Fianna Fail Launches Pension Strategy Paper

The Fianna Fail pension strategy, launched today by Willie O’Dea, deals with several issues close to our heart:

1.       The funding requirements for DB schemes

2.       The priority order for DB schemes on wind up

3.       Early Access to Pensions and

4.       The issue of Pension Charges

As chair of the Pensions Committee of the IBA I have actively involved in communicating with politicians of all shades on the issues facing pensions. The paper launched by Willie O’Dea is testament to the fact that patient and consistent dialogue does have an impact.

The funding levels DB schemes have to met is set at artificially high levels due to:

1.       the historically low level of bond yields and

2.       the additional reserve requirement imposed by the current government

The Paper proposes that this be addressed by easing the funding requirements and allowing greater flexibility as to when and if annuities are purchased.

In relation to the priority order the Paper suggests that, once a certain level of pension has been guaranteed in priority to pensioners the balance should rank equally with other members of the scheme. This would address the big gap in benefit that can exist between members either side of retirement age.

The current early access regime is too restrictive (as it only applies to AVCS) and mean spirited (as it imposes an additional 41% tax on those in difficult financial circumstances). The solution proposed is to replace it with an option to take some or all of your tax free lump sum at any stage in your life. There is no loss of tax to government and the greater flexibility enhances the attractiveness of pensions and gives relief where it is due.

On pension charges the Paper proposes the development of a Total Expense Ratio so that fund manager costs can be more easily identified. Also greater transparency on other costs is advocated.

 

To view the full paper click here.

Written by Aidan McLoughlin

Independent Trustee Company

Managing Director

Finance Act 2013 – the Bill

The Government published Finance Bill 2013 on 13^th February 2013.

In the area of pensions, the Government introduces new thresholds to the regime for ARFs and vested PRSAs. The measures are significant because they contravene previously introduced efforts at securing pensioners’ retirement income in old age.   The new thresholds, which had not been flagged by the Minister in his Budget speech in December, means that the thresholds which applied to ARFs pre-Finance Act 2011 will now see a comeback.

Since Finance Act 2011, members of Occupational Pension Schemes and contributors to Personal Pensions and PRSAs who have an annual pension income of €18,000 can take the entirety of their pension benefits into an ARF.  Those who do not have sufficient pension income must first set aside pension benefits to the value of €119,800 in an AMRF - or buy an annuity for that amount. The AMRF has to be kept until age 75, or until such times as the pensioner becomes entitled to an annual pension income of €18,000 (whichever is the earlier).

However, from the passing of the Finance Act, the requirement of a €18,000 pension income will be reduced to €12,700. This means that recipients of the Old Age Pension (currently around €12,000) who have very limited additional pension income, no longer have to put money aside for very old age. Accordingly, Finance Act 2013 effectively marks the beginning of the end for the prudence of thinking which infused the AMRF concept.

Furthermore, from the date of the passing of the Finance Act, the max value of the AMRF will be reduced from €119,800 to €63,500.  But it is perhaps more precise to say that the value of ARFs will be increased by the difference, namely €56,300. This is significant because ARFs are subject to imputed distributions which, in turn, are subject to income tax - while AMRFs are not. So, bigger ARFs, bigger income for the Exchequer. While there can be no other reason for decreasing the value of the AMRF other than to improve the tax take for the Exchequer, the measure is, seen in isolation,  perhaps of little importance as the AMRF regime is on the way out – as already argued.

Another measure, one which was flagged in the Budget, is the access to AVCs prior to retirement in certain circumstances.  An individual who has made AVCs can make a once-off withdrawal of up to 30% of the value of their AVCs prior to reaching retirement.  This is restricted to AVC funds. Access to other types of pension arrangements, such as personal pensions, is not available.  The access to AVCs will be available for a period of 3 years from the passing of the Finance Act 2013.

Funds withdrawn in this manner will be subject to income tax at 41% but will be exempt from USC and PRSI.  If an individual can provide a certificate of tax credits or evidence that they are subject to income tax at the 20% rate, the tax payable may be less than 41%.

While this would appear to be a welcome measure at first glance, on reflection it could once again signal the government’s shift to short-sighted policies to increase the short term tax take from pension funds.  As with the changes to the AMRF regime, allowing early access to AVCs only serves to reduce the benefits available to fund an individual’s retirement which may once again leave them dependant on the State later in life.

 

Tommy Nielsen & Jennie Faughnan

Independent Trustee Company

Women taking 'huge financial risks' by relying on partners for support

Thursday 8th March marks International Women’s Day. This day has been observed since the early 1900s and since then we have witnessed a significant change and attitudinal shift in both women's and society's thoughts about women's equality. With more women in the boardroom, greater equality in legislative rights, and an increased critical mass of women's visibility as impressive role models in every aspect of life, one could think that women have gained true equality.

Why then has a new academic study found that a majority of females rely on their partners to pay for their retirement?

Less than one in three women who are entitled to a state contributory pension qualify for the full €230 a week payment, a study by academics from NUI Galway and Queen's University, Belfast, found. A majority of men, by contrast, end up with the full state pension when they retire.

Women have inferior pensions compared with men because they are mainly engaged in low-paying jobs or only work part-time and do not earn enough to qualify for a full state pension, with most of them not paying into a private retirement fund.

The fact that the primary role of many women is caring also accounts for poor pension provision among women.

The study, 'Older Women Workers' Access to Pensions', found that many depend on their partners' or husbands' incomes for a secure future, even though they may well outlive them as women tend to have longer life expectancies. This is a high-risk strategy because they could be left with nothing in the event of a separation, divorce, widowhood, illness or redundancy.

Women only tend to become aware of the importance of having a personal pension late in life when it becomes too expensive to fund for an adequate pension.

With an aging population and the Trioka having already signalled that state benefits to pensioners should be reduced, the notion of a state sponsored retirement is a high risk strategy. Supplementary pension coverage and contributions through private pensions must be increased to improve adequacy of incomes in retirement. 

They say life begins at retirement and for many women while it will be nice to get out of the rat race, without an adequate private pension they have to learn to get along with a lot less cheese. 

Emer Kirk

Independent Trustee Company



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

As an advisor, how will the pensions levy affect your business?

Independent Financial Advisors provide advice on 70% of all contributions into private sector pensions in Ireland and, as professionals, are at the forefront of advising the Irish public to provide for income on retirement.

A poll conducted by Independent Trustee Company has revelaed that the vast majority of financial advisors believe that the pensions levy will negatively affect the amount contributed to private sector pension funds in one way or another over the next few years.

The question put to top Financial Advisors was “Following the new pension levy, how will this affect your clients’ future decisions to contribute to their pension fund?”

The results of the poll are highlighted below.

Pensions coverage in Ireland is still at an alarmingly low level with voluntary private pension coverage at 53% for people aged between 25-34 years. Adequacy of pensions savings is a major issue for people aged between 45-65 years. This is a long term issue that needs to be tackled and not exacerbated by a short-term need for cash. The government needs to support and incentivise people who are prepared to save for their later years. Tax relief on contributions is crucial to this and must be maintained and these benefits must also be highlighted to the Irish public.

Pensions, despite the levy, are still the most efficient way of saving for retirement.

Michael Keyes