Indexing pension cap would ease recruitment headache for top public posts

Indexing the cap on pension tax relief would resolve difficulties for Government in recruiting people to senior posts in the public service and the Garda, an industry body representing insurance brokers has said.

As trade unions consider talks on a successor to the current public service pay deal, several industry bodies are calling on Minister for Finance Michael McGrath to index the Standard Fund Threshold to increases in wages.

The Standard Fund Threshold is a figure above which tax relief does not apply on pensions. The threshold, originally brought in to counter abuse of the tax relief by very wealthy individuals, was initially set at €5 million. But the figure was reduced to €2 million in 2014.

While the threshold was index-linked in its early years, indexing after 2014 was left to the discretion of the finance minister of the day. The figure has not been indexed since then.

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Wages over that time have risen by 31 per cent, on average, according to data from the Central Statistics Office.

“The threshold has been fixed since 2014 without indexation, meaning that each year, retiring workers are treated less favourably than workers who retired the year before,” said Neil McDonnell, chief executive of small business group Isme, which has been lobbying for an increase in the threshold for several years.

In the public service and for those private sector workers on final salary, or defined benefit pension schemes, the notional size of their pension fund is determined by their salary and a multiple related to their age. In more recent times, this formula means salaries on offer for top posts in the Garda and the public service will take their occupants above the threshold – exposing them to tax rates of up to about 72 per cent on some of their pension pot.

“The critical issue for many members of the An Garda Síochána and other public sector workers in senior positions who have the option to retire early is they believe it is more financially advantageous to retire than to take promotions which will leave them with a notional Standard Fund Threshold over the €2 million limit,” said Rachel McGovern, director of financial services at Brokers Ireland.

“While we believe there is much wrong with this particular system, the least the Minister should do in the short term and has the power to do without new legislation would be to index link this notional figure, which has not been indexed since 2014.

She noted that the Commission on Taxation and Social Welfare report, published last year, recommended the periodic benchmarking of the threshold to what it considered “an appropriate and fair level of estimated retirement income”.

The Government has announced a review of the threshold following difficulty in persuading internal candidates to apply for a deputy commissioner role in the Garda.

Isme said it was ironic that the issue was being addressed now, “not because it is just, fair and equitable to do so, but because members of the public service are being hit with tax demands”.