Dail Drawdown

To recap, the following specific recommendations are set out in the report:

1. Continue to monitor the implementation of the 2012 Consumer Code (Central Bank) and take specific actions to:

a. Examine the practice of re-brokering to ensure that it is always in the best interests of the consumer; and

b. Conduct an exercise to ensure compliance with the recently introduced requirement for Annual Statements.

2. Develop approaches to improve consumer, employer and trustee awareness and knowledge of pension charges.  This should ensure that information is clear and concise.  It should be standardised, where possible, and based on best practice (several organisations have a remit here).

3. Develop a communications action plan on pension charges (several organisations have a remit here).

4. Improve trustees’ knowledge and awareness of pension charges (Pensions Board).  Take specific actions to:

a. Develop a separate module on pension charges in trustee training;

b. Provide a support service to trustees setting out principles and best practice.

5. Review occupational pension disclosure regulations specifically to:

a. Provide for the issue of an Annual Statement to all deferred members (Department of Social Protection, Pensions Board);

b. Improve the information provided in the Statement of Reasonable Projection and the need for focussed detail should be reviewed (Department of Social Protection, Pensions Board).

6. Monitor developments and continue efforts to develop a single standard measure that would assess all costs and charges and thereby enable easier comparisons to be made (Department of Social Protection, Central Bank, Pensions Board).

7. Conduct further research on the drivers behind consumer choice of individual pension products – with particular reference to PRSAs.

8. Ensure data on charges is collected on a periodic basis - 3 yearly intervals is considered appropriate - to allow for continued scrutiny and future decision-making. (Central Bank, Pensions Board).

9. Evaluate the impact of this report, these recommendations and future EU developments after two years and assess if further and more stringent recommendations are required (Department of Social Protection, Central Bank, Pensions Board).

Source: www.welfare.ie

Dail Drawdown

Yield from the taxation of the annual imputed distribution of ARF assets 2007 – 2012

Year	Yield (€ million)
2007 (earliest available)	2.75
2008	6.5
2009	7.9
2010	10.3
2011	11.6
2012	11.5

A Question of Income

“The question isn’t at what age I want to retire, it’s at what income”.

-          George Foreman

While we await the fall-out from the increase in the State Pension Age to 66, due to take effect on 1^st January 2014, and the unknown changes to the pension regime, anticipated in Budget 2014, George Foreman’s declaration gains particular relevance for Irish pension savers.

What measures affecting pensions are we likely to see in October’s Budget?

Last year the Minister announced that the Government would introduce measures to ensure that tax relief on pension contributions would only serve to support pensions that deliver an annual income of up to €60,000.  This aim is likely to be achieved by reducing the maximum allowable pension fund (the standard fund threshold - “SFT”). The threshold will potentially be reduced to anywhere between €1.2m and €2m. 

If the current system of valuation is maintained, i.e. by using a multiple of 20, then a reduced SFT of €1.2m could be introduced.  That would affect all those with defined contribution arrangements as it is not realistic to expect €1.2m to produce an annual income level of €60,000.  Some in the industry, therefore, are lobbying for a more realistic multiple of 30 times to give an SFT of €1.8m.  Of course, an increase in the multiple, while favouring defined contribution pension schemes, could see a higher number of defined benefit pension entitlements affected by the threshold.

A further consequence of the reduction in the threshold, and this is likely to be more important to the majority of pension savers, will be a reduction in the retirement lump sum.  Currently up to €200,000 of a pensioner’s retirement lump sum may be taken tax-free and further lump sum entitlements up to €375,000 may be claimed at 20% tax.  A reduction in the SFT could also lead to a corresponding reduction in the amount of the lump sum available at the 20% tax rate.   If this also leads to a corresponding reduction in the €200,000 tax-free lump sum, a large number of pension savers could be affected.

Realising that we possibly can’t change much about the upcoming Budget, we could adopt a defeatist attitude. Foreman took a different approach to his retirement and famously invented a grill.

