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.  However, when we compare two employees from the different sectors, it would appear that the public sector worker has proved to be the sensible one.

If we take a public sector employee with a defined benefit pension who has an entitlement to a tax free lump sum of €200,000 at retirement and an annual pension of €100,000 and compare him or her to an employee in a private sector defined contribution pension scheme with the same entitlements, we find that they will need vastly differing pension funds to achieve those same entitlements.

For the public sector employee, assuming he or she retired on 1st January 2014, the capital value of their fund would have been €2.2m.  Following the reduction in the standard fund threshold (“SFT”) from €2.3m to €2m, that individual could have applied for a personal fund threshold (“PFT”) of €2.2m as at 1st January 2014 and would have incurred 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 retired on 1st January 2014, with this level of fund they could have applied for a maximum personal fund threshold of €2.3m.  This would have left an excess of €1.8m which would have been subject to excess fund tax of 41%, i.e. €738,000.  This would have reduced the fund available to pay the annual pension, giving an annual pension of just over €80,000.

While some degree of equality will emerge with the introduction of the age related capitalisation factors, the true impact of this will not be felt for many years.  Up to 1st January 2014 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, when we look at the detail it transpires that any benefits accrued up to 1st January 2014 will still be valued at 20 times and only benefits accrued after 1st January 2014 will be subject to the new higher factors.  So, our current public servants need not worry.

For more information on the Personal Fund Threshold please contact Jennifer Dowd by emailing Jennifer.dowd@independent-trustee.com.

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


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