Pension savers face new levy and tighter rules on relief

The Government has stood by its pledge to end the 0.6 per cent levy on pension funds at the scheduled end of the four-year term next year - but first the charge will rise to 0.75 per cent next year.

In 2015, the levy will be 0.15 per cent of the value of pension funds.

Minister for Finance Michael Noonan said the new "tax" would provide funds to continue support for the Government's job creation programme.

It will also "make provision for potential State liabilities which may emerge from pre-existing or future pension fund difficulties" - a reference to the adverse ruling against the State in the European Court of Justice on its decision to leave workers at Waterford Crystal substantially out of pocket when that company collapsed.

The Waterford Crystal case is due back before the courts tomorrow (Thursday).

As expected the Minister has also reduced the Standard Fund Threshold (the maximum permitted size of one’s pension fund for tax relief purposes)to €2 million from its previous level of €2.3 million.

The change takes effect on January 1st.Anyone with a fund between those two figures will need to apply for a “personal fund threshold” from the Revenue.

As part of the Government’s previously declared intention to reduce the level of retirement income on which a person can claim relief to €60,000, Mr Noonan also introduced new “capitalisation” factors.

At present, members of defined benefit pension schemes use a factor of 20 to calculate the value of the “accumulated rights”. Thus, a fund currently targeting a pension of €100,000 per annum is equal to the new standard fund threshold - i.e. 20 x €100,000 = €2 million.

From January 1st, a range of new capitalisation factors will be introduced depending on the age at which someone starts to draw down their pension.

This will vary from 37 for people aged 50 or below to 22 for people aged 70 or above. The capitalisation factor for people looking to start drawing down their pension at the current standard retirement age of 65 will be 26.

Under the new rules a person retiring from a defined benefit scheme at the age of 60 with a pension of €60,000 per annum thereafter would calculate their benefits at 60,000 * 30 = €1.8 million. Including their €180,000 lump sum, their pension would be just under the €2 million threshold at €1.98 million.

Pension income of €61,000 plus a lump sum would take them above the threshold.

Any figure above the threshold would attract additional tax of 41 per cent. On top of tax already paid, including the Universal Social Charge and PRSI, this would amount to an effective tax rate on this income of around 70 per cent - allowing the State to recoup relief initially given on the pension contributions.

However, any pension rights already accrued before January 1st next will continue to be calculated on the basis of the old capitalisation factor of 20.

The situation for people in defined contribution schemes is easier as the size of the fund is the figure used in assessing whether it meets the standard fund threshold.