone retiring at 60, you multiply their pension by 30 to find out the value of their pension. If they retire at 65, its 26. If they are lucky enough to receive a defined benefit pension at 50, you multiply it by 37.
If you earn €130,000 and retire at 60 on a pension of €65,00 and a lump sum of €195,000, you have breached the current threshold by €145,000 and have to pay €58,000 in tax. While €130,000 is a good salary and €65,000 is a good pension, you would not consider this person as a high earner. They do not have access to €2m, they are receiving a pension income that is valued at over €2 million. If they die after a year, the pension stops. Their estate don’t receive a big lump sum for the remainder.
Steven Barrett
23 September 2024