High-paid executives who have stopped contributions to their pensions to avoid breaching a €2 million tax-friendly threshold will inadvertently find themselves signed up to the Republic’s incoming auto-enrolment (AE) pension regime.
The cap on pension savings subject to tax relief was introduced in 2005, originally at €5 million. That was cut after the financial crash to €2.3 million in 2010 and then to €2 million in 2014. The threshold is being reviewed by the Government.
Anything above the €2 million so-called standard fund threshold (SFT) is taxed at 40 per cent. However, total charges rise to a “penal” 68.8 per cent when tax is applied as funds are drawn down in retirement, and the universal social charge, are included, according to an analysis by KPMG.
The defined scope of the incoming AE, aimed at capturing about 750,0000 mainly lower-paid not in pension scheme, means it could also “include people who have ceased contributions to a pension scheme to remain below the SFT”, a spokesman for the Department of Social Protection has confirmed to The Irish Times.
Still, individuals can opt out of the AE scheme, which the Government plans to launch in January, after six months.
There has been a growing trend in Ireland over several years of providing cash in lieu of pension contributions for high-paid executives who are approaching or have breached the SFT.
A host of senior Irish executives, including Ryanair chief executive Michael O’Leary, Smurfit Kappa boss and former Glanbia managing director Siobhán Talbot, either did not receive pension contributions, or got cash in place of contributions, from their employers last year, according to annual reports for various publicly quoted companies. However, the reports did not clarify the reasons for the cash payments.
Under the AE criteria, inclusion will automatically apply to individuals aged between 23 and 60 who are earning more than €20,000 across all employments and without active contributions to a pension scheme through their payroll.
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Those who opt out of AE after six months can secure a refund of their contributions. However, employer and State contributions would remain in their pot.
“If these amounts, and any investment growth accruing, resulted in their pension savings exceeding the SFT, then tax at the applicable rate would arise on that amount (the SFT excess) on benefits crystallisation,” said the spokesman. “It is worth noting that, in such a situation, this tax liability would only arise in respect of the additional contributions to the individual’s savings pot rather than their own contributions. Therefore, the individual would be in a net better financial position.”
AE was first proposed in 2006 by then government minister Séamus Brennan.
The Government plans to launch the scheme at the start of next year, even if pensions industry experts are sceptical about the latest timeline after the project has been hit by a series of stops and starts.
Draft enabling legislation, which Minister for Social Protection Heather Humphreys originally aimed to publish last summer, was only introduced to the Dáil earlier this month.
Aside from pushing through enabling legislation, the department has yet to appoint a company to build and run the AE system, set up a national automatic enrolment retirement savings authority to manage it or start the official process of finding investment firms to be responsible for the underlying investments.
Work to find a company to build and run the AE system is the most advanced, with department officials believed to be carrying out a final assessment of shortlisted bids from companies vying for an estimated €150 million contract spread over 10 years.
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