THE REPRESENTATIVE GROUP for small- to medium-sized businesses ISME is preparing to take a legal test case in the coming weeks against the Irish government over the way pensions are taxed.
The case is over the Standard Fund Threshold (SFT) – the maximum private pension an individual is allowed at retirement for tax purposes, which currently stands at €2 million.
Once private pension pots pass the €2 million threshold, the holder can pay as much as 70% tax when the funds are withdrawn.
Public pensions are not subject to a ‘standard fund threshold’ because they are paid out of public money, rather than individuals’ pension savings.
ISME chairman Ross McCarthy says the body is taking the action in order to solve what he argues is inequality between public and private pensions. He says:
“This is not us pitting the private sector against the public sector, it is an equity issue to ensure that all income is treated the same. People in the private sector have a substantially lower ceiling than people in the public sector.
If a Secretary General or a Minister retires, they could potentially have a pension pot valued at €2.8m [plus], but that is not taxed in the same way as those working in the private sector.
“On a current open market basis, anyone in the public service on a salary greater than €133,000 has a pension pot worth more than €2m, yet they contribute only €14,000 per annum to it.”
The above figures are based on this circular.
In a statement to TheJournal.ie from the Department of Finance, a spokesperson said:
“The State offers extremely generous pension tax relief to encourage individuals to save during their working life and ensure that they will have sufficient income for their retirement. This relief is given at their marginal rate as they build/accumulate their pension fund. The SFT provides that the value of retirement benefits in excess of €2m is taxed at the higher rate of income tax (40%) at the point that the pension is drawn down.
The SFT has been in place since Finance Act 2006 and operates to discourage the building up of excessive pension funds by setting a maximum allowable pension fund for tax relief purposes. The SFT charge unwinds the tax advantage of funding for benefits above the €2m limit by clawing back tax relief previously granted.
The current maximum threshold of €2 million would allow an individual to claim tax relief on the accumulation of potential income of over €60,000 per annum for thirty years after retirement (subject to the competitiveness of the annuities market). This is well in excess of average incomes in retirement or indeed employment.
“The suggestion that the SFT is not applied to public sector pensions is inaccurate. The SFT is applied to the value of public sector pensions at the same €2m threshold. There are differences in how the SFT charge is paid in the case of public sector pensions which reflects the fact that public sector pensions are “unfunded” so there are no proceeds to use at the point of drawdown. These arrangements are in place as affected public servants cannot cease membership of a public service pension scheme otherwise than by leaving their employment, unlike affected individuals in the private sector who can take steps to avoid the impact of the SFT.”
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‘Disincentive to stay in Ireland’
McCarthy continued: “This challenge is being taken from a tax perspective as well as a democratic perspective. It is not about public v private. It is long overdue to protect people’s pension rights and level the playing field between people – no matter where they make their income.”
He added that the current situation could also result in many high-earning professionals leaving Ireland in order to protect their future income.
“If someone is working, say as a consultant, and has spent many years training and working in a professional field, they will look at this threshold and think that their hard-earned pension is not going to work for them in Ireland.
“This might force them to leave the country as the price of passing the threshold is very costly,” he said.
The Standard Fund Threshold was first introduced in 2005 at €5 million, increasing to €5.4 million in line with inflation, before being cut to €2.3 million in 2010 and to €2 million in 2014.
— to www.thejournal.ie