Dáil Drawdown: Standard Fund Threshold

Minister Noonan went on to say; "there is currently no underlying data available to my Department or to the Revenue Commissioners on which to base reliable estimates of the savings from a further significant reduction in the SFT to the level indicated in the question. Information on the numbers and values of individual pension funds or on individual accrued benefits are not generally required to be supplied to the Revenue Commissioners by the administrators of pension schemes and personal pension arrangements. The estimated savings indicated at the time in respect the Budget and Finance Act 2011 change in the SFT were quite conservative, based as they were, on incomplete data and using very broad assumptions. Indeed, those underlying data and assumptions may not be directly applicable to determining the effect of a further significant decrease.

My Department has been engaging with representatives of the pensions industry with a view, among other things, to gathering private pensions-related data which may be of value into the future in estimating the costs of potential changes in the pensions’ tax area. These engagements are ongoing".

Source: www.oireachtas.ie

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

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