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Budget 2014 - Pensions Update

  • Ireland
  • General

16-10-2013

In his Budget speech this afternoon, Minister Noonan has introduced two reforms which will have a significant impact on pension arrangements.

1. Pensions Levy

The Minister has announced that a new additional pensions levy of 0.15% will be introduced in 2014. While the existing levy will be abolished after 2014, this new levy will result in an increase in the overall pensions levy for 2014 from 0.6% to 0.75%.  The new levy will be continued into 2015 at a rate of 0.15%.

This effectively represents a U-turn on the commitment contained in Budget 2013 whereby the pensions levy was not to be renewed beyond 2014. So, what is the driver for this change?

Minister Noonan has explained that this is being done to help to continue to fund the Jobs Initiative and to make provision for potential State liabilities which may emerge from pre-existing or future pension fund difficulties.

This latter point is clearly a reference to the State’s exposure arising from the decision of the European Court of Justice in the Waterford Crystal case earlier this year. The Court held in that case that Ireland had breached its obligations under a European Directive by failing to adequately protect employees’ pension entitlements on the insolvency of their employer.

It is clear from Minister Noonan’s speech that this new levy will be in place for 2014 and 2015.  However, there is no express confirmation that it will be discontinued at that point. This leaves scope for this new 0.15% levy to be continued beyond 2015 depending on the fall-out from the Waterford Crystal case and its impact on the State.

How this new levy will work in practice is unclear. It has yet to be clarified whether it will mean that defined contribution (“DC”) scheme members will be effectively paying towards a protection fund for insolvent defined benefit (“DB”) schemes.

2. Standard Fund Threshold (“SFT”)

Budget 2013 announced the introduction of a €60,000 limit on the amount of annual pension in retirement which will be tax incentivised.  This new lower limit was to be introduced from 1 January 2014. 

Instead of introducing an express €60,000 per annum cap, the Minister has instead reduced the SFT from €2.3 million to €2 million effective from 1 January 2014 and introduced new age-related valuation factors for SFT purposes. 

As before, grandfathering arrangements will apply to individuals who have pension rights in excess of the new SFT of €2 million on 1 January 2014.  They will be able to claim a Personal Fund Threshold (“PFT”) by notification to Revenue. PFTs approved under the previous regime should not be impacted by the new lower SFT cap. 

For DB schemes, the new age-related valuation factors are being introduced for pension rights accrued after 1 January 2014.  They will range from a factor of 37 for those aged 50 and under to a factor of 26 for 65 year olds reducing down to 22 for those aged 70 and over. The standard capitalisation factor of 20 will continue to apply to calculate the capital value of DB pension rights accrued up to 1 January 2014. 

The new age-related valuation factors are, according to the Minister, being introduced to help improve the equity of the SFT regime as between DB and DC arrangements and between those who retire at an early age and those who retire at an older age.

The introduction of the age-related factors should help to put a capital value on accrued DB pension rights which is closer to market annuity costs.  However, this change will have limited impact in the immediate term as DB rights accrued up to 1 January 2014 will continue to benefit from the existing valuation factor of 20. The calculation of DB pension rights for SFT purposes will also prove more complicated under this new regime given that there will be different calculation methods for DB entitlements accrued pre and post 2014.

Disclaimer

This information is for guidance purposes only and should not be regarded as a substitute for taking legal advice. Please refer to the full terms and conditions on our website.

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