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Recent Key Changes in Pensions
There have been a number of changes in pensions over the last year and while some of the advantages have been cut
slightly, the reality is that the attractiveness and need for pensions is as strong as ever.
The most important thing to remember about pensions is that if you want any kind of financial security when you retire,
you simply have to put some money away now.
In the current financial situation, relying on the State pension is unlikely to be an option. The state funds public pensions
through taxes such as income tax. So the more people working, the more the Government has to spend on state benefits
such as pensions. Just take a look at the following diagrams.
A few years ago:
Number of people working
Vs
A single pensioner
Vs
A single pensioner
Vs
A single pensioner
2030:
Number of people working
2050:
Number of people working
(Source: Green Paper on Pensions)
This is going to put massive pressure on the public pension system, and we’re already seeing the results of that. The
Government has announced that it is to increase the state pension age to 68 by 2028 and the reality is that, even if they
can avoid cutting the state pension soon, it is quite likely that the amount will reduce in real terms over the coming years.
This means that planning a pension is really important and it explains why, even after the budget cuts, the Government
continues to give such good incentives for people to contribute to their pension.
Warning: The income you get from this investment may go down as well as up.
The value of your investment may go down as well as up.
Recent Key Changes in Pensions
Removal of PRSI and Health Levy relief on pension contributions made by employees
Pension contributions generally receive income tax relief up to a percentage of your earnings. Employees also had the
benefit of being able to claim PRSI and Health Levy relief on their pension contributions. This relief has now been
removed.
However, employees who make a pension contribution before the 31st October 2011 and backdate it against the 2010 tax
year will be able to avail of income tax, PRSI and health levy relief. PRSI and Health Levy relief has been removed for
2011 tax year onwards.
Even with the removal of PRSI and Health Levy relief a 41% income tax payer will still get €41 back in income tax relief
for every €100 they invest. Similarly, a 20% tax payer will get €20 back in tax relief for every €100 they invest.
Their pension fund will grow tax free, meaning that their funds would grow at a higher rate than savings funds. Finally,
they can access a portion of their funds tax free (usually a quarter). The rest will be taxed as an income and subject to
income tax, PRSI and the Universal Social Charge which has replaced the Health and Income Levies.
Tax free lump sum is capped at €200,000
The maximum tax free pension lump sum that can be taken has been capped at €200,000. This includes all pension
lump sums taken since 7 December 2005. The table below shows how pension lump sums are taxed.
Pension Lump Sum
First €200,000
Next €375,000
Balance
Tax Due
Exempt
Standard rate income tax – currently 20%
Marginal rate income tax plus PRSI and USC
As most pension holders can take a quarter of their fund as a pension lump sum this cap will generally only impact you if
your fund is over €800,000. Even if you are lucky enough to have a fund of that size or more, you can still take the
balance taxed at 20% up to a total of €575,000.
For example, as the diagram below shows, if you had a fund of €1 million, you could take €250,000 cash - €200,000
would be tax free and €50,000 would be taxed at 20% - meaning you just pay €10,000 tax or 4% of the cash amount.
€10,000
€50,000
Taxed Amount
Taxable Amount
€250,000
€240,000
€200,000
Take Home Cash
Tax Free Lump Sum
Total Cash Amount
Warning: The income you get from this investment may go down as well as up.
The value of your investment may go down as well as up.
Recent Key Changes in Pensions
Allowable income for tax relief purposes is capped at €115,000
The maximum pension contribution you can pay and receive tax relief is set as a percentage of your salary capped at
€115,000 depending on your age as shown below.
For example, if you are 50 you can get income relief on pension contributions of 30% of salary - this is now capped at
€34,500 (30% of €115,000 per year). In reality most people do not earn over €115,000 so this will not have any impact
on them. However, even if you do earn over €115,000 this cap will not apply to any employer contributions to your
company pension plan. If you have a PRSA plan this cap will apply to the total of your employee and employer
contributions.
The total pension fund you can build is capped at €2.3 million.
For tax purposes the maximum pension fund you can build up is €2,300,000, this is called the Standard Fund Threshold
(SFT). This is a lifetime limit and includes all pension benefits taken since 7 December 2005. At retirement if the value of
your pension fund is greater than the SFT or your Personal Fund Threshold where applicable the excess will be liable to
41% tax before retirement benefits are paid. Pension income in retirement is subject to income tax, PRSI and Universal
Social Charge.
Minimum withdrawals on ARFs increased to 5%
An Approved Retirement Fund or “ARF” is that it’s a fund you have after you retire that you can use to draw an income
from. Even if you do not make a withdrawal from your ARF during the year you must pay tax as if you have taken a
withdrawal of 5%, this amount may change in the future. This applies to all ARF holders from the year they turn 61.
If you take a regular withdrawal from your ARF, it’s possible that fund growth may be lower than expected and taking a
regular withdrawal could reduce the capital you’ve invested.
The Pension Levy
The Government announced its Jobs Initiative on the 10 May 2011 which sets out measures intended to promote job
creation. This initiative is to be financed by a 0.6 per cent levy on pension funds which aims to raise €470 million year for
the four years from 2011 to 2014, or €1.88 billion in total.
The details of the pension levy are contained in the Finance (No 2) Act which was published on 19 May 2011 and signed
into law by the President on the 22 June 2011.
The levy will apply to occupational pension schemes, personal retirement bond, PRSAs and personal pensions. The levy
will be based on the market value of the assets on the 30 June each year from 2011 to 2014. The levy will not apply to
Approved Retirement Funds, Approved Minimum Retirement Funds or PRSAs that are being used for ARF or AMRF
purposes (vested PRSAs).
Warning: The income you get from this investment may go down as well as up.
The value of your investment may go down as well as up.
Recent Key Changes in Pensions
Working to maintain incentives on pensions
In the National Pensions Framework published in March 2010, there was a proposal to reduce income tax relief on
pension contributions to 33%. We are hopeful of finding a solution that works for the Government and continues to
provide a strong incentive for people to save for their retirement.
So in summary:
 You really need to review your own pension. Even if it’s just a small one, when added to the state pension
currently €230.30 a week for a single person, it will make a difference
 Pensions remain a tax efficient way to build up money for retirement
 It is possible that income tax relief could reduce in the future, so it’s worthwhile considering how you can
maximize how much you contribute to your pension now.
This article is meant to just give a broad overview of some of the main changes to pensions in the last year. If you need to
review your pension plan, it’s important that you talk to your Financial Adviser today.
Pensions are a long term investment plan that can only be taken at retirement.
Warning: The income you get from this investment may go down as well as up.
The value of your investment may go down as well as up.