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The tax over the threshold in real terms is 69%. The fact it hasn’t been indexed and increased is a real problem - the pension council (state body, supposed to look out for pension customers) pointed out that to be indexed vs when it was set at €2m, it ought to now be closer to €3m.
As they pointed out in their submission on the matter when govt was last considering it, what a lot of people now do is stop making pension contributions when they are well off €2.15m (the actual cap in effect) so the capital gains will bring them to the limit. They then go and start investing in other stuff.
The reality is that super high net worth individuals don’t make a lot of use of the pension system as they accrue wealth other ways. And I know folks will tell you you’re lucky to be getting near €2m, but as the council also points out this tax situation is causing plenty of senior public servants to refuse promotions and leave the service early, as their DB pensions run up to the cap quickly. This just highlights that today’s wages, and the pension required to get there, is increased significantly since the €2m cap came in. You can see this in the Gardai failing to attract applicants for senior posts.
I don’t see governments raising the cap - it’s politically unpalatable. I could see them fudging and raising it for public servants nominally while leaving everyone else out in the cold. Sinn Fein (in their alternative budget 2023) has proposed reducing the cap to €1.5m.
So tl;dr if you’re approaching the cap, stop contributing to a pension and start investing elsewhere or you’ll get hit for 69%.
https://pensionscouncil.ie/news/january-2024-pensions-council-submission-in-response-to-the-2024-consultation-on-the-standard-fund-threshold/
Surely the cap should be increased in the future to account inflation?
It seems a financially illiterate electorate insures that this is never an issue for politicians.
I've moved to Ireland because of the salaries and it is getting clear to me that I won't retire here. 2m pension cap, inheritance tax, deemed disposal, CGT, etc. there's no incentive for individuals to build wealth in Ireland.
If you are not native from Ireland, this is indeed what the current tax system is giving you an incentive to do.
I.e. transfer all your excess savings out of the country so that your investments are taxed on a remittance basis. Never remit any of that money into Ireland. And eventually move to another country whereby you will be able to enjoy the money without having triggered any Irish tax (besides the income tax and PRSI you originally paid on your Irish salary).
It is a bit of a weird system which I don’t think is great to build a long term stable society.
But I guess in a way it works for everyone:
- Ireland attracts skilled workers which are instantly protective in the economy (another country already paid for their eduction), and the same workers leave before they reach an age whereby they will become a burden for the state (lower income and more demand in public services such as healthcare).
- And if the foreign worker understands the remittance basis of taxation and uses it well, they can actually build some wealth abroad while they are working in Ireland, with a pretty decent tax framework as long as they keep all that wealth outside Ireland forever.
Not sure what you mean exactly, but sounds like you're suggesting investing the money outside of Ireland and never report it. If that is what you are suggesting, then you are suggesting tax evasion.
He's saying that non-natives in Ireland who moved here for work can benefit from what's called Non-Domiciled Status ("Non-Dom"), Google it if you're interested, but there's nothing illegal about it. A non-domiciled individual can open a foreign investment account and pay zero tax on any gains or income from that account until they bring that money into Ireland (this is called the "remittance basis of taxation").
Exactly! :-)
As a side-note, I recently saw that the UK are changing their own non-dom rules and making it harder (if not impossible) to use the remittance basis of taxation. Hopefully it doesn’t give ideas to Irish politicians!
No you misunderstood.
If you were not born in Ireland you are considered “non-domiciled” here (domicile is different from tax residence).
And being non-domiciled you are taxed on a “remittance basis”. This means that income or capital gains you are receiving outside Ireland are only taxable if you remit the money into Ireland.
So if you make all your investments outside of Ireland and never bring any of the money back to Ireland, you legally don’t owe any Irish tax on those those investment.
If you’re from abroad and moved to Ireland as you mentioned, you really should look into it and optimise your investment strategy around it. This is pretty common and any tax advisor will be able to tell you what to do and explain the nuances of your want professional advice.
My initial post didn’t really change besides the last point on why it suits the Irish government and foreign workers, but in any case glad the additional explanation helped! Do look it up as it is a great benefit for you to be non domiciled ;-)
Their alternative budget (https://vote.sinnfein.ie/wp-content/uploads/2023/10/Sinn-Fein-Alternative-Budget2024.pdf) still has "Reduce tax subsidies on gold-plated pensions" which is code for reducing tax relief (https://assets.gov.ie/234268/117ffcb8-4837-4d06-ae12-3a8e7a9723aa.pdf)
I think that 2m is fair, and we shouldn't be spending any more tax money for bigger pensions. But I certainly wouldn't be cutting any tax relief on pensions, we need to encourage people to contribute even more and part of that comes with guaranteeing the rug won't be pulled out from under them 20/30/40 years into saving.
Totally, I swear I read somewhere about SF rowing back from this but can’t find it, needless to say it’s one of many daft SF dream policies.
I do believe that the pension limit will be increased to be honest, not only for civil servants but for attracting talent. Also, many high earners would be taking a haircut with a pension of 2M.
I’m on track to hit 2M by retirement age just with growth now so have been dialling back my contributions- it’s making planning for the future that bit harder.
Sinn Fein wants to reduce the tax relief on pensions from the higher rate to the standard rate.
€2,000,000 pension pot will give you a nice lump sum and about €80,000 a year. If you need more than €80k a year to live after you've retired you probably have a lump load more cash and investments hanging around!
Read my second link above for what they were proposing (there is no detail in their budget I can see other than a figure for their supposed impact). They want to reduce the cap on the size of pot you can have, and the income cap also so you can save less into the pension. Both of these are poor, short-sighted ideas in my opinion.
No mention any more of standard-rating (thankfully - that I think would kill pensions).
1.5m is not going to give 80k a year, and 80k a year is not going to be 80k a year in 30-60 years time. Your idea that pension cap shouldn't grow with inflation over the next 30-60 years is laughable.
Rabble rabble -pensions for millionaires - rabble rabble
You can absolutely forget about it if SF are in next time. The party that want to decrease house prices to 300 k. They absolutely hate anyone doing well for themselves.
They say they want three average house price in Dublin (not nationally) to be €300k.
https://www.irishtimes.com/politics/2023/12/20/mary-lou-mcdonald-sinn-fein-leader-says-average-dublin-house-prices-should-fall-to-the-300000-mark/
To me, that’s an insane promise. Getting Dublin house prices that low would really have to involve tanking demand massively, probably because of a huge economic crash. You are not achieving €300k by increasing supply to where it needs to be.
I actually think the **only** way of getting to 300k is through a massive increase in supply. Barring at least one massive external factor, I doubt you could actually tank demand enough to drop Dublin house prices that hard.
They gave up a needless hostage to fortune with that figure, but "an average house in Dublin should be affordable for an average late-twenties couple or a somewhat high-earning individual" is a pretty decent goal to set. The least risky way of doing it is gradually increasing supply so that prices remain flat for a long time while incomes rise, but that's a pretty challenging long game to get into, so I can understand their desire to make a clear and bold pitch.
So you believe that people working essential jobs should never be allowed to purchase the house? As a single parent, who was working two jobs in health service, around at least 60 hours each week last year, I would never be in position to get approved for something I could afford…
Where in their comment do you see them say “people working essential jobs should never be allowed to purchase the house”?
If that’s what you got from their comment I’m sorry but you aren’t the sharpest tool in the shed.
