New tax rules on pensions a real sticking point for highest earners

BACKGROUND:THE GOVERNMENT'S new ceiling for pensions contributions is exercising minds in the private and public sector.

Under the last Finance Act, the government lowered the cap on the amount a person can claim tax relief on pension savings to €2.3 million from €5.4 million previously.

Anyone with a pension pot above the level of €2.3 million on budget day – December 7th last – must contact the Revenue Commissioners by June 7th to register this higher amount. It will then become a person fund threshold and only amounts subsequently added to it will be subject to tax.

The issue is important because pension savings above this level will now effectively be subject to tax at 69 per cent as soon as the pension is activated in retirement. Amounts above the cap or personal fund threshold will immediately become liable to income tax at the higher rate. Then, as the money is drawn down from the pension, it will again be taxed in the usual way.

The ceiling is not an issue for most public service workers. A secretary general of a government department earns €188,640, which even with a full 40 years’ service will have a maximum attributed value on their pension fund of €2.17 million.

The issue is, however, a real sticking point for anyone in public service with a salary of more than €200,000.

That raises questions for every member of the High Court and Supreme Court, as well as for the president of the Circuit Court, whose service is accelerated – even without taking into account pension savings from their previous careers as barristers or solicitors.

Others likely to be affected will be senior executives in a number of semi-State companies.

So what is “attributed value” and how does it work?

The €2.3 million threshold is straightforward for a person on a defined contribution pension – the amount of your pension savings is what has accumulated in your fund by December 7th last. People in the public service and with defined benefit pensions – those effectively on a promise to a paid pension rather than a specifically accumulated pot, in other words – have to look to “attributed value”.

In the public service, this value is worked out by multiplying your salary by the number of years served, divided by 80 (because a maximum public service pension is 40/80ths of final salary).

This sum is then multiplied by 20. Added to this is the gratuity to which public servants are entitled on retirement – a sum that amount to a maximum of 1½ times final salary.

If this total figure exceeds €2.3 million, the excess is subject to tax on retirement.

If a public servant is already above that level, they can ringfence their existing savings by registering for a personal fund threshold with the Revenue by June 7th.

Working out an example, take a person retiring later this year with a final salary of €200,000 and a full 40 years’ service.

Their calculation is (200,000 x 40/80) x 20 + (200,000 x 3 x 40/80).

The 200,000 x 40/80ths (which is equal to half) is 100,000. This multiplied by 20 equals €2 million. Adding in the gratuity – 200,000 multiplied by 3 is 600,00, which multiplied by 40/80ths is €300,000 – you get a final “attributed value” of €2.3 million, precisely equal to the new cap.