The Irish Budget announced on 7 December 2010 has introduced many changes to pensions and their interaction with the taxation structure that operates here in Ireland. The various pension measures announced are expected to yield the Exchequer some €235m in tax savings. The following are a summary of the main pension changes.
1. Marginal rate tax relief retained
Relief on personal pension contributions remains at one's marginal tax rate. Though the Government's four year plan aims to reduce this to the standard rate between now and 2014, they have indicated that they are willing to talk to the pension industry to examine alternatives that might produce similar savings than the one currently proposed.
2. Reduction in earnings limit
This is now down to €115,000 for 2011 from €150,000 in 2010. Any contributions paid in 2011 but backdated to 2010 must use the lower figure of €115,000.
3. Loss of pay related social insurance (PRSI) and health levy relief
Personal pension contributions by employees will not get relief from PRSI and the health levy. This brings them into line with the self employed who never got this relief.
4. 50% loss on employer PRSI relief
The employer in 2011 will see his PRSI relief reduced by 50% on pension contributions that are paid by employees.
5. There is no change to employer pension contributions
They will continue to be fully deductible for corporation tax purposes and will still have no benefit in kind effect on employees.
6. Tax free lump sums reduced to €200,000
Amounts between €200,000 and €575,000 will be taxed at the standard rate along with PRSI and the Universal Social Charge (USC). Amounts in excess of €575,000 will be taxed at the marginal rate plus PRSI and the USC. These are lifetime limits and not a limit per pension arrangement.
7. Standard fund threshold reduced to €2.3m
This is the maximum pension fund allowed from 7 December 2010. If your fund was between €2.3m and the old standard fund threshold (SFT) of €5.4m then you can apply to the Revenue by 7 June 2011 to seek a personal fund threshold (PFT). If you have a PFT from before 7 December 2005, you get to keep it and need not apply again for a new PFT.
8. Deemed distribution of approve retirement fund (ARF) increased to 5%
This is effective from the 2010 year of assessment and is an increase from the current rate of 3%.
9. New ARF option
All defined contribution schemes will have automatic access to an ARF. However, their approved minimum retirement fund (AMRF) requirement will increase to €120,000 approximately. With deemed distribution on ARFs increased to 5% this may not be a disadvantage as the deemed distribution does not apply to AMRFs.
10. Sovereign annuities
This may result in higher annuity rates in the future but with the risk of a loss of the annuity were the Irish Government to default on its debt in the future. Its greatest effect may be on the liabilities of defined benefit pension schemes.
Overall, it could be advised that the self employed should look to incorporate and proprietary directors should ensure their spouse's are building up allowable pension pots of €2.3m.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
