The Government has announced plans to increase the amount of money high earners can have in their pension pot without facing a significant tax bill.
Under the changes, the Standard Fund Threshold (SFT) will rise to €2.8m in four equal phases each year between 2026 and 2029.
A review will then take place in 2030 looking at the earnings data from the Central Statistics Office and, on the basis of that, the SFT will then increase each following year by a set amount.
The SFT is a limit on how much a person can have in their pension pot and currently stands at €2m.
If the SFT is exceeded it creates what is known as a chargeable excess, which in turn attracts tax at 40%.
The remaining post-tax excess also attracts further tax on drawdown at the marginal rate of tax that is being paid by the person.
This can lead to an effective income tax rate of up to 68.8% on the excess funds, with 40% incurred upfront and the balance collected on drawdown, according to KMPG.
In a statement today, the Department of Finance said the Chargeable Excess Tax (CET) will remain unchanged but will be reviewed in 2030.
The threshold for the higher rate of tax to apply to a pension lump sum will be limited to €500,000, rather than a proportion of the SFT.
The department said this change will be introduced in Budget 2025.
Currently the first €200,000 of a lump sum is tax free, with the balance between €200,000 and €500,000 taxed at 20%.
The changes follow the publication by the Government of a report of the independent examination of the SFT, carried out by expert Dr Donal de Buitléir.
Last year the Minister for Finance announced the review following calls for the SFT to be rebased to take account of inflation, demographic changes and social factors.
The review contains a range of recommendations and the department said that an inter-agency group will be formed to oversee the implementation of the remaining recommendations.
It is estimated by KPMG that between 2014 and 2023, Irish wage inflation was 34%, which on its own merits an increase of the SFT to €2.68m.
The SFT was introduced in 2005 to stamp out the process of tax arbitrage, where wealthy individuals were using older pension rules to amass pension assets worth millions.
It was initially set at €5m, but during the financial crisis it was lowered to €2.3m in 2010 and further reduced to €2m in 2014 where it has remained for the past decade.
