I am advised by Revenue that Chapter 2C of Part 30 of, and Schedule 23B to, the Taxes Consolidation Act 1997 (TCA) provide for limits on the tax-relieved amount of an individual’s supplementary pension arrangements, including public sector pensions. As the Deputy states, the standard fund threshold (SFT) is currently €2 million and has been set at that amount since 1 January 2014. Some individuals were able to claim a “personal fund threshold” (PFT) of up to €2.3 million where the capital value of their pension rights as of 1 January 2014 exceeded €2 million, but eligible individuals had to apply for a PFT before 31 July 2015.
Public service pension schemes are treated for SFT purposes in the same way as all “defined benefit” (DB) pension schemes which provide for a lump sum that is accrued separately to the individual’s pension (rather than providing for possible conversion or “commutation” of part of the pension to a lump sum). Account is also taken of the fact that part of the individual’s pension fund would have accrued prior to 1 January 2014, before which date the SFT was higher.
The way the fund is calculated for public servants (and other members of DB pension schemes with lump sums separate from pensions) is best illustrated by way of an example. For the purposes of this example, it is assumed that the individual has not had a previous “benefit crystallisation event” as defined in paragraph 2 of Schedule 23B TCA (which includes a pension the individual is already receiving), and does not have a PFT.
If an individual retires on 1 January 2020 at age 60 years, gets a pension on retirement of €100,000 - €80,000 of which is deemed to have accrued up to 1 January 2014 (the “specified date”) and the balance of which (€20,000) is deemed to have accrued after that date - plus a lump sum on retirement of €300,000, the capital value of the individual’s pension fund for SFT purposes is the sum of
- The amount accrued up to the “specified date” (€80,000) multiplied by the “relevant valuation factor” on that date (20), which equals €1,600,000, plus
- The amount accrued after the “specified date” (€20,000) multiplied by the “relevant age-related factor” provided in the table to Schedule 23B TCA (30 for age 60 years) which equals €600,000, plus
- The amount of the lump sum, which is €300,000.
The total capital value of the pension fund for SFT purposes for this individual is therefore €1,600,000 plus €600,000 plus €300,000, which equals €2,500,000.
The pension on retirement for the purposes of the calculation is the annualised equivalent of the amount paid on retirement – any adjustments in the first year (for example, increases in the pension) are ignored. The “relevant valuation factor” for the specified date (1 January 2014) is 20, while the “relevant age-related factor” ranges from 37 for those who retire at age 50 years or younger to 22 for those who retire at age 70 or over. For this “split” calculation to apply, the pension fund administrator must be satisfied that an “accrued pension amount” (that is, pension rights accrued before 1 January 2014) arises for the DB pension in question.
For public servants and anyone whose pension fund exceeds the SFT (or the PFT, if applicable) the balance over the threshold, which is called the “chargeable excess”, is subject to “chargeable excess tax” at the higher rate of income tax, currently 40%. To return to the example, that individual had a chargeable excess of €500,000 (€2,500,000 minus the SFT of €2,000,000) so the chargeable excess tax due at 40% is €200,000.
No reliefs, allowances or deductions may be set against the chargeable excess when calculating the tax due. In certain cases, standard rate lump sum tax may be offset against tax due on a chargeable excess.
The administrator of the public service pension fund will pay the chargeable excess tax due, which is recoverable from the individual. The legislation outlines a variety of ways in which the tax can be reimbursed by the individual to the administrator, depending on the amount to be reimbursed - by reducing the lump sum, by direct payment by the individual, or by reducing the individual’s pension over a period not exceeding 20 years, or a permitted combination of these methods. The legislation also provides for cases where a pension adjustment order applies.
There is an “encashment option” in section 787TA TCA for certain individuals who had both private sector and public sector pension savings and whose overall pension fund exceeded the SFT or PFT, as appropriate. The provision allows an eligible individual a once-off opportunity to cash in her or his private sector pension rights with a view to eliminating or minimising the chargeable excess that would arise when her or his public sector pension crystallises. To be eligible to use the option, an individual had to have both public and private sector pension rights as of 8 February 2012.