Pension Funding Dilemma:

Pension Funding Dilemma:

There have been a number of changes in pension funding legislation in the last year that will affect the
retirement planning of high net worth individuals going forward. It is therefore important to know
how you are affected and how you can adapt your plans around these new changes.

So what are some of the changes that may impact you at this stage?

As part of the changes brought about in the Budget 2011, the standard pension funding threshold was
reduced from €5.4 million to €2.3 million. Although the Revenue did provide time for individuals
who had exceeded the new threshold to apply for a Personal Fund Threshold (PFT), this deadline has
now passed. Those of you with a fund in excess of the new threshold and who have not applied for a
PFT, will now be looking at a significant and unexpected tax liability on your pension fund when you
come to retire.

Whether or not you have applied for the PFT, where you have reached the thresholds, there is now
little incentive for you to fund for pension as to do so will see you breach your threshold and create
an excess in your pension fund. Where an excess occurs, this excess will not only be taxable on
retirement but it will in fact be hit with a form of double taxation.

Pension Funding Draw Down

How?
First of all the excess will be taxed at 41%, then, when you draw down the money, you will suffer the
usual income tax liability that comes with pension draw down. The Net effect of this is that you will
pay approximately 70% tax on the excess!

It now becomes important to consider is the issue of the total remuneration packages for high Net
worth individuals.

Where an employer contribution is a contractual part of the total remuneration package, the fact that
an individual has reached their maximum funding threshold will effectively render these employer
contributions worthless .In this situation, where there is an excess created at retirement through
employer contributions it can lead to the Revenue requesting a return of these contributions to
the employer. Therefore the individual may not be getting the benefit of the agreed remuneration
package.

If you also consider someone who is in a defined benefit pension scheme who has reached the new
funding thresholds; these people may be contractually obliged to maintain their existing contribution
levels even though the result of this will be to create an excess above the threshold which again will
be hit with the double taxation.

This issue needs to be addressed and employers and employees may want to look at their pension
scheme structure and consider if this still suits highly paid employees who have hit the PFT/SFT and
question whether some other reward mechanism should be agreed.

Pension Funding in a Defined Contribution Scheme

For those people in a defined contribution scheme it is important now to assess what to do with the
funds that are already invested within the pension and indeed what to do with the money that would
previously have being put towards pension.

If we look at where these funds are currently invested, it creates another problem as there has not yet
been any allowance made for indexation on the Personal Fund Thresholds. Therefore, any growth
achieved on a fund already at the threshold limit will face the same double taxation treatment as
mentioned above.

You may therefore look at moving these funds in to a low risk/low return fund such
as cash within the pension scheme to avoid the possibility of significantly breaching the threshold.
Some would disagree with this and may argue that where there is growth you will still get a gain after
you factor in the tax. In theory this is fine however in order to make a gain there will have to be an

element of risk taken. In my opinion, I would question whether anyone should take any risk where
you are not getting rewarded equally for doing so.

Where to now?

There is an obvious hole now left for people who have reached the new thresholds as they will no
longer benefit from further pension funding. Many are turning to straight forward savings plans
by diverting money that was being used to fund pensions in to monthly savings contributions. The
obvious disadvantage of this is the lack of tax relief that was previously being enjoyed. However
this will provide another pool of wealth that can be accessed in retirement and should possibly be
considered at this stage. To discuss your pension  funding benefits  please CLICK HERE or please contact us on 01-230-9000 for more information