Ireland’s wealthiest pensioners will benefit from raised tax threshold while 800,000 workers have no pension at all

One of the ways public life works in Ireland is that those with proximity to power tend to find their interests protected rather better than those without.
You’ve probably heard about the difficulties in recruiting people to fill posts at the most senior levels of the gardaí – some elements of the media have been commendably energetic in drawing public attention to it. The Irish Independent warned of a “‘clearout’ of top management in the force”. Why so? “High-ranked gardaí are facing a tax bill of several hundred thousand euro when they retire, due to a cap on tax relief for pension contributions,” it said. As a result, there were no applicants for the job of deputy commissioner first time around.
“The tax regime means that each of the six serving assistant commissioners are accruing additional tax liabilities for every month they serve,” the paper reported. “A source says that if any of them retire now, they will be left with a tax bill of ‘between 200 and 300 grand’.
“If any of them go for the deputy commissioner job and serve another three years or so, they will on retirement be hit with a tax bill of between €400,000 and €500,000.”
Happily, it seems that that issue is about to be resolved; in recent weeks senior gardaí were given assurances that the pension problem would be fixed, and several applied for the deputy commissioner’s role. This week the Government published a report on the issue, recommending changes to the tax treatment of pensions; it will have the greatest impact on higher-earning public servants.
[ The Irish Times view on raising the pension tax threshold: a retrograde moveOpens in new window ]
Nothing in the above story about the poor senior gardaí is untrue. What it is conspicuously missing, though, is some important context. The reason that the gardaí – and a small number of other senior public servants – are facing a big tax bill is because their pensions are huge.
The “standard fund threshold” – and I promise I’ll keep jargon to a minimum – was introduced in 2005 after it emerged that some very well-paid people in the private sector were funnelling huge amounts of money into their pension funds to avoid tax. A threshold for pension funds was set at €5 million and anything with a value above that would become liable for tax on maturation. That was subsequently reduced to €2 million during the financial crisis. Because saving €2 million in your pension fund is the preserve of only a small number of wealthy people, it didn’t hit that many people.
But public servants don’t have an actual pension fund as such – they have a promise from the State to pay them a pension. So their pension is given a “notional” value – in other words, what would it cost to buy this pension if you had an actual fund of savings and investment returns? And because public service pensions are extraordinarily valuable, senior public servants are now getting caught by these rules designed to hit the wealthiest pensioners. Another way of looking at this, of course, is to say that top public servants are among the wealthiest pensioners.
Significant changes to public service pensions were introduced in 2013, which will reduce their value and the State’s liability – currently somewhere around €200 billion for all public service pensions – over time. But that really only becomes effective when public servants recruited under the new scheme retire – 20 or 30 years down the line from today.
[ Garda pensions: Why is the force finding it hard to hire a deputy chief – and how the tax issue worksOpens in new window ]
The vast majority of public servants who are retiring nowadays have the benefit of the old scheme: after 40 years’ service they qualify for a pension of half their final salary, plus a tax-free lump sum on retirement of 1½ times their final salary. The pension usually increases in line with pay increases to serving staff. So a senior public servant earning €250,000 will receive an annual pension of €125,000 plus a lump sum payable on retirement of €375,000, taxable only after the first €200,000. Nothing remotely like this is available to private sector workers. And 800,000 private sector workers have no pension at all.
Calculations provided to me by some pointy-headed pension nerds suggest that to purchase the pensions of top public servants such as secretaries-general, senior judges, heads of State bodies and so on would cost more than €3 million. And that’s why they’re getting caught for the tax – because the pensions are so valuable. Strangely, nobody seems to mention that.
It’s especially acute for the gardaí because they accrue pensions earlier than other State employees. A garda can retire on 30 years’ service for a full pension (compared with 40 years for most other public servants). That perk is there for good reasons, of course, given the nature of a garda’s work. But it means that if you joined the force in your early 20s (as many of today’s retirees did), you can retire with full pension and lump sum in your early 50s. Bear in mind that gardaí are, on average, the best-paid public servants.
Figures from the Department of Finance suggest that the number of people hit for the pension tax is very small – about 250 in 2022. In addition, public servants can spread the liability over 20 years by way of a reduction in an already generous pension, and if they die, the liability is written off by the State.
I’m not sure what the right thing to do is on the senior garda pensions. Clearly the State needs senior gardaí to step up and fill these roles. And we are where we are when it comes to people’s legally binding entitlements. Changes are inevitable, and probably warranted. But the episode illustrates a massive pension divide in this country. It’s curious that nobody ever talks about it. Top public servants are not the people whose pensions we should be worried about.