It’s a problem lots of people would like to have. Back in the bad old days of the economic crash and the Troika, it was decided to limit the amount people could accumulate in their pension funds through the introduction of a Standard Fund Threshold (SFT).
Following a few revisions, this was set at €2 million, calculated as the amount that would deliver a pension of around €100,000. Exceeding the threshold comes with a penalty of a 40 per cent chargeable excess tax (CET).
It was originally thought that this threshold would only apply to fairly wealthy people. Then came the Garda retirement crisis when it turned out that senior gardaí were choosing to retire because they would exceed the threshold if they didn’t.
The Government responded by agreeing to increase the SFT over the coming years, but that still requires some serious decision making by those with sizeable pension pots.
RM Block
“The Standard Fund Threshold (SFT) is a limit set by the Government as to what is the most you can tax-efficiently save through a pension. It is currently €2.2 million and set to increase by €200,000 each year until 2029. It will be reviewed again in 2030 with a wage inflation factor determining its level,” says Peter Feighan, private client adviser at Davy.
Any assets saved above the relevant SFT at the time you crystallise your pension are subject to CET.
“Reaching the SFT is likely a good problem as it means you have a substantial pension pot, have availed of tax-efficient saving throughout your working life and experienced good returns. However, it is there by design to put a cap on the tax efficiency of pensions,” he explains.
If your pension remains invested and markets perform well then investment growth can edge it over the threshold. Careful planning is therefore essential, he cautions.
“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 per cent of the pension fund value or €500,000,” he explains.
The first €200,000 of a retirement lump sum can be taken tax-free. The next €300,000 is taxed at 20 per cent 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 (personal fund threshold) before any additional CET becomes payable,” he adds.
Given the known changes to the SFT, we at least know what it will be over the coming years to 2029, he points out. 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,” he says.
Even with the higher thresholds, the earlier you start considering it, the better.
“Pensions remain one of the most tax-efficient ways of building long-term retirement wealth but they shouldn’t necessarily be viewed in isolation. If somebody is approaching the SFT, or projections suggest they may reach it in the future, it may make sense to consider building wealth outside the pension structure as well,” says Nick Charalambous, managing director of Alpha Wealth.
He breaks this down into different pots. “You need accessible cash for emergencies and shorter-term expenditure. Beyond that, money that won’t be needed for a number of years can potentially be invested outside a pension, depending on the individual’s circumstances, objectives and appetite for risk,” he says.
This can provide additional flexibility in retirement. “Having all of your wealth tied up in one structure can limit your options, whereas having a combination of pension assets, cash and non-pension investments can give you more choice around where your income comes from and when,” he points out.
The Government’s new investment account might help too. The plan is to legislate for the framework during 2026, with accounts expected to become available from 2027.
“That could provide another useful home for long-term savings, particularly for somebody who is already making significant pension contributions or is projected to approach the Standard Fund Threshold,” says Charalambous.
“However, I would be cautious about describing the precise tax benefit at this stage because the final details have not yet been confirmed.”
