Medical Consultants: Planning for the standard fund threshold at retirement

In Ireland, there is currently a funding cap on pensions of €2m. This is known as the standard fund threshold. This is the maximum amount of pension that can be accumulated before a second tax is applied to the pension. This is a tax rate of 40% on the excess of over €2m. It applies to both private pensions (both defined contribution and defined benefit) and also public sector pensions.

For medical consultants who often hold both private and HSE pensions, the combined value of both pensions is taken into account (a capital value calculation of the HSE pension would be completed at retirement to determine its value). In fact given recent pay increases, it is possible that the capital value of the public pension alone could exceed the €2m threshold.

One question that we often get asked is what will happen to the standard fund threshold. Will it rise or fall in the future? It is obviously very difficult to make any predictions. The direction has been pretty much one way – down – since the standard fund threshold was introduced in 2005 when the maximum pension was set at €5m. The threshold was briefly indexed up to €5.4m before being reduced to €2.3m in December 2010. It was subsequently reduced again in January 2014 to €2m. Over time this may again be indexed upwards in line with inflation. However, it is worth bearing in mind that Sinn Féin’s last election manifesto had advocated bringing the threshold down to €1.2m.  The threshold in the UK is circa £1m.

The standard fund threshold is very relevant for medical consultants as demonstrated in this example below. 

Worked example:

For illustrative purposes, consider the following:

  • Consultant on B * contract which has a salary rate of €185,000 (new uplifted scale)
  • The consultant holds €400,000 in personal pensions

When the consultant reaches the age of 65, they are projected to have service as follows.

  • Service pre-Jan 2014                       16 years                     
  • Service post Jan 2014                      12 years
  • Professional added years               9.3 years
  • Class A PRSI

Based on the figures above the consultant would be expected to receive a lump sum of circa €259,000 and an annual pension of circa €74,000.

However, the capital value of this pension will be approximately €2.3m. Therefore, there will be an excess tax due at retirement of €120,000. In the past the consultant has simply paid this tax from their lump sum which is the least tax efficient approach. However, there are a number of different steps that can be taken in order to minimise the tax impact of being over the standard fund threshold.

Steps to be taken

  • Determine if it is still worthwhile to make private pension contributions.
  • Consider retiring from personal pensions from age 60.
  • Consider applying for lookback Personal Fund Threshold on retirement. It is possible to apply for a higher retrospective pension threshold than the €2m based on 2014 pension entitlements.
  • Review more tax efficient methods of paying down the excess tax such as the encashment option or the loan option from the hospital. There can be substantial tax savings by adopting these approaches.

Conclusion:

There are planning opportunities that can substantially mitigate the level of tax owed on the retirement benefits. However, proper guidance is needed to ensure that the correct sequence of steps are taken. It is vitally important that any actions taken are fully considered to avoid any unintended consequences

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