Insight from Patrick Cosgrave, director, Deloitte on Budget 2013
Following the controversy around large bank pensions in the run up to the budget, it is unsurprising that Minister Noonan has increased the 4% USC rate applicable for those over age 70, to 7% if their income is in excess of €60,000pa. However, this measure will have no immediate effect on many of the former bankers subject to recent commentary as they already pay USC at the rate of 7% due to being under age 70. The Government expects this measure to generate €25 million in 2013 and €38 million in 2014.
In a welcome development, the Minister has confirmed that tax relief on individual pension contributions for those who are attempting to provide for a pension of up to €60,000pa, will remain in place at the marginal rate. This is fundamentally important as further curtailment in tax relief on pension savings would undermine the rationale and necessary trust in the wider retirement savings system.
The widely anticipated quid pro quo for this will be the reduction in an individual’s ability to build up larger pension pots within a tax effective structure. The Minister announced that arrangements would be made to modify the current Standard Fund Threshold (SFT) of €2.3 million in a manner to implement a €60,000 tax effective cap on pensions, with effect from 1st January 2014.
The reduction in tax effective pension pots will affect higher earning self-employed, private sector employees and senior civil servants. These will now have to reconsider their pension planning. Those with larger accrued pensions will be most immediately impacted, but many others may be affected over the longer term if this cap is not indexed. The Government expects to save €250 million per annum from this measure.
In an interesting parallel, the UK Chancellor’s autumn statement earlier today stated that the Lifetime Allowance (which is broadly equivalent to the SFT) will reduce from £1.5m to £1.25m in 2014/15. The Chancellor also announced a £10,000 reduction in the annual pension saving allowance to £40,000. That said, in the UK there are additional tax advantaged savings mechanisms (such as ISAs) and greater flexibility to provide unfunded pension benefits on a tax neutral basis.
A surprise temporary measure that the Minister introduced today is the ability for individuals who have built up pension funds through Additional Voluntary Contributions (AVCs) to have early access to up to 30% of their AVC pot over a three year period following the passing of the Finance Bill 2013. AVC early withdrawals will be subject to income tax at the individual’s marginal rate. Whilst not fundamentally changing the pension landscape, this limited measure may be of value to those who have accumulated significant AVCs in the past and need access to additional funds now.
In overall terms, our view is that the changes are probably the least bad outcome from what had been signalled as being a tough budget for pensions. There has also been an attempt to apply some level of balance between those who already are benefitting from large pensions and the working population who are in the process of trying to build up their own pension provision in challenging times. Particularly important was the statement that the Pension Levy will not be extended beyond 2014 and, most importantly, that the fiscal incentives that support retirement saving remain in place for the vast majority of the working population.