Dail Drawdown

Minister Noonan went on to say “I considered that I was in a position to make these significant commitments on foot, among other things, of proposals in late 2012 from the pensions sector for changes to the Standard Fund Threshold (SFT) regime, as an alternative to standard rating of pension tax relief, which it was claimed would yield savings and tax revenues in the region of €400 million. Pending further analysis of this claim, I included a much lower figure of €250 million in the Budget 2013 arithmetic. That analysis has since revealed significant downside risks to the achievement of even this lower level of yield or savings. The estimate of the yield from the changes to the SFT regime which I announced in last week’s Budget is €120 million. These changes differ in some respects from those proposed by the pensions sector and reflect, on legal advice, the requirement to protect pension rights at the date of change. In addition, valuation factors to place a value on Defined Benefit pensions for SFT purposes will vary with the age at which the pensions are drawn down thereby improving equity within the regime.

I would not categorise my engagement with the pensions sector on this matter as a “deal”, in the manner suggested by the Deputy. However, the assessment that the changes to the SFT regime required to deliver on the Budget 2013 commitment to cap taxpayer subsidies to higher value pensions would have a considerably lower yield than originally put forward, meant that the achievement of the overall budgetary objectives (including the continuation of the reduced VAT rate for the tourism sector and to make provision for potential State liabilities which may emerge from pre-existing or future pension fund difficulties) necessitated the imposition of the additional 0.15% pension fund levy for 2014 and 2015.”

Budget 2013 - Act Now?

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.

Jennie Faughnan

ITC Consulting

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.