Important Pension Change - Act Now

Budget 2014 reduced the standard fund threshold (SFT) from €2.3m to €2m.

This means that, when an individual accesses their pension benefits, if the value of all pensions held by that individual exceeds €2m, the excess will be subject to an effective rate of tax of up to 70%! 

While a fund of €2m may seem quite large, it in fact equates to an annual income in retirement of around €50,000 so it may affect more pension savers than you would initially imagine.

In a recent survey conducted by Independent Trustee Company, 75% of the advisors polled said that   securing the €2.3m PFT for their clients was of high importance.  There is a window of opportunity available, but you must act quickly.  

Where an individual has existing benefits in excess of €2m at 1^st January 2014, Revenue will allow them to apply for a personal fund threshold (PFT) and that threshold will apply to them instead of the SFT.  The maximum PFT available is €2.3m.  Depending on your clients’ circumstances, it may therefore make sense for them to contribute to their scheme before the end of the year in order to secure a PFT for the full value of their benefits.  Contributions made after 1^st January 2014 cannot be included in the calculation of the PFT.

The key is to act now, before the 31^st December, while the opportunity for your clients is still available. 

For further information, please contact one of our consultants in ITC Consulting:

Barry Kennelly on (01) 6148068 or at barry.kennelly@independent-trustee.com

Jennie Faughnan on (01) 6035140 or at jennie.faughnan@independent-trustee.com

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



Post Election Stress Buster

The Finance Bill 2011 reduced the Standard Fund Threshold for pensions to €2.3m but how does this affect clients on a practical level?

Let’s take an example of a client on a salary of €150,000 looking to retire in 10 years’ time with 2/3rds final salary.  This would mean an annual income in retirement of €100,000.  The value of this fund at retirement would be approx €3.4m. 

If the client already had a fund of this size on 7^th December 2010, he could apply for a Personal Fund Threshold and only amounts above the €3.4 would be subject to the additional tax of 41% at retirement.  This would mean that any future contributions or fund growth would be taxed at 41% on retirement in addition to the normal tax on withdrawals.  This could result in an overall effective rate of tax of 72%. 

Now assume that the client, who still has 10 years to retirement, hadn’t gotten to the €3.4m fund in December 2010, thinking that he still had 10 years to get there before he retired.  If his fund was valued at €2m on 7^th December 2010, he would not be entitled to apply for a Personal Fund Threshold.  If he continues to contribute and enjoy growth in his fund until he gets to a fund of €3.4m on retirement, he would suffer tax at an effective rate of 72% on all amounts above the €2.3m threshold. 

With the government having spent the last 10 years encouraging us all to make provisions for our retirement, they now appear to be undoing all of this.  Years of planning in good faith for retirement could now be punished by up to 72% tax.

And, according to the Fine Gael manifesto, this client may soon be facing tax on any excess above a €1.5 million fund threshold. Who knows what's in store with the new Programme for Government and what influence Labour may have had on Fine Gael's pre-election manifesto.

Jennie Faughnan