Since January 2023, many company directors had switched their pension plan from an Executive Pension to a Personal Retirement Savings Account (PRSA)*. Changes in the Finance Act 2022 had meant that PRSAs now offered much greater scope for their company to make an employer contribution into the pension scheme on behalf of employees as employer contributions to a PRSA were not subject to the same funding rules that existed within Executive Pensions.

However, some of the pension funding that took place by Employers via PRSAs did come under the scrutiny of the Revenue Commissioners who, in May of this year, disclosed publicly in an Oireachtas finance committee meeting that they had raised concerns with the Department of Finance**. Our understanding is that their concerns related to large contributions by employers to PRSAs for persons connected with that employer which from the governments perspective, were not in keeping with the policy intent of the Finance Act 2022.

In this year’s Finance Act, the government decided to change those PRSA funding rules once again. The new funding regime will come into effect on the 1 January 2025. Up until that date an employer can still fund a PRSA for an Employee (no limit on employer contributions) under the existing rules.

With effect from 1 January 2025 onwards, the maximum employer contribution to a PRSA that will be tax relieved by an employer and will not trigger a benefit in kind (BIK) for the employee will be “100% of employee salary” in the relevant year. Existing regular premium PRSA arrangements with employer contributions in excess of “100% of Employee Salary” will need to be reduced to avoid any issues for clients.

This is a major change, and clients may wish to now seek an alternative pension arrangement such as the Zurich Master Trust which may in some cases allow for more generous ability to fund for that company director’s retirement. A funding calculation will be needed to determine the scope for pension funding under the Zurich Master Trust and a comparison can then take place.

In September, the then Minister for Finance, Jack Chambers, published the report of the independent examination of the SFT. The targeted review of the SFT regime was led by an independent expert, Dr. Donal de Buitléir.

The Government implemented some aspects of the report in this year’s Finance Bill which included:

Changes to the SFT

The Finance Bill confirms future increases in the SFT of €200,000 per year beginning in 2026 until 2029.

In addition to those increases, the Finance Bill† confirms that from 2030 onwards the SFT will be index linked to increases in average earnings as per Central Statistics Office (CSO) data.

It’s also important to note that for Defined Contribution clients the ability to fund for an extra €150,000 above SFT remain possible as tax paid on pension lump sums up to €500,000 can still be offset against Chargeable Excess Tax bills. See these enhanced effective rates of the SFT for these future years below.

The ringfencing of pension lump sum limits

There will be no changes to the taxation of pension lump sums. The lifetime limit for tax free lump sums will remain at €200,000 with the next €300,000 of any pension lump sum taxable at 20%. The threshold for the higher rate of taxation to apply to a pension lump sum will be limited to €500,000 rather than a proportion of the SFT.

Other recommendations from Dr. Donal de Buitléir on the SFT

An inter-agency group will be formed to review the remaining recommendations of the report. Below are those recommendations from the report that have yet to be agreed but may be implemented in the future.

Rate of Chargeable Excess Tax (CET)

The report recommends that the rate of CET should be lowered to 10% (currently 40%).

If the rate of CET is reduced as above, the ability to offset the standard rate tax deducted on pension lump sums between €200,000 and €500,000 should be discontinued.

If the rate of CET is reduced as above, it is recommended that the encashment option (currently open to clients with a mixture of Public Sector DB (Defined Benefit) & Private Sector DC (Defined Contribution) benefits in excess of €2,000,000) should be removed from the SFT regime.

If the encashment option as above is retained, the opportunity for a one time encashment option should be extended to all individuals including those who are not members of a public sector pension scheme, where the total of their pension entitlements is expected to exceed the SFT.

Impact on Defined Benefit (DB) Schemes***

The report recommends revised valuation factors for DB pensions. The Minister has requested an evaluation of the age-related valuation factors proposed in the report to be undertaken. No immediate changes will take place in that regard.