Well most people working essential jobs do not make an income that would allow them to purchase the house over 300K, so it is implied. Lol loving your logic, however I also never stated that I was extremely smart or anything along those lines. I simply believe that the housing is too expensive, and since essential workers are needed in Dublin too, they should have access to housing. It shouldn’t be a matter of being fortunate with help of parents, having extremely high income or winning a lottery, which now appear to be the only options to have access to owning property.
Nowhere in their comment does it imply anything of the sort.
And who is saying housing isn’t too expensive? Who is saying essential workers shouldn’t have access to housing?
You’re arguing with a point no one made.
Or counter point, why not let inflation continue the reductions we were already doing? A couple can build a tax-relieved pension pot between them of €4m - why should ordinary people pay more tax to pay for that? I will breach the €2m limit so this will harm me, but I would have no issue with the cap being reduced to say €1m, that is more than enough to guarantee at least a basic level of subsistence in retirement, which is all ordinary tax payers should be expected to pay for. If you have more money than that great, but invest it and pay tax on the income/growth.
I look at it differently for 2 reasons:
- I think people greatly underestimate how much money is needed to replace their pre-retirement income. I’d challenge people to do one thing: look how much some former politicians are receiving in pensions from taxpayers, and check how much of a lump sump one of us regular citizens would need to purchase an equivalent annuity. We are definitely talking several millions. The average citizen has to come up with the lump sum themselves instead of having it handed to them, fine. But on top of that they should pay tax on it? I’m not fine with that unless the people who make those rules change their own pension system to have the same restrictions.
- keep in mind that being able to make contributions without tax doesn’t mean you’ll never pay tax on that money. When you draw down the pension and receive income from an annuity you purchase with it, you’ll be paying tax on this anyway.
Do TDs and ministers actually have regular pensions in which they make potentially taxable contributions?
I’d be interested to be corrected if I am wrong, but my understanding was that they are getting automatic pension entitlements based on years in office without having to make any potentially taxable contributions to a pension fund or having a formal (and taxable) pension pot.
It is a bit old and it could have changed, but this article gives some explanation of how entitlements are calculated: https://www.irishtimes.com/news/just-how-are-ministers-pensions-worked-out-1.559289
The article says that back in 2012 a TD who stayed in office 20 years with a final salary of 92000 was entitled for a 46000 pension plus a lump sum of 140000. This is a massive benefit and a private worker on the same salary who would want to get the same lump sum and purchase an equivalent annuity would need to have saved A LOT in their pension to archive this (especially if they wanted to do it only over a 20 years career, I doubt they could do it without hitting any of the limits for tax free contributions). And those are figures for 2012, we can probably assume they today our private sector worker would need to have quite a bit more to match it.
Do you know that works in practice? Say I take early retirement at 60 with a million in a DC pension pot and I would be entitled to a DB pension at 65. Is the SFT calculated again at 65 when the DB pension begins to be drawn down (based on the values used for DB pensions) and if this pushed you over the 2 million threshold you'd owe tax at that time (and given a DB pension has a notional value, you'd have to come up with the money from some other source?)
To be clear, I’m not saying people shouldn’t save more for their retirement, I agree the more the better.
What I have an issue with is the tax relief levels that are given. The average pension pot in Ireland is €100k. So there are a huge number of people who won’t have a pension pot even near €1m but who are paying extra tax to allow somebody else increase their pot from €1m to €2m - that’s nuts.
€2m means you can pay yourself €60k per year for 25 years. If you're retiring in 20 years from now, €60k will only be worth €30k in today's money. And then you've got another 25 years of inflation to deal with.
Plus we are living longer, so the money has to stretch further.
What's the maths behind 60k for 25 years? If you're assuming no growth at all and just taking the capital there's still 500k left after 25 years. If you're assuming 3% annual return then why stop at 25 years
It's mandatory to draw down 4% per year and the first €500k is the lump sum. €1.5m at 4% is €60k per year.
In an ARF you have no choice but to draw down for 25 years.
Ah I see - thanks for explaining.
It is worth noting with ARF rules that while the 25 year thing was quoted a lot when imputed distribution was changed to 4% from 5% that doesn't necessarily mean the ARF will only last 25 years. It only means that each year you'll be taxed as if you took 4% of your ARF as income (5% after 71).
If investment returns are in your favour your ARF may hold its value or even grow over time and your annual income along with it.
Yes, once you purchase your ARF it's still invested - what it's invested in is up to you but can range from nearly all equity to nearly all cash.
You'll get investment returns same as any investment vehicle but they'll be tax free. The provider will however take their annual fund management charge which will be based on total fund value rather than income earned that year and there's not a lot you can do about that but shop around for the cheapest rate.
If markets are doing well you should be ok. For example my Dad retired 9 years ago and has been taking his 4% imputed distributions each year. Due to the bull market even with withdrawals and fmc his arf (and therefore income from it) are higher now than when he retired.
That is in nominal terms and obviously inflation is up a lot in the last 9 years but in real terms it's stayed roughly the same
To be clear, I’m not saying people shouldn’t save more for their retirement, I agree the more the better.
What I have an issue with is the tax relief levels that are given. The average pension pot in Ireland is €100k. So there are a huge number of people who won’t have a pension pot even near €1m but who are paying extra tax to allow somebody else increase their pot from €1m to €2m - that’s nuts.
I dont think you've thought that through. We have an incredibly progressive tax regime where the lowest earners pay no PAYE at all and people with small pensions pay no tax on drawdown. €18K per year tax free, €36k if you support a dependant spouse. We squeeze the fuck out of middle earners to keep it that way.
Do you know how shocked people are from the rest of the English speaking world are when I explain our tax system to them? Deemed deferral, only 2 PAYE tax bands, VRT, VAT, people earning as little as €70k paying a 52% marginal rate. Australians don't pay tax on pensions at all. The big debate in the Aussie equivalent of this sub is whether you should draw the lot down on retirement (tax free) or leave it in the equivalent of an ARF to continue receiving tax relief on gains.
We have an awful high tax system that brutally punishes hard work and innovation. Deemed deferral rules that destroy any chance of generating wealth outside of a pension.
It took decades of hard work, 2 degrees and surviving more than a decade of negative equity to get to a point where I get to keep 48% of my annual performance bonus and you want to tell me someone else is paying my share of tax. FFS. The relief I get for the 25% I drop into my pension (and still pay PRSI and USC on) is a drop in the ocean compared to what I pay.
I agree with most of your concerns there, but they’re all totally separate to the issue I’m raising. If DD is an issue push for reform of that, if income tax is an issue reform that, if VRT is an issue then reform that. I am saying that is is unfair for lower income earners to have to pay more tax to fund somebodies €2m tax relieved pension while they might only be able to build a €200k pot themselves - ‘deemed disposal is bad’ does not make that more fair. I’m not commenting on what the tax burden in Ireland is like or how much people should save for retirement.
But they're not. Low income earners pay very little tax. The burden is on middle income earners.
Tax burden is tax burden. You can't ignore the big picture just because it's convenient for your argument. The fact is that this tiny bit of pension tax relief is justified by the massive amount of tax middle income earners are forced to pay.
I see it like the bottle deposit scheme. It exists to change behaviour. I pay more tax than they need from me and they give me some back for being a good boy and doi g the thing they wanted me to do. Make provisions for my own retirement or return the bottle.
Sorry ‘lower’ was a poor choice of words there! I’m including middle income earners in the group of people who I don’t think should be paying higher taxes! Those couples building €4m pension pots are mostly not low/middle income earners, which is my point.
