The government has announced changes to the lifetime pension cap (also known as the standard fund threshold) in Ireland. Currently the cap is €2 million, and beyond that, a penalty tax applies. The aim is to make sure the government gets its tax take. (There are some ways to squeeze a bit more below the cap, but we’ll keep it simple for now).
How is the standard fund threshold changing?
From 2026, the intention is to raise the cap by €200,000 annually for four years, reaching €2.8 million in 2029.
Targetting a €2 million pension might seem ambitious for many, but saving €650 a month for 40 years would generate a sum of that size – so it’s hardly the preserve of the super-rich.
On the face of it, raising the pension cap is a good idea. Money in pensions gets taxed eventually, and we need people to get serious about building up their own income in retirement.
What’s more, the cap hasn’t been adjusted since 2013 (and it stood at €5 million when originally introduced back in 2005). Inflation, life expectancy, and annuity rates all look very different two decades later.
No change to pension lump sums
It’s a well-established rule in Ireland that 25% of your pension can be taken as a lump sum at retirement.
Presently, that leads to a maximum lifetime lump sum of €500,000 for most workers (being a quarter of €2 million). Of that, the first €200,000 is free of tax, and the next €300,000 is taxed at the standard income tax rate of 20%.
That link will be broken from 2026. There is no intention to increase the lump sum amounts in line with the overall cap. That’s a pity as inflation has impacted on the value of lump sums as well as pensions overall. In effect, for owners of large pensions, more of the money will find its way into their Approved retirement fund or annuity.
What should you do?
While aiming for a €2 million pension pot was always a prudent financial goal, for most people it is a tall order to begin with.
High earners or those who have prioritised their pension wealth may be able to take advantage however. Adjustments could include funding for a larger pension, adjusting one’s risk-posture within a pension to accommodate greater gains, or reviewing plans to split pensions so they remain under the cap at retirement. Moneycube can help you consider these options as you approach retirement.
What more could be done?
The immediate prompt for raising the cap has come from a report on the topic commissioned last year. What’s notable is that while the cap has been increased, several other changes proposed in the report have so far fallen on deaf ears. That’s a pity, as we’d all benefit from them. They include:
Removing age-related limits for pension contributions. Right now, as you get older these limits increase, but if you earn decent money in your 20s and 30s, you’re held back from doing the right thing to build retirement wealth.
Removing the €115,000 annual limit on earnings that can be taken into account for tax relief. That might be irrelevant to most people with stable income, but it’s hard on people – such as the self-employed – who might want to use a bumper earnings year to secure their pension.
As the report says “it is difficult to see the need for annual limits on pension contributions where an overall standard fund threshold limit is in place”.
But these changes will have to wait. For the rest of this decade, the main change looks to be a simple rise in the standard fund threshold.