The valuation factors used to value pension entitlements in DB Schemes from 2014 onwards should be updated. The new valuations recommended for future crystallisations of DB pensions are:

Age Valuation Factors

Subject to government agreement, these new factors would apply to future crystallisations of

DB pensions accrued after 1 January 2014, replacing the current age-related valuation factors. These new factors would also be reviewed over regular intervals to ensure they remain appropriate. The single factor of 20 would continue to apply for pension rights accrued up to 1 January 2014.

Additional Recommendations

• Allow for the payment of the CET by the taxpayer to Revenue to be spread over 20 years for all types of pension arrangements. This is currently possible in Public Sector and DB Schemes but not in DC Arrangements.
• Adjust the application of the SFT regime to ensure individuals are not unduly constrained in making provision for their own pension when a Pension adjustment Order (PAO) is in place.
• It is recommended that the age-related limits for pension contributions are removed along with the €115,000 relevant earnings limit for pension contributions. The suggestion is to replace this with a maximum fixed monetary amount for tax relievable pension contributions for all individuals, however the exact figure for this new limit has not been confirmed.

In October, it was announced by the government that the new auto-enrolment retirement savings system will be known as “My Future Fund” and the then Minister for Social Protection, Heather Humphreys TD, signed a commencement order which will see the first enrolments under the AE savings system begin on 30 September 2025. With a firm start date now in place, employers around the country need to prepare for the new reality of employment in this country which is that they will need to pay into a pension for employees earning over €20,000 who are aged between 23 and 60 and not already included in a workplace pension.

It is important for employers to understand that they have a choice as to how to meet their new obligations. The decision for employers is whether they wish for their employees to be covered under the new state-run AE system or under a traditional workplace pension arrangement such as a Master Trust or PRSA. Both pension systems will now run parallel to each other and employers will have to decide which route is best for their employees. Many employers may already have an existing Master Trust or PRSA, but if all employees are not included in that arrangement, they will need to decide how best to provide pension access for those employees not already paying into a workplace pension.

It’s important for employers in Ireland to familiarise themselves with the specific AE regulations. They will need to carefully consider their specific circumstances, resources, and employee needs when deciding between AE and a traditional workplace pension such as a Master Trust or PRSA. As part of that process, they will need advice and guidance from a Financial Broker to work out how best to navigate the variety of pension arrangements available in Ireland and decide which route is best for them.

As part of this year’s Budget, the maximum rate of state pension was increased by €12 per week for those on the top rate of payment with those on lower rates to receive increases on a pro rata basis. The maximum payment for an individual is now just over €15,000 per annum.

There are also significant changes to the method in which pensions are calculated. The current basis for determining the pension payable known as the Yearly Averaging approach will be phased out over a 10 year period and replaced with the Total Contributions approach. This phasing out period commences in 2025 and will be finalised by 2034 with all pensions calculated under the Total Contributions approach from that point on. The Total Contributions approach requires 40 years’ worth of Pay Related Social Insurance (PRSI) to qualify for the maximum rate of state pension with lower rates payable for those with between 10 – 39 years of contributions calculated on a pro rata basis. Further information is available on gov.ie.

Further info on gov.ie

2025 is likely to be another year of substantial change for Pensions. It’s likely that any remaining one-member Occupational Pension Schemes will start to transition to Master Trusts, Personal Retirement Bonds and PRSAs to ensure they are compliant with their deadline for IORP’s II compliance which is April 2026. You will likely receive communications from the relevant providers in the coming year and clients will require advice as to where they would be best placed in transferring these funds.

In addition, growth in both Master Trust and PRSA arrangements should be expected as many employers seek to avoid AE by utilising existing pension offerings and encourage staff to join existing arrangements.

It’s also highly likely that we will see further changes to “simplify” and “harmonise” the rules which govern private pensions as recommended by a review undertaken by an Interdepartmental Group tasked with Pension reforms in 2020.

*Source: Zurich Life

** Source: The Irish Times Article: “Revenue raises concerns over rule change allowing people to sink up to €2m tax free into pension pots”

*** gov.ie – Examination of the Standard Fund Threshold – Dr. Donal de Buitléir

† gov.ie – Minister Chambers announces changes to Standard Fund Threshold