Similarly, pension savers facing the unknown may also take precautions.  So, if you are close to or have passed your retirement age, you may consider whether to draw down your pension now.  It can continue to grow tax free in an Approved Retirement Fund, but you could avoid the possible reduction in the lump sum benefits.  If you decide that you are too young to retire you can later change your mind and fund a new scheme.

If you are close to the standard fund threshold or in the fortunate position of having made investments which will bring you above it before your retirement, you may similarly consider the retirement option or avail of the temporary measure to draw down 30% of your AVCs – in order to avoid the punitive tax.

If on the other hand you have no intention of hanging up the gloves or are far off any of the thresholds, the best advice is to avail of the tax benefits of the current regime to the greatest possible extent.  Tax relief on pension contributions continues to be beat all other reliefs in the tax code.  The best precautionary measure against the unknown is to make your pension contributions now!

Tommy Nielsen

ITC Consulting

The Good, the Bad and the Ugly – the revised Revenue Pensions Manual

When you have finished cringing at the admittedly appalling juxtaposition of a classic of its genre and a somewhat unexciting piece of work, you will probably have to agree that the Revenue Pensions Manual is a critical document for anyone practising in pensions, be they providers or advisers.  And it has been recently revised by Revenue with changes being made to several chapters and new ones being written.

A detailed review of the changes is beyond the scope of this blog, but it suffices to point out that some aspects of the revised manual are, well, good, others are bad and some are a bit ugly.

First, the good. Chapter 22 on Pension Adjustment Orders confirms that either a pension adjustment order or a property adjustment order can be used for ARF and AMRF benefits.  Previously there had been a concern that a transfer of benefits from an ARF/AMRF to the ARF/AMRF of a spouse, on foot of a property adjustment order, would give rise to a distribution for tax purposes and a consequent income tax hit.

The same section of Chapter 22 confirms that the recipient spouse or civil partner can set up an ARF without qualifying for it under the Taxes Consolidation Act.  While this is to be welcomed, it does seem remarkable that Revenue has the discretion, with no legislative authority, to grant tax relief for a whole segment of society. 

As for the bad, it’s not that the changes are bad – it’s more the lost opportunity to correct some issues that are crying out for change.  For example, the manual continues to provide that a proprietary director who takes their benefits due to ill-health must dispose of their shareholding.  While there may be some justification in making the disposal of shares a condition of early retirement - to prove genuine withdrawal from service where the person is otherwise fit (though one would think that a P45 should do the trick) - there seems no reason why a person who has to retire because of ill-health should be subject to the same condition.  This requirement may have been imposed in error because Revenue systematically put the rules on ill-health in the chapter on early retirement.  And in practice Revenue even demand the sale of shares in cases of retirement due to serious ill-health - these are the cases, known as the death’s door concession, where the member only has weeks rather than months to live.

As for the ugly, and admittedly this is just a pet peeve of mine, I would have preferred it if the whole manual had been treated as a single document and someone had gone through it with a view to making it more readable or even to format it consistently.  Granted, this is not an easy task with what is essentially a very dry and rule-bound subject, and it is probably a resource issue (and that cannot make things easy), but given that it is a primary source material for an important, albeit often unacknowledged, area of most people’s lives it is a shame that there wasn’t time for someone to give it the care and attention I feel it merits.

One final comment concerns the process by which the manual is put together.  There seems to be a lack of consultation in the production of revisions to the manual.  For example, our understanding is that the Revenue officials who deal with advisers on a day-to-day basis have little input into the manual.  That is a pity because surely they are the ones who know the kind of issues that are relevant to advisers and, more importantly, pension scheme members.

And, apart from consulting those closest to the issues, perhaps Revenue might also enter into a consultation process with the industry, in the same manner practiced by the Pensions Board and the Central Bank, before engaging in further updates of such an important policy document as the manual.  Such an approach may benefit all parties involved, to include Revenue.

It would also save us from blogs with excruciating headlines.

