Ireland’s Minister for Finance, Jack Chambers, recently introduced substantial updates to pension regulations following an in-depth review led by Dr Donal de Buitléir. These updates represent a significant shift in retirement planning. Below, we outline the key aspects of the changes and their potential impact.

Standard Fund Threshold (SFT) Increase

For the first time in over a decade, Ireland’s maximum tax-efficient pension fund—known as the Standard Fund Threshold (SFT)—will increase. The SFT will rise gradually from €2 million to €2.8 million, with annual increments of €200,000 from 2026 to 2029. From 2030 onwards, it will adjust yearly in line with economic growth indicators. This long-awaited update addresses the real value decline of the SFT since 2014, which has fallen by 39% due to inflation.

Chargeable Excess Tax (CET) Implications

The SFT plays a pivotal role in retirement planning, as exceeding this threshold triggers a Chargeable Excess Tax (CET) of 40% on amounts above the limit. Further taxes may apply as income is drawn from the pension, potentially reaching a combined tax rate of up to 71%. Although the CET rate remains unchanged for now, a review by 2030 could potentially lower it to 10%, as suggested by Dr de Buitléir’s report.

Retirement Lump Sum Limits

Currently, individuals can access a lifetime tax-efficient lump sum of up to €500,000. Of this, the first €200,000 is tax-free, while the next €300,000 is taxed at 20%. Notably, these lump sum limits will remain unchanged, even with the phased SFT increases.

Additional Recommendations for Future Reform

Alongside the confirmed changes, Dr de Buitléir’s report also proposed broader recommendations that the government may review over the coming years:

• Removal of Age and Earnings Limits: Phased elimination of age and earnings limits on personal pension contributions.
• Spreading CET Payments: Allowing CET liabilities to be paid over a 20-year period.
• Capitalisation Factor Adjustments: Revising capitalisation factors for defined benefit pensions, potentially reducing their impact on SFT calculations.

Potential Impacts on Pension Holders

While these proposed changes outline the government’s direction for pension policy, more detailed guidance will follow in Budget 2025 and through subsequent legislation. Additionally, the broader recommendations in Dr de Buitléir’s report may be adjusted or not implemented.

We recommend timing withdrawals strategically to reduce CET impacts, particularly given the phased SFT increase starting in 2026. Those considering retirement in 2025 may want to review their strategy. Individuals nearing retirement should also reassess contribution, investment, and drawdown plans to make the most of the updated limits.

Each person’s situation is unique, and pension strategies should be tailored accordingly. This period of regulatory change presents an ideal opportunity to review or establish a comprehensive financial plan.

Summary

The increase in Ireland’s Standard Fund Threshold is a welcome development aimed at alleviating high tax burdens on pensions and supporting workforce retention. Based on recommendations from Dr de Buitléir’s report, these updates maintain the tax-free lump sum cap at €200,000 and the CET at 40%, while providing greater flexibility in retirement planning.

For tailored guidance on navigating these updates and optimising your retirement strategy, contact F J Hanly & Associates.