Budget Briefing Webinar Recording and Slides

Our Budget 2013 Briefing in conjunction with the Irish Brokers Association took place this morning. The briefing aimed to give you some guidance around the changes in order to help you plan for 2013. If you missed the webinar you can access the recording here.

We hope that you find the content useful for the upcoming year and if you have any questions in relation to the presentation please e-mail JustAsk@independent-trustee.com.

You can also download the presentation slides here.

We won't go to the same lengths as Will Ferrell...

Have you heard the good news? Aidan McLoughlin, Managing Director of Independent Trustee Company has been shortlisted for the Irish Pension Personality of the Year Award. The award, taking place as part of the Irish Pension Awards aims to recognise the individuals that have truly made their mark in the Irish pensions space in recent years.

The winner of this award is decided through a public vote and while we won't go to the same lengths as Will Ferrell, we would really appreciate your support!

You can vote for Aidan by clicking on the link below and if you could share the details to those within your organisation we would be grateful. 

VOTE Aidan McLoughlin - Irish Pension Personality of the Year Award

We are delighted to announce that ITC Managing Director Aidan McLoughlin has been shortlisted for the Irish Pension Personality of the Year Award. The Award, taking place as part of the Irish Pension Awards on November 21st, aims to recognise those individuals that have truly made their mark in the Irish pensions space in recent years. The voting proccess for this award is slightly different than the rest as the winner is decided through a public vote. We would appreciate your support on this and you can vote for Aidan at the link below. Voting closes on November 7th.

A leading visionary and thought leader in the Irish pensions Industry since 1987. As a solicitor and tax consultant Aidan has pioneered the self-administered pensions market. He passionately combines managing ITC alongside his tireless work with industry bodies developing the Irish pensions Industry.

 

Aidan passionately combines managing ITC alongside his tireless work with industry bodies developing the Irish pensions Industry.

His achievements include:

• Fellow of the Irish Taxation Institute and Irish Association of Pensions Management 
• Founding Chairman of the Association of Pensioneer Trustees of Ireland 
• Chair of the Irish Brokers Association Pensions committee 
• Editor of the Irish Taxation Institute’s Pensions - Revenue Law & Practice
• Member of the Association of Pension Lawyers of Ireland

Many thanks,

 

Michael Keyes

Sales and Marketing Director

Independent Trustee Company

OECD Review: Financial Sustainability

In our last post on the OECD review, we discussed how Ireland's policy stance measured up against key criteria, looking at the performance of the Social Insurance Fund. Another item on the OECD's agenda is that of financial stability and how it is evaluated through international analysis. The first step to this evaluation is to look at international comparisons. 

As you can see from the chart below, in 2010, Ireland ranked somewhat average in our public expenditure on pensions, with the inclusion of all government pension costs; contributory, social welfare pensions, non-contributory pensions and public sector pensions.

If you look at the next chart, you can see that the projected change in expenditure is quite significant between 2010 and 2060, Ireland projected to rank third on the table.

The charts highlight the rising cost of State funded pensions which the National Pensions Reserve Fund (NPRF) was intended to offset.

Broadly speaking 1/3^rd of the NPRF covered public sector pensions whilst 2/3rds covered social welfare pensions.

The fastest increasing cost is public sector pensions. These grew from an estimated capital cost of €75bn in 2007 to €129bn in 2009. No figures have been produced since, however it is likely that that cost has continued growing.

Source: OECD Review of Pensions in Ireland, 14.09.2012. John Martin, Edward Whitehouse, Anna D'Addio, Andrew Reilly. 

5 Reasons to recommend ITC

Independent Trustee Company are delighted to announce that we have been shortlisted for 5 Irish Pension Awards. The awards which will take place on 21st November 2012 aim to give recognition to pension funds and providers who have proved their excellence, professionalism and dedication to maintaining high standards of Irish pension provision. The categories that we have been shortlisted for can be seen below.

You can find out more information on the awards here.

Dáil Drawdown - NPRF

In this installment of Dáil Drawdown, Deputy Michael McGrath asks the Minister for Finance for more information on the National Pensions Reserve Fund.

Source:www.oireachtas.ie

A third of workers plan to rely solely on a state pension

In a recent survey conducted by Amarach Research, it was found that a third of workers plan to rely solely on a state pension, the Irish Independent reported today.

