Tax legislation provides for a limit or ceiling on the total capital value of tax-relieved pension benefits that an individual can draw down in their lifetime from all of their supplementary pension arrangements. This is known as the Standard Fund Threshold or SFT and was introduced on 7 December 2005 and amended since (most recently in Finance (No 2) Act 2013 which, among other things, reduced the SFT from €2.3 million to €2 million from 1 January 2014).
A higher limit, known as a Personal Fund Threshold or PFT, may be claimed where the capital value of an individual's pension benefits exceeded the SFT on the date of its introduction or on the dates of its reduction.
The SFT regime was introduced and subsequently amended mainly to deal with the abuse of the tax-relief arrangements for pensions which resulted in pension overfunding by individuals and to place a constraint on the cost to the Exchequer of tax relief for pension saving. The regime deals with these issues at the point of pension drawdown in retirement rather than by applying restrictions to pension savings or accrual upfront. There is, therefore, no restriction or limit on the contributions that an individual can make to his or her pension savings on an ongoing basis (other than the standard earnings and age-related percentage limits that determine the annual level of tax-relieved contributions that can be made by an individual). Instead, a significant tax charge is imposed on the value of retirement benefits above the SFT or PFT, as appropriate, when they are drawn down. In this way, the maximum allowable pension fund for tax purposes acts to discourage the building up of large pension funds in the first place or unwinds the tax advantage of funding for benefits above those limits by clawing back, through the significant tax charge, the tax relief granted.
Where an individual is a member of a pension scheme or arrangement on or after 7 December 2005 and the scheme or arrangement is or becomes subject to a pension adjustment order (PAO), then in calculating the capital value of any benefit drawn down at retirement from the pension scheme or arrangement (e.g. a pension, annuity, lump sum etc.) in respect of that individual for the purpose of establishing if their SFT or PFT has been exceeded, the benefits designated to a spouse or civil partner under the PAO are to be included in the calculation as if the PAO had not been made. Also, in calculating whether an entitlement to a PFT arises in the first place, the individual includes the capital value of his/her pension benefits as if the PAO had not been made.
The PAO exclusion provision was introduced as an anti-avoidance measure, designed to prevent an individual with a PFT, whose pension was subject to a PAO, from taking the view that as part of his or her pension had been assigned to a spouse/civil partner, he or she was then free to avail of further tax relief in building their part of the pension fund back up to the level of their PFT. If this had been permitted, it would have allowed a situation to arise whereby the aggregate amount of the pension funds built up originally with tax relief (in respect of which the PFT was granted) and then built back up again (with further tax relief) to the PFT amount, following the PAO, to greatly exceed the original amount of the PFT, at significant additional tax cost to the Exchequer. For these reasons, the legislation requires a PAO to be ignored for the purposes of determining whether an individual's SFT or PFT has been exceeded. The corollary of this is that the designated benefit going to the non-member spouse or partner is not included in determining the overall capital value of the non-member spouse or partner's supplementary pension benefits, if any, as to do so could result in double taxation.
In this year's Finance Bill, I am making provision that where, in cases involving PAOs, an individual's SFT or PFT is exceeded giving rise to an immediate tax charge on the excess at the higher income tax rate, that the tax charge is shared equitably between the former spouses or partners in relation to whom the PAO refers.
As to the request for my views on the particular scenario outlined in the question under which it is apparently being suggested that the entire value of an individual's pension benefits (which happen to equate to the current level of the SFT) are designated to a former spouse or partner under a PAO, it would be difficult to make any meaningful comment on the tax relief aspects of the particular scenario in isolation. This is a highly complex matter and each case depends on its own circumstances. In cases of divorce or separation where pension adjustment orders have been made by the Court it is open to the parties to apply to court to have their pension adjustment orders varied if their circumstances change. It would be a matter for the courts to determine what would be appropriate in each case.
It is important, however, to address an apparent assumption in the question which is not correct. The SFT is not a €2 million allowance available to taxpayers, generally, or to a particular category of taxpayer, as is the case for example with the PAYE allowance to which PAYE taxpayers are entitled. The SFT has relevance and potential application only to individuals who are funding for or accruing pension benefits in pension saving arrangements approved by the Revenue Commissioners and who have relevant earnings out of which contributions to such arrangements are or are capable of being tax-relieved or tax subsidized. It has no direct application or relevance to individuals or taxpayers who are not in this position, including for example, the former spouses or partners of pension scheme members who are not in pension saving arrangements as described. Moreover, since the SFT operates as a limit or threshold at a relatively high value and only impacts when that threshold (or the higher PFT limit, if applicable) is exceeded, the funding for or accrual of pension benefits by the vast majority of individuals in pension saving arrangements whether or not impacted by PAOs are and will continue to be unaffected by the SFT regime.
