Lucas Financial Consulting Ltd

Introduction

Minister Brian Lenihan, T.D. has outlined the Government’s planned budgetary adjustments for 2011 and given some further detail on some of the measures announced in the National Recovery Plan. According to Minister Lenihan “it is the Government’s strong view that the economy can continue to grow while we make the budgetary adjustments outlined in the National Recovery Plan.” In achieving this conomic growth it must be “built on solid foundations: that are sustainable socially, economically and environmentally.”

Key Issues for Pensions

• The allowable annual earnings limit will be reduced to €115,000 from 1 January 2011. These reduced limits apply for payments made in 2011 regardless of whether the pension contribution is against 2011 earnings or to the earnings of 2010. In order to maximise the benefit in 2010 (current threshold of €150,000), individuals may wish to make additional pension contributions before the end of the tax year.

• The Standard Fund Threshold (SFT) is being reduced as on and from Budget Day (7 December 2010) from €5.4 million to €2.3 million. Individuals with pension rights in excess of this lower SFT on Budget Day will be able to protect the capital value of those rights by claiming a Personal Fund Threshold (PFT) which must be applied for to the Revenue Commissioners within 6 months of Budget Day.

• The overall lifetime limit on the amount of tax-free retirement lump sums that an individual can draw down from pension arrangements is being reduced to €200,000. The excess of this amount will be taxed at the standard income tax rate (currently 20%) up to an amount equal to 25% of the new SFT (up to €575,000). The excess of retirement lump payments over that amount will be taxed at the taxpayer’s marginal rate of income tax.

• Tax-free retirement lump sums taken on or after 7 December 2005 will count towards “using up” the new tax free amount so if an individual has already taken tax free retirement lump sums of €200,000 or more since 7 December 2005, any further retirement lump sums paid to the individual on or after 1 January 2011 will be taxable. These earlier lump sums will also count towards determining how much of a lump sum paid on or after Budget day is to be charged at the standard or marginal tax rate. These changes take effect from 1 January 2011.

Amendments to Approved Retirement Funds (ARFs)

From 2011 ARFs will become more widely available with all members of Defined Contribution pension schemes now being eligible but an individual wishing to avail of the ARF options must satisfy the lower of the following new minimum set aside rules:

Invest the first €120,000 or so in a Minimum Retirement Fund

or

Other annual pension income of around €18,000 already in payment.

The Budget also increases the imputed distribution charge from 3% to  5% of the value of the ARF, at 31 December each year. This has the effect of increasing the withdrawal to 5% pa and individuals are taxed accordingly

PRSI on pension contributions

The PRSI and health levy reliefs available on pension contributions will cease with effect from 31 Decemeber 2010. Employee pension contributions will be subject to employee PRSI and the USC. Employer PRSI relief on pension contributions made by employees is also to be reduced by 50% from 1 January 2011.

Contact Your Local Independent Financial Adviser

Lucas Financial Consulting Ltd is based near Carrickmacross Co Monaghan. As we straddle four counties – Louth, Monaghan, Cavan and Meath we are ideally placed to become your new Local Independent Financial Adviser.

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