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THE REPRESENTATIVE GROUP for small and medium-sized companies ISME is preparing to bring a legal test case in the coming weeks against the Irish government on how pensions are taxed.
The Finance Department has called the inequality allegations “inaccurate.”
The case is above the standard funds threshold (SFT), the maximum private pension that an individual is allowed upon retirement for tax purposes, which is currently € 2 million.
Once private pension funds pass the € 2 million threshold, the holder can pay up to 70% tax when the funds are withdrawn.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 the pension savings of individuals.
ISME President Ross McCarthy says the body is taking steps to resolve what he says is the inequality between public and private pensions. He says:
“It is not about us pitting the private sector against the public sector, it is a question of fairness to ensure that all revenues are treated in the same way. People in the private sector have a substantially lower ceiling than people in the public sector.
If a secretary general or minister retires, they could have a pension fund worth 2.8 million euros. [plus], but they are not taxed in the same way as those who work in the private sector.
“Based on the current open market, anyone in public service with a salary greater than 133,000 euros has a pension fund worth more than 2 million euros, yet they only contribute 14,000 euros a year.”
The above figures are based on this circular.
The Department’s rebuttal
In a statement to TheJournal.ie from the Department of Finance, a spokesman said the state offers an “extremely generous” pension tax break to encourage people to save during their working lives.
“This relief is given to their marginal rate as they build / accumulate their pension fund. The SFT establishes that the value of retirement benefits in excess of 2 million euros is taxed at the highest rate of income tax (40%) at the time the pension is withdrawn.
The Department said the Standard Fund Threshold operates to discourage the accumulation of “excessive” pension funds by establishing a maximum pension fund allowed for tax relief purposes.
“The SFT charge undoes the tax advantage of financing profits above the 2 million euro limit by recovering the tax relief previously granted,” he said.
The current maximum threshold of € 2 million would allow a person to apply for a tax relief on the accumulation of potential income exceeding € 60,000 per year for thirty years after retirement (subject to the competitiveness of the annuity market). This far exceeds the median income in retirement or even in employment.
On allegations that the SFT is uneven, as public sector pensions are not taxed in the same way, the Department said: “The suggestion that the SFT does not apply to public sector pensions is inaccurate. The OFV is applied to the value of public sector pensions at the same threshold of 2 million euros “.
“There are differences in the way the SFT charge is paid in the case of public sector pensions, reflecting the fact that public sector pensions are not ‘funded’ so there is no income to use at the point of withdrawal.
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“These arrangements are in force since the affected public servants cannot cease to be members of a public service pension plan other than by leaving their employment, unlike the affected people in the private sector who can take measures to avoid the impact of the SFT ”.
‘Disincentive to stay in Ireland’
McCarthy continued: “This challenge is being taken from a fiscal and democratic perspective. It is not about the public versus the private. People’s pension rights have long been protected and the playing field leveled between people, no matter where they get their income. ”
He added that the current situation could also lead to many high-income professionals leaving Ireland to protect their future income.
“If someone is working, let’s 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 could force them to leave the country, since the price of exceeding the threshold is very expensive,” he said.
The standard fund threshold was first introduced in 2005 at € 5 million, increasing to € 5.4 million in line with inflation, before being cut to € 2.3 million in 2010 and € 2 million in 2014.
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