Explore retirement options carefully in light of proposed taxation changes

There has been much reporting of late about proposed changes to pensions and, in particular, as to how tax-free lump sum entitlements might be impacted This has largely been due to the fact that certain recommendations of The Commission on Taxation report have come to light in advance of its formal publication. On reaching retirement age, normally from 60 years of age but from age 50 in certain circumstances, individuals can access 25 per cent of their pension fund tax-free with the balance being used either to purchase a pension for life or invested in a post-retirement investment product. Based on what has been reported, the speculation is that a €200,000 tax-free lump sum cap may be imposed. If this is true, it is likely to be of immediate concern only to individuals with pension funds in excess of €800,000. The question now is 'should I take my retirement benefits now?' According to Yann Harrison, chartered accountant and pensions specialist with Russell Brennan Keane: "For those with pension funds below this level, the imposition of a tax-free lump sum cap is likely to be negligible. Any decision to retire should, therefore, be made not as a reaction to speculation, but on the grounds of what best suits your particular circumstances. If pension monies have been invested in equity linked funds, retiring now could serve simply to crystallise the losses experienced by equity funds over the last 18 months or so. With markets currently enjoying somewhat of a rally, the advice might be to postpone taking retirement benefits, keep a watchful eye on your fund and re-evaluate your position and options at a later date." For those with funds in excess of €800,000, it is worth stating that the Commission's recommendations to Government will be just that - recommendations. Notwithstanding, it may be advisable for such individuals to explore their retirement options. They should do so before December as this probably represents the earliest opportunity for Government to effect changes. Failing to do so could prove costly, he said. For many, accessing retirement benefits now will not be an option due to age. But that does not mean that those individuals will not be impacted upon if the Government decides to adopt one of the Commission's other reported recommendations, added Mr Harrison. Any move to standardise the rate of tax relief on pension contributions is likely to significantly curtail a higher rate taxpayer's ability to shelter earnings from income tax. Undoubtedly, this will cause some to question the wisdom of contributing to a pension fund. "For the moment, however, pension contributions remain one of the easiest tax breaks to take advantage of, enjoy tax-free growth and, most importantly, serve to ensure some level of basic provision for income in retirement," said Yann Harrison. "With pension fund unit values still relatively cheap, it might be worth considering making a top-up contribution to your pension before 31st October to either reduce your tax burden or to create or increase an income tax refund," he concluded.