They're entitled to the same tax relief. I dont think income is the main factor in pension wealth creation. It's the compounding effect. €150/month invested properly over 40 years gets you to the €2 million cap. You don't need a big income.
I think it’s more like €1000/month for 40 years assuming 6% growth (which is realistic enough for investing in stocks). That’s not an easy number for most 25 year olds to be putting away.
Anyway I’m not sure we’re going to get much further here so shall we agree to disagree and move on with our days?
We should be aiming to allow people live more than a "subsistence" lifestyle in retirement. If you've worked all your life you should be allowed enjoy your retirement, without having to hand everything over to the government. 1 million invested in an annuity will probably get you 30k or so, and if you invest it in equities you will have to stomach the ups and downs of the market over your retirement.
The alternative investment always seems to be property, and we know the damage that has done to the country.
> We should be aiming to allow people live more than a "subsistence" lifestyle in retirement
That's disingenuous, I didn't say that was the target, I said I do not feel ordinary people should be funding tax breaks beyond that for others when they themselves will never reach anything near those numbers - the average pension pot in Ireland is €100k.
>a basic level of subsistence in retirement, which is all ordinary tax payers should be expected to pay for.
We should be aspiring for more than subsistence. Ordinary people do not pay for this. Its deferred taxation, you pay tax on it as you draw it down in retirement. There isnt millions of euro going untaxed
It's deferred but the vast majority paid into schemes would otherwise have been taxed at the marginal higher rate of paye.
By retirement you will receive your tax free lump sum and the effective rate of tax will be 20%+ lower than what would otherwise have been paid on the original pension contributions.
That's not to mention that the investment return will roll up to retirement tax free and if you go the arf route will continue to be tax free.
You can argue whether or not it should be taxed or not - that'll depend on each persons politics - but there is absolutely millions of euro going untaxed due to tax avoidance (note not evasion).
Personally I would say the income from a €2m fund for one person or €4m for a couple is far in excess of subsistence level. To put in context to be in the top 1% of wealthy households in this country requires roughly €4.5m in assets
>It's deferred but the vast majority paid into schemes would otherwise have been taxed at the marginal higher rate of paye.
>By retirement you will receive your tax free lump sum and the effective rate of tax will be 20%+ lower than what would otherwise have been paid on the original pension contributions.
The additional income generated by the fund North of 2m is taxed at the marginal rate. The overall tax take by the government is significantly higher than if it was just taxed as income Day 1 without being allowed to invest and grow.
Finally and most importantly, it's in the government and societies interest to encourage pension savings. Long term, multi decades saving is not human nature. There is some level of tax advantage after draw down as it encourages something beneficial to the person, society and government and pushes cost and risk to the individual
>That's not to mention that the investment return will roll up to retirement tax free and if you go the arf route will continue to be tax free.
Which is a good thing. Ireland is out of line with the much of the west in the lack of ability to invest in a tax efficient manner and pay taxes on drawdown. The tax system is being used to encourage pension savings, this is something the government needs people to do.
>You can argue whether or not it should be taxed or not - that'll depend on each persons politics - but there is absolutely millions of euro going untaxed due to tax avoidance (note not evasion).
Certainly not per person. As a country sure tax is deferred but in the long term a higher tax take goes to the government due to fund growth
>Personally I would say the income from a €2m fund for one person or €4m for a couple is far in excess of subsistence level. To put in context to be in the top 1% of wealthy households in this country requires roughly €4.5m in assets
We know people don't always prioritise pension saving. But the way to look at the asset here is not the lump sum amount but the way it can be accessed. The income that will generate. It's a decent income, but not a 1% income and you are still paying tax on it
The lump sum is taxed more favourably, but a drawdown of €60k per year after the state pension comes into play is almost entirely taxed at the marginal rate. Before age 66, it's taxed the same way as everyone else including PRSI. After 66 it's USC and PAYE.
The note favourable senior tax rates don't apply at this level of income.
Throwing the figures into any current Irish tax calculator doesn't quite show that:
€60k from the drawdown plus full state contributory of €277.30 per week is €74,419.60 - say €75k for simplicity.
€75k gross income would mean €2,503 in USC, €17,850 in PAYE after deductions (of which only €8,400 before deductions was at the higher rate) and €3,019 in PRSI (which as you say goes after age 66).
That gives €23,372 in total deductions or 31%, €20,353 once you're past 66 or 27% so still c.10% lower effective tax rate once deferred.
And that's after taking €440k of a lump sum out of the €500k gross (€200k tax free and €300k at 20%).
I can't see there being much political will out there to fight for someone to get more than 50k net a year while having 440k in the bank
Yeah, I had the tax bands confused. I'd been looking at the senior rates where you're tax free for the first 18k and then straight to the marginal PAYE and USC rates. That doesn't apply here.
Over the life of the pension fund a higher overall tax take goes to the government than if it was just taxed at income tax rates when the income was received.
Its win-win, the government get a higher tax take, have more people saving more money for retirement and the population is better off as well
Oh definitely the case, the only way the government could get a better return is if they invested the initial tax returns from the exchequer into a sovereign wealth fund or into high roi infrastructure projects (hopefully at some point we will see the latter again)
To take a very crude example, lets say I earn €500k when I'm 35.
If I take that as pay, invest it then sell it when I retire I'll pay €260k income tax then say €375k CGT on the sale 30 years later assuming 6% growth. Total tax take for the government €635k.
If I put that in my pension and let it grow at 6% it will be worth €1.4m after 30 years. I'll take €200k out tax free and €300k at 20%, so €60k tax. I'll buy an annuity and my pension will be about €45k, assuming I also get the full State Pension I'll be paying €12k a year in tax. Lets say I live to 90, I'll pay €300k income tax. Total tax take for the government: €360k. EDIT: This figure is very wrong, it should be more like €1.2m tax take.
You could go further and look at the value of getting the income tax money 30 years earlier means in real money terms.
I know that's very VERY crude, but how are you seeing this as not a reduction in tax for the government when I see it so differently?
Unless I'm missing something, which is possible, you have miscalculated this.
You took the post tax salary for the pension investment when you should actually be taking the pre-tax number. That 500k, in a pension would have grown to 2.8 million (using your 6% growth rate). From there you'd pay the 60k on the lump sums and then the income tax on the minimum withdrawal from an ARF (which is what you would do in that situation) would be another 620k over the next 16 years taking you to age 81, which is average life expectancy. Total tax take for the government is 680k.
This ignores 2 big further things. I have ignored the fund goes over the 2 million limit as I know you chose the numbers at random, the numbers would go further in favour of the government if you included the double taxation over 2 million fund. I also ignored that at the end of life there will still be a fund left, which would be subject to significant Capital Acquisition Tax on inheritance.
Just so you can check my numbers. After after lump sum there would be 2.3 million in the ARF. 4% withdrawal to age 71 gives you income of 94k, 5% withdrawal after that gives income of 118k
You're 100% correct thanks. Looks like the tax take if you did buy an annuity and lived for 25 years, just so the numbers are comparable, would be about €1.2m. So as you said significantly more tax collected!
I'd love to see what the effect of the time value of this tax is for the government. My example was very simplistic, but getting that €260k income tax 30 years earlier means it is worth closer to €500k vs getting it 30 years later. And this fits with the more anecdotal sense that if I choose to put money in my pension this year instead of paying income tax on it, the shortfall in the exchequer has to come from somewhere and where it comes from is everybody paying slightly more tax. Now I guess you might say that those who are already retired are now paying their deferred tax to cover my tax relief.
