Pension Standard Fund Threshold

The world of pensions can be complex and challenging to navigate, especially with changing regulations and thresholds. In this guide, we’ll explore strategies to manage your pension assets efficiently and effectively, considering the Standard Fund Threshold (SFT)

Understanding the SFT

The SFT is the maximum value of pension assets an individual can accumulate in their lifetime without facing punitive tax rates.

?In January 2014, the SFT was reduced from €2.3 million to €2.0 million. This means that any combined value of an individual’s lifetime pension funds in excess of this threshold is subject to a punitive tax at retirement. This has prompted many individuals who are affected to consider the most appropriate strategy for their pension assets.

Is the SFT relevant to my situation?

The notion of attaining a pension fund of €2 million might seem unattainable and unrealistic to many readers. However, it is crucial to recognise the potential for significant growth in one's pension through consistently using allowable contribution limits and the compounding returns inherent in pension fund investments.

For employees in established company pension schemes, the employer might contribute a fixed percentage of their salary into their pension fund on a monthly basis. Furthermore, these companies often incentivise personal contributions from employees by matching them up to a specific limit.

here is a list of best practices and insights if you're close to your SFT:

1. Cease Future Pension Contributions

While pension contributions are one of the most tax-efficient means of saving, continuing to make contributions once assets have reached the threshold is not efficient. This is because a chargeable excess tax of 40% applies to pension assets over the SFT or PFT at retirement, and this portion of the assets may be taxed again at higher income tax, USC, and potentially PRSI when drawn as income of up to 52%. This leads to a combined effective rate of up to 71% on the excess amount.

2. Credit for Tax Paid on Retirement Lump Sum

There is some relief from the chargeable excess tax applying to amounts over the threshold. Tax paid at a 20% rate on lifetime retirement lump sums can be used as a credit against chargeable excess tax. The maximum tax-efficient retirement lump sum is set at 25% of the SFT and is currently €500,000. The first €200,000 of this lump sum is tax-free, with the balance between €200,000 and €500,000 taxed at 20%.?

Therefore, tax of €60,000 would be paid on a lump sum of €500,000, and this tax can be used as a credit against any chargeable excess tax that arises. This means that, in effect, there can be additional capacity for growth of up to €150,000 above the SFT or PFT before chargeable excess tax at 40% will need to be paid.

3. Review Investment Strategy

Having assets valued above the SFT and the associated looming chargeable excess tax liability is likely to warrant a review of the investment strategy being adopted with pension assets. The cumulative tax rate of up to 71% on growth above the SFT means that the reward for taking risk is restricted, while there continues to be full exposure to loss.

Reducing the level of risk taken with the overall pension assets may be a sensible move.

4. Access Benefits Early

For those impacted by the threshold, any further growth of pension assets will be taxed punitively when benefits are drawn. So, it may make sense to access benefits at the earliest opportunity. This results in the value of the pension fund being crystallized for the purposes of the SFT: a lump sum is drawn, and it may be possible to transfer the balance of the fund to an Approved Retirement Fund (ARF).

5. Staggered Access to Retirement Benefits

Some clients will be able to consolidate their accumulated pensions to a Personal Retirement Savings Account (‘PRSA’). One of the advantages of this pension structure is the ability to split larger pots into two or more smaller pension accounts that can be drawn at different times.

As with most technical issues, the most appropriate strategy for each individual will depend on their specific circumstances. The sooner the discussion starts, the sooner the most effective solution can be implemented.