Understand the latest pension reforms in Finance Act 2024

Standard Fund Threshold (SFT)

There is a limit, above which a penalty tax applies, on the cumulative value of retirement benefits people can take from Irish approved pension schemes on or after 7 December 2005, known as the Standard Fund Threshold (SFT). In 2024, the SFT is €2 million.

Where the value of benefits taken from Irish pension arrangements on or after 7 December 2005 exceeds the SFT, any amount that exceeds the SFT, referred to as the chargeable excess, is taxed at 40%.

This chargeable excess tax (CET) is payable by the administrator of the relevant pension arrangement within three months of the liability arising. This tax liability is in addition to income tax, Universal Social Charge (USC), and potentially Pay-Related Social Insurance (PRSI) that are deducted as income is received in retirement.

Following the recent examination of the SFT by Dr. Donal de Buitléir, Finance Act 2024 introduces several of the recommendations outlined in his report:

•  Increase in SFT limit: The SFT will rise by €200,000 per annum from €2 million to €2.8 million over the period from 2026 to 2029.

• Indexing the SFT from 2030: The €2.8 million limit will be adjusted in line with increases in average weekly earnings from 2030, with an initial adjustment being made in respect of the period from Q1 2025 to Q3 2029.

• No change to lump sum limit: The maximum tax-efficient lump sum, currently 25% of the SFT, will be capped at €500,000, regardless of the SFT increase.

Individuals who have accessed their pensions savings already and fully utilised their SFT will not benefit from the increase to €2.8m. However, those who have partially utilised their SFT will be eligible for a portion of the increases.

In addition to the changes announced, an inter-departmental working group will be established to review other recommendations from the independent report, including:

• Review of CET: the current 40% CET rate is to be reviewed, and the independent report flags that a rate as low as 10% could be justified.

• Pension contribution limits: a gradual removal of annual revenue age and salary related limits for pension contributions. This change aims to provide more flexibility in how much can be contributed to pensions each year.

• Defined benefit scheme valuation factors: the current age-related valuation factors used to value defined benefits accrued after 1 January 2014 are to be reviewed. 

This further review may result in additional adjustments or new policies in the future.

The changes are set to enhance pension funding capacity over the medium term and will particularly benefit high-earning employees who breach, or are likely to breach, the current SFT limit. 

Do I need to take action?

The changes announced and wider recommendations are positive for individuals impacted by the SFT limit and have been widely welcomed. The increase to the SFT will reduce the amount of tax payable on breaching limits from 2026 onwards. Coupled with potential future reductions to the level of CET, and the potential for tax liabilities to be met over an extended period of time, it is clear the SFT regime is being significantly amended. 

In light of this we encourage impacted individuals to review current plans to ensure they remain fit for purpose. 

What if I have drawn pension benefits already but have additional benefits to draw?

As the SFT limit will increase, a quirk of the original legislation takes effect. In essence, any previous drawdown of pension benefits will be revalued in line with the increase in the SFT, therefore partially or fully absorbing the benefit of the increase in the SFT. 

What should I consider if I have yet to draw pension benefits?

As the SFT increases will be phased in over a period of time you may wish to consider the optimal timing of pension drawdown. In addition both existing funding plans and investment strategy design may require reassessment in light of the changes.

Any decisions should be made in conjunction with plans for how and when pension assets will be drawn down as this is a key planning point and should be influenced by wider financial and tax circumstances. 

Pension assets can generally be accessed from age 50 onwards, subject to having left employment. Once pension assets have been accessed, this can result in income being payable subject to income taxes and USC. Alternatively there is an opportunity to defer pension access (potentially to age 70-75) and this approach tends to favour those individuals who have no immediate need for income and wish to use the pension as a vehicle for holding, and ultimately transferring, wealth tax effectively. 

The range of potential timeframes for pension drawdown is significant and different drawdown approaches will inform different pension funding and investment strategies. 

Material tax benefits can be unlocked where appropriate tax planning is introduced.

Our experience shows there is a material benefit to getting the planning right. Our proprietary tools can help develop the optimal plan for your circumstances, and our support can help you navigate and consider the impact of changes to the wider economic and taxation environment over time.  Staying proactive and informed will help you make the most of your pension benefits under the new rules.

Personal Retirement Savings Accounts 

Finance Act 2024 brings several important changes that will impact employer funding for PRSAs. These updates are designed to provide clearer guidelines and address previous ambiguities in the tax treatment of PRSA contributions and transfers.

Cap on employer PRSA contributions

Finance Act 2024 introduces a key change by capping the level of annual employer PRSA contributions, subject to tax relief, to 100% of the employee's or director's emoluments for the relevant tax year. This new cap establishes clear boundaries for employer contributions. The removal of the benefit-in-kind (BIK) charge in Finance Act 2022 previously allowed for unrestricted employer funding, but this is no longer the case. Contributions exceeding the cap will now be treated as a BIK and taxed as income.

Transfers from non-vested to vested PRSAs

Transfers from non-vested to vested PRSAs will now be considered a benefit crystallisation event, potentially resulting in a tax liability if pension entitlements exceed the SFT at the time of transfer. This new treatment clarifies the tax implications of such transfers. Previously, there was a technical argument that transferring a non-vested PRSA could circumvent the SFT regime and associated tax liabilities. Finance Act 2024 brings clarity from 1 January 2025.

High earning employees who operate PRSAs may find these changes particularly impactful. 

Many PRSAs would have been established following the freedom provided under Finance Act 2022 but with this change in position, PRSA holders will need to review contributions from 2025 to ensure they are not in excess of the new limits. Also, individuals may need to reconsider whether or not a PRSA remains the most suitable savings vehicle relative to a trust-based occupational pension scheme.  

PRSAs and occupational pension schemes differ in several ways. Other variations relate to when pension benefits can be drawn, the treatment of assets in the event of death, the impact on termination payments, and investment opportunities. 

Those with individual pension arrangements in place to review their retirement planning arrangements and seek tailored advice to navigate these changes effectively.