The Finance Bill 2011 reduced the Standard Fund Threshold for pensions to €2.3m but how does this affect clients on a practical level?
Let’s take an example of a client on a salary of €150,000 looking to retire in 10 years’ time with 2/3rds final salary. This would mean an annual income in retirement of €100,000. The value of this fund at retirement would be approx €3.4m.
If the client already had a fund of this size on 7th December 2010, he could apply for a Personal Fund Threshold and only amounts above the €3.4 would be subject to the additional tax of 41% at retirement. This would mean that any future contributions or fund growth would be taxed at 41% on retirement in addition to the normal tax on withdrawals. This could result in an overall effective rate of tax of 72%.
Now assume that the client, who still has 10 years to retirement, hadn’t gotten to the €3.4m fund in December 2010, thinking that he still had 10 years to get there before he retired. If his fund was valued at €2m on 7th December 2010, he would not be entitled to apply for a Personal Fund Threshold. If he continues to contribute and enjoy growth in his fund until he gets to a fund of €3.4m on retirement, he would suffer tax at an effective rate of 72% on all amounts above the €2.3m threshold.
With the government having spent the last 10 years encouraging us all to make provisions for our retirement, they now appear to be undoing all of this. Years of planning in good faith for retirement could now be punished by up to 72% tax.
And, according to the Fine Gael manifesto, this client may soon be facing tax on any excess above a €1.5 million fund threshold. Who knows what's in store with the new Programme for Government and what influence Labour may have had on Fine Gael's pre-election manifesto.
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