The Irish SME organisation, ISME, has said it is working with members and interested bodies to take a legal test case against the government with regard to the way pensions are being taxed in Ireland.

The representative body for SMEs is supporting the challenge to the €2m 'Standard Fund Threshold' on Irish pensions.

The Standard Fund Threshold is the lifetime limit above which private pensions do not receive tax relief.

Once private pension pots pass the €2m threshold, the holder faces severe penalties and could pay as much as 70 per cent tax when the funds are withdrawn.

Public pensions are not subject to a standard fund threshold because they are paid out of public money, rather than individuals’ pension savings.

ISME Chairman Ross McCarthy is to make the announcement during a webcast for Pensions Awareness Week, which is running until 25 September.

Mr McCarthy said the body is taking the action — which is to be started within weeks —  in order to solve inequality between public and private pensions.

"This is not us pitting the private sector against the public sector, it is an equity issue to ensure that all income is treated the same. People in the private sector have a substantially lower ceiling than people in the public sector. If a Secretary General or a Minister retires, they could potentially have a pension pot valued at over €2.8m but that is not taxed in the same way as those working in the private sector," he said.

Mr McCarthy added that the current situation could also result in many high-earning professionals leaving Ireland in order to protect their future income.

"If someone is working, say as a consultant, and has spent many years training and working in a professional field, they will look at this threshold and think that their hard-earned pension is not going to work for them in Ireland. This might force them to leave the country as the price of passing the threshold is very costly. Talent is global and these kind of laws are pushing talent overseas."

The Standard Fund Threshold is the maximum pension an individual is allowed at retirement for tax purposes and currently stands at €2m.

The threshold was first introduced in 2005 at €5m, growing in line with inflation to €5.4m before being cut to €2.3m in 2010 and then to €2m in 2014.

Ralph Benson, Pensions Awareness Week founder and's Head of Financial Advice said that private-sector workers have seen a "steady erosion" of their pension prospects over the past twenty years.

"While the value of a guaranteed public sector pension is not taxed under the Standard Fund Threshold, private sector workers shouldn’t have to risk a supertax to be sure of a comfortable retirement," he said.

"It’s not just the ultra-rich who are affected by the Standard Fund Threshold. People who have saved hard to retire in their 60s are often hit. At current annuity rates, a €2 million pension pot would provide a 65-year-old couple with less than €65,000 per year," he added.