Summary of implications for pensions:
Tax relief on pension contributions by employees and self employed.
Earnings cap will drop from €150k to €115k for tax year 2011.
Employee pension contributions will no longer qualify for PRSI and Health levy relief from 2011.
No change here for self employed who do not currently do not qualify for PRSI and Health levy relief.
41% income tax relief will remain in place for 2011.
The Plan proposes that relief will reduce thereafter to the following effective rates 2012 – 34%, 2013 – 27% and 2014 – standard rate (currently 20%)
Standard Fund Threshold (SFT)
SFT will be reduced in line with earnings cap reduction from 2011.
This suggests a new SFT of c. €4M for 2011 in place of current figure of €5.4M. This change could be introduced from Budget Day 7th December.
Tax Deduction for Employer Pension Contributions
No changes outlined other than impact of reduced SFT to c. €4M above.
Pension Scheme Lump Sums
Pension lump sums up to €200k will remain tax free.
Budget will outline tax treatment for pension lump sums and for redundancy payments / ex gratia payments in excess of €200k.
This change may take effect from budget Day 7th December.
Implications for pension investors
Cutting tax relief on personal contributions to standard rate by 2014 has very serious implications for pension investors. However the Plan holds the 41% relief rate for 2011 and leaves room for further discussion with industry in the meantime to agree more suitable method of bringing in the revenue required.
Therefore 2010 and 2011 are likely to be the optimum income tax years for paying personal contributions to PPPs, PRSAs, AVCs or AVC PRSAs.
Earnings Cap drops from €150kto €115k for 2011 so important for high earners to firstly use up higher cap allowance for 2010.
Tax free lump sum entitlements over €200k (currently) should be reviewed asap to consider vesting any options.
Professionals who have options to incorporate practice should investigate incorporation for 2011 tax year.
Executive pensions for employed spouses of professionals and directors should be investigated for 2010 business year end.
SFT drop likely from budget day so company directors and senior executives should quickly consider injections to existing funds now while current SFT of €5.4M remains in place.
This Plan does not and was not expected to address the new ARF options issue scheduled for early 2011 as same is not strictly a revenue generating change. However the new €18k pa specified income test for ARF eligibility is still very much an integral part of the NPF and if implemented will have a very serious effect on retirement planning for existing clients. As such pre qualification options under current ARF rules remains a priority.
For further information, please contact Neil Brooks or Ross Ingram in TAB Financial Services Ltd.