Any secretaries general appointed from now on will have to work until retirement age and will not get their lump sum payment until then.
Previously, they could start drawing down a pension and claim a golden handshake when they step down from the top positions in their departments.
Alternative positions in the public service will be offered to secretaries general younger than the age of retirement at the end of their seven-year terms.
The only exemption will be secretaries general recruited from the private sector — they will be entitled to a lump sum at the end of their term.
The changes were made following recent controversy over the entitlements of Dermot McCarthy, who retired as secretary general of the Department of the Taoiseach in the summer with a €570,000 lump sum and €142,000 annual pension.
Public Expenditure Minister Brendan Howlin said the retirement deals available to date were “far too generous”.
He said the savings made will not be huge in the greater scheme of the public finances, but the changes were being made in the interest of fairness.
Under the changes, tax will be applied on any part of a lump sum payment above €200,000. Most secretaries general are entitled to a €350,000 lump sum based on 18 months of their current salary.
The maximum salary of serving secretaries general has fallen from €285,000 to €228,000 but all those currently in office have already taken a voluntary pay cut to €200,000.
The two secretaries general due to retire before the end of February will have their pension based on their pay before the changes.
Mr Howlin said he wanted to ensure “people of the highest competence” are attracted to the “challenging departments” and to do that a “reasonable remuneration package” is needed.
But he said it was “inappropriate that there would be an automatic entitlement to an immediate pension”.
Under the new regime, “the norm will be that you are offered another position within the public service and the normal retirement age of 40 years of service would be achieved until a pension would be available”, said Mr Howlin.
Fianna Fáil welcomed the changes but said a similar regime should be applied to county managers.
Sinn Féin’s Mary Lou McDonald said it makes “no sense” that the Government has not dealt with the pension arrangements of existing secretaries general.
“The Superannuation and Pensions Act of 1963 empowers the Government to withhold added years and the special severance gratuity payment to current secretaries general on retirement,” she said.