Phased increase to the Standard Fund Threshold announced

Jack Chambers, Minister for Finance, announced a number of positive pension related changes this week. These changes follow the publication of a review of the Standard Fund Threshold (SFT) led by an independent expert, Dr. Donal de Buitléir, which made significant recommendations. The key changes announced by Minister Chambers are outlined below.

Standard Fund Threshold

The maximum tax-efficient pension fund in Ireland, known as the Standard Fund Threshold (SFT), will change for the first time in over 10 years. The change will see an increase to the limit on a phased basis from €2.0 million to €2.8 million  with the threshold to increase by €200,000 each year from 2026 to 2029. From 2030 onwards, the intention is to increase the limit each year in line with an applicable level of growth. We welcome this change and believe it is long overdue. The lack of adjustment to the SFT since 2014 has meant that, allowing for the impact of wage inflation, the value of the maximum tax-efficient pension fell by over 39% in real terms during this time according to data from the CSO.

Chargeable Excess Tax

The SFT has long been a major factor in decision making when clients are planning for their retirement. A chargeable excess tax (CET) of 40% applies immediately to the value of pension assets over the SFT. This excess may be taxed again as income when the pension is drawn, leading to a combined tax rate of up to 71%. This rate of CET is to remain unchanged for now, however a specific review of the rate is to take place by 2030 which could result in a rate as low as 10%. This lower rate was suggested in the recommendations report as the current 40% rate is viewed as overly penal.

Retirement Lump Sums

Under current rules, a lifetime maximum tax-efficient lump sum of up to €500,000 can be accessed. The first €200,000 of this lump sum is tax free, and the next €300,000 is taxed at the standard rate of income tax which stands at 20% today. Minister Chamber’s announcement confirmed that both elements of the tax-efficient lump sum will remain at the current levels and not increase as future increases to the SFT are applied.

In addition to the changes announced above, the report sets out a number of further significant recommendations, including;

• A removal of the annual age and earnings related limits that apply to personal pension contributions on a phased basis.
• An allowance for CET liabilities for all pensions to be spread and paid over a 20-year period.
• A change to capitalisation factors that are used to value defined benefit pensions, leading to a reduction in the value of these pensions for SFT purposes.

What do these changes mean for you?

The changes announced by Minister Chambers are still very high level, with the finer detail to emerge after Budget 2025 once the relevant legislation is published. In addition, the broader recommendations contained in Dr. de Buitléir’s report will need to be fully considered by the Government over the coming years and may be altered, or potentially not implemented at all. Nonetheless, we are beginning to get a sense of the direction of travel for Government pension policy which helps to inform the best course of action for clients.

In general terms we recommend that our clients leave their pension assets unretired until income and/or lumps sums are required, while also timing drawdown to minimise the impact of CET where possible.  This position is further strengthened by the proposed changes and wider recommendations. Unfortunately, the increases in the SFT aren’t expected to become effective until 2026. For clients who were waiting to retire pensions in 2025 under a new limit, we recommend they review their pension strategy with their adviser. For clients approaching retirement, we recommend they review the existing contribution, investment and drawdown strategy for their pension funds with their adviser.

It is important to note that the specific implications and appropriate strategy will differ depending on each client’s individual circumstances. We see the recommended SFT changes as a great opportunity for clients managing the accumulation and drawdown of their pensions to take action. It is also an Ideal time for clients to either revisit their existing financial plan, or to put one in place if they haven’t yet.

Contact your Davy adviser to understand the impact on your broader retirement plan and the best course of action for you.

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