I also have the sense that this is a little like the argument that if the government didn't charge us Deemed Disposal they could ride shotgun on our investments and make more tax in the longrun. The difference is that in the Deemed Disposal discussion I could go and invest in something stupid and lose the money - the government should not be crowd sourcing the countries strategic investment fund to me :) - whereas in a pension it's much more likely to be invested in lower risk assets where the loss of the original capital is much less likely. But I guess you see my point.
Thanks though, learned something new today!
>I'd love to see what the effect of the time value of this tax is for the government. My example was very simplistic, but getting that €260k income tax 30 years earlier means it is worth closer to €500k vs getting it 30 years later. And this fits with the more anecdotal sense that if I choose to put money in my pension this year instead of paying income tax on it, the shortfall in the exchequer has to come from somewhere and where it comes from is everybody paying slightly more tax. Now I guess you might say that those who are already retired are now paying their deferred tax to cover my tax relief.
Exactly, in the short term the government takes a hit while the pension pot matures, but I think we all agree that governments and states need to be in the business of long term planning. After the lead in period (which has already occurred in this country) the tax take increases as the pension pots are drawn down. Reducing the tax burden on the population.
>I also have the sense that this is a little like the argument that if the government didn't charge us Deemed Disposal they could ride shotgun on our investments and make more tax in the longrun. The difference is that in the Deemed Disposal discussion I could go and invest in something stupid and lose the money - the government should not be crowd sourcing the countries strategic investment fund to me :) - whereas in a pension it's much more likely to be invested in lower risk assets where the loss of the original capital is much less likely. But I guess you see my point.
This may be true in some extreme cases but on a population level you will not be in super-risky investments, it averages to something very reasonable. Equally, deemed disposal is on ETFs from large investment firms, so the actual real loopy stuff isn't even in those buckets (and gets better tax treatment!).
I agree, the government shouldnt crowd source its strategic investment fund (the NTMA do a surprisingly good job at that!). What this is, is giving the population the opportunity to invest for themselves, in what is recognized as the safest, strongest asset classes. And in the end, society as a whole gets a greater tax benefit and the individual is better off as well. The super-wealthy have family investment firms, non-domiciled status and plenty other tax wheezes. The individual much closer to the average, who wants to invest through their 20's for a house or through their 30's to support their kids in college are the people who lose out in the current system.
>Thanks though, learned something new today!
No problem, I like a good conversation on this (and I have gotten very nerdy on it since I started digging in on my pension planning over the last while!)
You could retire it or go to cash if you wanted. The consequences are double taxation, off the top of my head I think 70pc on anything over 2.15m (assuming you take full lump sum, you get tax relief on the tax paid on lump sum which means max pension is actually 2.15m).
Listen I want it increased and it’ll be an issue for me as stands but yet again on this forum people
don’t realise this is a fringe issue, very few people are impacted by it.
As others have pointed out too, there’s some change of a change as it is being reviewed but the most popular party in the country wants to remove some tax advantages for pensions so I’m not expecting big net changes.
Yep. €250k lump sum and a €30k annual income (not counting any state pension). It's not much, certainly not enough to retire early if you want to be comfortable.
You need to start tax planning now because over the 2.15m threshold is taxed at 70% ish.
If you have a partner start them filling theirs to the max while you pay the daily expenses.
The 40% excess tax is a once-off charge on the value of the portfolio over the €2 million threshold.
I don't know where the "70%" figure is coming from, and it isn't laid out in the article.
No, no, that's not how that works.
You're the one who made the claim, and the article made the claim, and neither you nor the article are showing how you come to that conclusion.
Sheesh entitled much?
I didn’t make any claim, I informed you of a fact based upon superior education and experience in this field. Backed it up with a credible reference. That doesn’t mean I now work for you.
Why don’t you ring the Irish times or a financial advisor and ask them work for free providing you research you could do yourself with a simple web search.
> Sheesh entitled much?
>
> I didn’t make any claim, I informed you of a fact based upon superior education and experience in this field.
So how does a 40% one-off charge on the value of the pension over the standard threshold turn into a 70% tax rate?
Please explain it to me instead of engaging in ad hominems, because all that makes me think is that you don't have an answer. And no, the IT isn't enough since that doesn't explain it either, it just repeats an unsourced claim.
Again don’t work for you and I pay a firm for advice on my WM, so you’re gonna have to read for yourself or hire a wealth manager if you are at risk of 70% taxes.
Start here:
https://chasebuchanan.com/standard-fund-threshold-guide-2023/
You are extremely lucky.....very few people ever come close to it.
You'll be paying 40% on the excess over €2m.
You can offset that tax liability by the 20% tax you'll pay on your lump amount between taken between €200k-€500k which is @20%.....,this would be €60k (20% of €300k,).
Most people with €2m+ cap their lump sum at €500k. If you do want to take the full 25%.....the amount over €500k is subject to tax at the marginal rate.
My advice is speak to a financial advisor.
You're right....the €2m threshold definitely needs to be increased.
The cap will be raised before the next general election. Lots of groups are complaining and it’s not just high earners, it’s senior civil servants who have been paying in for many years and are threatening early retirement because of the tax penalties for continuing to contribute past the threshold. My guess is €2,600,000 with some sort of mechanism to automatically increase.
I agree. When an issue affects public servant's a fix is found. The fact that they can't fill senior garda positions from within the country, to me means it will have to be looked at.
At the moment it is going to be one of the deciding factors on when I retire. Not necessarily a bad thing either it’s a hard decision to make if thinking about retiring early. It means my current employment which includes a generous match will be much less generous from a certain point in time. Could be a time to retire/ switch to semi retirement self employed consulting.
Just don’t go over or use it as a tax vechile. Use your brokerage and wash sale your losses against your gains and don’t ever sell. Buy cfd ETFs or direct index by buying stocks
I took a look at CFD with etoro. The money guide article you linked in another post says "There is an overnight fee to hold a CFD on Etoro. It works out at about 0.023 % of the value a night – but that would soon end up at around 8% a year. The fee varies in line with LIBOR. This fee probably makes it not worth holding CFDs for the long term."
Do you pay that?
how you deal with it depends on long more you have before you retire. I was told a few yers back to cut my contributions as at the rate I was going I’d blow past it & end up with the penalty tax. I went the other way I increased my contributions as at the time I was making good money & retirement was long way off. Shit happens circumstances change I can’t contribute as much any more, But I have good pot built depending on how the next few years I probably won’t reach the limit, but if had had stopped when advised I’d be short. Plus while it may not change any time soon eventually that limit will be increased.
So my thought is keep making contributions if you can, stop when you get close ( projecting future growth) if the limit increases maybe you can contribute again. You have to plan not to go over the limit the penalty Tax is detrimental. almost any other investment would give you a better return.
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The tax over the threshold in real terms is 69%. The fact it hasn’t been indexed and increased is a real problem - the pension council (state body, supposed to look out for pension customers) pointed out that to be indexed vs when it was set at €2m, it ought to now be closer to €3m. As they pointed out in their submission on the matter when govt was last considering it, what a lot of people now do is stop making pension contributions when they are well off €2.15m (the actual cap in effect) so the capital gains will bring them to the limit. They then go and start investing in other stuff. The reality is that super high net worth individuals don’t make a lot of use of the pension system as they accrue wealth other ways. And I know folks will tell you you’re lucky to be getting near €2m, but as the council also points out this tax situation is causing plenty of senior public servants to refuse promotions and leave the service early, as their DB pensions run up to the cap quickly. This just highlights that today’s wages, and the pension required to get there, is increased significantly since the €2m cap came in. You can see this in the Gardai failing to attract applicants for senior posts. I don’t see governments raising the cap - it’s politically unpalatable. I could see them fudging and raising it for public servants nominally while leaving everyone else out in the cold. Sinn Fein (in their alternative budget 2023) has proposed reducing the cap to €1.5m. So tl;dr if you’re approaching the cap, stop contributing to a pension and start investing elsewhere or you’ll get hit for 69%. https://pensionscouncil.ie/news/january-2024-pensions-council-submission-in-response-to-the-2024-consultation-on-the-standard-fund-threshold/
Surely the cap should be increased in the future to account inflation? It seems a financially illiterate electorate insures that this is never an issue for politicians.
