Independent Trustee Company is a proud sponsor of the IBA Life, Pensions and Investment Awards for Brokers, 2014

2014 will mark the introduction of the inaugural IBA Life, Pensions and Investment Awards for Brokers. This black tie function is to be held on Thursday, March 13^th in The Round Room, Mansion House and ITC are delighted to announce our support for what promises to be an exciting event for all brokers in the life, pension and investment market.

The LPI Awards will ensure that those at the forefront of the profession are identified and commended. The event aims to give recognition to the life, pension and investment brokers who have proved their excellence, professionalism and dedication to maintaining high standards in the Irish market.  There are ten different award categories to be won, to recognise and reward brokerages for their significant accomplishments. 

Consisting of a drinks reception, dinner, awards ceremony hosted by a celebrity compere and after show entertainment, the LPI Awards for brokers will be a night to remember and an event that ITC are proud to support.  Full details of the event are available on the website: www.lpiawards.ie

Why aren't pensions totes amazeballs?

To paraphrase Oscar Wilde: “Pensions are wasted on the Young”. 

The Question is Why?

A mini-survey was carried out on 67 individuals in different industry sectors under the age of 35 with some of the findings coming as a surprise. The purpose of this survey was to derive an idea of the opinions of those individuals on saving for their future.

The findings indicated the youth of today are focused on ‘living for the now’. However, when asked about their idea of what retirement means, they think of a time which is fun, filled with holidays and, specifically, not having to work. The State pension nowadays is less than half the current average salary of those in employment in this age group, which poses the question ‘how do they expect to fund for this expected lifestyle?’

The results of the survey reveal that the majority of these individuals do not have a pension scheme. Just fewer than half the participants claim that their employer company does not provide a pension scheme. It was surprising to note that a large amount of these individuals stated they have not been approached by their employer and advised of the availability of a mechanism to begin saving for their retirement.  It is a mandatory requirement that all employers offer a company scheme or a standard PRSA, this leads us to believe the availability of such schemes are not sufficiently promoted.

When the sample was asked if they would save themselves for retirement, responses were negative, consisting of phrases such as “too costly”, “can’t afford to” and “maybe in the future”.

The lack of saving earlier in life will mean a significant amount of stress will be placed on the amount to be contributed to make up the same expected salary for retirement. Take for example, two people, both earning €40,000 per annum and expecting to get a pension of 68% of that salary (€24,600). One decides to begin saving at 26, the other at 41. To achieve the same outcome they will both have very different contribution amounts:

It is important to focus on providing guidance to younger people to invest in their pension as this will benefit them later in life when they may need more disposable income.

This issue was discussed directly with some of the participants who worked in financial services and who were therefore professionally aware of the need for pension savings but had not yet undertaken any pension planning themselves.

Whilst validating some of the comments outlined above these participants also offered some comments on the approach of the industry itself to the issue:

“If pensions are so important why do they appear at the end of the Manual?”

“When we were presented with details of the financial planning pyramid – pensions always appeared at the bottom”.

Portions of the survey undertaken focused on particular features that could be included in pension products to make them of more interest to young people. This will form the subject of a later article.

However both the general comments and the specific feedback from those in the industry highlighted a number of points about communication:

1. We as an industry are not clear in the message we give to young people on this topic
2. Whilst employers are obliged to provide access to a pension mechanism, greater work needs to be done around communicating this to the younger audience

The under 35s are often referred to as the “Apple Generation”. This reflects the significance of technology and social media to their everyday lives. Perhaps the real message coming from this survey is that greater use of such tools is necessary if we want to communicate fully to this generation.

By Emma Herrity, Trustee Administrator, Independent Trustee Limited.

Wishing you a Merry Christmas and a Happy New Year from ITC

The ITC team would like to take this opportunity to wish all our readers a very Merry Christmas and a Happy New Year.  Our office will be closed from Tuesday December 24th 2013 to Wednesday January 1st 2014. We will reopen on Thursday 2nd January 2014.

We will be back in 2014 with more from Ireland's first truly independent pensions blog!

www.independent-trustee.com

Dail Drawdown

Yield from the taxation of the annual imputed distribution of ARF assets 2007 – 2012

Year	Yield (€ million)
2007 (earliest available)	2.75
2008	6.5
2009	7.9
2010	10.3
2011	11.6
2012	11.5

Aidan McLoughlin on RTE Radio 1

Aidan McLoughlin speaks to Sean O'Rourke on RTE Radio 1 about how the Government has signed off on new rules that could see cuts in pensions for retired members of defined benefit schemes.  Listen to the full podcast here.

www.independent-trustee.com

Reprioritisation of Benefits: the real winner is…?

5 years into the financial crisis that destroyed the Balance Sheet of almost all DB schemes  (and 18 months after a comprehensive solution backed by IBEC, ICTU and certain pension bodies was presented to the Minister) action has finally been taken to restructure the Priority Order.

Why that is necessary can be illustrated by looking at a scheme with 2 members (1 pensioner, 1 active), an insolvent employer and a fund value of €500,000:

A. Before Financial Crisis

Value of Pensioner liability   €350k

Value of Active liability        €150k

Funding for Actives             100%

B. After Financial Crisis

Value of Pensioner liability   €500k

Value of Active liability        €150k

Funding for Actives              0%

The deterioration was primarily caused by the decline in bond yields in Germany which meant annuities became more expensive and therefore more of the fund was allocated to pay pensioner benefits.

