Major pension reforms announced by Minister for Finance

On 18 September 2024, Minister for Finance Jack Chambers revealed a series of pivotal changes to Ireland’s pension system. These changes are designed to modernise the framework and provide long-term security for workers.

Key changes

Standard Fund Threshold

The Standard Fund Threshold (SFT) is the maximum amount of tax-relieved pension savings an individual can accumulate in their lifetime without incurring tax penalties. Prior to this reform, the SFT had been set at €2 million since 2014 and remained unchanged despite wage inflation and other economic developments.

Under the new plan announced by Minister Jack Chambers, the SFT will increase by €200,000 annually starting in 2026, reaching €2.8 million by 2029. After 2029, the SFT will be indexed to wage growth, intended to provide a more dynamic threshold that adapts to economic changes. This increase addresses concerns that the previous cap, unchanged since 2014, had become outdated, particularly given the steady rise in wages over the past decade.

For individuals whose pension funds exceed the SFT, there is a significant tax cost with the excess funds immediately taxed at 40% and additional tax paid as the funds are drawn down. While this chargeable excess tax (CET) rate of 40% will not be immediately changed, it will be included in the next review of the pension system scheduled for 2030.

Taxation of lump sums

Under current rules, a lifetime maximum lump sum of up to €500,000 can be accessed at reduced tax rates. The first €200,000 of this lump sum is paid tax free, and the next €300,000 is taxed at the standard rate of income tax, currently at 20%. Based on the changes announced, both elements of the lump sum will remain at the current levels and not increase as future increases to the SFT are applied i.e. €500,000 capped at the reduced rates.
 

Further reforms

In addition to the above, the following changes were also announced including: 

• Revised valuation factors, accounting for different types of pensions and benefits, will be introduced.  
• Age-related valuation factors will undergo independent evaluation.
   

Should you have any queries on these pension reforms, contact our tax team for more information.