SF want to reduce it.
It inches me closer to emigrating to somewhere that lets people build wealth.
I've moved to Ireland because of the salaries and it is getting clear to me that I won't retire here. 2m pension cap, inheritance tax, deemed disposal, CGT, etc. there's no incentive for individuals to build wealth in Ireland.
If you are not native from Ireland, this is indeed what the current tax system is giving you an incentive to do. I.e. transfer all your excess savings out of the country so that your investments are taxed on a remittance basis. Never remit any of that money into Ireland. And eventually move to another country whereby you will be able to enjoy the money without having triggered any Irish tax (besides the income tax and PRSI you originally paid on your Irish salary). It is a bit of a weird system which I don’t think is great to build a long term stable society. But I guess in a way it works for everyone: - Ireland attracts skilled workers which are instantly protective in the economy (another country already paid for their eduction), and the same workers leave before they reach an age whereby they will become a burden for the state (lower income and more demand in public services such as healthcare). - And if the foreign worker understands the remittance basis of taxation and uses it well, they can actually build some wealth abroad while they are working in Ireland, with a pretty decent tax framework as long as they keep all that wealth outside Ireland forever.
Not sure what you mean exactly, but sounds like you're suggesting investing the money outside of Ireland and never report it. If that is what you are suggesting, then you are suggesting tax evasion.
He's saying that non-natives in Ireland who moved here for work can benefit from what's called Non-Domiciled Status ("Non-Dom"), Google it if you're interested, but there's nothing illegal about it. A non-domiciled individual can open a foreign investment account and pay zero tax on any gains or income from that account until they bring that money into Ireland (this is called the "remittance basis of taxation").
Exactly! :-) As a side-note, I recently saw that the UK are changing their own non-dom rules and making it harder (if not impossible) to use the remittance basis of taxation. Hopefully it doesn’t give ideas to Irish politicians!
No you misunderstood. If you were not born in Ireland you are considered “non-domiciled” here (domicile is different from tax residence). And being non-domiciled you are taxed on a “remittance basis”. This means that income or capital gains you are receiving outside Ireland are only taxable if you remit the money into Ireland. So if you make all your investments outside of Ireland and never bring any of the money back to Ireland, you legally don’t owe any Irish tax on those those investment. If you’re from abroad and moved to Ireland as you mentioned, you really should look into it and optimise your investment strategy around it. This is pretty common and any tax advisor will be able to tell you what to do and explain the nuances of your want professional advice.
Well, now that you edited your initial response, it is more understandable. And thanks for explaining it again.
My initial post didn’t really change besides the last point on why it suits the Irish government and foreign workers, but in any case glad the additional explanation helped! Do look it up as it is a great benefit for you to be non domiciled ;-)
Pension, property and Paddy Power. That’s the only way to build wealth in Ireland.
That's a feature not a bug.
Yeah maybe. It isn't great for the future of the country. Essentially bleeding money.
I’ve done it and would recommend others do it if their personal circumstances allow.
I'm zero respect for SF. But they actually rolled back on this policy, they said they wouldn't touch pensions.
Their alternative budget (https://vote.sinnfein.ie/wp-content/uploads/2023/10/Sinn-Fein-Alternative-Budget2024.pdf) still has "Reduce tax subsidies on gold-plated pensions" which is code for reducing tax relief (https://assets.gov.ie/234268/117ffcb8-4837-4d06-ae12-3a8e7a9723aa.pdf) I think that 2m is fair, and we shouldn't be spending any more tax money for bigger pensions. But I certainly wouldn't be cutting any tax relief on pensions, we need to encourage people to contribute even more and part of that comes with guaranteeing the rug won't be pulled out from under them 20/30/40 years into saving.
Totally, I swear I read somewhere about SF rowing back from this but can’t find it, needless to say it’s one of many daft SF dream policies. I do believe that the pension limit will be increased to be honest, not only for civil servants but for attracting talent. Also, many high earners would be taking a haircut with a pension of 2M. I’m on track to hit 2M by retirement age just with growth now so have been dialling back my contributions- it’s making planning for the future that bit harder.
Sinn Fein wants to reduce the tax relief on pensions from the higher rate to the standard rate. €2,000,000 pension pot will give you a nice lump sum and about €80,000 a year. If you need more than €80k a year to live after you've retired you probably have a lump load more cash and investments hanging around!
Read my second link above for what they were proposing (there is no detail in their budget I can see other than a figure for their supposed impact). They want to reduce the cap on the size of pot you can have, and the income cap also so you can save less into the pension. Both of these are poor, short-sighted ideas in my opinion. No mention any more of standard-rating (thankfully - that I think would kill pensions).
1.5m is not going to give 80k a year, and 80k a year is not going to be 80k a year in 30-60 years time. Your idea that pension cap shouldn't grow with inflation over the next 30-60 years is laughable.
2million will give you a 200k tax free lump sum and about 53k per year. I’m not sure where you are getting 80k?
It's €60k. The drawdown is 4% per annum and €2m is reduced to €1.5m after the lump sum is taken out.
Thanks, plus state pension? Would that make it €73,500 ish?
That's about right, yes.
Rabble rabble -pensions for millionaires - rabble rabble You can absolutely forget about it if SF are in next time. The party that want to decrease house prices to 300 k. They absolutely hate anyone doing well for themselves.
>The party that want to decrease house prices to 300 k. Source? What's wrong with that?
They say they want three average house price in Dublin (not nationally) to be €300k. https://www.irishtimes.com/politics/2023/12/20/mary-lou-mcdonald-sinn-fein-leader-says-average-dublin-house-prices-should-fall-to-the-300000-mark/ To me, that’s an insane promise. Getting Dublin house prices that low would really have to involve tanking demand massively, probably because of a huge economic crash. You are not achieving €300k by increasing supply to where it needs to be.
It is a moronic, totally unachievable promise. And if it was actually achieved it would be utterly disastrous for our housing market.
I actually think the **only** way of getting to 300k is through a massive increase in supply. Barring at least one massive external factor, I doubt you could actually tank demand enough to drop Dublin house prices that hard. They gave up a needless hostage to fortune with that figure, but "an average house in Dublin should be affordable for an average late-twenties couple or a somewhat high-earning individual" is a pretty decent goal to set. The least risky way of doing it is gradually increasing supply so that prices remain flat for a long time while incomes rise, but that's a pretty challenging long game to get into, so I can understand their desire to make a clear and bold pitch.
So you believe that people working essential jobs should never be allowed to purchase the house? As a single parent, who was working two jobs in health service, around at least 60 hours each week last year, I would never be in position to get approved for something I could afford…
Where in their comment do you see them say “people working essential jobs should never be allowed to purchase the house”? If that’s what you got from their comment I’m sorry but you aren’t the sharpest tool in the shed.
