Finance Bill 2024: How Does It Impact Your Retirement Planning?
This is marketing material.
On October 10th, 2024, Jack Chambers TD (Minister for Finance) published Finance Bill 2024. There were significant changes to pension funding, and the window of opportunity for maximising tax-efficient transfer of company profits into private ownership is closing. The new regulations are due to take effect from 1st January 2025.
Pension Funding
Employers
Contribution and benefit limits apply to all types of pension savings, which can be confusing. The maximum pension benefit for occupational scheme members is two-thirds of their final salary, with employer contributions restricted by the salary and service formula. Employer contributions to PRSAs, currently are only limited to the Lifetime Pension Fund Limit (Standard Fund Threshold) and employer’s capacity to fund.
Finance Bill 2024 introduces a new cap to tax relieved Employer PRSA contributions. The new ‘employer limit’ is equal to 100% of an employee’s salary i.e. €100k salary would allow for €100k employer contribution. Any contribution above the new employer limit will be considered a BIK for the employee and therefore subject to tax.
Employer’s contributions to an employee’s PRSA within the new cap will remain to be an allowable deduction in calculating the employer’s taxable profits.
Employee pension funding
Personal employee contributions to any pension plan stay unchanged and are linked to the age-related percentage limits, with a maximum earnings cap of €115,000 for tax relief calculations.
Standard Fund Threshold (SFT)
On September 18th, the Minister for Finance announced changes to the SFT, to be implemented between 2026-2029. The SFT, which limits the total capital value of pension benefits an individual can draw without additional tax liabilities, is currently set at €2 million and has not been updated since 2014. Starting in 2026, the SFT will increase by €200,000 annually, reaching €2.8 million by 2029.
The Finance Bill 2024 clarified that in 2030 and subsequent years, the SFT will be the higher of €2.8 million or an amount adjusted in line with the Earnings, Hours and Employment Costs Survey.
Pension balances above the SFT are subject to a 40% Chargeable Excess Tax (CET). Additional taxes on the drawdown of these funds can result in an effective tax rate as high as 68.8% (or 71.2% if PRSI is included).
Retirement Lump Sum
Currently, up to €200,000 of a pension lump sum can be taken tax-free, with the balance up to €500,000 taxed at the standard rate (20%). The tax paid on the lump sum at the standard rate (€60,000) offsets the CET liability to avoid double taxation. The retirement lump sum amount will remain fixed and will not increase with the SFT.
Key Highlights and Implementations in the Pensions Sector to Date
It’s worth reviewing the pensions reform to date and to see what’s on the horizon in the future on the back of the roadmap for pensions reform 2018-2023 aimed at modernising our pension system.
Simplification of the Pensions Landscape
PRSA as the Sole Pension Product
Efforts to reduce the number of pension vehicles have led to several changes:
- Phasing out of Personal Pensions and Buy-Out Bonds/Personal Retirement Bonds (no new RAC applications approved since January 1st, 2024).
- PRSAs now allow transfers from other pension arrangements, except Buy-Out Bonds.
- Approved Retirement Funds (ARFs) will be replaced by PRSAs, which will operate as whole-of-life products. (The restriction on taking benefits from a vested PRSA after age 75 has been abolished).
Standardisation of Pension Drawdown Ages
Normal retirement age within occupational pension schemes is generally between 60-70 years, without the need to terminate employment. Personal Pensions and PRSAs allow access to retirement benefits between 60-75 years, without requiring cessation of economic activity.
Early Retirement: Previously available from age 50 for occupational scheme members and employer-funded PRSA holders, early retirement is now restricted to those ceasing all economic activity.
Pension Lump Sum
The mandatory requirement to purchase an annuity after taking a lump sum based on the salary and service approach (occupational pension schemes) remains unchanged.
Death in Service Rules
Different rules apply to death-in-service benefits across pension types. Occupational schemes may pay a lump sum limited to four times the deceased member’s final remuneration, plus a refund of the member’s contributions, with the balance used to purchase an annuity. In contrast, PRSAs and Personal Pensions can pay the entire fund as a lump sum, tax-free to a surviving spouse/civil partner.
State-Sponsored Supplementary Retirement Savings System
A state-sponsored supplementary retirement savings system, where workers will be automatically enrolled, is set to begin on September 30th, 2025, and will be known as My Future Fund. Government approval has been secured for the establishment of the National Automatic Enrolment Retirement Savings Authority (NAERSA) on 31 March 2025. This will ensure the board and executive management of NAERSA has six months to oversee the implementation of the various arrangements and systems ahead of the auto-enrolment system going live.
The Finance Bill 2024 has announced the following regarding the taxation of this new Auto-Enrolment (AE) Scheme:
- Employer contributions to AE will be exempt from tax.
- Income and gains of AE funds while held by an AE provider will be exempt from tax.
- Amounts paid from the fund (after any tax-free lump sum) will be taxed.
While there is still a long way to go in simplifying the pensions landscape, many changes are on the horizon. We are here to monitor these developments and assist you pivot your strategy as markets shift and needs change.
The PRSA continues to be the most versatile pension structure accessible, and we can help you establish a PRSA with a quick turnaround to allow you to maximise your pension funding, ahead of the changes coming into effect on 1st January 2025 regarding Employer Contributions.
We cannot underestimate the value of professional financial advice to keep your personal finances on track and proactively identify financial opportunities and risks as they arise.
Do not hesitate to get in touch with us for support with navigating through your financial plan & creating a tailored retirement plan that is a perfect fit for your requirements.