Navigating Recent Changes to the Standard Fund Threshold

The Standard Fund Threshold (SFT) is the maximum allowable pension a client can accumulate before the application of Chargeable Excess Tax (CET) of 40%. It was introduced in 2005 to curtail wealthy individuals from using existing pension rules to accumulate overly vast pension pots. Originally the SFT was set at €5 million, but subsequently revised downwards to €2.3 million in 2010 in the wake of the financial crisis, and again to €2 million in 2014. Now, over 10 years later the SFT has finally increased again, albeit on a phased basis.

Prior to January 2026, an individual could accumulate a retirement fund of up to €2 million across all their pension benefits. When they come to retire, they could potentially access up to €200,000 tax-free as a lump sum, while the next €300,000 is taxed at the standard rate of income tax of 20%. These are lifetime limits and apply across the combined total of all an individual’s benefits. Any lump sum taken after €500,000 was then taxed at the marginal tax rate. This is known as a Benefit Crystallisation Event (BCE). On a BCE, a pension scheme provider must calculate the chargeable excess due, and then deduct and pay this to the Revenue. However, tax at 20% paid on a lump sum can be offset against the CET, if applicable. As a result, an individual who took a lump sum between €200,000 and €500,000 could have seen their SFT rise to a maximum of €2,150,000.

It is important to note that a retirement is not the only time a BCE can occur; it can also be triggered on the transfer of a pension to an overseas scheme.

Following an independent review by Dr. Donal de Buitléir, it was announced in September 2024 that the SFT would be updated. From January 2026 the SFT will now increase at a rate of €200,000 per year until 2029, when it will reach a new limit of €2.8 million. The limit will increase annually thereafter at an applicable level of growth. The level of retirement lump sums remains unchanged, not increasing along with the SFT.

A review of the CET, while currently remaining at the existing rate, is due to take place by 2030 and could reduce to as little as 10%. Were this to happen, it could subsequently see the removal of the tax credit gained on the 20% tax paid on a retirement lump sum.

The increase, however, isn’t as straightforward as it may appear on the surface. Rather, the limit is increasing proportionally based on how much of the SFT a person has already accessed. For example, if an individual has a retirement pot of €2,000,000 and a BCE occurs, they are deemed to have used 100% of their SFT and will not benefit from future increases. If the retirement pot is worth €1,000,000 and a BCE occurs, then only 50% of their SFT has increased. In this case, their remaining SFT balance in 2026 will then become 50% of €2,200,000 which is €1,100,000. Similarly, a pot of €500,000 will be considered to have used 25% of the SFT, so would have a new remaining limit of €1,650,000, or 75% of €2,200,000. The implications of this should be considered carefully; if an individual is close to retirement and has a total fund nearing the SFT, it may be beneficial to delay retirement where possible to take advantage of the rising limits by making further contributions to the pension.

There are several other strategies that are worth bearing in mind. If there is a chance that one might breach the Standard Fund Threshold, a simple solution might be to halt further contributions into the scheme. Of course, positive investment returns may still grow the fund size to over the limit.

In some cases, it may be possible to retire from age 50 and draw down benefits before the SFT is reached. Alternatively, an individual may opt to not draw down their pension at all, and instead allow it to pass to their spouse or be paid in full to their estate, on death. There may of course be Capital Acquisitions Tax where the fund is paid out to the estate. Multiple PRSAs can be used to split a retirement and only draw down a portion of the fund at a time; each PRSA being entitled to a 25% lump sum.

Finally, a transfer to an IORP approved overseas pension scheme could be very beneficial in some circumstances. As noted above, a transfer to an overseas arrangement is a Benefit Crystallisation Event, so if the retirement fund is above the SFT at the time of transfer then the CET will need to be paid. In some countries, such as Malta, a pension fund can grow tax-free to any level without any additional taxes being levied on the fund.

Understanding the Standard Fund Threshold is key in planning for retirement. Somebody who conscientiously makes pension contributions throughout their employment, and benefits from tax-free investment returns, needs to be cognisant of the effects of the threshold or they may find themselves facing a sizable tax bill when they retire. The strategies above outline ways in which the effects of the SFT can be planned towards or somewhat mitigated against, but before making any decision it is important to speak to an independent financial advisor.

At a time of higher and higher costs of living, increased longevity, and increased focus on saving for retirement, the changes to the Standard fund Threshold are welcomed and are a just reward for people who have been fortunate enough to fund for their retirement.

For further information, please speak to your financial advisor or email service@itcgroup.ie.

Stephen Doyle, ITC Business Development Manager