The Government is currently reviewing the tax relief limits on pension pots worth €2 million or more. Under that limit, known as the Standard Fund Threshold (SFT), the total capital value of pension benefits that an individual can draw down from tax-relieved pension arrangements in their lifetime cannot be more than €2 million.
The examination of the SFT, which was carried out by an independent expert, was recently submitted to the new Minister for Finance Jack Chambers, for consideration. Once he has considered this examination, the Minister will decide whether or not to implement any of its recommendations.
In the Government’s recently published Budget 2025 Tax Strategy Papers, it was mentioned that the majority of respondents to a recent public consultation on the SFT were in favour of an increase to the SFT, with a small number calling for the threshold to be abolished in its entirety.
It remains to be seen whether or not there will be any changes to the SFT in the upcoming budget, or indeed later.
Tax-free limits around pensions have attracted much attention.
A number of changes to the tax rules around pensions – and to which the SFT is relevant – have been criticised by Sinn Féin as a “massive loophole in our tax system” that is “being exploited by the wealthiest in our society”.
However, these changes, which have been in place since January 1st, 2023 and relate to Personal Retirement Savings Accounts (PRSAs), are long overdue and crucially important. Not only do these changes make it fairer for job-creating entrepreneurs – who have deferred their own pension planning in order to establish, and ensure the viability of, their own business – to build up a reasonable pension pot, it should also make it easier for parents who have taken time out of the workforce to raise children to do so.
The changes to the tax rules, which were brought in under Finance Bill 2022, specifically relate to employer contributions to PRSAs.
The changes effectively free up an employer to pay more employer contributions into an employee’s PRSA, should they wish to, or be in a position to do so.
Apart from affordability, the only limit on large contributions to PRSAs now is the €2 million SFT.
Sinn Féin have been quick to hone in on this €2 million limit, arguing that it undermines all the principles of pension policy and tax equity.
To the contrary, we believe the new rules even out the playing field around tax relief for PRSAs so that the same level of tax relief is available to workers over their entire working life, regardless of their gender or employment type. The changes in the PRSA rules mean that those who take career breaks for family or other reasons should be better able to make up any lost ground on their pension when they return to work.
As an employee will have a better chance of building up a reasonable pension pot if they have employer contributions going into their pension as well as their own personal contributions, the changes have huge potential to boost the pensions of women or men who have taken time out of the workforce to rear children.
The previous tax rules around PRSAs had essentially prevented these workers from making up this lost time in terms of pension saving. The recent changes make it easier for them to plug the gap that built up in their pension while they were out of the workforce.
The pension gap that can build up following time out of the workforce can be significant. Mothers often take time out of the workforce – or move to shorter working weeks – to look after children. This in turn eats into their ability to save for a pension. Currently, a woman’s pension is on average 35 per cent less than a man’s, according to the latest official figures. Unless this gap is closed, many women could struggle to make ends meet in retirement, find it difficult to fund the cost of urgent or unexpected bills (such as healthcare) and in some cases, may even have to postpone their retirement or return to work after retiring.
The changes to the tax rules on PRSAs are a boon to business owners who focus on reinvesting in their businesses before going on to deal with their pension contributions in the latter part of their careers. The previous tax rules around PRSAs and the restrictions to funding in occupational schemes meant they would not have been able to take full advantage of tax relief on pension contributions, which in turn made it harder for them to build up a reasonable pension. The small business owners that are the lifeblood of the Irish economy spend years grafting away at their business and reinvesting all the money they have to make it work.
And while the rules allow entrepreneurs and company directors to make up for lost time on their pension, it is unfair to dub this as “aggressive tax planning” or favouring the “wealthy” over “ordinary workers”. Furthermore, there isn’t much sign that employers are abusing the new rules. Revenue figures for 2023 show that the growth in employer contributions to PRSAs isn’t huge when compared to the growth in contributions between 2021 and 2022 when the rules didn’t exist. From this, one could infer that employers are simply utilising the new limits to catch-up on missed contributions, rather than engaging in aggressive tax planning.
The roll-out of auto-enrolment is also pertinent here, too. The Government is currently rolling out auto-enrolment because many people are not adequately saving up for their retirement. The self-employed unfortunately will not be included in auto-enrolment – other than having to pay the cost of implementing it and contributing to the scheme for their staff. If the recent changes to the PRSA tax rules encourages further pension funding among the self-employed, it should be viewed as a positive.
This country needs its entrepreneurs – many of whom make huge pension sacrifices in the early years of their business so that they create a viable business that can provide valuable and sustainable employment. Why should these people be penalised for making up for lost time on their pension?
Glenn Gaughran is head of business development at Independent Trustee Company
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