The Finance Act 2024 (Finance Act), which was signed into law on 12 November 2024, introduces significant changes to the tax landscape as it affects pensions in Ireland.

These changes will affect the Standard Fund Threshold (SFT) and Personal Retirement Savings Accounts (PRSAs) and clarify the tax treatment of the State’s Automatic Enrolment Retirement Savings System (AE System).

Key Changes to SFT

The SFT has remained fixed at €2m for the past decade, which has created challenges for the Government when it comes to recruitment and retention in certain senior public sector roles. It has also meant that many employers within the private sector have had to restructure remuneration arrangements for those in senior roles where they accrue pension savings up to the SFT.

This prompted an independent examination of the SFT. This review resulted in a series of recommendations published by the Minister for Finance in September. The Finance Act will bring certain key recommendations from this review into force so that:

1. from 2026, the SFT will increase by €200,000 each year up to €2.8m in 2029; the SFT will remain at its current level of €2m for 2025; and
2. from 2030, the SFT will be adjusted annually in line with wage growth based on earnings statistics published by the Central Statistics Office.

Key Changes to PRSAs

The Finance Act will also introduce some significant tax changes to PRSAs, including:

1. The introduction of an allowable limit for employer contributions to an employee’s PRSA of 100% of an employee’s emoluments (Employer Limit).
2. Any contributions in excess of the allowable Employer Limit will be considered a benefit-in-kind and taxed accordingly.
3. Any employer contributions to an employee’s PRSA up to the Employer Limit will be an allowable tax deduction for employers.

Provisions Impacting the AE System

In addition, the Finance Act includes a number of provisions in relation to the taxation of savings under the AE System. These provisions confirm that:

1. Employer contributions to the AE System will be deductible for tax purposes and will not be subject to income tax.
2. State contributions to the AE System shall also be exempt from income tax.
3. Income and gains on retirement savings while held within the AE System pre-retirement will be exempt from tax.
4. Drawdowns from the AE System, other than any tax-free lump sum, will be subject to tax.
5. Up to 25% of an individual’s retirement savings within the AE System may be taken as a lump sum, with the normal limits regarding tax-free lump sums applying.
6. Retirement savings within the AE System will be taken into account for SFT purposes.

The provisions of the Finance Act relating to the AE System await a commencement order to bring them into force.

What do these changes mean for employers and their employees?

As the SFT is not increasing until 2026, this may encourage certain employees to remain in employment for a longer period. In addition, employees who had previously opted out of a pension scheme on reaching the SFT ceiling may look to opt back in and accumulate pension benefits up to the new SFT. Their ability to do so will depend on the pension scheme’s opt-in provisions, which may need to be amended to facilitate such opt-ins.

The new Employer Limit on contributions to PRSAs will not come into effect until 1 January 2025. Therefore, there is an opportunity for employers to make tax-efficient employer contributions in excess of the Employer Limit between now and year-end.

The clarifications in the Finance Act regarding the tax regime that will apply to the AE System are welcome. Given that the AE System is due to commence on 30 September 2025, employers have a window of opportunity between now and then to prepare for its introduction. This is not a straightforward exercise, and employers should take steps to begin those preparations without delay. We have commented on how employers can prepare for the introduction of the AE System in our recent article.

Please feel free to contact Ian Devlin, Ciara McLoughlin, Jane Barrett or your usual William Fry contact if you need any support relating to the pension aspects of the Finance Act and for your pension arrangements.

Contributed by Ciara Kelliher.