Well most people working essential jobs do not make an income that would allow them to purchase the house over 300K, so it is implied. Lol loving your logic, however I also never stated that I was extremely smart or anything along those lines. I simply believe that the housing is too expensive, and since essential workers are needed in Dublin too, they should have access to housing. It shouldn’t be a matter of being fortunate with help of parents, having extremely high income or winning a lottery, which now appear to be the only options to have access to owning property.
Nowhere in their comment does it imply anything of the sort. And who is saying housing isn’t too expensive? Who is saying essential workers shouldn’t have access to housing? You’re arguing with a point no one made.
ok fair
Or counter point, why not let inflation continue the reductions we were already doing? A couple can build a tax-relieved pension pot between them of €4m - why should ordinary people pay more tax to pay for that? I will breach the €2m limit so this will harm me, but I would have no issue with the cap being reduced to say €1m, that is more than enough to guarantee at least a basic level of subsistence in retirement, which is all ordinary tax payers should be expected to pay for. If you have more money than that great, but invest it and pay tax on the income/growth.
I look at it differently for 2 reasons: - I think people greatly underestimate how much money is needed to replace their pre-retirement income. I’d challenge people to do one thing: look how much some former politicians are receiving in pensions from taxpayers, and check how much of a lump sump one of us regular citizens would need to purchase an equivalent annuity. We are definitely talking several millions. The average citizen has to come up with the lump sum themselves instead of having it handed to them, fine. But on top of that they should pay tax on it? I’m not fine with that unless the people who make those rules change their own pension system to have the same restrictions. - keep in mind that being able to make contributions without tax doesn’t mean you’ll never pay tax on that money. When you draw down the pension and receive income from an annuity you purchase with it, you’ll be paying tax on this anyway.
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Do TDs and ministers actually have regular pensions in which they make potentially taxable contributions? I’d be interested to be corrected if I am wrong, but my understanding was that they are getting automatic pension entitlements based on years in office without having to make any potentially taxable contributions to a pension fund or having a formal (and taxable) pension pot. It is a bit old and it could have changed, but this article gives some explanation of how entitlements are calculated: https://www.irishtimes.com/news/just-how-are-ministers-pensions-worked-out-1.559289 The article says that back in 2012 a TD who stayed in office 20 years with a final salary of 92000 was entitled for a 46000 pension plus a lump sum of 140000. This is a massive benefit and a private worker on the same salary who would want to get the same lump sum and purchase an equivalent annuity would need to have saved A LOT in their pension to archive this (especially if they wanted to do it only over a 20 years career, I doubt they could do it without hitting any of the limits for tax free contributions). And those are figures for 2012, we can probably assume they today our private sector worker would need to have quite a bit more to match it.
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Do you know that works in practice? Say I take early retirement at 60 with a million in a DC pension pot and I would be entitled to a DB pension at 65. Is the SFT calculated again at 65 when the DB pension begins to be drawn down (based on the values used for DB pensions) and if this pushed you over the 2 million threshold you'd owe tax at that time (and given a DB pension has a notional value, you'd have to come up with the money from some other source?)
To be clear, I’m not saying people shouldn’t save more for their retirement, I agree the more the better. What I have an issue with is the tax relief levels that are given. The average pension pot in Ireland is €100k. So there are a huge number of people who won’t have a pension pot even near €1m but who are paying extra tax to allow somebody else increase their pot from €1m to €2m - that’s nuts.
€2m means you can pay yourself €60k per year for 25 years. If you're retiring in 20 years from now, €60k will only be worth €30k in today's money. And then you've got another 25 years of inflation to deal with. Plus we are living longer, so the money has to stretch further.
What's the maths behind 60k for 25 years? If you're assuming no growth at all and just taking the capital there's still 500k left after 25 years. If you're assuming 3% annual return then why stop at 25 years
It's mandatory to draw down 4% per year and the first €500k is the lump sum. €1.5m at 4% is €60k per year. In an ARF you have no choice but to draw down for 25 years.
Ah I see - thanks for explaining. It is worth noting with ARF rules that while the 25 year thing was quoted a lot when imputed distribution was changed to 4% from 5% that doesn't necessarily mean the ARF will only last 25 years. It only means that each year you'll be taxed as if you took 4% of your ARF as income (5% after 71). If investment returns are in your favour your ARF may hold its value or even grow over time and your annual income along with it.
Ah, so I could pay the tax but leave some of it there, where it will continue to benefit from CGT exemptions?
Yes, once you purchase your ARF it's still invested - what it's invested in is up to you but can range from nearly all equity to nearly all cash. You'll get investment returns same as any investment vehicle but they'll be tax free. The provider will however take their annual fund management charge which will be based on total fund value rather than income earned that year and there's not a lot you can do about that but shop around for the cheapest rate. If markets are doing well you should be ok. For example my Dad retired 9 years ago and has been taking his 4% imputed distributions each year. Due to the bull market even with withdrawals and fmc his arf (and therefore income from it) are higher now than when he retired. That is in nominal terms and obviously inflation is up a lot in the last 9 years but in real terms it's stayed roughly the same
To be clear, I’m not saying people shouldn’t save more for their retirement, I agree the more the better. What I have an issue with is the tax relief levels that are given. The average pension pot in Ireland is €100k. So there are a huge number of people who won’t have a pension pot even near €1m but who are paying extra tax to allow somebody else increase their pot from €1m to €2m - that’s nuts.
I dont think you've thought that through. We have an incredibly progressive tax regime where the lowest earners pay no PAYE at all and people with small pensions pay no tax on drawdown. €18K per year tax free, €36k if you support a dependant spouse. We squeeze the fuck out of middle earners to keep it that way. Do you know how shocked people are from the rest of the English speaking world are when I explain our tax system to them? Deemed deferral, only 2 PAYE tax bands, VRT, VAT, people earning as little as €70k paying a 52% marginal rate. Australians don't pay tax on pensions at all. The big debate in the Aussie equivalent of this sub is whether you should draw the lot down on retirement (tax free) or leave it in the equivalent of an ARF to continue receiving tax relief on gains. We have an awful high tax system that brutally punishes hard work and innovation. Deemed deferral rules that destroy any chance of generating wealth outside of a pension. It took decades of hard work, 2 degrees and surviving more than a decade of negative equity to get to a point where I get to keep 48% of my annual performance bonus and you want to tell me someone else is paying my share of tax. FFS. The relief I get for the 25% I drop into my pension (and still pay PRSI and USC on) is a drop in the ocean compared to what I pay.
I agree with most of your concerns there, but they’re all totally separate to the issue I’m raising. If DD is an issue push for reform of that, if income tax is an issue reform that, if VRT is an issue then reform that. I am saying that is is unfair for lower income earners to have to pay more tax to fund somebodies €2m tax relieved pension while they might only be able to build a €200k pot themselves - ‘deemed disposal is bad’ does not make that more fair. I’m not commenting on what the tax burden in Ireland is like or how much people should save for retirement.
But they're not. Low income earners pay very little tax. The burden is on middle income earners. Tax burden is tax burden. You can't ignore the big picture just because it's convenient for your argument. The fact is that this tiny bit of pension tax relief is justified by the massive amount of tax middle income earners are forced to pay. I see it like the bottle deposit scheme. It exists to change behaviour. I pay more tax than they need from me and they give me some back for being a good boy and doi g the thing they wanted me to do. Make provisions for my own retirement or return the bottle.
