What is the optimum pension fund to aim for?
There is a limit on the total capital value of pension benefits that an individual can draw in their lifetime from tax relieved pension products where those benefits are taken, or come into payment, for the first time on or after 7 December 2005. This limit is called the standard fund threshold (SFT) and is currently €2.2m. Under current legislation this limit will increase by €200,000 annually until it reaches €2.8 million in 2029.
While legislation states that the limit is currently €2.2m, the optimum fund to aim for is actually €2.35m. How can this be?
You pay tax on your fund at retirement in two ways.
- You pay tax at the standard rate (20%) on any lump sum taken in excess of €200,000 (up to maximum €500,000).
- You pay tax at the higher rate on the excess of your fund over your Standard Fund Threshold (this is called your chargeable excess).
Per Revenue rules the amount paid at the standard rate can be offset against any tax due on your chargeable excess. Taking benefits from your pension is referred to as a Benefit Crystallisation Event (BCE).
In the event that you accumulate a fund of €2.35m it will be treated as follows;
As the €60,000 tax paid on your lump sum is then available as a credit against the tax on the excess over your SFT, it is to your advantage to build up a fund which is sufficient to fully utilize the credit. While you will often hear that the maximum permitted fund is €2.2m, the optimum maximum fund is actually €2.35m.
If you are interested in discussing this and other tax saving tips further please give us a call on 01 546 1100 or book a 15 minute video call with us here.
The material and information contained on this website is for general information purposes only. Neither the writer nor Highfield Financial Planning Ltd makes any warranty as to the completeness, accuracy or reliability of the information or the suitability or availability of products or services, referred to on the website, for any purpose. You should not rely on any information contained on this website as a basis for making any financial, legal, taxation or other decision. The information presented does not include all the considerations which are relevant to the topic discussed as to do so would render it un-readable. When considering any financial issue you should seek the advice of a suitably qualified adviser.
Warning: If you invest in this product you may lose some or all of the money you invest.
Warning: The value of your investment may go down as well as up. You may get back less than you invest.
Warning: This product may be affected by changes in currency exchange rates.
Warning: The income you get from this investment may go down as well as up.
