Chase Buchanan's Irish pensions specialist, Malcolm McDowell, has recommended all Irish pension savers, and non-residents with Irish retirement products, review their tax positions if they are approaching, or likely to reach, the 2 million Standard Fund Threshold calculation (SFT).
The SFT is a level above which Irish pension fund holders are exposed to additional taxation. While the Standard Fund Threshold calculation only applies to higher-value pension funds, the tax levies assigned are substantial, and can be mitigated with support from a suitably experienced and licenced financial adviser.
Sustained Reductions in Irish Pension Allowances
Over recent years the SFT has gradually been reduced from a previous level of 5 million in 2005, reaching 2 million in January 2014. Pension savers with Irish pension products, including Irish citizens living overseas, will be subject to further taxation on their pension wealth above this value:
- The Chargeable Excess Tax, or CET, is applied at 40% to pension funds over the SFT on retirement.
- The proportion of pension funds above the SFT may be taxed again at higher income tax rates and further against PRSI, while the remainder of the pension value is taxable at the individual's marginal rate.
- Effective tax rates on pension savings above the SFT can exceed 70%, with only the residual post-tax proportion of pension assets above the SFT threshold accessible by the fund holder.
Tax credits may reduce the overall liability by offsetting some of the tax payable on a lump-sum drawdown against the CET obligation, but the impact is negligible and will not make a marked difference to the total tax owing.
This punitive tax on retirement may prompt some to consider reducing pension contributions, causing an issue where retirement savings are the key pool of capital retirees normally rely on to finance a comfortable retirement.
Guidance on Addressing Irish Standard Fund Threshold Taxation Levies
Malcolm indicates that alternative solutions may remove the exposure to higher tax rates without necessitating changes to the fund holders' retirement or pension contribution plans. Transferring pension wealth to another jurisdiction can allow a pension fund to grow without heavy tax penalties.
He says, "The SFT affects all pension holders either approaching the 2 million threshold or likely to exceed this in the future, whether you are an Irish resident with a domestic pension product or living internationally with an Irish pension scheme, no matter what colour your passport.
However, pension schemes can represent a tax-efficient, safe and low-risk way to secure your financial future, and reducing or stopping pension deposits can mean facing shortfalls in your income during retirement.
One of the solutions is to consider a pension transfer, as a strategic way to continue working and making pension contributions, according to your wishes and circumstances, without the worry that on retirement, you will face an extremely high tax charge.
While the most appropriate plan will depend on a broader analysis of your finances and objectives, there is no reason any Irish pension fund holder at or expected to exceed the 2 million threshold cannot take proactive steps to protect their wealth.
Many of my clients select highly efficient schemes in other EU member nations, which are fully compliant and permissible under the EU Directives that allow the free movement of capital. This generates protection from the SFT and varied other advantages, such as higher tax-free lump sum withdrawals and greater flexibility around managing and accessing your pension."
McDowell is a Private Wealth Manager with the global Chase Buchanan group, a financial advisory team focused on providing tailored and dynamic wealth management strategies. The company has a network of hubs across Europe, including key destinations such as Malta, Belgium, France, Portugal, Spain, Cyprus and Tenerife.
EU Regulations Around Pension Transfers From Ireland
Ireland is a full member of the European Union. Therefore most pension products are eligible to be transferred to an alternative scheme, in compliance with the Directives, which permit the free movement of capital between EU countries. Scheme trustees and the Department of Social Protection impose greater limitations on transfers outside of Europe, making this a less viable option.
EU member countries have varying rules around pension access and taxes, but many are considered more generous. Examples include systems that allow a higher 30% tax-free lump-sum drawdown, compared to a maximum of 25% within Ireland.
Many EU countries do not have an equivalent to the SFT, allowing pensions to grow free of taxation to any value without an imputed distribution requirement mandating annual withdrawals of a certain proportion of pension finances.
The contrasting tax treatments are even more notable for non-residents who have relocated outside of Ireland. The Irish Revenue treats pension wealth, after a 25% lump-sum drawdown, as 'Emoluments', meaning that the balance is taxable in both the country of residence and again in Ireland.
The Importance of Appropriate Irish Pensions Advice
Pension fund holders assessing the suitability of a pension transfer to another region outside of Ireland yet still within the EU must seek financial advice from a MiFID (Markets in Financial Instruments Directive) licensed Independent Financial Adviser (IFA). Generally, IFAs working within Ireland are licensed by the Central Bank of Ireland and do not hold MiFID licensing, meaning they cannot provide professional advice on this topic.
MiFID is a transparency regulation applied across Europe, ensuring firms follow standardised disclosure rules.
As one of the pensions experts within the Chase Buchanan group and a MiFID-regulated adviser, Malcolm invites interested parties to download his Standard Fund Threshold Guide and get in touch for an online or in-person discussion to explore the prospect of a pension transfer and assess how this may reduce their ongoing tax obligations and safeguard their overall pension wealth. He notes that "The CET charged on Irish pension funds above the SFT is largely seen as voluntary, given the ease with which this additional tax exposure can be mitigated. If you have any concerns about your tax obligations or the projected value of your pension fund exceeding the SFT, please get in touch to discuss your options. Ultimately, this is all about reducing your exposure to risk by taking advantage of Irish legislation."
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About Malcolm McDowell
Malcolm McDowell is an authority in pensions-related financial planning and provides comprehensive support to his clients as a portfolio manager with a robust range of accreditations, certifications and qualifications, including CySEC Advanced credentials. Malcolm has launched the new SFT advisory service and free downloadable standard fund threshold calculation guide for pension savers who potentially benefit the most from tactical pension planning.
About Chase Buchanan Private Wealth Management
Chase Buchanan is a highly regulated wealth management company that specialises in providing global finance solutions for those with a global lifestyle. We are global financial advisers, supporting expatriates around the world from our regulated European headquarters, and local offices across Belgium, Canada, Canary Islands, Cyprus, Malta, Portugal, Spain, UK and the USA.
Chase Buchanan Ltd is authorised and regulated by the Cyprus Securities and Exchange Commission with CIF Licence 287/15.
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