The Standard Fund Threshold calculation (SFT) has been a part of Irish pension tax legislation for several years. However, the approaches to this higher-level taxation have largely been reactive rather than proactive, where pension fund holders have either chosen to accept unnecessarily high tax burdens or ceased contributions past a certain point.
One of the most broadly beneficial, compliant and safest solutions is to consider the advantages of an EU-based pension transfer. This favourable resolution allows holders of Irish pension products from around the world to protect their retirement wealth from punitive tax charges while introducing greater freedoms and lump sum withdrawal thresholds.
As part of our new series exploring the SFT, the European legislation supporting EU pension transfers of Irish-based products, and the severity of the tax implications of the Chargeable Excess tax (CET), today we’ll explore the reasons why more retirement savers don’t take advantage of these opportunities within tax law – and how compelling the benefits may be.
Taxation Charges for Irish Pension Products Exceeding the Standard Fund Threshold Calculation
While we have covered the specifics of the Chargeable Excess Tax (CET) in greater detail within our complimentary, downloadable guide, it is worth reiterating that pension funds held within Ireland exceeding the SFT are heavily taxed – irrespective of the residency status or place where the holder lives.
At the time of writing, the SFT is set at €2 million following tapered reductions in the cap since it was originally introduced with a threshold of over double, at €5 million.
Therefore, any pension savers in any jurisdiction with a pension fund based in Ireland that is at or expected to reach a valuation of €2 million is exposed to significant tax obligations. The CET is levied at a 40% rate on all retirement wealth over the SFT, with an effective total tax charge of as much as 70% when the taxpayer’s marginal rate is accounted for.
How Does Exceeding the Irish SFT Affect Retirement Wealth?
The outcomes are evident where pension fund holders who have anticipated a comfortable and well-funded retirement and are unaware of the SFT and how this applies to their pension wealth could lose a considerable proportion of their saved funds when their pension products are assessed following a crystallisation event.
Events can include reaching a pensionable age, making a lump-sum withdrawal, or transferring a pension fund in Ireland to an alternative location, including those within the EU.
Outcomes for Irish non-residents can be greater, where the Irish Revenue treats pension wealth withdrawn by non-resident expatriates over the initial 25% tax-free lump-sum as ‘Emoluments’. The impact is that pension savers may find themselves exposed to double taxation, both with a tax burden in Ireland and their country of residence, depending on the tax regime and rate concerned.
Needless to say, an effective and safe solution, consistent with EU free movement of capital Directives, is welcome – and yet so often not used, effectively paying the tax office a generous and unnecessary tip in the form of a large proportion of your retirement savings.
The Importance of Licensed, Professional Irish Pension Transfer Advice
During our analysis, we found that one of the core barriers to credible, relevant and tailored advice is that the majority of Independent Financial Advisers (IFAs) operating within Ireland, with varying levels of experience, are solely licensed with the Central Bank of Ireland.
While that licensing status is certainly not a negative, it means that Irish IFAs cannot provide advice or guidance around EU pension transfers and do not hold the appropriate licensing to support clients for whom this would be a tax-efficient move.
EU laws require advisers to hold the MiFID – Markets in Financial Instruments Directive – licence to comply with European legal frameworks around transparency and disclosures. Unfortunately, even the most talented wealth planner cannot provide support with this strategic and protective transition without sufficient accreditation.
As the Chase Buchanan lead, on all things SFT-related and across a broader field of international pensions assistance and retirement strategy, Malcolm McDowell offers personalised support, help and advice with comprehensive MiFID licensing alongside a raft of other recognised accreditations, approvals and registrations.
This position allows Malcom not only to consult with clients from around the world but also to explore avenues for wealth preservation and protection that can efficiently deliver tax advantages to the benefit of retirement savers, their families, and estates.
Those saving for retirement from any location and with pension products within Ireland, including Irish expatriate nationals, are welcome to get in touch at any time to discuss their exposure to the CET and to access expertise to ensure they can make informed decisions about the best way to manage their pension fund tax liabilities.
Irish EU Pension Transfers as a Tax-Efficiency Measure
Transferring an Irish-based pension product to another country within the EU is currently one of the best possible solutions, conforming to regulations around EU capital movements, removing any additional pension transfer obligations, and ensuring retirement savers have complete control over how, when, and where their savings are invested.
Whatever your key financial objectives, the advantages are well worth considering, even if you anticipate your pension fund valuation falling even slightly over the SFT:
- Tax liabilities on savings over €2 million within Ireland can be subject to taxation as high as 70% and above – eroding your retirement wealth by a notable margin. EU countries with comparable pension products have no such threshold, mitigating this tax obligation entirely.
- Tax-free lump sum withdrawals within Ireland are restricted both in terms of the percentage of your total pension fund and the cash value – you can draw down up to 25% or €200,000, whichever is higher. In other locations, no such monetary threshold exists, and maximum tax-free withdrawals are permitted up to 30% of your pension value.
- Non-residents intending to draw down pension funds from an Irish scheme can forgo the exposure to double taxation, where rules introduced in 2018 mean that the Irish Revenue treats the 75% balance, after a tax-free lump-sum, drawn by overseas tax residents as Emoluments. The outcome of this tax treatment is that the bulk of a pension fund is exposed to taxation in Ireland before being subject to tax in the individual’s country of residence.
These advantages mean that for many, transferring pension funds outside of the Irish tax environment, where ongoing changes to taxation and regulations are a possibility, can be a wise move, protecting your financial future and selecting a ring-fenced overseas pension that is aligned with your expectations.
Further information about the SFT and Irish pension transfers is available through our Guide to Standard Fund Threshold Taxation for Irish Savers and International Expats. You are also welcome to contact Malcolm McDowell, the Chase Buchanan pension advisory lead and SFT specialist, to arrange a private consultation by using our contact form.
*Information correct as at September 2023