Pat Ryan, Principal, Pat Ryan Pensions Limited
ON SEPTEMBER 18, the Minister for Finance announced the Government’s intent to raise the standard fund threshold (SFT), following months of speculation. The SFT, currently set at €2m since 2014, represents the maximum valuation of pension funds that can be drawn down without being subject to the chargeable excess tax (CET) at 40%. Any funds exceeding the SFT are liable to this tax, making this announcement significant for pension holders and advisers dealing with large funds.
Announcement Details
The minister outlined that the SFT will increase by €200,000 annually starting in January 2026, reaching €2.8m by 2029. A review is scheduled for 2030. However, this delayed start in 2026 was unexpected, as many had anticipated changes by January 2025 or earlier through the Finance Act 2024. This delay creates uncertainty for pension holders close to the current SFT limit, as it’s unclear how these increases will be legislated. It remains to be seen whether the annual increases will be pre-scheduled in the Finance Act 2024 or be subject to annual approval through the Finance Bill.
The maximum tax-free lump sum will stay at €200,000, and the 20% tax threshold for lump sums will remain capped at €500,000, regardless of future SFT increases.
Notably, the minister did not address other proposals from the recent SFT review, such as reducing the CET rate, lowering SFT valuation factors, or modifying SFT on pension adjustment orders. Instead, further stakeholder working groups will explore these recommendations in the coming years.
Impact
The proposed changes will not benefit individuals planning to retire before January 2026, creating a dilemma for those nearing retirement. However, for public sector workers, such as senior employees in Garda roles, the delayed increase might incentivize them to postpone retirement until the higher SFT limits are in place.
Splitting large pension funds into multiple personal retirement savings accounts (PRSAs) will become a key strategy for CET planning. For example, a retiree with €2.6m in their fund at age 60 could split it into PRSA A of €2m and PRSA B of €600,000. They could mature PRSA A without triggering CET and take the maximum €500,000 lump sum, then mature PRSA B (likely worth €800,000 by 2029) when the SFT increases, avoiding CET on that fund as well. Other options might include delaying pension maturities until closer to age 75.
For those under 74 who have already matured substantial pension funds but are still working, there could be an opportunity to make additional contributions to a PRSA. These new contributions could be earmarked for drawdown after 2026 when the SFT limits increase, allowing them to benefit from the higher threshold.
If you might be affected by these changes, it is advisable to consult your pension adviser to develop a tailored plan.
