Well, what is it and what’s it all about?
This is a term you may have heard a lot more about recently as it has been getting a lot of coverage in recent months particularly in the Business sections of most Sunday newspapers. Without getting too technical in a description, ‘The Standard Fund Threshold’ is the maximum you can have in your pension fund before it ceases to become tax efficient. Currently, this figure is €2,000,000 but with some Tax planning you won’t actually pay any additional tax unless your fund goes over €2,150,000.
Why has there been so much talk about it recently?
The government brought in the Standard Fund Threshold (SFT) back 2005 due to concerns about some people using pension rules to accumulate huge amounts of tax-relieved pension assets. When originally introduced in 2005 it was set at €5 million, this was later reduced to €2.3m in 2010 before being reduced again to €2 million in 2014, and has remained at that level ever since.
Why might the current SFT limit of €2m be a problem?
People are now living longer than ever, which is good news overall but also poses a problem from a pension perspective. A longer lifespan means more time spent after retirement, and that pension fund will have to be stretched out longer.
There is also the simple fact of inflation and the rising cost of living in Ireland in all areas. The standard Fund threshold has remained at €2m since 2014, What might have seemed more than adequate for people to retire on in 2014 doesn’t have the same purchasing power now.
There has also been significant increase in public sector pay and pensions over this period and it now seems the government are struggling to fill some senior civil servant roles as they are likely to get hit with a big tax bill at retirement.
KPMG recently published a paper on the Standard Fund threshold and raised some interesting points in their findings:
Firstly, they say that the current €2 million should be raised to as much as €3.475 million simply to stand still. The €2 million threshold needs to be rebased to take account of Inflation and demographic changes. Inflation as measured by the consumer price index has Increased 21.5% since 2014, and by 34% if measured by wage inflation. Also, people are now living, on average, to age 83, this is 2 years longer than the life expectancy back in 2014. In practical terms, this means that your pension pot will need to stretch over a longer period than was assumed in 2014.
All of these factors along with lobbying from the Pensions industry has resulted in Minister Michael McGrath announcing his intention to undertake a comprehensive review of the Standard Fund Threshold regime. This review which will be led by Dr. Donal de Buitléir will include a public consultation process which will allow interested parties to express their views and put forward their proposals for any amendments.
It is anticipated that the recommendations made by this review process will be presented to the Minister for consideration in the Summer of 2024 and may influence and changes he intends to make in Budget 2025 later this year.
