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Pension Tax Relief Escapes Budget Cuts

The Irish pensions industry breathed a sigh of relief when the Minister for Finance announced during his Budget speech that, "as it is in everyone's best interest, the Government wishes to encourage as many citizens as possible to continue to invest in pension schemes".

Taxand Ireland investigates how the pension industry will be affected by the Budget 2013.

No change in pensions tax relief
Marginal rate tax relief continues to be available on personal contributions made to pension plans.

Changes to maximum allowable pension fund
Tax relief on pension contributions will be capped on pension schemes which deliver an income of up to EUR 60,000 per annum with effect from 1 January 2014. Very little details are known as yet as to how the EUR 60,000 pension fund cap will operate in practice. A key issue is how the maximum allowable pension fund at retirement for tax purposes (the Standard Fund Threshold) will be calculated (eg what multiplying factor will be used and whether index linking will apply). Further analysis will be required when details of the measures are announced in the next Finance Bill.

No change in taxation of retirement lump sums
The EUR 200,000 maximum tax free lump sum that can be taken from a pension arrangement on retirement has not been changed.

End of pensions levy in 2014
The four year 0.6% pension fund levy will cease after 2014.

Early access to AVCs
Members who have paid additional voluntary contributions (AVCs) to their pension scheme will now be able to draw down up to 30% of their AVC value before retirement age. This option to withdraw will be available for a three year period, and withdrawals will be subject to income tax at the member's marginal rate.

Discover more: Pension tax relief escapes budget cuts

Your Taxand contacts for further queries are:
Martin Phelan
T. +353 1 639 5139

Lorna Osborne
T. +353 1 63 95 000

Taxand's Take

It is estimated that approximately 27,000 people could be affected by the Government's plan to cap tax relief on pension schemes which deliver an annual retirement income in excess of EUR 60,000 from 2014. The penalty for exceeding the EUR 60,000 cap is likely to be a 41% charge on any amount over EUR 60,000, on top of paying income tax and the USC. This could result in a net effective tax rate of approximately 70%. Consequently employers are advised to look at their benefit structures and consider ways to restructure employees' remuneration in order to avoid penal tax on employees.

Taxand's Take Author

Martin Phelan
Taxand Board member