Technical Pensions Update

Standard Fund Threshold (SFT) Changes:

Up until now, the maximum tax-efficient pension size (the SFT) has been €2m. Note that, because of the tax offset between the 40% Chargeable Excess Tax and the 20% tax on the (€200k - €500k) lump sum, the target pension size has effectively been €2.15m.

?This €2m is now due to increase as follows:

?·???????? €2.2m in 2026

·???????? €2.6m in 2028

·???????? €2.4m in 2027

·???????? €2.8m in 2029

?In effect, just like the current target pension size is €2.15m, one can add €150,000 onto each of the above values. So, for example, the target pension size in 2029 will be €2.95m.

There will also be an inflation adjustment from 2030 onwards which will ensure that the SFT will be adjusted annually with an earnings factor ensuring that the threshold remains relevant and beneficial.

Lump Sums:

The tax treatment of the 25% lump sum will not be changed; the first €200,000 will continue to be tax-free and the next €300,000 at 20%, with the balance being taxed at 40%. So even with the increased SFT amounts, as it stands, the lump sum tax bands and rates stay the same.

Pensions Retired before 2026:

For those who have already crystallised a pension before 2026, they will not benefit from the full uplift in the value of the SFT. If for example, if one had ‘crystallised’ €800,000 of pensions up to now, they have used 40% of the SFT.

?When the SFT is at €2.8m, someone who has retired €800,000 of pensions before 2026 will effectively be deemed to have used 40% of that SFT, so the €800,000 effectively becomes €1.12m for the purpose of managing pension size at crystalisation.

PRSA Funding Changes:

For 2023 & 2024, as a result of Finance Bill 2022, Companies were able to contribute any amount to a PRSA without any traditional maximum funding calculations.

As long as there was a bona fide salary in place for an employee / company director, and as long as there was no ‘salary sacrifice’ arrangement in place, the Company could contribute any amount to a PRSA without a ‘max funding’ calculation and without triggering a Benefit In Kind (BIK).

It’s been confirmed in the Finance Bill 2024 that Employer Contributions will now be capped at 100% of the Employee’s salary in that year and this is expected to be in place from January 2025 onward.

Which one-member pension is best: PRSA or a Retail Master Trust?

At any point in time, a Business Owner will have 2 structural options when funding a pension: a one-member Company Scheme or a PRSA. The funding strategy for 2025 onwards will be completely different:

• A one-member Company Scheme is based on a ‘max funding’ calculation, which is based on age, gender, years of service (with that company), salary, target retirement age and existing fund value.
• With a PRSA, as noted above, the contribution amount is 100% of the person’s salary.

This disparity will now create a lot of planning work. In certain cases, the PRSA will be a better route, particularly for younger Business Owners who have a higher salary. However, for those closing in on retirement age, a company scheme may be better as they will have longer back-service years to use.

It is possible for a Business Owner to switch between pension structures on a year-to-year basis to maximize the pension contribution amount.

Approved Retirement Funds (ARFs)

There was no change to the ARF distribution amounts for 2025. They remain as follows:

Age 61 to 70:???4% per annum

Age 70 and over: 5% per annum

ARFs over €2million: 6% per annum

Note that each ARF must be administered by a Qualified Fund Manager (QFM). For ARFs over €2m in size where there is more than one QFM, a Nominee QFM needs to be in place to administer the entire distribution on behalf of all QFMs.

Pensions Auto-enrolment: Lots of new tax relief rates

Pensions Auto-enrolment is due to come into force in October 2025. The effective tax relief that the Government will give is 25% i.e. for every €3 the employee puts in, the Government top it up with €1.

This 25% tax relief is at odds with the current tax relief levels employees can receive, which is at 20% (for those who earn less than €44,000 in 2025) or 40% for those earning salary at the marginal rate.

This new auto-enrolment scheme now effectively means that, from a tax perspective, workers earning less than €44,000 would be better off being auto-enrolled while those earning above €44,000 would get more tax relief by contributing to a private pension.

Furthermore, remember that on company contributions to private pensions, the worker can effectively get up to 52% tax relief, calculated as 40% marginal relief plus avoiding USC and PRSI.

So, this has the recipe to be very confusing for employers and employees. There are many other issues with auto-enrolment, such as lack of fund choice and the inability to make Additional Voluntary Contributions ???????????????????????????????????????????????????????????????????????????????????????????????

Small Self-Administered Schemes & Executive Pensions

IORP II is?an EU Directive that sets new regulatory requirements for occupational pension schemes. The legislation for this was passed into law in April 2021 in Ireland.

Most new one-member company pension schemes are generally being set up as Retail Master Trusts (RMTs). Executive Pension products, which were set up after April 2021, are being transitioned into RMTs or PRSAs.

There are still a lot of legacy one-member SSAS & Executive Pensions out there (that were set up before April 2021) but these are expected to gradually be transitioned to new structures. Going forward the future is definitely going to center more around the Retail Master Trust (RMT) and the PRSA.

Summary:

The Government has embarked on a mission to simplify pensions, but unfortunately the whole area has just become more complex and the need for planning for small businesses has never been greater.

?At Compass Pensions, we are here to help so don’t hesitate to contact us.

Disclaimer: Please note that the above points are our understanding and opinions on Irish Pensions at this time of writing in November 2024. Compass Private Wealth does not provide tax advice. No information above should be relied on as formal advice in relation to Pension planning. It is for guidance purposes only.