What is the Value of a Promise?

 

It is estimated that 90% of defined benefit schemes in Ireland are in deficit and that the pension schemes of 200,000 individuals are in danger of collapse with the new rules regarding funding requirements.  You will most likely see more of your clients coming to you asking what to do next.

The defined benefit scheme was the holy grail of pension schemes for a long time.  You were guaranteed a certain level of pension in retirement based on your years of service and salary.  What you effectively have is a promise and now you must ask yourself what value you can put on a promise from a scheme which is in deficit.  When advising clients who are considering exiting a defined benefit scheme, you must take particular care.  The client is considering giving up what could be a very valuable benefit, if the scheme can deliver on the promise.  However, if there are doubts as to the ability of the scheme to deliver or even survive, you would need to consider whether the client would be better off taking a transfer value now and putting those funds to work for them.

When an individual ceases employment or leaves a company pension scheme, or the company pension scheme is wound up, there are a number of options available to them.  Taking the transfer value to a buy out bond is becoming increasingly popular among clients.  The trustees of the existing company pension scheme will establish a buy out bond in the individual’s name and transfer the value of their benefits to the bond.  The aim is to put the individual in control of their pension benefits.  The buy out bond has fewer restrictions with regards to investments and often more favourable costs than a PRSA.  The buy out bond can also provide greater flexibility when accessing benefits. 

Independent Trustee Company has recently launched their new Buy Out Bond.  To find out more about  ITC’s BOB download our Brochure & Terms and Conditions.

Written by Jennie Faughnan

ITC Consulting

For further information contact our team to discuss:

Michael Keyes (01) 614 8045 / michael.keyes@independent-trustee.com

Sean Mc Loughlin (01) 614 9220 / sean.mcloughlin@independent-trustee.com

Martin Glennon (01) 603 5130 / martin.glennon@independent-trustee.com

www.independent-trustee.com

Why PRSA's are still relevant

The introduction of imputed distributions announced in November’s budget caused some concern to fans of the PRSA. The Memorandum published by the Department of Finance immediately after the Minister’s Budget speech proclaimed that income tax should now be paid on 5%/6% of PRSAs post retirement but also that the tax should be calculated on the aggregate value of all of an individual’s PRSAs once benefits were taken from just one of them. 

The proposal led some advisors to state that the PRSA was no longer a useful vehicle to hold pension benefits. The clarification provided by Finance Bill 2012 that the imputed distribution would only apply to post retirement assets brought some relief.

However, for many reasons we still see the PRSA as a useful and flexible vehicle for pension planning, even after the introduction of the imputed distribution. Here are a few reasons why:

1. There is no imputed distribution where the PRSA investor has not drawn down benefits.
2. Income from UK property held in a PRSA, as opposed to an ARF, can be taken tax-free.
3. Where no benefits have been accessed, the fund goes to the PRSA holder’s estate tax-free. In the same circumstances, benefits of an occupational pension scheme have to be spent buying an annuity for dependants.
4. The PRSA allows you to consolidate personal pensions and frozen occupational benefits and facilitates the transfer of benefits from a personal pension to an occupational pension scheme.
5. The PRSA offers statutory protection against creditors, the ARF does not.
6. The PRSA allows you to split benefits which allow significant planning opportunities.
7. A PRSA investor who is also a 20% director and who wishes to retire before Normal Retirement Age is not compelled to sell his/her shareholding of the employer company.
8. A PRSA investor can continue to contribute until age 75, no matter whether benefits are taken or not.
9. The PRSA is the most carefully regulated pension product in the country, thus meeting the demands of the ever more attentive pension client.
10. The PRSA is still the only pension vehicle which allows all types of contributors; the employed, the unemployed, those without Schedule D or E income.

We will of course continue to keep you updated with developments in the Pension’s area as the finance bill runs through the houses of the Oireachtas.


More information on ITC's PRSA here.

