Pension actions are structured around pre-retirement and then post-retirement stages. The pre-retirement stage, referred to as the accumulation phase, often attracts the most attention, but both involve many rules and regulations, which can also be altered on budget day.
The insider book covering most of these details is the Revenue Pensions Manual – a great bedtime reading recommendation if you’re suffering from insomnia.
There were more legislative changes in the past 23 years in pension rules than in the previous century. A prevailing reason behind the more recent changes has been the desire of successive governments to encourage people to make private provision and not to rely exclusively on the state pension.
A reaction to the financial crash in 2008 is another factor – while the actual rate of tax relief allowed by the Government was no altered, more generous thresholds were clawed back.
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Previously €5 million, now €2 million, the standard fund threshold (SFT), the figure above which pension funds are liable to additional taxation, is still high.
Joe Hanrahan, head of retirement and financial planning at RBC Brewin Dolphin Ireland, says there are a number of routes to accumulating that size of fund.
“Defined benefit pensions, which are now considered old fashioned and replaced by defined contribution pensions, would have been popular originally and they did depend on actual salaries,” he says.
The main difference between a defined benefit scheme and a defined contribution scheme is that the defined benefit scheme promises a specific income, while the defined contribution outcome depends on factors such as the amount you pay into the pension and the fund’s investment performance.
In terms of reaching thresholds, holders of defined contribution pensions are more likely to achieve higher sums. The contributions can vary from the employer, which may be enough to push the fund towards the threshold, rather than the actual underlying salary. Longevity of pension (with annual contributions) will also contribute to compounded higher sums, which is also why the general advice is to start your pension early.
Self-employed people are unlikely to reach the threshold as the rates of contribution tend to be relatively modest. However, in company pensions it is possible to add funds by way of additional voluntary contributions (AVCs).
“If you own your own business it is technically possible, with the benefit of money built up on the balance sheet, to write a cheque for half a million euros and add that to the pot, right until the day before retirement,” says Hanrahan.
He quotes the Finance Act of 2022, where there is no limit on the amount an employer can put into a personal retirement savings account (PRSA) on behalf of an employee.
Individuals in the public service, such as judges or hospital consultants, can end up exceeding the SFT and may need to pay the excess tax from their lump sum or alternatively their pension payment may be reduced. However, they can also opt to stretch out the excess tax over 20 years; should they die before this period is up the tax liabilities are wiped out, to the benefit of their estate.
“We advise clients to evaluate their glide path and reduce or eliminate contributions to avoid this scenario. It’s not an exact science,” says Hanrahan.
“Or we might advise that they wind up the scheme and transfer the benefits into an alternative pension arrangement or PRSA. That way, you might take the pension at the threshold but hold off on additional funds until you reach the age of 75 – which you either reach or not and, in the latter case, the estate benefits. It’s a first-world problem. It’s a way of treating it like an investment vehicle.
“As financial planners, we like to concentrate on the accumulation phase to grow their pension through tax reliefs. Then, at the time of retirement, we help our clients to move excess funds into ARFs which can be viewed predominantly as a vehicle to generate sustainable income in retirement.
“The whole legacy of pensions has changed in the last 30 years as well-funded pensions are viewed through the prism of succession and wealth planning.”