A number of pension related changes were announced by the Minister for Finance in Budget 2011. Most of these changes had been unveiled in the four year National Recovery Plan which was published at the end of November. A brief summary of the main changes is set out below:

Employer PRSI

The current employer PRSI exemption on pension contributions will be curtailed by 50% from 1 January 2011.

Employee PRSI

Prior to the Budget, employees' pension contributions got full relief from PRSI and the Health Levy. Following the Budget, contributions to pension arrangements will be subject to employee PRSI and the Universal Social Charge (which replaces the income and health levies).

At present, pension contributions by employees are tax relieved at the individual's marginal rate. The National Recovery Plan envisages that such contributions will only be tax relieved at the individual's standard rate of income tax. The proposed reduction in the rate of income tax relief will be introduced on a phased basis as follows:

Reduction in the Standard Fund Threshold

From 7 December 2010 the Standard Fund Threshold (SFT), which is the maximum allowable pension fund on retirement for tax purposes, is being reduced from €5.4 million to €2.3 million. Where the capital value of an individual's pension rights exceeds this new SFT on 7 December 2010, the individual may be able to protect that higher capital value by claiming a Personal Fund Threshold (PFT). Individuals have until 6 June 2011 to submit a claim to Revenue for a PFT. Where the capital value of pension benefits drawn down by an individual exceed their SFT or PFT a tax charge of 41% is applied to the excess.

Annual earnings limit

The annual earnings limit which determine maximum tax-relievable contributions for pension purposes is being reduced from €150,000 to €115,000 for 2011. The annual earnings limit for 2010 will also be deemed to be €115,000 for the purpose of determining how much of a pension contribution paid by an individual in 2011 will be treated as paid in 2010, where the individual elects under existing rules to have it so treated.

Taxation of retirement lump sums

A cap of €200,000 applies to tax-free lump sums with effect from 1 January 2011. Amounts in excess of this tax-free limit will be taxed at two stages. The portion between €200,000 and €575,000 will be taxed at the standard rate of tax in force at the time of payment. Any portion above that will be taxed at the recipient's marginal rate of tax. The cap is a lifetime limit which means that any tax-free lump sums taken since 7 December 2005 will reduce an individual's tax-free amount.

New Funding Standard

Due to the extensions announced by the Pensions Board ("the Board") since 2008, there has effectively been no funding standard in place in Ireland for a significant period of time. The Board is keen to set a revised date for the reintroduction of the funding standard. The Board had hoped to be in a position to announce revised dates at the end of January 2011, at the same time as the defined benefit review being carried out by the Government. However, those dates have been pushed back not least because of the change in Government. When the funding standard deadline is announced, the Board has indicated that the time allowed to trustees of pension schemes will be as short as is reasonably possible. The Board has advised that trustees use the time before the announcement to think about the management and future of their schemes and the decisions that will have to be taken.

Approved Retirement Funds (ARF)

The annual imputed distribution which applies to the value of assets in an ARF at 31 December each year is being increased from 3% to 5% in respect of assets at 31 December 2010 and future years.

Defined Contribution Flexible Benefits

The Minister has indicated that the flexible options available to members of defined contribution pension arrangements will be extended. The flexible options will be provided for in the Finance Bill. Pending the passing of the Finance Bill, the option introduced in December 2008 to allow the deferral of annuity purchase on retirement for defined contribution scheme members is to be extended by the Revenue Commissioners.

Sovereign Annuities

It is anticipated that the National Treasury Management Agency will issue bonds to facilitate the creation of sovereign annuities based on Irish Government bonds. These will either be coupon-only bonds or zero-coupon bonds. They will be available for purchase by any investor, including pension funds. The yield on the bonds will be announced in 2011 in light of the market conditions prevailing at the time. Any sovereign annuities issued by the insurance industry on the basis of these bonds must be certified by the Board.

There is no obligation on scheme trustees to buy sovereign annuities or related bonds. Trustees may choose to buy sovereign annuities on behalf of pensioners, in the name of the scheme or a combination of both. By purchasing the bonds or scheme annuities in the name of the scheme, the pension scheme will continue to be responsible for payments to pensioners. Where sovereign annuities are purchased in the pensioner's name, the annuity belongs to the pensioner and there is no further scheme liability.

It is intended that the Minister for Social Protection will change the funding standard to allow pension schemes that invest in these bonds or foreign annuities to reflect the higher yield in their liability calculations to the extent of their investment.

This article contains a general summary of developments and is not a complete or definitive statement of the law. Specific legal advice should be obtained where appropriate.