Jeremy Mitchell

Head of ITC Consulting and Group Legal

Finance Act 2013 – the Bill

The Government published Finance Bill 2013 on 13^th February 2013.

In the area of pensions, the Government introduces new thresholds to the regime for ARFs and vested PRSAs. The measures are significant because they contravene previously introduced efforts at securing pensioners’ retirement income in old age.   The new thresholds, which had not been flagged by the Minister in his Budget speech in December, means that the thresholds which applied to ARFs pre-Finance Act 2011 will now see a comeback.

Since Finance Act 2011, members of Occupational Pension Schemes and contributors to Personal Pensions and PRSAs who have an annual pension income of €18,000 can take the entirety of their pension benefits into an ARF.  Those who do not have sufficient pension income must first set aside pension benefits to the value of €119,800 in an AMRF - or buy an annuity for that amount. The AMRF has to be kept until age 75, or until such times as the pensioner becomes entitled to an annual pension income of €18,000 (whichever is the earlier).

However, from the passing of the Finance Act, the requirement of a €18,000 pension income will be reduced to €12,700. This means that recipients of the Old Age Pension (currently around €12,000) who have very limited additional pension income, no longer have to put money aside for very old age. Accordingly, Finance Act 2013 effectively marks the beginning of the end for the prudence of thinking which infused the AMRF concept.

Furthermore, from the date of the passing of the Finance Act, the max value of the AMRF will be reduced from €119,800 to €63,500.  But it is perhaps more precise to say that the value of ARFs will be increased by the difference, namely €56,300. This is significant because ARFs are subject to imputed distributions which, in turn, are subject to income tax - while AMRFs are not. So, bigger ARFs, bigger income for the Exchequer. While there can be no other reason for decreasing the value of the AMRF other than to improve the tax take for the Exchequer, the measure is, seen in isolation,  perhaps of little importance as the AMRF regime is on the way out – as already argued.

Another measure, one which was flagged in the Budget, is the access to AVCs prior to retirement in certain circumstances.  An individual who has made AVCs can make a once-off withdrawal of up to 30% of the value of their AVCs prior to reaching retirement.  This is restricted to AVC funds. Access to other types of pension arrangements, such as personal pensions, is not available.  The access to AVCs will be available for a period of 3 years from the passing of the Finance Act 2013.

Funds withdrawn in this manner will be subject to income tax at 41% but will be exempt from USC and PRSI.  If an individual can provide a certificate of tax credits or evidence that they are subject to income tax at the 20% rate, the tax payable may be less than 41%.

While this would appear to be a welcome measure at first glance, on reflection it could once again signal the government’s shift to short-sighted policies to increase the short term tax take from pension funds.  As with the changes to the AMRF regime, allowing early access to AVCs only serves to reduce the benefits available to fund an individual’s retirement which may once again leave them dependant on the State later in life.

 

Tommy Nielsen & Jennie Faughnan

Independent Trustee Company

Where’s the money going?

One of the most common questions I get asked when on my visits to Advisors is - “What are people doing with the money once they’ve set up an ITC self-administered structure?”

Let me state first that what follows is an observation of movement of existing and new money. As you know, ITC does not offer investment advice, so please don’t confuse the following as a recommendation. If you require any advice in relation to the following, please contact your Advisor.

With our compliance department now satisfied, I think the best way to answer the above question this is to look at the main areas of client interest in 2012.

 

Area 1 - Deposits

The banks thirst for deposits during 2011 and average inflation at 1.65%, made it very easy for investors to achieve “Real” growth with little or no risk.

It was noticeable in 2012 that the banks had changed their tune and were pushing headline rates down and this is expected to continue throughout 2013.

Despite the downward pressure on deposit rates, demand from clients has remained strong and an expected inflation rate for 2013 of 1.3% (HICP) is unlikely to dent this demand.

What we have seen, however, is a shift from short term deposit accounts to the more long term.

These trends are backed up by statistics from the Dept. of Finance.

