The Government levy on pension pots is set to get bigger before it falls back.
The Irish Times â€“ Special Report by Frank Dillon.
With only about half of the countryâ€™s workers currently in occupational pension schemes, any moves to disincentivise those who have signed up is clearly unwelcome. Last monthâ€™s budget did not help the cause of those promoting pensions.
For starters, the Government levy on pension pots is set to increase to 0.75 per cent from the start of next year. On a pension pot of â‚¬500,000, 0.75 per cent represents a tax charge of â‚¬3,750.
The levy, which took effect from 2011, was scheduled to be phased out at the end of next year but concern is growing as to whether it will become a longer term fixture given the decision to retain it at the lower level of 0.15 per cent for 2015. A look at the revenues it generates indicates why.
The levy raised â‚¬483 million for the Government last year, is scheduled to raise â‚¬534 million this year and a substantial â‚¬675 million next year.
â€œThe levy is set to take around â‚¬2 billion out of pension funds over a four-year period. Unlike other forms of taxation, this is a tax on your capital not on the interest that you have earned which is of concern,â€ says Jerry Moriarty, the chief executive of the Irish Association of Pension Funds.
In another change, from the start of next year, drawing a pension benefit of more than â‚¬2 million will result in a penal tax bill at the point of retirement. â€œA pension of up to â‚¬100,000 per annum will be permitted if it was fully accrued prior to 1 January 2014,â€ says Munro Oâ€™ Dwyer of PwC.
â€œBut for defined-benefit pensions, which accrue fully in the period post 1 January 2014, a pension in excess of â‚¬54,054 per annum at age 50 would create a liability to excess taxation. But at age 70, a pension of up to â‚¬90,910 per annum would be allowed.â€
For those with defined-contribution pension entitlements the calculation is far more straightforward: the limit is set at â‚¬2 million for benefits that result from a defined-contribution fund, and the exposure to any excess tax is determined based on the value of the pension fund that is accessed.
â€œWhere the pension limits are breached, any excess will be subject to taxation at 41 per cent. This excess tax is payable at the point of retirement, and the balance of the pension benefit will then be subject to the standard statutory deductions â€“ income tax, universal social charge and at certain ages PRSI. What has not changed . . . is that a clear tax inefficiency results where the pension limits are breached,â€ O Dwyer says.
â€œWhile significant, the changes really only affect a small minority of pensioners,â€ notes Frank Downey of brokers Invesco. â€œThe really big issue is the substantial number of people â€“ about 50 per cent â€“ who are not members of any scheme at all.â€
Read the full article here.