A Question of Income

“The question isn’t at what age I want to retire, it’s at what income”.
-          George Foreman

While we await the fall-out from the increase in the State Pension Age to 66, due to take effect on 1st January 2014, and the unknown changes to the pension regime, anticipated in Budget 2014, George Foreman’s declaration gains particular relevance for Irish pension savers.

What measures affecting pensions are we likely to see in October’s Budget?
Last year the Minister announced that the Government would introduce measures to ensure that tax relief on pension contributions would only serve to support pensions that deliver an annual income of up to €60,000.  This aim is likely to be achieved by reducing the maximum allowable pension fund (the standard fund threshold - “SFT”). The threshold will potentially be reduced to anywhere between €1.2m and €2m. 

If the current system of valuation is maintained, i.e. by using a multiple of 20, then a reduced SFT of €1.2m could be introduced.  That would affect all those with defined contribution arrangements as it is not realistic to expect €1.2m to produce an annual income level of €60,000.  Some in the industry, therefore, are lobbying for a more realistic multiple of 30 times to give an SFT of €1.8m.  Of course, an increase in the multiple, while favouring defined contribution pension schemes, could see a higher number of defined benefit pension entitlements affected by the threshold.

A further consequence of the reduction in the threshold, and this is likely to be more important to the majority of pension savers, will be a reduction in the retirement lump sum.  Currently up to €200,000 of a pensioner’s retirement lump sum may be taken tax-free and further lump sum entitlements up to €375,000 may be claimed at 20% tax.  A reduction in the SFT could also lead to a corresponding reduction in the amount of the lump sum available at the 20% tax rate.   If this also leads to a corresponding reduction in the €200,000 tax-free lump sum, a large number of pension savers could be affected.
Realising that we possibly can’t change much about the upcoming Budget, we could adopt a defeatist attitude. Foreman took a different approach to his retirement and famously invented a grill.
Similarly, pension savers facing the unknown may also take precautions.  So, if you are close to or have passed your retirement age, you may consider whether to draw down your pension now.  It can continue to grow tax free in an Approved Retirement Fund, but you could avoid the possible reduction in the lump sum benefits.  If you decide that you are too young to retire you can later change your mind and fund a new scheme.

If you are close to the standard fund threshold or in the fortunate position of having made investments which will bring you above it before your retirement, you may similarly consider the retirement option or avail of the temporary measure to draw down 30% of your AVCs – in order to avoid the punitive tax.

If on the other hand you have no intention of hanging up the gloves or are far off any of the thresholds, the best advice is to avail of the tax benefits of the current regime to the greatest possible extent.  Tax relief on pension contributions continues to be beat all other reliefs in the tax code.  The best precautionary measure against the unknown is to make your pension contributions now!

Tommy Nielsen
ITC Consulting

_{*Please note this content is the view of the author and not of Independent Trustee Company}