• Deposits from Insurance Corporations and Pension funds increased by 6.9% in 2012.
• Shorter term deposit rates (less than 2 years) reduced from 3.57% in Jan 2012 to 3.35% in Nov ’12.
• Longer term deposit rates (more than 2 years) increased from 2.37% to 2.42% over the same period.

It’s no surprise that ARF clients are the biggest supporters of deposit strategies. Their age profile means that they have less appetite for risk. This has resulted in over 60% of ITC ARF funds being held in deposits.

We contacted the insured companies towards the end of 2012 regarding the charging structure of their ARF products. An annual management fee of 1% is very common.

This probably explains the inflows to the ITC ARF. Choosing an annual management charge of 0.5% gives most clients a reduction in fees, full access to the deposit markets and covers the Advisors continued work of research, recommendation and implementation.
 

Area 2 - Broker Portfolios

What I’m talking about here is where the Advisor has built their own offering for clients through the use of insured funds, stockbroking accounts and funds, deposit agencies etc.

The ITC products work really well in providing Advisors and clients the structures for choice and control of investments.  

The Advisor assists the client in understanding their attitude to risk/loss, and then builds an agreed portfolio around their goals and objectives.

The strengths of this approach are obvious. The client has a better understanding and more involvement in the process. This gives the client more clarity and control. There are more touch points with the client which, results in a much stronger relationship between the client and Advisor.

For many reasons (to be covered in a future blog), we believe that this type of strategy will continue to grow in 2013 and beyond.
 

Area 3 – Property

We’ve seen a significant pick up in activity for both Commercial and Residential property and the following gives an indication why we have had this activity from existing clients and new clients moving away from traditional insured funds.

• The consensus from the major estate agents is that for prime commercial property in the major cities, prices have stabilised.
• Residential property continued to fall in 2012. In Dublin it was down 2% and down 9% for the country as a whole. But South County Dublin saw an average increase of 3.1%. (Daft.ie)
• Rental yields are averaging 8.8% and the average residential property price was €140k. (Allsop Space/Goodbody 8/12)

The one thing we haven’t seen is leverage. The lenders experience of negative equity and overall impairments has obviously affected their appetite to lend. Will lending to pensions happen again? Yes, I believe so, but in prime property and with lower loan to value ratios.

Martin Glennon QFA CFP® 

Corporate Account Manager
Independent Trustee Company

Budget - Lucky 13

For advisors and financial planners the Budget offers a number of planning opportunities. By far the most significant is the confirmation of the importance of pensions and the formal statement on two significant tax matters:

1. The removal of the Pensions Levy in 2014
2. The retention of marginal rate tax relief on contributions.

Other ideas are outlined below.

1. EII – Fun(d) for all the Family?The Employment and Investment Incentive or EII is the new name for BES. In 2011 the relief available was overhauled and made more attractive but hasn’t been extensively used. This year the proposal is to extend the relief (subject to EU approval until 2020).

Why is it of interest?

With the increases in tax on savings and the reduction of interest rates on deposits clients will be looking for alternatives – EII could be an option.

From the point of view of corporates EII represents a possible source of finance. Particularly for small scale sums up to €500k it is possible to structure an arrangement for “family and friends” which delivers a cost effective and available alternative to bank finance.

EII should be added to the discussion Advisors have with any SME looking for finance.

2. REITs – a new market for brokers?

Real Estate Investment through REITS is big business globally. As of mid-2012, the global index included 414 public real estate companies from 37 countries representing an equity market capitalization of about $1 trillion (with approximately 68% of that total from REITs).(Source Wikipedia)

The key features of a REIT are that it is:

1.  a quoted company
2. Invests exclusively in property
3. Is tax exempt/tax transparent

The benefits to the Irish economy are the potential for NAMA and the Banks to tidy up their property debt portfolios.

For private individuals the attractions are likely to be:

1. Access to a new investment option to diversify investment portfolios.
2. An opportunity for larger scale property investors to warehouse their investments in more tax efficient structures.

For all clients with a current or prospective interest in property REITs will now be an essential part of the discussion.