The ITC PRSA Launch - We're open for business

We are delighted to launch the ITC PRSA this week. The ITC PRSA is available exclusively through Advisors and offers the same features available in all our existing pension structures through a non-standard PRSA. For example:

• Improved security: All assets of the ITC PRSA will be held in trust and segregated from other client’s assets
• Greater control: You and your client decide on what investments are made
• Greater transparency: All fees are transparent
• Flexibility: Access the most comprehensive range of investments available
• Online access available

 

Contact us for more information on:
t:	Emer Kirk - 087 620 0820 Sean McLoughlin - 087 2319765 Michael Keyes - 086 856 4520
w:	www.independent-trustee.com/pages/PRSA/
e:	JustAsk@independent-trustee.com

Some Planning Benefits of a PRSA

A previous blog looked at the advantages a Vested PRSA has over an ARF. This blog considers some of the key planning features inherent in a PRSA:

1. Transfers- A PRSA can receive in benefits from occupational pension schemes, personal pensions and other PRSAs. No other pension structure has this flexibility.
2. Phased retirement- It is possible to have multiple PRSAs and retire from the PRSA as required thereby accessing your tax free lump sum over a multi-year period. With the recent changes to the tax fee lump sum cap, the PRSA offers the individual the ability to make more use of their income tax exemption limits.
3. Better disclosure and reporting-The regulatory regime surrounding the PRSA is probably the most thorough of any financial product available in Ireland.  In addition to the normal checks and balances imposed by the Central Bank on the PRSA provider, there are an additional set of checks imposed by the Pension Board and supervised by the PRSA actuary.  In addition to the tighter regulatory regime there are more comprehensive regular reporting requirements to the individual investor in a PRSA contract than for most other pension structures.
4. 100% allocation rate and no exit penalties- On transfer business, a PRSA provider must give an allocation rate of at least 100% and cannot impose exit penalties.  This gives individual clients much more flexibility if their financial needs change and they need to access their funds.  It also means that PRSA providers are more likely to lower the annual management charge rather than enhance the allocation rate as they don’t have the protection of the exit penalties.
5. Flexibilty – A PRSA can exist as a pre-retirement vehicle (Accumulating PRSA), as a post lump sum vehicle (Vested PRSA) or as a drawdown vehicle (Drawdown PRSA). Being able to use the one vehicle pre and post retirement results in significant cost savings and planning opportunities.
6. Availability – A PRSA can be used by employees, directors, those with self-employed income and those with no earned income at all.
7. Public Sector AVCs – The option of paying AVCs into a PRSA is enormously popular in the public sector where the choice of providers is otherwise severely restricted. Ironically, the current financial crisis is making such AVCs more popular than ever as civil servants become aware of the possibility that their pension benefits could be reduced.

For Pension Advisors the flexibility and planning potential inherent in a PRSA has led to its current success. None of the recent legislative changes have altered the natural advantages it enjoys over other pension vehicles. From a standing start in 2003 PRSAs are now the fastest growing area of the pensions market.

Paul Gilmer

Part 5: Standard v non-standard PRSAs

There are two types of PRSA – a Standard PRSA and a non-Standard PRSA. The main differences between them are the charges and investment options.

What is a Standard PRSA?

1.     A Standard PRSA has maximum charges of 5% on the contributions paid and 1% a year on the managed funds

2.    Apart from temporary cash holdings, these types of PRSAs can only be used to invest in pooled funds, also known as managed funds. These are typically internal linked funds of an insurance company or a collective investment scheme.

3.    A Standard PRSA may not be marketed or sold if purchasing it is conditional on also buying some other product, such as life assurance.

What is a non-Standard PRSA?

A non-Standard PRSA does not have a maximum limit on charges and allows investments in funds other than pooled funds. This is the great feature of non-standard PRSAs - the PRSA holder can potentially invest in anything he/she wishes subject to the Revenue investment rules.

A key thing to take note of is that the SORP for a non-standard PRSA must contain the following warning notice:

“It is recommended that you seek professional financial advice about the nature of this PRSA contract”

Conclusion

Simple differences but notably the non-standard offers a lot more flexibility in terms of investment choice.

Paul Gilmer

Part 4: Transfers - to and from a PRSA

One of the great benefits of the PRSA as a pension vehicle is its ability to interact with other pension products in terms of transfers. Here are some of the things it can do:

Occupational pensions

1.   Transfer to an occupational pension scheme is possible subject to the trustee’s consent.

2.  Can receive a transfer from an occupational pension scheme provided the period for which the individual has been a member of the scheme is 15 years or less and benefits have not become payable. The 15 year restriction does not apply to AVC transfers. Certificate of Comparison and Written Statement required.

Personal Pensions

3.   Can receive a transfer from a personal pension subject to the rules of the personal pension.

4.    A personal pension cannot receive a transfer from a PRSA.

Approved Retirement Funds

5.    At the point of retirement, a PRSA holder can elect to take their lump sum and transfer to an Approved Retirement Fund. However, once having elected to ARF, the client cannot transfer back to a PRSA.