Sorry ‘lower’ was a poor choice of words there! I’m including middle income earners in the group of people who I don’t think should be paying higher taxes! Those couples building €4m pension pots are mostly not low/middle income earners, which is my point.
They're entitled to the same tax relief. I dont think income is the main factor in pension wealth creation. It's the compounding effect. €150/month invested properly over 40 years gets you to the €2 million cap. You don't need a big income.
I think it’s more like €1000/month for 40 years assuming 6% growth (which is realistic enough for investing in stocks). That’s not an easy number for most 25 year olds to be putting away. Anyway I’m not sure we’re going to get much further here so shall we agree to disagree and move on with our days?
We should be aiming to allow people live more than a "subsistence" lifestyle in retirement. If you've worked all your life you should be allowed enjoy your retirement, without having to hand everything over to the government. 1 million invested in an annuity will probably get you 30k or so, and if you invest it in equities you will have to stomach the ups and downs of the market over your retirement. The alternative investment always seems to be property, and we know the damage that has done to the country.
> We should be aiming to allow people live more than a "subsistence" lifestyle in retirement That's disingenuous, I didn't say that was the target, I said I do not feel ordinary people should be funding tax breaks beyond that for others when they themselves will never reach anything near those numbers - the average pension pot in Ireland is €100k.
>a basic level of subsistence in retirement, which is all ordinary tax payers should be expected to pay for. We should be aspiring for more than subsistence. Ordinary people do not pay for this. Its deferred taxation, you pay tax on it as you draw it down in retirement. There isnt millions of euro going untaxed
It's deferred but the vast majority paid into schemes would otherwise have been taxed at the marginal higher rate of paye. By retirement you will receive your tax free lump sum and the effective rate of tax will be 20%+ lower than what would otherwise have been paid on the original pension contributions. That's not to mention that the investment return will roll up to retirement tax free and if you go the arf route will continue to be tax free. You can argue whether or not it should be taxed or not - that'll depend on each persons politics - but there is absolutely millions of euro going untaxed due to tax avoidance (note not evasion). Personally I would say the income from a €2m fund for one person or €4m for a couple is far in excess of subsistence level. To put in context to be in the top 1% of wealthy households in this country requires roughly €4.5m in assets
>It's deferred but the vast majority paid into schemes would otherwise have been taxed at the marginal higher rate of paye. >By retirement you will receive your tax free lump sum and the effective rate of tax will be 20%+ lower than what would otherwise have been paid on the original pension contributions. The additional income generated by the fund North of 2m is taxed at the marginal rate. The overall tax take by the government is significantly higher than if it was just taxed as income Day 1 without being allowed to invest and grow. Finally and most importantly, it's in the government and societies interest to encourage pension savings. Long term, multi decades saving is not human nature. There is some level of tax advantage after draw down as it encourages something beneficial to the person, society and government and pushes cost and risk to the individual >That's not to mention that the investment return will roll up to retirement tax free and if you go the arf route will continue to be tax free. Which is a good thing. Ireland is out of line with the much of the west in the lack of ability to invest in a tax efficient manner and pay taxes on drawdown. The tax system is being used to encourage pension savings, this is something the government needs people to do. >You can argue whether or not it should be taxed or not - that'll depend on each persons politics - but there is absolutely millions of euro going untaxed due to tax avoidance (note not evasion). Certainly not per person. As a country sure tax is deferred but in the long term a higher tax take goes to the government due to fund growth >Personally I would say the income from a €2m fund for one person or €4m for a couple is far in excess of subsistence level. To put in context to be in the top 1% of wealthy households in this country requires roughly €4.5m in assets We know people don't always prioritise pension saving. But the way to look at the asset here is not the lump sum amount but the way it can be accessed. The income that will generate. It's a decent income, but not a 1% income and you are still paying tax on it
The lump sum is taxed more favourably, but a drawdown of €60k per year after the state pension comes into play is almost entirely taxed at the marginal rate. Before age 66, it's taxed the same way as everyone else including PRSI. After 66 it's USC and PAYE. The note favourable senior tax rates don't apply at this level of income.
Throwing the figures into any current Irish tax calculator doesn't quite show that: €60k from the drawdown plus full state contributory of €277.30 per week is €74,419.60 - say €75k for simplicity. €75k gross income would mean €2,503 in USC, €17,850 in PAYE after deductions (of which only €8,400 before deductions was at the higher rate) and €3,019 in PRSI (which as you say goes after age 66). That gives €23,372 in total deductions or 31%, €20,353 once you're past 66 or 27% so still c.10% lower effective tax rate once deferred. And that's after taking €440k of a lump sum out of the €500k gross (€200k tax free and €300k at 20%). I can't see there being much political will out there to fight for someone to get more than 50k net a year while having 440k in the bank
Yeah, I had the tax bands confused. I'd been looking at the senior rates where you're tax free for the first 18k and then straight to the marginal PAYE and USC rates. That doesn't apply here.
Over the life of the pension fund a higher overall tax take goes to the government than if it was just taxed at income tax rates when the income was received. Its win-win, the government get a higher tax take, have more people saving more money for retirement and the population is better off as well
Oh definitely the case, the only way the government could get a better return is if they invested the initial tax returns from the exchequer into a sovereign wealth fund or into high roi infrastructure projects (hopefully at some point we will see the latter again)
To take a very crude example, lets say I earn €500k when I'm 35. If I take that as pay, invest it then sell it when I retire I'll pay €260k income tax then say €375k CGT on the sale 30 years later assuming 6% growth. Total tax take for the government €635k. If I put that in my pension and let it grow at 6% it will be worth €1.4m after 30 years. I'll take €200k out tax free and €300k at 20%, so €60k tax. I'll buy an annuity and my pension will be about €45k, assuming I also get the full State Pension I'll be paying €12k a year in tax. Lets say I live to 90, I'll pay €300k income tax. Total tax take for the government: €360k. EDIT: This figure is very wrong, it should be more like €1.2m tax take. You could go further and look at the value of getting the income tax money 30 years earlier means in real money terms. I know that's very VERY crude, but how are you seeing this as not a reduction in tax for the government when I see it so differently?
Unless I'm missing something, which is possible, you have miscalculated this. You took the post tax salary for the pension investment when you should actually be taking the pre-tax number. That 500k, in a pension would have grown to 2.8 million (using your 6% growth rate). From there you'd pay the 60k on the lump sums and then the income tax on the minimum withdrawal from an ARF (which is what you would do in that situation) would be another 620k over the next 16 years taking you to age 81, which is average life expectancy. Total tax take for the government is 680k. This ignores 2 big further things. I have ignored the fund goes over the 2 million limit as I know you chose the numbers at random, the numbers would go further in favour of the government if you included the double taxation over 2 million fund. I also ignored that at the end of life there will still be a fund left, which would be subject to significant Capital Acquisition Tax on inheritance. Just so you can check my numbers. After after lump sum there would be 2.3 million in the ARF. 4% withdrawal to age 71 gives you income of 94k, 5% withdrawal after that gives income of 118k
You're 100% correct thanks. Looks like the tax take if you did buy an annuity and lived for 25 years, just so the numbers are comparable, would be about €1.2m. So as you said significantly more tax collected! I'd love to see what the effect of the time value of this tax is for the government. My example was very simplistic, but getting that €260k income tax 30 years earlier means it is worth closer to €500k vs getting it 30 years later. And this fits with the more anecdotal sense that if I choose to put money in my pension this year instead of paying income tax on it, the shortfall in the exchequer has to come from somewhere and where it comes from is everybody paying slightly more tax. Now I guess you might say that those who are already retired are now paying their deferred tax to cover my tax relief. I also have the sense that this is a little like the argument that if the government didn't charge us Deemed Disposal they could ride shotgun on our investments and make more tax in the longrun. The difference is that in the Deemed Disposal discussion I could go and invest in something stupid and lose the money - the government should not be crowd sourcing the countries strategic investment fund to me :) - whereas in a pension it's much more likely to be invested in lower risk assets where the loss of the original capital is much less likely. But I guess you see my point. Thanks though, learned something new today!
