Budget 2025: How Could It Impact Retirees and Pensions?

As we head towards Budget 2025, many Irish retirees, pensioners, and those with private pensions are watching closely. Will this budget bring changes that help bolster financial security in retirement, or will it create new challenges? Let’s dive into what might be on the horizon and what you need to know to prepare for the future.

What Can Retirees Expect from Budget 2025?

For those nearing retirement or already enjoying their golden years, Budget 2025 could play a pivotal role in shaping their financial future. Here are a few key areas to keep in mind.

1. Pension Increases and Adjustments

The State Pension currently provides a significant part of retirement income for many. With ongoing inflationary pressures, there’s hope that Budget 2025 will address the need for pension increases. The last few budgets have seen moderate hikes, but will the government offer more substantial support this time?

Retirees, particularly those on fixed incomes, are vulnerable to rising living costs. Discussions around a potential increase in the Contributory State Pension are promising, but the extent of the raise remains uncertain. It’s worth noting that previous budgets have sometimes adjusted pensions in line with inflation, though not always sufficiently​.

Additionally, as people are living longer, it is expected that future budgets will continue to tackle the challenges associated with funding an aging population. The Irish Fiscal Advisory Council has raised concerns about the sustainability of the pension system as it currently stands​. This growing demographic pressure is likely to push the government to consider longer-term reforms in the pension system, with Budget 2025 potentially laying the groundwork for these changes.

2. The Standard Fund Threshold (SFT)

One of the key issues on the pensions front is the Standard Fund Threshold (SFT), which limits the amount of tax-relieved pension savings one can accumulate. At the moment, the SFT stands at €2 million, and there hasn’t been an adjustment to this cap since 2014​. Given inflation and rising incomes, there are arguments that the SFT should be indexed, similar to the approach taken in other jurisdictions like the UK.

The prospect of increasing the SFT could provide some much-needed relief for those with larger pension pots. However, Budget 2025 may also take a different approach, such as removing the threshold altogether, as has been done in the UK, or at the very least introducing more flexibility for retirees with significant savings​.

3. Private Pensions and Tax Relief

For those contributing to private pension schemes, any changes to pension tax relief could have a notable impact. Currently, contributions to pensions benefit from tax relief are at an individual’s marginal tax rate, making pensions one of the most tax-efficient ways to save for retirement​.

In previous years, the government has toyed with the idea of flattening the relief rate, offering a standard rate of tax relief on all pension contributions. This would have the effect of reducing the tax benefits for higher earners while increasing them for those on lower incomes. However, it is unclear whether such a move will feature in Budget 2025. If it does, it could significantly alter retirement planning strategies.

4. Inheritance Tax: What Could Change?

Another area of interest in Budget 2025 is the much-discussed potential changes to inheritance tax, or Capital Acquisitions Tax (CAT). At present, the parent-to-child tax-free threshold is set at €335,000, a figure which has remained unchanged since 2019​.

Given the continued increase in property prices, there have been calls to raise this threshold to better reflect the realities of the housing market. Some commentators have suggested a new threshold of €500,000, though this seems ambitious​. More likely, we could see the threshold increased to €400,000, offering some relief to those passing on family homes and assets.

Such a move would appeal to an older demographic and could be framed as a way to ease intergenerational wealth transfer at a time when younger generations are struggling to get on the property ladder. However, any increase will also need to balance the fiscal impact, as raising the threshold significantly would reduce tax revenue.

5. PRSI Changes and Their Impact on Pensions

Budget 2025 is expected to bring further changes to Pay Related Social Insurance (PRSI). With an aging population, there’s a growing recognition that the current system may not be sustainable in the long run. The government has already committed to increasing PRSI rates in small increments over the coming years, with the first 0.1% increase having taken effect in October 2024.

For retirees, the main concern is how these changes will affect their pension entitlements and whether additional increases to PRSI contributions will impact the level of support they receive from the State Pension system. While Budget 2025 may not bring immediate changes to retirees’ PRSI contributions, it is likely to lay the groundwork for future increases that could affect those still working.

6. Long-Term Pension Reforms

Beyond the immediate changes in Budget 2025, retirees should keep an eye on the broader pension reforms that could come into play over the next decade. The government has signalled its intention to introduce a new auto-enrolment pension scheme, which would require all employees to contribute to a pension unless they opt-out​.

This could provide a significant boost to pension savings across the country, particularly for those in lower-paying jobs who might otherwise struggle to save for retirement. However, the introduction of such a scheme could also mean higher costs for employers, which may be passed on to employees in other ways.

Conclusion: Stay Informed and Plan Ahead

As with every budget, there are always winners and losers. For retirees and those approaching retirement, Budget 2025 presents both opportunities and risks. Whether it’s changes to the State Pension, adjustments to the Standard Fund Threshold, or new inheritance tax rules, it’s essential to stay informed and plan ahead.

If you’re unsure how the changes might impact you, it could be a good idea to consult with a financial planner. With the right advice, you can ensure that you’re prepared for whatever comes next and continue to enjoy your retirement years with confidence.

Stay tuned as we await the final details of Budget 2025 and make sure your financial plan is ready to adapt to the new landscape.