Budget 2011 announced on 7 December 2010 contained sweeping changes to the rules governing pensions, writes Tom Kennedy (Mercer). These changes have implications for anyone contributing to either a personal pension or an employer-sponsored pension arrangement. It also affects those already receiving pension benefits through an approved retirement fund (ARF).
The main changes introduced are as follows:
- Earnings cap – the earnings limit for the purposes of tax relief on pension contributions has been reduced from €150,000 to €115,000 with effect from 1 January 2011. This new reduced limit will also apply to contributions paid in 2011, but applied against 2010 earnings. This affects all pension arrangements.
- Abolition of employee PRSI and health relief – with effect from 1 January 2011, employee contributions will no longer qualify for any PRSI or health levy relief, though they will continue to benefit from income-tax relief.
- Reduction of employer PRSI relief – at present, employers can normally claim 10.75% PRSI relief on any employee contributions to either a company pension scheme, a trust-RAC or an employer-sponsored PRSA. With effect from 1 January, this relief is reduced by 50%.
- Standard fund threshold – the standard fund threshold (SFT), which is effectively the lifetime limit on the accumulated value of all of an individual’s pension arrangements, is being reduced from €5.4 million to €2.3 million, with immediate effect. An individual can, however, benefit from a higher personal fund threshold if the total value of any pension entitlements in place now, or claimed after 7 December 2005, is already in excess of the new limit. Such individuals have six months from 7 December 2010 to apply for a higher personal fund threshold, which will be based on their total pension entitlements at current values to a maximum of €5.4 million – including the value of any benefits taken from a pension since 7 December 2005. This application must be made within six months of 7 December 2010.
- Retirement lump sum – the tax-free lump sum available from pension arrangements is to be capped at €200,000, with any balance up to €575,000 in total, subject to tax at the standard rate (currently 20%). Any amount paid out in excess of this figure will be taxed at the individual’s marginal tax rate. Any tax-free retirement lump sums taken on or after 7 December 2005 will count towards this €200,000 cap.
- ARFs – the minimum withdrawals of 3% of value, which must, in effect, be taken from ARFs held by those over 60, has been increased to 5% with effect from 31 December 2010. It is intended that the ARF option will, with passage of the Finance Act, become available to all defined contribution company pension scheme members. To place retirement benefits in an ARF, the minimum guaranteed lifetime annual income required will be €18,000 – this represents an increase from the €12,700 previously required. Individuals who cannot fulfil this condition will be required to place €120,000 in an approved minimum retirement fund (AMRF) or annuity before any money can be placed in an ARF – again, this represents an increase on the €63,500 currently required. Both the €18,000 income requirement and the €120,000 AMRF requirement will move in future in line with changes in the state pension. The capital of an AMRF cannot be accessed until age 75.
If you believe you may need to take steps regarding your pension on foot of the budget changes, you may wish to contact your pension provider.