Every year around this time we
see a lot of clients wishing to take action before Budget day. Whether it is making contributions or
accessing their benefits, the general sense is that, while they don’t know what
will happen in the Budget, they don’t expect there to be many changes for the
better.
This year is no different and
with reports in the media every day speculating about what changes Budget 2013
will bring, when it comes to your and your clients’ pensions, what should you
do?
Tax Relief on Contributions
There is much speculation that
tax relief on pension contributions will be cut for marginal rate tax
payers. This was one of the proposals in
the Programme for Government and the National Pensions Framework and one of the
few pension related changes that has not yet been implemented. Tax relief for marginal rate tax payers may
be cut to 20%.
Could you still avail of the
higher rate of tax relief if you make your pension contribution before the Budget?
Pension Fund Threshold
The pension fund threshold
imposes an excess fund tax on pension funds over €2.3m at the date at which
they are accessed. This threshold was
reduced in 2010 from €5.4m. The Fine
Gael manifesto stated that they intended to reduce this to €1.5m. There is much talk in the media that
ministers believe that an annual pension of €60k should be enough for anyone in
retirement. Using the same
capitalisation factor used to value the fund threshold, this would equate to a
threshold of €1.2m. In reality, however,
a fund of €1.2m would not buy you an annual pension of €60k. It is more likely to buy an income of around
€30k per annum.
If the threshold is to be reduced
in the Budget, should you fund your pension as close to the €2.3m threshold as
you can now?
Pension Cap
The other way of restricting
pension benefits to an annual income of €60k would be to impose a “super tax”
on pension payments above €60k per annum or to limit tax relief on
contributions which deliver a pension in excess of €60k. This would appear to be a more popular method
as it would target those on large pensions who we have heard so much about in
the media recently.
However, with the minister for
health recently stating that the average annual cost of a nursing home is €100k
per annum, the €60k annual pension does not sound like it would go too far if
these circumstances arose for you in retirement. In this context, it may not make sense to
fund up to the maximum fund threshold at this time as you may be penalised by
the “super tax” when you drawdown your benefits.
Unfortunately, we don’t have a
crystal ball and we can not predict what changes Budget 2013 will bring. It does, however, provide an opportunity to
review your and your clients’ pension provisions and assess what options may be
available.
ITC, in conjunction with the Irish Brokers Association are holding a Budget Briefing Webinar on Thursday December 6th. The briefing will focus on pension changes, capital taxes and retirement planning. Register below to reserve your place. Due to popular demand a second webinar has been scheduled and spaces are limited.