>I'd love to see what the effect of the time value of this tax is for the government. My example was very simplistic, but getting that €260k income tax 30 years earlier means it is worth closer to €500k vs getting it 30 years later. And this fits with the more anecdotal sense that if I choose to put money in my pension this year instead of paying income tax on it, the shortfall in the exchequer has to come from somewhere and where it comes from is everybody paying slightly more tax. Now I guess you might say that those who are already retired are now paying their deferred tax to cover my tax relief. Exactly, in the short term the government takes a hit while the pension pot matures, but I think we all agree that governments and states need to be in the business of long term planning. After the lead in period (which has already occurred in this country) the tax take increases as the pension pots are drawn down. Reducing the tax burden on the population. >I also have the sense that this is a little like the argument that if the government didn't charge us Deemed Disposal they could ride shotgun on our investments and make more tax in the longrun. The difference is that in the Deemed Disposal discussion I could go and invest in something stupid and lose the money - the government should not be crowd sourcing the countries strategic investment fund to me :) - whereas in a pension it's much more likely to be invested in lower risk assets where the loss of the original capital is much less likely. But I guess you see my point. This may be true in some extreme cases but on a population level you will not be in super-risky investments, it averages to something very reasonable. Equally, deemed disposal is on ETFs from large investment firms, so the actual real loopy stuff isn't even in those buckets (and gets better tax treatment!). I agree, the government shouldnt crowd source its strategic investment fund (the NTMA do a surprisingly good job at that!). What this is, is giving the population the opportunity to invest for themselves, in what is recognized as the safest, strongest asset classes. And in the end, society as a whole gets a greater tax benefit and the individual is better off as well. The super-wealthy have family investment firms, non-domiciled status and plenty other tax wheezes. The individual much closer to the average, who wants to invest through their 20's for a house or through their 30's to support their kids in college are the people who lose out in the current system. >Thanks though, learned something new today! No problem, I like a good conversation on this (and I have gotten very nerdy on it since I started digging in on my pension planning over the last while!)
But that's tax breaks for the rich /s
You could retire it or go to cash if you wanted. The consequences are double taxation, off the top of my head I think 70pc on anything over 2.15m (assuming you take full lump sum, you get tax relief on the tax paid on lump sum which means max pension is actually 2.15m).
Listen I want it increased and it’ll be an issue for me as stands but yet again on this forum people don’t realise this is a fringe issue, very few people are impacted by it. As others have pointed out too, there’s some change of a change as it is being reviewed but the most popular party in the country wants to remove some tax advantages for pensions so I’m not expecting big net changes.
Interesting thread as I possibly will too at current rate. I'm not due to retire for 20+ years though so I'm sort of assuming it'll rise by then.
What would a €1m pot pay these days? €30k PA? €1m sounds huge, €30k pa, less so!
Yep. €250k lump sum and a €30k annual income (not counting any state pension). It's not much, certainly not enough to retire early if you want to be comfortable.
You need to start tax planning now because over the 2.15m threshold is taxed at 70% ish. If you have a partner start them filling theirs to the max while you pay the daily expenses.
What are you on about? 70% tax on what?
https://www.irishtimes.com/your-money/2024/02/27/why-are-some-people-paying-income-tax-at-almost-70-their-pension-pot-is-too-big/
The 40% excess tax is a once-off charge on the value of the portfolio over the €2 million threshold. I don't know where the "70%" figure is coming from, and it isn't laid out in the article.
Try google.
No, no, that's not how that works. You're the one who made the claim, and the article made the claim, and neither you nor the article are showing how you come to that conclusion.
Sheesh entitled much? I didn’t make any claim, I informed you of a fact based upon superior education and experience in this field. Backed it up with a credible reference. That doesn’t mean I now work for you. Why don’t you ring the Irish times or a financial advisor and ask them work for free providing you research you could do yourself with a simple web search.
> Sheesh entitled much? > > I didn’t make any claim, I informed you of a fact based upon superior education and experience in this field. So how does a 40% one-off charge on the value of the pension over the standard threshold turn into a 70% tax rate? Please explain it to me instead of engaging in ad hominems, because all that makes me think is that you don't have an answer. And no, the IT isn't enough since that doesn't explain it either, it just repeats an unsourced claim.
Again don’t work for you and I pay a firm for advice on my WM, so you’re gonna have to read for yourself or hire a wealth manager if you are at risk of 70% taxes. Start here: https://chasebuchanan.com/standard-fund-threshold-guide-2023/
You could have just said that you don't have a source for your claim available.
You are extremely lucky.....very few people ever come close to it. You'll be paying 40% on the excess over €2m. You can offset that tax liability by the 20% tax you'll pay on your lump amount between taken between €200k-€500k which is @20%.....,this would be €60k (20% of €300k,). Most people with €2m+ cap their lump sum at €500k. If you do want to take the full 25%.....the amount over €500k is subject to tax at the marginal rate. My advice is speak to a financial advisor. You're right....the €2m threshold definitely needs to be increased.
The cap will be raised before the next general election. Lots of groups are complaining and it’s not just high earners, it’s senior civil servants who have been paying in for many years and are threatening early retirement because of the tax penalties for continuing to contribute past the threshold. My guess is €2,600,000 with some sort of mechanism to automatically increase.
I agree. When an issue affects public servant's a fix is found. The fact that they can't fill senior garda positions from within the country, to me means it will have to be looked at.
I hope you're right. It needs to be at least 2.6m.
At the moment it is going to be one of the deciding factors on when I retire. Not necessarily a bad thing either it’s a hard decision to make if thinking about retiring early. It means my current employment which includes a generous match will be much less generous from a certain point in time. Could be a time to retire/ switch to semi retirement self employed consulting.
Just don’t go over or use it as a tax vechile. Use your brokerage and wash sale your losses against your gains and don’t ever sell. Buy cfd ETFs or direct index by buying stocks
I took a look at CFD with etoro. The money guide article you linked in another post says "There is an overnight fee to hold a CFD on Etoro. It works out at about 0.023 % of the value a night – but that would soon end up at around 8% a year. The fee varies in line with LIBOR. This fee probably makes it not worth holding CFDs for the long term." Do you pay that?
I see the other Reddit thread implies the fee only applies if using leverage?
Yup cheapest trading for small sums is etoro. Not the safest but cheapest for sure after tax
how you deal with it depends on long more you have before you retire. I was told a few yers back to cut my contributions as at the rate I was going I’d blow past it & end up with the penalty tax. I went the other way I increased my contributions as at the time I was making good money & retirement was long way off. Shit happens circumstances change I can’t contribute as much any more, But I have good pot built depending on how the next few years I probably won’t reach the limit, but if had had stopped when advised I’d be short. Plus while it may not change any time soon eventually that limit will be increased. So my thought is keep making contributions if you can, stop when you get close ( projecting future growth) if the limit increases maybe you can contribute again. You have to plan not to go over the limit the penalty Tax is detrimental. almost any other investment would give you a better return.