Vested and Non-vested PRSAs

6.    A non-vested PRSA can move to another non-vested PRSA without any restrictions or charges being incurred.

7.    Revenue have recently confirmed that a vested PRSA can move to another vested PRSA.

Buyout Bonds

8.    Transfers from and to a buyout bond are not permitted.

International Pensions

9.    PRSAs have specific provisions facilitating transfers to or from pension schemes outside the State.

We will expand on some of the points above in later blogs in the series but what is clear from the above is that the PRSA is the ideal pension vehicle not only for its transferability but also as a vehicle for consolidation of a client’s domestic and international pension arrangements.

Paul Gilmer

Part 3: PRSA versus Personal Pension

The PRSA was conceived as a replacement for Personal Pensions. It was originally intended by the Pensions Board that following the launch of the PRSA in 2002, that Personal Pensions (RACs)  would be phased out. However it has not quite worked out like that, with the personal pension continuing to co-exist alongside the PRSA.

Much of the reason for the continued existence of the RACs  is down perhaps to the approach of the larger life companies who tend to not be fans of the more onerous disclosure requirements attaching to PRSAs.

That is a pity because the PRSA offers significant advantages over personal pensions. Let us look at some of these key advantages:

• Transfers - The PRSA can receive transfers from occupational pensions and can also transfer to an occupational pension. That is a huge plus compared to personal pensions which are quite restricted from a transfer perspective.
• Post Retirement - The PRSA can be used to both accumulate a pension fund and later to pay it out. There is no post retirement mode for RACs.
• Transfer Costs - By law there can be no transfer costs associated with a transfer of pension assets into or from a PRSA. However there may be transfer charges on transfers from a personal pension
• Preserved Benefits - Both PRSAs (prior to vesting) and RACs offer a preserved benefit which can go without deduction of tax to the estate of a pension holder on their demise.
• Beneficial Owner - The Pensions Act Sec 98(1) makes it clear that “a contributor to a PRSA shall be the beneficial owner of the PRSA assets of that PRSA”.  No such provision exists for personal pensions.

In conclusion when we look at the above it might be difficult to justify choosing a personal pension over a PRSA.

Sean McLoughlin

Part 2: PRSA Reporting

One of the many advantages of the PRSA, from a client’s point of view, is the extensive reporting obligations imposed on the PRSA provider by the PRSA Regulations. From the advisor’s point of view this is the boring bit! You don't need to worry about them, as the PRSA provider we will look after all that. However, it might be useful for you to know.

1. A Preliminary Disclosure Certificate (PDC) must be provided to the client before they enter into a contract. The PDC specifies the benefits and the level of them which the client could reasonably expect to receive from the PRSA contract. The PDC is required to disclose all potential and actual commissions payable and details of any other charges. Note in a Non Standard PRSA this is usually a generic document.
2. Statement of Reasonable Projection (SORP) must be furnished to the contributor within seven days of the date of signing up to the PRSA. The PRSA provider is required to ensure the SORP contains a cancellation notice and information regarding charges. Following on from this, an SORP should be provided to the client on an annual basis. 
3. The PRSA provider is required to give to the client a Statement of Account at intervals not greater than six month’s duration.  This statement of account must:
• Show the total contributions paid since inception and, where a statement of account has previously been issued, the total contributions paid since the last statement.
• Where appropriate, distinguish between employer and employee contributions.
• Contain the PRSA value at the date of preparation of the statement. For this purpose the value is taken as the amount that would be available for transfer on the date of preparation of the statement.
4. The PRSA provider must provide an Investment Report to the client, at intervals not greater than six months, showing the investment performances of all funds in which the PRSA has invested in.

There is an old saying that says a camel is a horse designed by a committee. Well if that is the case a PRSA is definitely a pension designed by a committee of actuaries! No matter, it achieves a great result and we will deal with the onerous parts, so you can focus on the benefits the PRSA brings. 

Paul Gilmer

1. Why the Vested PRSA is replacing the ARF as the most flexible retirement option

On the face of it, ARFs were finally accepted into the larger pensions family in the Finance Act 2011 when they were made available to all retiring members of Defined Contribution arrangements. However their increased recognition in legislative terms, while welcome, brings it line with a ‘Vested PRSA’ which has existed for some time..

