In previous generations, those considered the sensible ones chose to work in the public sector for a safe career and a good pension. This view changed during the boom years when the preferred route was to work in the private sector as those roles offered better packages of salary and pension benefits. When we compare two employees from the different sectors, it would appear that the public sector worker was proven to be the sensible one, when it comes to pensions anyway.
If we take an individual who has an entitlement to a tax free lump sum of €200,000 at retirement and an annual pension of €100,000 and compare their situations if they were entitled to a defined benefit pension from the public sector or a defined contribution pension in the private sector, they will have very different experiences at retirement.
For the public sector employee, assuming he retired on 1 January 2014, the capital value of his fund would be €2.2m. Following the reduction in the standard fund threshold in the Finance Act from €2.3m to €2m, that individual could apply for a PFT of €2.2m as at 1 January 2014 and would therefore incur no excess fund tax.
For the private sector employee, in order to achieve a lump sum of €200,000 and an annual pension of €100,000, based on current annuity rates, they would require a fund of just over €4.1m. Again, assuming they are retiring on 1 January 2014 with this level of fund they could apply for a maximum personal fund threshold of €2.3m. This would leave an excess of €1.8m which would be subject to excess fund tax of 41% i.e. €738k. This would reduce the fund available to pay the annual pension and leaving a remaining annual pension of just over €80,000.
While some degree of equality will emerge with the introduction of the age related capitalisation factors in the Finance Act, the true impact of this will not be felt for many years. Up to now the capitalisation factor for valuing a defined benefit arrangement for PFT purposes was 20. Using the public sector individual above, the capital value of the fund was calculated as 20 times the annual pension plus the lump sum i.e. €2.2m. The age related factors will now apply varying capitalisation factors from 22 to 37. However, the true effect of this will not be seen for many years. When we look at the detail it transpires that any benefits accrued up to 1 January 2014 will still be valued at 20 times and only benefits accrued after 1 January 2014 will be subject to the new higher factors. So our current public servants need not worry.
For more information on Personal Fund Threshold changes please contact Jennie Faughnan by emailing email@example.com or call 01 603 5140.
*Please note this content is the view of the author and not of Independent Trustee Company