The state pension currently stands at just under €12,000 per annum which is about one third of the average wage (€35,849, CSO 2011). These figures mean that many people will find it almost impossible to keep up their current standard of living if they rely solely on the state. In a recent report by the IAPF it was found that there was a large gap between what people expect from the state pension and what they will receive in reality. This gap is likely to get wider.

The survey, conducted with 1,000 adults shows that only 4 out of 10 people plan to use a combination of the state pension and private retirement income. It was also found that three-quarters of people do not know how much they are paying in annual pension charges and just one in 10 shop around for pension products (Independent.ie).

The importance of private pension provision is unquestionable, relying solely on the state pension will not ensure long term financial security for most.

You can read the full article here.


Melanie Farrell
Independent Trustee Company

We asked a 1000 people…

As an industry we know that:

• the current ratio of people working versus those in retirement will half over the next two decades,
• the pending pension burden is unlikely to be absorbed by the state,
• approximately 50% of people working in Ireland do not have a pension and
• life and pension sales according to the IIF (Irish Insurance Federation) 2012 annual report has fallen to “barely 40% of their 2007 peak”.

Unsurprisingly, pensions coverage is being debated ad nausem by the entire pensions industry. However, amongst all the various discussion, debates and column inches the view of the Irish public is often overlooked.

As a result of this, Independent Trustee Company commissioned a RED C survey to investigate why people are reluctant to invest in pensions. We surveyed over 1000 people with some interesting results;

Findings

• Whilst affordability is an issue, it is not the overriding problem, poor performance and access are also a major cause of concern.
• ‘A fear of losing money’ and ‘affordability’ were found to be the main concerns for female respondents.
• Male respondents were more likely to mention ‘retirement being too far off ‘ and ‘an overall lack of trust’ than their female counterparts.
• Middle-aged respondents were most likely to mention ‘a fear of losing some or all of the money’.
• ‘Affordability’ was most likely to be mentioned by people aged 35-54 years.
• Those over 65 years of age; and younger adults were most likely to say that ‘pensions are too complicated’.

We are still digesting these results but it is clear that the lack of pension investment cannot be dismissed as a problem caused by “the economy”. We believe these results have highlighted the need for transparent and secure pension products. Some industry “experts” would lead you to believe that we need to educate the public; this is rubbish, the industry needs to provide people with a product that is designed with them as the consumer in mind and not the other way around!

Michael Keyes

Sales & Marketing Director

Aidan McLoughlin discusses upcoming regulation and future changes in the Irish Pension Market at EPI Summit

Aidan McLoughlin, Managing Director of Independent Trustee Company recently attended the European Pension and Investment Summit in the Netherlands. As a delegate at the event, Aidan was asked his opinion on upcoming regulation, the European approach to structuring pensions and future changes in the Irish pension market. You can view the full interview by clicking on the image below.

Independent Trustee Company

NEST: Protecting their young?

The UK government is making changes to encourage people to save for retirement. The Pensions Act 2008 introduced new duties on employers to provide access to a workplace pension scheme. All employees will be automatically enrolled into an occupational pension (unless they opt out) and where employers do not already have a scheme, people’s money will be invested in NEST. NEST (National Employment Savings Trust) will be a universal, defined contribution scheme, accumulating a fund during a workers life to purchase an annuity on retirement.  It is due to commence in October 2012.

Much scrutiny has been given to the investment choices that NEST will make available to their members. When it comes to the funds that NEST invests their members in in the early years this differs substantially to what is typically used in standard Defined Contribution Lifestyle funds in Ireland. 

NEST carried out extensive research and consultation and as a result they found that when it comes to younger members- those under 30- that they’re especially sensitive to volatility and loss and are most likely to act adversely in the face of such volatility.  NEST will invest younger members- in their 20’s - initially in funds that will target investment returns that look to match inflation after all charges have been taken out.  The next phase where members will spend the majority of their time circa 30 years, will target returns of inflation plus 3% after charges, the final stage is designed to manage the risk of shocks closer to retirement.

Niamh Quirke

Independent Trustee Limited

The Pensions Board publishes funding rules for defined benefit pension schemes

Yesterday, the Pensions Board published revised rules for defined benefit schemes and announced the deadlines by which trustees must submit funding proposals to the Board to deal with scheme deficits.

