The Minister for Finance, Michael Noonan, appears to have backtracked on the commitment made in last years’ Budget when he announced that the Pensions Levy will not be renewed after 2014. While the Minister has maintained his stance to remove the current 0.6% levy on pension funds at the end of 2014, he has disappointingly introduced a new levy of 0.15% on private pension funds in 2014 and 2015.
The planned changes will mean that private pension schemes will pay both the 0.6% levy and the 0.15% levy in 2014 (a combined 0.75% levy) and the 0.15% levy in 2015. The levy will take an estimated €650 million out of pension savings in 2014 and another €135 million in 2015.
The Minister has said that this new levy of 0.15% is designed to fund the continuing jobs initiative and to make provision for potential State liabilities which may emerge from pre-existing or future pension fund difficulties. However if the intention behind this new 0.15% levy is to fund defined benefit pension scheme deficits of insolvent companies, such as the Waterford Crystal pension scheme, it is difficult to see the levy ceasing in 2015.
Other pension changes announced in Budget 2014 include:
- The Standard Fund Threshold (SFT) (i.e. the maximum allowable pension fund at retirement for tax purposes) will be reduced from €2.3m to €2m with effect from 1 January 2014.
- Where an individual’s pension rights exceed the new lower SFT on 1 January 2014, such individual can protect those rights by formally applying for a Personal Fund Threshold (PFT) of up to €2.3m.
- The current single valuation factor of 20 used to value defined benefit pension entitlements is being amended. A range of higher factors are being introduced which will vary with the age at which the pension is drawn down.
Like the existing levy, the new levy will determinately affect all private pension schemes, at a time when many schemes are underfunded and have recently agreed cuts to benefits and increases to contributions. A further concern is the equity of a levy that effectively penalises defined contribution scheme members in order to fund historic deficits in defined benefit schemes.
Contributed by Lorna Osborne and Mary Greaney.