Pensions Law Update

Author:Mr Philip Smith and Declan Drislane
Profession:Arthur Cox

A number of pension related changes were announced by the Minister for Finance in Budget 2011. Most of these changes had been unveiled in the four year National Recovery Plan which was published at the end of November. A brief summary of the main changes is set out below:

Employer PRSI

The current employer PRSI exemption on pension contributions will be curtailed by 50% from 1 January 2011.

Employee PRSI

Prior to the Budget, employees' pension contributions got full relief from PRSI and the Health Levy. Following the Budget, contributions to pension arrangements will be subject to employee PRSI and the Universal Social Charge (which replaces the income and health levies).

At present, pension contributions by employees are tax relieved at the individual's marginal rate. The National Recovery Plan envisages that such contributions will only be tax relieved at the individual's standard rate of income tax. The proposed reduction in the rate of income tax relief will be introduced on a phased basis as follows:

Reduction in the Standard Fund Threshold

From 7 December 2010 the Standard Fund Threshold (SFT), which is the maximum allowable pension fund on retirement for tax purposes, is being reduced from €5.4 million to €2.3 million. Where the capital value of an individual's pension rights exceeds this new SFT on 7 December 2010, the individual may be able to protect that higher capital value by claiming a Personal Fund Threshold (PFT). Individuals have until 6 June 2011 to submit a claim to Revenue for a PFT. Where the capital value of pension benefits drawn down by an individual exceed their SFT or PFT a tax charge of 41% is applied to the excess.

Annual earnings limit

The annual earnings limit which determine maximum tax-relievable contributions for pension purposes is being reduced from €150,000 to €115,000 for 2011. The annual earnings limit for 2010 will also be deemed to be €115,000 for the purpose of determining how much of a pension contribution paid by an individual in 2011 will be treated as paid in 2010, where the individual elects under existing rules to have it so treated.

Taxation of retirement lump sums

A cap of €200,000 applies to tax-free lump sums with effect from 1 January 2011. Amounts in excess of this tax-free limit will be taxed at two stages. The portion between €200,000 and €575,000 will be taxed at the standard rate of tax in force at the time of payment. Any portion above that will be taxed at the recipient's marginal...

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