How the budget affects your pension?

There were wide-ranging pension reforms in the budget which will affect both private and public sector pensions.

State pensions

State pensions were left unchanged.

Widows pension

Widows and widowers' contributory pensions for those under 66 decreased from €201.50 to €193.50. There was no change for those over 66.

Personal rate of widow/widowers non-contributory pension personal rate decreases from €196 to €188.

Blind pension

There is an €8 cut to the weekly blind pension.

Public sector

All pensions over €12,000 a year are to be cut at an average four per cent. Retired staff on a pension below €12,000 a year will be exempted from the new cuts.

There is no cut up to €12,000. A cut of 6 per cent will apply to pension income above €12,001 and under €24,000; 9pc on anything above €24,001 and €60,000 and 12pc on sums higher than that.

Brian Lenihan said it would have been unfair if those on higher pensions were not affected as much as those on lower pensions.

“The Government has to make savings and pensions costs are a very significant part of public would be unfair if highly-paid pensioners remained unaffected while serving staff on low pay have had their pay reduced,” he said in his budget address.

New entrants to the public sector will have pensions linked to career-average pay rather than final salary.

Pension increases in retirement will be set in relation to the consumer price index rather than increases in pay for serving civil servants, as is the practice before the 2010 budget.

The government has also extended the grace period for pensions payable at salary levels that existed before the pay cuts of 2009. This has been extended from the end of December 2011 to the end of February 2011 meaning anyone retiring up to that time will collect a pension based on their pre-2009 salary cut.

However anyone retiring during the grace period will still be hit with the new four per cent pension tax.

Private pensions

From January 1, private pension contributions will no longer be able to claim relief from Pay Related Social Insurance PRSI and the health levy which will be subsumed under the new Universal Social Charge (USC) from the beginning of 2011

Employers will also lose the PRSI exemption on payments into staff pension schemes. This will be cut by 50 per cent from the new year.

The annual earnings limit on which tax relief is applicable has been reduced from €150,000 to €115,000.

For tax payers that would usually make a lump-sum contribution when submitting their tax returns after the end of the tax year, it should be noted that the new reduced limit of €115,000 will apply to any money invested in the calendar year 2011. So to avail of the higher 2010 limit of €150,000, contributions should be made before December 31, 2010.

A cap on the tax-free lump sum someone can take out of a pension fund has also been introduced for the first time. Up to now there was no limit as long as it was no more than 25 per cent of the total fund. Following the December, 2010 budget, there will be a cap of €200,000.

Sums drawn down on or after 7 December, 2005 will count towards “using up” the new tax free amount so that if an individual has already taken tax free retirement lump sum of €200,000 or more since 7 December 2005, any further retirement lump sums paid on or after January 2011 will be taxable.

The tax relief on contributions will also change but not until 2012. Link: How the four year plan will affect my pension.

The maximum allowable pension fund on retirement for tax purposes is also to be cut from €5.4m last year to €2.3m.

Approved Retirement Funds (ARFs) - the annual ‘imputed distribution for ARFs is being increased from 3 per cent to 5 per cent from December 31, 2010.

Useful links

Government budget documents

No cuts in state pension in Budget 2011

Noonan criticises cuts in pension for widows, the blind and disabled