The full Press Release on the revised rules can be found on the Pensions Board website. 

Sovereign Annuities – How will they work?

The scale of the funding crisis in Defined Benefit Schemes has been a topic of much debate for the last number of years. One of the solutions proposed by government was to introduce a Sovereign Annuity option. As the yield on Irish Government bonds is higher than the yield on the bonds normally used to back annuity the effect should be to reduce the scheme’s liabilities. Thus a sovereign annuity is designed to ease funding pressures on a Defined Benefit scheme, provide a source of funds to the State and also to adjust the priority rules in a more acceptable manner.

The first sovereign annuity product is due to be launched in the coming weeks. Initially, this sovereign annuity product will be based on Irish and French bonds. It is expected that this will mainly be of interest to schemes which are in wind up and in some cases where the employer company is also in liquidation. It is estimated that the total value of the sovereign annuity market will be approximately €2-3 billion.

However this sovereign annuity product will only be available to pensioners and not to active and deferred members. This causes a dilemma for the trustees: are you disadvantaging pensioners (by linking their pensions to sovereign annuities) to improve the position of other member classes (by increasing the amount of the fund available to pay for their benefits)?

So it remains to be seen how sovereign annuities will work in practical terms. It will be interesting to see how trustees and pension scheme members will react to this new and long awaited product.

Aisling Daly

Independent Trustee Limited

Is the State likely to provide your pension expectations?

At the recent IAPF Annual Defined Contribution Conference some of the findings of the IAPFs Financial Literacy and Pensions Research Report (April 2012) were announced.  This report revealed that almost half of all adults (47%) believe the state pension will be their main source of income in retirement. When asked how much of their current income they think they will require in retirement below were the responses.

Level of current income required in retirement	Percentage of respondents
Less than 30%	11%
31-50%	22%
51-70%	31%
More than 70%	23%
Don’t know	12%

The current state pension is just shy of €12,000 per annum or about one third of the average wage(€35,849, CSO 2011).  The findings from the IAPF report highlight the huge gap between what people expect to have in retirement and what the State will actually provide. This gap is likely to get wider with increasing pressure on the State to reduce costs. 

This means that people will either have to make a reduction in their post retirement income expectations or increase their private pension savings dramatically.

Niamh Quirke

Independent Trustee Limited

ITI Annual Conference Main Tax Points

As mentioned in our previous post, ITC recently sponsored the Irish Tax Institute Annual Conference. The Conference provides an opportunity to discuss issues that other advisors come across with their clients. 

One topic of conversation was the change in language in the latest update of the EU/IMF Programme of Financial Support for Ireland published in February. Previous versions have proposed the reduction of private pension tax reliefs as one of its revenue-raising measures, but the February update omits any reference to such a reduction. This coincides with previous comments, so it seems that marginal rate tax relief on pension contributions is safe, for now at least. That is very good news for those making personal pension contributions.

A couple of other themes that came up time and again with advisors, whether speaking from the podium or in private, were:

     1.    Inheritance Tax

Clients are realising that inheritance tax is now for everyone.  Well, “for everyone” was the phrase used by one practitioner and it is somewhat exaggerated, but inheritance tax affects far more people than it did four years ago. 

You can see the massive differences for someone with an estate of €3 million with three children.  The respective tax bills are:

2008 tax bill:                €287,000

2012 tax bill:                €675,000

Additional tax:             €388,000

That’s a hike in the tax take of over 130%!  It’s certainly enough to get people considering estate planning when a few years ago they would not have considered it was for them.

      2.    Capital Gains Tax

One of the more interesting aspects of the Budget last December, which has since been enshrined in the Finance Act, was the CGT exemption for property.  It seems that people are just not familiar with it as it was not highly publicised, but it provides excellent opportunities, including in the family context.

What the exemption means is that, for a property acquired between 7^th December 2011 and 31^st December 2013 and held for more than 7 years, on the sale of  that property no CGT will be payable on the gain attributable to that 7 year period.

A couple of interesting points: 

• The exemption applies to any property within the EEA, i.e. the EU, Norway, Iceland and Liechtenstein.  A particular popular destination for property purchasers at the moment is Germany – the exemption would work there.

• The exemption also applies where there is a gift element in relation to children.  If consideration is paid of 75% or more of the value of a property by a child to a parent, the gain over the 7 year period will be CGT free to the child.  Of course, stamp duty has to be factored in, but it is now at much more favourable rates.

