How new tax rules hit those with big pension pots
SO what's all the fuss about?
New rules mean those on massive pensions will soon have to pay much more tax on retirement. Until this year, you could retire with a pension pot of up to €5.4m without triggering a tax bill.
The new rules mean you can only enjoy €2.3m tax free, if you're lucky enough to have built up a pension bigger than that then you'll pay a 41pc tax on any excess when you retire.
- Is everyone with a big pension going to be hit?
Nope. If your pension pot was bigger than €2.3m when the new rules came in on December 7, then you're off the hook. Anyone whose pension was below the old threshold -- ie €5.4m -- on December 7 can still claim the full amount tax free.
- Sounds straightforward enough, or is it?
It's pretty straightforward for those on newfangled 'defined contribution' pensions. They each have their own mini-pension funds, so it's easy to see whether they go above the tax thresholds.
It's messier for people on 'defined benefit' pensions. Those people don't know the value of their pot, they only know how much they're set to get paid each year.
The solution is to apply a rule of thumb that says your pension pot is 20 times the size of your annual payment.
So, if you ultimately retire on an annual payment of €200,000, meaning your new 'pot' is €4m, then you'll have to pay the 41pc tax on everything above the €2.3m threshold.
- So how does it work? Do I just write a big cheque?
You can do. The big cheque is payable within three months of your retirement.
If you're putting your pension into an Approved Retirement Fund then the fund can pay out the money for you, according to Jenny Faughnan of the Independent Trustee Company.
Or if you're taking a lump sum out of your pension, you can also use that to pay off the tax. Otherwise, your pension group fund can make the payment.
- What about civil-servant types such as judges who aren't in pension schemes?
Civil servant pensions are funded on a 'pay-as-you-go' basis by the exchequer, so there's no pension fund per se. Usually the retiree would pay off the tax bill from their pension lump sum.
The alternative is for the Exchequer to pay off the lump sum and then claw the money back from the retiree by making lower pension payments.
- Are there ways around it?
Absolutely. Big companies have already begun giving executives "payments in lieu of pension" so that their pension pots won't go above the threshold.