Written answers

Tuesday, 10 February 2015

Department of Finance

Pension Provisions

Photo of Eric ByrneEric Byrne (Dublin South Central, Labour)
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215. To ask the Minister for Finance the reasons for the changes to the standard fund threshold regime; and if he will make a statement on the matter. [5630/15]

Photo of Michael NoonanMichael Noonan (Limerick City, Fine Gael)
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I assume the Deputy is referring to the significant changes announced in Budget 2014 and provided for in Finance (No 2) Act 2013 to the maximum allowable pension fund at retirement for tax purposes (the Standard Fund ThresholdSFT).

The main changes made can be summarized as follows:

- Firstly, the absolute value of the SFT was reduced, with effect from 1 January 2014, from €2.3 million to €2 million.

- Secondly, the valuation factor to be used for establishing the capital value of defined benefit (DB) pension rights at the point of retirement, where this takes place after 1 January 2014, was changed from a standard valuation factor of 20 to a range of higher age related valuation factors that vary with the individual s age at the point at which the pension rights are drawn down. 

- Thirdly, in calculating the capital value of a DB pension at the point of retirement, transitional arrangements provide for a split calculation where part of the pension had already been accrued at 1 January 2014 so that the part accrued up to that date will be valued at a factor of 20 and the part accrued after that date valued at the appropriate higher age-related valuation factor. (The factors range from 37, in respect of pension benefits accrued after 1 January 2014 and drawn down at age 50 or under, to 22 in respect of benefits drawn down at age 70 or over.) 

- Finally, the reimbursement options, introduced in Finance Act 2012, for public servants affected by chargeable excess tax are being amended and extended. 
As occurred on the occasion of the introduction of the SFT regime in 2005, and again when the value of the SFT limit was reduced to €2.3m in 2010, the legislation contained in Finance (No 2) Act 2013 provides for an individual who has pension rights on 1 January 2014 in excess of the new lower SFT limit of €2m, to claim a Personal Fund Threshold (PFT) from Revenue in order to protect or grandfather the value of those rights on that date. This is subject to a maximum PFT of €2.3m, and individuals with PFTs from 2005 or 2010 retain those PFTs.

The primary purpose of the changes made to the SFT regime is to further restrict the capacity of higher earners to fund or accrue large pensions through tax-subsidised sources in line with the commitment made in the Government programme for National Recovery 2011-2016. In addition, the introduction of higher age-related factors to value DB pension entitlements significantly improves the equity of the SFT regime as between DB and defined contribution (DC) pension arrangements and between those who retire at younger ages and those who retire later in life.

The SFT regime addresses the problem of pension overfunding and excessive pension accrual by dealing with it at the point of pension drawdown in retirement rather than by applying restrictions to pension savings or accrual upfront. The regime achieves this by imposing a significant tax charge on the value of retirement benefits above set limits (the SFT or PFT, as appropriate) when they are drawn down. In this way it acts to discourage the building up of large pension funds in the first place or unwinds the tax advantage of such overfunding by clawing back, through the tax charge, the tax relief granted.

In Finance Act 2014, I introduced further amendments to the SFT regime to deal with issues arising in cases involving Pension Adjustment Orders (PAOs) the purpose of which is to provide for a more equitable sharing of the chargeable excess tax between the parties to PAOs in affected cases where the SFT or PFT, as appropriate, is exceeded.

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