Despite the recurring uncertainties in which we live these days, the certainty of tax does at least throw up some opportunities for advisors.

Jeremy Mitchell

Director

ITC Consulting

ITI Annual Conference. Fund your Bucket List with an ITC Pension

ITC were proud to sponsor the Irish Taxation Institute Annual Conference last weekend in Galway where over 370 delegates attended. Bucket List's were a hot topic throughout the Conference as we invited delegates to share their's with us in the hope of winning a New iPad. 


An ITC Pension can ensure that you make the most out of your retirement. Our bucket will be seen at many more events in the coming months so be sure to have your list at the ready. A sample of some of the  entries we received:

"To dance the Argentine Tango with Antonio Bandero"

"To become the No. 1 Formula One Driver"

"To star in a musical on the West End"

"To visit the 7 Ancient Wonders of the World"

The seminar topics ranged from a general update on the 2012 Finance Act to more specific topics such as Capital Taxes, Business Taxes and Property Taxes.

One of the more interesting topics for the delegates from ITC was the Pensions seminar. Most of the key take home points have been the subject of ITC Blogs over the last number of months, and the top five to consider are:

1. Fund to SFT as soon as possible

Individuals whose pension fund is currently less than €2.3m should consider funding their pension to €2.3m (taking account of a buffer for future investment returns within the fund up to retirement) in light of announcements to decrease tax relief on pension contributions and other potential changes that may be introduced in the future. 

2. Consider de-risking pension if close to SFT

For individuals that are close to the SFT, consideration should be given to reducing investment risk (employing a de-risked pension investment strategy – e.g. cash/bonds), with increasing urgency depending on how close one is to the SFT.

3. Critical that pension funds are monitored re SFT ceiling

Advisors should consider putting a tracking system in place to determine when an individual’s pension fund may be coming close to the SFT so that alternatives can be considered in advance.

4. Maximising lump sum at retirement remains attractive – 13% effective tax up to €575K. Tax credit up to the amount of tax paid on the lump sum is available against tax payable on any chargeable excess over SFT. 

5. Employer Pension Contributions – Incorporation of business can increase the level of pension contributions allowed and can involve family members in the business.

We will provide worked examples of these main points in the next few blog posts.

Buying Property through a Self-administered Pension

A report issued on Monday 26th March from the Central Statistics Office confirmed that residential property prices fell by almost 18 per cent in the year to February. Recent surveys have estimated that property prices have actually fallen by 55 per cent to 60 per cent from the peak.

While property prices have fallen dramatically, a recent CSO report has shown that Irish residential rents are continuing to rise 3% annually. This presents an opportunity for individuals who are fortunate enough to have cash in their companies and wish to invest in property. How this can be achieved in the most tax efficient way is the next question.

                                                                 CSO Report. Residential Property Price Index. [Image Online].Available at: http://namawinelake.wordpress.com/2012/03/15/cso-reports-irish-residential-rents-continuing-to-rise-3-annually/. [Accessed 26/03/12].

There are three obvious ways of doing this:

• The cash could be extracted from the company by the shareholder of the company and the property purchased by the shareholder after paying income tax,
• the property could be purchased by the company or
• the property could be purchased through aself-administered pension.

The self-administered pension can be the most efficient route of achieving this for the reasons set out below.

Extracting cash and then buying the property

Extracting funds directly from the company to purchase the property personally would give rise to significant income tax and potentially company law problems, so that generally will not work. 

Buying property through the company

If the property is bought through a company, there will be corporation tax on rent received (as well as a close company surcharge). In addition there will potentially be corporation tax on chargeable gains, if the property is sold, although the new relief from CGT on sales of properties held for 7 years could help here. However the same tax problem described above when sales proceeds are extracted from the company will apply. It should also be noted there are anti-avoidance provisions which prevent cash extraction at CGT (rather than income tax) rates which could also come into play. Furthermore purchasing an investment property in a company can adversely impact on the availability of CGT retirement reliefs and  CAT business property reliefs which may be relevant in due course.     

