Budget 2011 Update

12 December 2010

Budget 2011 Update

The main changes affecting private sector pensions announced in the Budget are:

• Employee PRSI
Contributions to occupational pension schemes and other pension arrangements will be subject to employee PRSI and the Universal Social Charge.

• Employer PRSI on pension contributions
The current employer PRSI exemption for employee contributions to occupational pension schemes and other pension arrangements will be reduced by 50% from 1st January 2011.

• Annual Earnings Limit:
The limit will be reduced from €150,000 to €115,000 for 2011.

• Standard Fund Threshold
The maximum allowable pension fund on retirement for tax purposes will be set at €2.3 million with effect from 7th December 2010.

However anyone with undrawn pension benefits valued at more than €2.3m and less than €5.4m on 7th December 2010 may be able to protect such funds by seeking a Personal Fund Threshold certificate from Revenue before 7th June 201.

Individuals who received a Personal Fund Threshold as at 7th December 2005 for more than €5m, when the pension fund limits were first introduced, hold onto that level of PFT and do not need to reapply to Revenue for a fresh PFT.

• Retirement Lump Sums
The tax free lump sum will be reduced to €200,000. The excess of this amount will be taxed at the standard income tax rate up to 25% of the new Standard Fund threshold (€575,000). Amounts in excess of this will be taxed at the taxpayer's marginal rate. This will be effective from 1st January 2011.

The €200k and €575k limits are personal lifetime limits, and NOT a limit per pension arrangement. So you can't get €200k tax free from every pension arrangement you have. You only have one €200k tax free limit.

Therefore pension lump sums will be taxed as follows from 1st January 2011

First €200k  Tax free
Next €375k  Standard rate
Balance  Marginal rate

• Defined Contribution Flexible Benefits
Members of Defined Contribution pension arrangements will have access to flexible options on retirement in respect of the main benefits, subject to certain conditions that will be outlined in the Finance Bill.

 
• Annuity Purchase for Occupational Defined Contribution Members
Pending the passing of the Finance Bill, the deferral of the requirement to purchase an annuity on retirement for Defined Contribution scheme members will be extended by Revenue.

• Approved Retirement Funds (ARF's)
The annual imputed distribution which applies to ARF's at 31st December each year will be increased to 5% in respect of asset values at 31st December 2010.

• Sovereign Annuities
The Government has decided to make sovereign annuities and bonds available to pension funds from 1st January 2011.

National Recovery Plan
Other provisions contained in the National Recovery Plan, such as the reduction in tax relief have not been incorporated in the Finance Bill.  .The Minister has stated that Government will engage with the pension industry to explore alternative options other than reducing the top rate of income tax relief in order to achieve similar savings.