Some of the attractions of the PRSA as a post retirement vehicle are:

1. Deemed drawdown-There is currently no compulsory drawdown requirement on a PRSA in retirement. An individual has the option at retirement to leave their assets invested in their PRSA until age 75 thereby deferring the payment of such taxes.
2. Pensions Levy – The pensions levy, while it applies to a PRSA pre-retirement, does not apply to a vested PRSA post retirement.
3. UK property-The UK tax authorities have sometimes had a difficulty recognising the Approved Retirement Fund (ARF) as a pension vehicle and as a consequence any UK rental income arising in the ARF is potentially subject to UK tax. They have had no difficulty recognizing the PRSA.as a pension vehicle.
4. Early Retirement -  If you are a company owner/director looking to retire early, and you have an occupational pension, the Revenue are likely to insist that you sell your shares in the employer company. However when you are retiring from a PRSA, while the Revenue will insist that it is a genuine retirement, they do not require a sale of shares.
5. Estate planning- As stated above you can transfer your benefits at retirement to a number of PRSAs, and you can access these over a number of years. The value of a PRSA where no lump sum has been drawn down, can pass directly to your estate on your death, effectively acting as a form of life assurance for those pension holders up to the age of 75 who do not need to access all their funds. This offers advantages over an ARF where once the 25% tax free lump sum has been drawn, further withdrawals are subject to income tax.(Note there may be pensions levy implications)  
6. Flexibilty- Assets in a Vested PRSA can at a later stage be transferred into an ARF. Under current rules ARF assets cannot be transferred into a PRSA. 
7. Pension Adjustment Orders: A little known feature of pension orders is that they can sometimes be varied at a later stage, creating a lot of heartache for people who thought they had a final settlement.   It is possible to  block the variation of a pension settlement on separation and divorce when the pension vehicle is a PRSA. However, this facility is not available for an Approved Retirement Fund. 
8. Defer the AMRF requirement: The recent Finance Act increased the AMRF requirement to €120,000. This requirement does not kick in for a PRSA until it becomes ‘in payment’ i.e. a further drawdown is taken from from the PRSA after the lump sum has been taken. The AMRF requirement is immediate for ARF holders who do not have a guaranteed pension income of €18,000 at the time of transfer to the ARF. 

PRSAs are playing an increasing role as a retirement planning vehicle. Whilst the ARF is still the retirement vehicle of choice for many clients, the flexibility of the PRSA offers Pension Advisors significant planning opportunities for their client at retirement. 

Paul Gilmer

PRSA Planning Points

Independent Trustee Company will be launching their new PRSA product over the coming weeks, to coincide with our launch and marketing campaign we will be outlining some of the key PRSA planning points with a particular focus on client benefits post retirement.

If you have any thoughts or questions relating to PRSA planning we would be delighted to hear from you and will look to deal with these queries through the blog.

PRSAs and USCs – How not to do it!

The PRSA was introduced to increase private pension coverage - it’s a consumer-friendly product, very transparent, mobile and above all flexible.

Both an employer and employee can contribute to a PRSA and from an employer perspective there is no need to create a group pension fund. Employers, particularly multinationals, had started to favour PRSA’s as a part of an overall remuneration package.

In the context of pension schemes, employer contributions to PRSAs are taxable on the employee as a benefit-in-kind. However, the employee could claim tax-relief up to the normal age-related pension limits, so in general there was no tax liability arising.

With the passing of the 2011 Finance Act, which saw PRSI extended to certain types of pension contributions, and the introduction of the Universal Social Charge (USC), the unfortunate employee, with a PRSA as his company pension vehicle, gets hit with a double whammy - the employer and the employee contributions are subject to both PRSI and USC.

As employer contributions are treated as if they were made by the employee and effectively added to the pay of the employee, employer contributions to a PRSA now attract a USC liability ranging from 2% of the first €10,036 up to 7% on sums over €16,016 plus PRSI of 4% (on amounts over €127 per week).That’s an 11% hit on pension contributions for virtually all employees on monies they will not be receiving until they retire.

Meanwhile employer contributions to a self administered pension scheme are, quite rightly, not subject to either the USC or PRSI.   

The impact of a potential 11% hit on PRSA contributions by an employer was probably unintentional.  However it will very quickly kill that market.

An example of how not to do it – we live in hope that the new government will realise the damage that is being caused and reverse the Finance Act changes.  

Paul Gilmer