The recent budget confirmed significant improvements to the private pensions tax regime. Buried in the small print there are also some surprising guidelines that have largely gone unnoticed, but may give rise to changes in our retirement planning advice to clients.

Over the last year, the government undertook a review of the €2M standard pension fund threshold, over which the pension holder is subject to a 40% tax surcharge. It has remained unchanged for over 10 years despite significant wage inflation over that period. On behalf of ISME, I made a presentation to the Department of Finance review committee, arguing that the €2M limit was an unfair restriction on the ability of successful business owners, senior executives, professionals and creatives to fund retirement incomes on a par with their senior public sector peers. I also argued that pension tax relief is not a permanent loss to the Exchequer because, as more private pension fund holders retire, they will start to pay taxes on their retirement income. Pension tax relief is designed to incentivise people of working age to invest surplus income and set it aside to produce an income for their retirement, and it does that very effectively, so I advocated that the limit should be benchmarked with inflation. It was also widely reported that the €2M limit was causing difficulties in the recruitment of senior Gardai and other public servants, for fear of penal tax surcharges on their pensions at retirement. In the end, good sense prevailed, and the budget confirmed that the limit will increase to €2.8M in four steps of €200,000 each from 2026-2029.

The pre-budget announcement also signalled a significant improvement in the valuation system for public sector defined benefit pensions for the purposes of the €2.8M limit. A working group is being established and is expected to report back quickly with lower multiples for the calculation of the capital value of annual defined benefit pensions. This will be of particular value to dual-income hospital consultants and barristers who become judges. Based on the draft guidelines, these new multiples would be the equivalent of increasing the pension fund limit by a further €500K+, in addition to the increase from €2M to €2.8M.

Hidden in the small print is the note that, for anyone who has already retired pensions and retires further pension funds when the limit has increased to €2.8M, the value of the previously retired pensions will be increased by 40% for the purposes of determining whether you have exceeded the standard pension fund threshold of €2.8M. That requires careful consideration for those planning to retire their pensions gradually.

The budget also signalled that consideration will be given in 2029 to reducing the tax surcharge rate from 40% to 10%. That possibility also requires very careful consideration for those who are already over the limit and in a position to defer the retirement of some pensions in the long term.

As always, we are happy to discuss any of these issues with you.

Tom Clinch
MD & Head of Technical Services