Pensions – Reduction In The Standard Fund Threshold (SFT)

The issue of pensions and tax relief has been a topic of conversation over the last number of years particularly against the current economic backdrop.

Further changes were included in the last Finance Act which will see the net value of certain pension benefits reduce arising from these changes. One of the main changes is the reduction in the Standard Fund Threshold (SFT) from €2.3m to €2m in 2014.

What Does This Mean And What Are The Tax Implications?

The SFT seeks to limit the capital value of pension benefits arising to an individual.

Where the value of pension benefits are in excess of €2m tax at the marginal rate currently 41% will be applied to any chargeable excess.  The chargeable excess is the value of the pension less the SFT at a benefit crystallisation event (BCE).  A BCE will occur when you seek to draw down your pension benefits.

The changes to the SFT should be viewed along with the general rules relating to the taxation of pension lump sums.

The first €200,000 of a pension lump sum received is currently not subject to tax.  You should note that this limit relates to lump sums received after 7 December 2005 and is a lifetime limit.

The next portion of a pension lump sum is subject to tax at the standard rate which is currently 20%.  The amount subject to 20% tax is calculated as the SFT multiplied by 25% less the tax free amount.  The balance of the pension lump sum will be subject to tax at 41%.

It is clear from the above formula that the reduction in the SFT will lead to a lower portion of the pension lump sum being taxed at 20% with the higher balance being taxed at 41%.  This will lead to lower net benefits for the individual.

The SFT when originally introduced in December 2005 was set at €5m and eventually increased to €5.4m in 2008.  It is clear that the significant reduction to today’s value of €2m can decrease dramatically the value of the pension benefits.

What Can Be Done To Minimise The Impact?

Individuals can protect themselves from the falling SFT by applying for a Personal Fund Threshold (PFT).  When a revised lower SFT is introduced an individual with pension benefits valued in excess of the revised SFT can apply for a larger PFT.

For example an individual with pension benefits of €2.1m would be subject to the revised SFT of €2.0m.  However the individual can apply to Revenue for a PFT of €2.1m and this would ensure that a further erosion of the SFT would not reduce the individual’s net benefits.

Final Note

It is important that individuals with large pension funds are aware of these changes. In the ever changing arena of pensions individuals in conjunction with their pension advisors and tax advisors should ensure that they are maximising their pension entitlements.

What Questions Do You Have?

We are happy to help. Please post your comment below or call Eamonn Madden, Tax Manager at Cooney Carey, on 01 677 9000. Alternatively, send him an email: emadden@cooneycarey.ie

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