The deadline for submitting a Personal Fund Threshold (PFT) notification on 31 July 2015 is fast approaching. While it only affects a few, if it does apply to you, it is very important to make the notification in order to avoid a very hard taxation system. So, what is a Personal Fund Threshold
First, we must look at what the Standard Fund Threshold is. The maximum value that your pension fund can have is €2m.
Having a cap on the value of pensions was introduced in 2005 and the limit then was €5m. It was subsequently increased to €5,418,085 before being reduced to €2.3m on 07 December 2010 and reduced further to €2m with effect from 01 January 2014.
If your pension fund was worth over €2m on 01 January 2014, you can notify the Revenue for an exemption for the amount that was over the cap. It can’t exceed the old cap of €2.3m though. The PFT that the Revenue give you is the absolute limit on the size of your pension fund. If you get a PFT of €2.1m and your fund grows to €2.2m, that additional €100,000 is liable to chargeable excess tax.
You can only apply for a PFT if the value of your pension on 01 January 2014 is over €2m. You cannot apply if your accrued benefits on that date were not over €2m but will be by the time that you retire.
If you have a defined contribution pension, it is simply the value of your pension on 01 January 2014. If you have a defined benefit pension, it is the value of gross pension (before tax free lump sum) accrued as at 01 January 2014 multiplied by 20. If the defined benefit scheme provides for the lump sum separately (as with public service pensions), you multiply the gross pension by 20 and add the value of the lump sum.
The Revenue will also look back at all pension benefits that you have received since 07 December 2005. The word they use is “crystallised”, which basically means any matured pensions. So if you have bought an annuity, invested in an A(M)RF or have a vest PRSA, the value of the pension before the lump sum was taken is counted.
If you go over the SFT or PFT (if you have one), the excess is liable to a tax called the chargeable excess tax, which is 41%. It has to be paid upfront by the scheme administrator and recovered by the individual. In most cases, the insurance company are the scheme administrator, so they will make sure the tax is paid before releasing the remainder of the funds to you.
If the 41% chargeable excess tax wasn’t bad enough, what money is left is taxed again at your marginal rate of tax when you draw it down from the pension fund. USC and PRSI may also be applied.
If you were €100,000 over the threshold, after paying all the various taxes, you may only receive €28,320! That is a tax rate of 71.68!!
You must apply online through the ROS or PAYE Anytime systems . You must register for these systems and it can take a few weeks to complete the process, so if you are not already registered, you would want to start the process now.
If you have any questions, please contact me directly on steven@bluewaterfp.ie
Updated on 30 June 2015 after the Revenue extended the deadline from 02 July to 31 July 2015.