Wednesday, February 20 10:06:10
Pension Rules and Fund Threshold limits should be equally applied to everyone and not just those unlucky enough not to have a defined benefit nest egg, according to IFG Corporate Pensions.
The pension advisory firm believes the current system favours those in Defined Benefits pension arrangement (public servants, bankers and employees of large long-established firms) over those in Defined Contribution schemes (typically self-employed and workers in newer firms including multi-nationals). The current cap of E2.3m allows a DB member to have a pension of E115,000pa as the rules allow for a factor of 20:1.
In the "real world" annuity rates of between 30:1 to 45:1 apply to DC members and therefore their maximum pension can only be between E51,000-76,600pa.
The pension fund cap of E2.3m may not seem that penal to most pension savers, but its application does highlight the inequity of the 20:1 valuation basis adopted for Defined Benefit schemes which ensures that these employees benefit from preferential tax treatment when compared with the treatment of their Defined Contribution counterparts.
According to Fionan O'Sullivan, Director of Corporate Pensions with IFG Corporate Pensions, "If we look at the example of an employee in a defined benefit scheme (which are typically public sector pension schemes) earning E200,000 at retirement, on the current structure they enjoy a retirement pension of E100,000pa (50pc of salary) plus a lump sum of E300,000 (150pc of salary). The assumed notional value is 20 x E100,000 + E300,000 = E2.3m which comes under the cap resulting in no double taxation at retirement."
"Compare that to an individual in a defined contribution (private sector) pension trying to fund a comparable benefit and planning to retire at age 60. The cost of buying a joint-life annuity of E100,000pa with indexation in payment is circa E4,000,000. If you add a similar cash lump sum of E300,000, the total fund required comes to E4,300,000. As it's over the cap, they will be subject to an additional tax liability at 41pc of E2,000,000 = E820,000," said Mr O'Sullivan.
"So in effect, if the private sector worker tried to replicate a senior civil servant retirement benefit package, requiring a fund of circa E4m, he/she would have to surrender all of their lump sum and probably sell their house to meet the tax penalty. That does seem more than a little inequitable."