Buying property through a self-administered pension 
The alternative is to purchase the property through a self-administered arrangement. On the basis that the required contribution can be made (which involves a funding assessment),

• a corporation tax deduction would be available for the company’s contribution and 
• the rent could be received tax free in the pension.
• there is no CGT on sale of Irish residential property by a pension

On retirement 25% of the fund can be taken tax-free by the client with the first €200,000 tax free with the balance from €200,000 to €575,000 taxed at 20%. The property could be transferred in specie to an ARF post retirement and could continue to generate a post retirement income.   

This illustrates how the self-administered route still makes sense as a tax efficient way to buy property.  

Barry Kennelly
Associate Director Solicitor AITI TEP
ITC Consulting

Lobbying the Oireachtas Committee - Part 3

In the third part of our video blog series on the presentation to the Orieachtas, Aidan McLoughlin discusses the recent announcement that the government are to review the costs of pensions. Could applying international standards improve the pensions industry?

Planning points after the Personal Fund Threshold applications. Part 3

The third common query that I want to address in this series of posts is around a guaranteed annuity rate when considering the PFT.

Where a person has a pension with a guaranteed annuity rate in excess of 5%, do you use:

a.    20 times multiplier of the guaranteed sum, or

b.    multiplier based on actual annuity rates as at 7^th December 2010?

For Defined Benefit (DB) schemes the valuation basis provided for, by the legislation, is 20 x Pension. For a Defined Contribution (DC) scheme where the insurance contract contains an entitlement on retirement at Normal Retirement Age (NRA) to a minimum guaranteed annuity rate, a number of questions arise:

1.    Does the existence of the guaranteed annuity rate convert this into a Defined Benefit scheme? In my view the answer is no.

2.    If not, should the contract still be valued using the 20 x valuation system? Again my view is no. Typically market annuity rates will give a better value.

3.    Are market rates the only way to value? No. Consideration should be given to other value options e.g. Discounted cash flow.

If you have any queries on any of the queries raised in this series of blog posts, please contact us on (01) 661 1022.

Aidan McLoughlin

Planning points after the Personal Fund Threshold applications. Part 2

Continuing on with the common queries around the Personal Fund Threshold (PFT), another key issue raised was expressed well in this example:

If a hospital consultant has worked for 20 years as at 7^th December 2010 and expects to work for a further 20 years, is the capital value of the pension

a.    pensionable salary x (20/80) x 20 or

b.    pensionable salary x (40/80) x 20?

This question goes to the heart of the PFT valuation issue. The rules for valuing Defined Benefit (DB) scheme benefits, as outlined by the Revenue Commissioners, are clear that the value is outlined under Option A above.

Some advisors have taken a different view of the legislation. In particular, the assumptions used under Schedule 23B suggest the value should be achieved on the basis of no reduction due to early retirement. This is the basis of the valuation under Option B above.

An alternative view is to value the existing benefit under Option A and to then provide a second valuation for future benefits. As this falls outside the formal valuation methodology suggested by Revenue, it provides more scope for an advisor to look at alternative valuations.

Aidan McLoughlin

Planning points after the Personal Fund Threshold applications. Part 1

Over the last few weeks we have been giving a pensions update to advisors at the joint LIA/ITI events. Some of the common queries that were consistently raised at the events revolved around the Personal Fund Threshold (PFT). Some of the queries raised are good examples for the basis of calculating a PFT.  I will be discussing some of these over the next few blog posts.

The first query put to me was; if you value a PFT on a gross basis and the asset is subsequently sold with the debt repaid, can you make further contributions up to the PFT level?

The allowance available under the PFT legislation is an extremely valuable asset.  Say you are granted a PFT for €3.3million, this equates to a €410k reduction in your tax bill.  Whilst the allowance is granted based on the value of assets held as at 7^th December 2010, there is no requirement that those assets should continue to be held.  Thus, by the time you retire, your Fund could comprise of entirely different assets.

For example, a property worth €3.3million on 7^th December 2010 could have €2million in debt attaching to it.  Whilst a PFT of €3.3million could be applied for, the actual Fund is, in practice, worth €1.3million.  If that asset is disposed of today and the debt is paid off, it becomes clear that the Fund is €2million below the PFT.  This can then be built up with further contributions. 

It should be noted that Revenue have recently issued a letter stating that in their view, PFTs should be valued on a net basis.  We are aware of a number of applications that proceeded on a gross basis and await, with interest, the outcome of those.

Aidan McLoughlin