3. High Noon(an) for Film Finance?

The Minister for Finance has made clear that tax relief for Film production will continue but that the individual investor will be eliminated from the process by 2016.

This tax break therefore has a limited remaining shelf life.

Any advisors dealing with clients in this area need to be aware that the end is nigh.

4. Deposits and Life Company Investments

The increase in tax to 36% for rolled up investments is a significant negative. The hunt will now be on for better alternatives leaving advisors with the job of rejigging client portfolios. Alternatives will include:

1. Tax exempt Post Office Investments.
2. EII and REITS mentioned above.
3. Pension funding.

The availability of tax free growth coupled with the confirmation of the levy ending makes pensions more attractive than ever. Whilst the ultimate Fund limit is not yet known the fact is that the average pension fund has only €100k value. It will take a lot of saving to come anywhere near the fund limit. Equally clients should have more comfort about this type of saving due to the reassurances on tax given by the Minister for Finance.

Portfolio reviews should be scheduled for all clients in the new year.

5. Termination Payment Magic – a Non Disappearance before your very eyes!

The current tax code allows €200k to be paid on termination of employment without tax. Thereafter tax is imposed at a special rate due to top slicing relief. This ensures that the tax paid is reduced to the average tax paid by the individual for the previous 3 years.

Budget 2013 proposes the removal of Top Slicing Relief with effect from 1 January 2013. In other words it is still available for the rest of this month.

When you recognise that termination payments can be made to individuals who haven’t actually ceased employment you realise your clients should be made aware of this before it disappears.

Don’t write – email TODAY  to ensure clients have considered this option.

6. Capital Tax Increases - a Laboured Delivery?

Given the composition of the government increases in capital taxes were a given, the surprising thing is the range of breaks that weren’t closed off. These include:

           1. Over 55 Retirement Relief – still available at €750k (until 2014 for those aged over 66). This        means you can enhance your retirement with an additional €750k in tax free cash.

Any advisors who haven’t built this into their own financial plans need to set aside some personal planning time over Christmas.           2. Business Property Relief - this allows a 90% reduction in the value of Business assets for CAT  purposes. With the reduction in allowances and the increase in rates every business owner needs to look at this.

 Every business owner needs to know about this – and the fact it could disappear.

7. CGT losses – a valuable asset?

We all know individuals who have suffered significant losses on investment portfolios with bank shares perhaps being the most infamous. Yet we all hang in there in the belief that one day they will recover.

A smarter way of doing this would be to crystallise the loss now for use against other gains – saving 33% on all gains. The shares can then be repurchased by a self-administered pension ensuring the recovery is also tax free.

Turning the black cloud of the Budget into a Tax Refund is a guaranteed stocking filler this Christmas.

8. ARF a Loaf is better than no loaf at all

The assets of an ARF can ultimately pass on to children at a tax rate of 30%. The alternative route is much more taxing - the same benefit passed on in cash could be subjected to income tax of 52% (on extraction from a business) and CAT at 33% (on passing to the next generation).

Clients developing an estate plan need to give serious consideration to the benefits of ARFs. Unlike other pension vehicles they allow the transfer of specific assets to the next generation. The certainty provided by the Minister for Finance on Pensions also means that clients have more security using these types of vehicles for planning purposes.

A compulsory point for every estate planning discussion.

9. PFT Planning – A Personal Tax Free Zone?

The Minister for Finance confirmed that the pension limit will be €60,000. However discussions are still on-going with the pension industry as to the level of fund this will permit in practice. These won’t become law until 2014.

Assuming current rules applied the maximum allowable fund would drop to €1.2m. On the other hand the pension industry has suggested:

1. A factor of 30:1 should be used
2. The tax free lump sum should be added to this.

In practice this would give a maximum fund of €2m.

Rather than waiting to see how things will turn out, those clients that are close to these limits can take matters into their own hands. All previous Fund Thresholds have provided an exemption for those with funds in excess of the new limit. Therefore it makes sense for clients to pay in as much as possible in the next 12 months if it will increase their funds over €1.2m. This can then form the basis of their new PFT application in 2014.

