Rising markets and the higher Standard Fund Threshold

Recent years have seen strong growth in global stock markets, alongside a welcome increase in Ireland's maximum tax-efficient pension fund limit, known as the Standard Fund Threshold (SFT).

The SFT increased this year for the first time in more than a decade. The current threshold is €2.2 million and is scheduled to increase by €200,000 each year until it reaches €2.8 million in 2029. From 2030 onwards, the intention is that the threshold will increase annually in line with an appropriate measure of growth, a positive development for Irish pension legislation. 

While the higher SFT provides additional scope for pension growth, individuals whose pension benefits exceed the threshold remain subject to Chargeable Excess Tax (CET) at a rate of 40%. This has prompted many people to review their pension strategies and consider how best to manage their retirement assets.

Where the total value of an individual's pension benefits exceeds the SFT, or their Personal Fund Threshold (PFT) where applicable, the excess amount is subject to CET at retirement. As a result, careful planning is essential for those approaching or exceeding the relevant threshold.

Credit for tax paid on retirement lump sums

There is some relief available where CET applies. Individuals can use tax paid on retirement lump sums as a credit against any future CET liability. The maximum tax-efficient retirement lump sum is currently the lower of 25% of the pension fund value or €500,000.

The first €200,000 of a retirement lump sum can be taken tax free. The next €300,000 is taxed at 20%, resulting in a tax liability of €60,000 on a €500,000 lump sum.

This €60,000 tax payment can be offset against any future CET liability. In practical terms, this means there may be capacity for pension growth of up to €150,000 above the SFT or PFT before any additional CET becomes payable (€60,000 ÷ 40% = €150,000).

Strategies for individuals approaching the SFT

Increased scope for further contributions

The recent increase in the SFT means that many individuals who were previously close to the limit may now have greater scope for pension contributions and future growth.

Where possible, delaying the crystallisation of pension benefits until the SFT has increased further may reduce or eliminate potential CET liabilities. However, this decision should always be considered in the context of an individual's overall financial circumstances and retirement plans.

Strategies for individuals at or above the SFT

Cease future pension contributions

Pension contributions remain one of the most tax-efficient forms of long-term saving. However, once pension assets have reached the SFT or PFT, further contributions may become less attractive.

Any excess above the threshold is subject to CET at 40%. In addition, amounts subsequently withdrawn as income may also be subject to income tax, USC and, where applicable, PRSI. Depending on personal circumstances, this can result in an effective tax rate of up to approximately 71% on pension assets above the threshold. 

For this reason, continuing to fund a pension after reaching the relevant limit may not always be the most tax-efficient strategy.

This rate of CET is to remain unchanged for now; however, a specific review of the rate is to take place by 2030 which could result in a rate as low as 10%. This lower rate was suggested in the recommendations report as the current 40% rate is viewed as overly penal.

Consider taking benefits earlier

Many pension schemes allow benefits to be accessed from age 60, while some occupational pension schemes may allow access from age 50 where an individual has left employment.

For those approaching or exceeding the threshold, taking benefits earlier may help limit future growth within the pension fund that could be subject to CET.

Review investment strategy

Individuals with pension assets above the SFT should consider whether their investment strategy remains appropriate.

With an effective tax rate of up to 71% applying to growth above the threshold, the potential reward for taking investment risk is significantly reduced, while the risk of investment loss remains unchanged.

This does not necessarily mean eliminating investment risk entirely. Pension funds continue to benefit from tax-efficient growth, and future returns may still be valuable. However, a review of the level of risk being taken is often worthwhile.

Concentrated investment positions may no longer be appropriate where a significant CET liability is expected. Depending on an individual's objectives, time horizon, and risk tolerance, reducing overall portfolio risk may be a sensible step.

For some investors this may mean moving a larger portion of their pension assets to cash. For others, a diversified portfolio with a lower overall risk profile may provide a better balance between preserving capital and achieving future growth.

Phase access to retirement benefits

Some individuals may be able to consolidate existing pension arrangements into a Personal Retirement Savings Account (PRSA).

One advantage of a PRSA is the ability to divide larger pension funds into multiple arrangements that can be accessed at different times. This flexibility may be particularly beneficial for those with pension assets above the SFT or PFT.

By accessing pension funds in stages, it may be possible to draw the maximum tax-efficient benefits at the earliest opportunity while deferring access to excess funds until a later date, potentially as late as age 75.

The potential benefits of this approach include:

• Deferring the payment of CET.
• Improving death benefit outcomes.
• Reducing mandatory taxable withdrawals where an Approved Retirement Fund (ARF) is used.

Conclusion

There is no one-size-fits-all solution for individuals approaching or exceeding the SFT. The most appropriate strategy will depend on personal circumstances, retirement objectives, and wider financial planning considerations.

With the SFT set to increase further over the coming years, now is an ideal time to review your pension position. Early planning can help maximise retirement benefits, minimise unnecessary tax exposure and ensure your pension strategy remains aligned with your long-term goals.

If you would like to learn more about how your pension strategy could support your financial goals, why not book a no-obligation consultation with a member of our team?