What the 2026 SFT increase means for your retirement planning

The increase in Ireland’s Standard Fund Threshold (SFT) from €2 million to €2.2 million in 2026 has been broadly welcomed by pension savers. It marks the beginning of a phased approach that will see the threshold rise by €200,000 per year, reaching €2.8 million by 2029. The SFT represents the maximum lifetime value of tax-relieved pension benefits an individual can draw without incurring an additional tax charge. Once benefits exceed this limit at a Benefit Crystallisation Event (BCE), a Chargeable Excess Tax (CET) of 40% applies to the excess. At first glance, this can create concern for individuals with significant pension funds. However, there is an important relief within the rules that is often overlooked.

The often-missed tax credit on retirement lump sums

When pension benefits are accessed, many retirees take a retirement lump sum. While the first €200,000 is generally tax-free, the balance (up to €500,000) is taxed at 20%. What is less well understood is that any income tax paid on this retirement lump sum can be offset euro-for-euro against a future CET liability. This can materially reduce, or in some cases eliminate, the additional tax charge on exceeding the SFT.

How it works in practice

Consider an individual retiring in 2026 with total pension benefits of €2.35 million.

• SFT (2026): €2.2 million
• Excess: €150,000
• Potential CET: €150,000 × 40% = €60,000

Now assume the individual takes a retirement lump sum of €500,000:

• First €200,000: tax-free
• Remaining €300,000: taxed at 20%
• Lump sum tax paid: €60,000

That €60,000 tax paid can then be used as a credit against the CET liability.

Result: the CET charge is fully offset, meaning no additional Chargeable Excess Tax is payable in this example.

Why this matters for planning

This interaction between lump sum tax and CET is a critical but often underappreciated feature of the system. It can significantly change the real impact of exceeding the SFT, particularly for individuals close to or above the threshold.

Looking ahead

The CET rate remains at 40% at least until 2030, with a commitment to review at that point. While future policy direction is uncertain, what is clear is that planning decisions made in the years leading up to retirement will have a lasting impact on the tax efficiency of your pension.

The SFT may continue to rise, but the key question is whether your pension strategy is evolving alongside it.

Final thought

If your pension is approaching or has already exceeded €2 million, now is the time to review your position. Not at retirement. Not in hindsight. But while you still have time to influence the outcome.

At Derradda Financial Services, we help clients navigate the interaction between pension growth, SFT limits, and tax efficiency to ensure retirement planning is as effective as possible.

  📞Call us: Dublin Office 01 2330209 / Galway Office 091 399256
  📧 Email us: info@derradda.ie