Nobody minds a tax if it someone else who is paying. Talk to clients with substantial pension funds in 2013.

10. PFT – Avoiding Excesses this Christmas?

For existing clients who already have PFTs the question arises as to how to manage the excess. The cumulative tax rate on the excess is 79%. However Budget 2013 may offer an opportunity to avoid this.

30% of AVCs can be withdrawn and taxed at a marginal rate at any age. A client with a PFT excess may be able to remove the excess using this mechanism and thereby avoid the 70% rate.

Client with a PFT needs special care – make sure they hear about this idea from you first.

11. 6% ARFs – Nice ARF: shame about the Drawdown!

ARFs worth more than €2m are subject to an extra drawdown requirement of 1%. – That’s an extra €20k in taxable income.

Taking the excess money out before you ARF would make sense and the AVC encashment option is one way of doing this.

Clients building up their PFTs need to watch this – add it to your planning list for large pension clients.

12. AVCs – a three year cooling off period

We all know individuals who can and should invest more in pensions. However, in the current environment, they are reluctant to commit to a long term financial issue in case they need the cash in the short term. The AVC encashment option provides a realistic way of managing this. You can now advise clients:

“commit for 1,2 or 3 years. You will avoid tax on the money invested. If you need the money back in the next 3 years you can pay tax at that stage and get 30% back. If you don’t need it in the next 3 years you can probably let it roll tax free until retirement”

A key market for AVC PRSAs will be the public sector. Time to add them to your 2013 to-do list.

13. AND FINALLY (Tongue in cheek)…….

With all the grief around flooded housing, lack of insurance cover etc it is good to know the Minister for Finance cares!

If severe flooding means your house now floats and you are known locally as Noah then you will be glad to know the Minister for Finance has deemed you exempt from the new Local Property Tax.

While the rest of us drown in debt you can sail happily into the sunset!!

Jobs Initiative announced - introduction of the Pension Levy

Last Tuesday (May 10^th) the government introduced the anticipated pensions levy as part of the Jobs Initiative. The government is imposing an annual levy of 0.6% on the value of the assets in private sector pension schemes. Approved Retirement Funds (ARFs) are excluded from this levy but are taxed in a different manner through the imputed distribution. Public Sector pensions are exempt.

The levy, which is to be backdated to January of this year, will be paid each year for four years and is expected to raise €470m a year, a total of €1.9 billion by the end of the 4 year period.

The levy has not been put into legislation as of yet but is expected in the coming days. We will keep you informed on any developments.

Creditor protection of ARFs

Recently various commentators have made the argument that ARFs do not enjoy protection against creditors because ARF funds are personally owned property of the individual and not protected by trust law. I recently saw this view forwarded by the Pensions Ombudsman and (too) readily accepted by commentators.

Whatever about the accuracy of this idea – ARFs can also be established under trust and enjoy protection of trust law – I find it baffling that commentators without discussion willingly accept that providing for retirement in good times is an idea which may be challenged by your creditors when things get bad.

Compare the regime protecting an individual’s transfer of assets to the spouse. Such transactions are, subject to certain criteria, protected by the courts. They are even encouraged by legislation as there is no CAT and no stamp duty. One has got to ask oneself why funds that you set aside for the honourable purpose of not being a burden to the State in retirement shouldn’t be protected while funds siphoned off to the missus is. I don’t see any reason for this.

And whatever the media may want to make you believe, there is no Irish case law to confirm that creditors may come after ARF funds, not even the recent Brendan Murtagh case. In that case it is reported that Mr Murtagh’s lawyers without argument made his ARF funds available to pay his debts.

The ARF regime is an innovative way of dealing with the annuity problem. Why commentators are so willing to sacrifice it when there are many laudable reasons to protect it, is beyond me but then again, the insurance industry never liked ARFs. I also think that the argument is fundamentally flawed. ARFs are protected, subject to certain conditions.

Tommy Nielsen