The new rules now mean (in scenario b above) that where both the employer and pension scheme is insolvent (Double Insolvency) the balance will be rejigged as follows:

C. After Minister’s announcement

Value attributable to Pensioner    €425k

Value attributable to Active         €75k

Shortfall                                     €125k

Earlier this year the European Court of Justice ruled that the Irish State had failed to provide adequate protection to members of such schemes. The net effect of this was that, under scenario b above, the State was facing a liability of at least €75k. This liability will now be Nil – the pensioner is picking up the tab.

Note that in the recent budget the Minister for Finance also raised an additional levy on pension funds to pay for this liability –money he can now use for other purposes.

The real winner is the Government!

Important Pension Change - Act Now

Budget 2014 reduced the standard fund threshold (SFT) from €2.3m to €2m.

This means that, when an individual accesses their pension benefits, if the value of all pensions held by that individual exceeds €2m, the excess will be subject to an effective rate of tax of up to 70%! 

While a fund of €2m may seem quite large, it in fact equates to an annual income in retirement of around €50,000 so it may affect more pension savers than you would initially imagine.

In a recent survey conducted by Independent Trustee Company, 75% of the advisors polled said that   securing the €2.3m PFT for their clients was of high importance.  There is a window of opportunity available, but you must act quickly.  

Where an individual has existing benefits in excess of €2m at 1^st January 2014, Revenue will allow them to apply for a personal fund threshold (PFT) and that threshold will apply to them instead of the SFT.  The maximum PFT available is €2.3m.  Depending on your clients’ circumstances, it may therefore make sense for them to contribute to their scheme before the end of the year in order to secure a PFT for the full value of their benefits.  Contributions made after 1^st January 2014 cannot be included in the calculation of the PFT.

The key is to act now, before the 31^st December, while the opportunity for your clients is still available. 

For further information, please contact one of our consultants in ITC Consulting:

Barry Kennelly on (01) 6148068 or at barry.kennelly@independent-trustee.com

Jennie Faughnan on (01) 6035140 or at jennie.faughnan@independent-trustee.com

2013 Business & Finance FS50 Awards - Aidan McLoughlin

We are delighted to announce that Aidan was chosen by Business & Finance magazine as one of the most influential business leaders in financial services in Ireland.

Aidan was joined at the Merrion Hotel on Wednesday night with other industry leaders that are playing a vital role in financial services. Padraig O'hUiginn, Former Secretary General Department of the Taoiseach 1982-1993 was also honoured during the evening for his outstanding contribution to financial services.

www.independent-trustee.com

Finance Act 2013 - The Bill, Part 2

Following the budget in early October, the Government have wasted no time in introducing Finance Bill 2013 (2) which, among other things, makes provision for how Noonan’s pension amendments are to take effect. Paul Gilmer sets out some of the key points from the first draft of the bill:

1. New Standard Fund Threshold (SFT)

As expected, the SFT has been reduced, but by a lot less than most expected. Finance Bill 2013 (2) reduces the €2.3 million cap down to €2 million with effect from 1 January 2014. However, as on previous occasions, an individual who has pension rights in excess of this new lower SFT limit on 1 January 2014 may claim a Personal Fund Threshold from the Revenue Commissioners (see note 2).

The new lump sum rules are:

1. Maximum tax relieved lump sum at 25% of €2,000,000 = €500,000
2. The first €200,000 tax free.
3. €300,000 taxed at 20%


Individuals with the capacity to fund to the €2.3 million mark should act before the 31 December 2013.

2. New .15 Levy

Minister for Finance Michael Noonan has followed through on the Government’s commitment to end the pension levy  of 0.6 per cent a year but disappointingly didn’t waste any time in introducing a new levy of .15 per cent for the years 2014 and 2015. Unfortunately, it seems that the levy is going to be a feature on the pension landscape for the foreseeable future.


3. Revenue are introducing e-filing for the new round of Personal Fund Thresholds (PFTs):

In order to make a PFT notification to Revenue, an individual will be required to obtain from the administrator of each pension arrangement of which he or she is a member, a statement certifying, among other things, the amount of the individual’s pension rights on 1 January 2014 relating to that arrangement. A PFT notification will have to be made electronically on a system being developed by Revenue and the time period for notification will be 12 months after the date on which the electronic system is made available.

A PFT notification made by electronic means shall be deemed to include a declaration to the effect that the notification is correct and complete.

Revenue will also accept a PFT application in the normal way for those retiring before the electronic system in place.

4. Another benefit to the public sector high earners:

The reimbursement options, introduced in Finance Act 2012, for public servants affected by chargeable excess tax (who, unlike affected individuals in the private sector, cannot generally minimise or prevent the breaching of the SFT or PFT by ceasing contributions and benefit accruals) are being amended and extended.  This will reduce the amount that can be recovered upfront from the net retirement lump sum payable to the individual to a maximum of 20 per cent (from 50 per cent) and to include the option of reimbursement of the pension fund administrator solely by way of a reduction in the gross pension payable over a period not exceeding 20 years.

5. There is more detail on the new rules for valuing pension benefits:

The valuation factor to be used for establishing the capital value of an individual’s defined benefit (DB) pension rights at the point of retirement, where this takes place after 1 January 2014, is being changed from the current standard valuation factor of 20 to a higher age–related valuation factor that will vary with the individual’s age at the point at which the pension rights are drawn down. The age–related valuation factors range from 37 for DB pension rights drawn down at age 50 or under, to a factor of 22 where they are drawn down at age 70 or over.  The valuation will also distinguish between benefits accrued before 1 January 2014 (still valued at 20 times) to those accruing after 1 January 2014 (valued based on the age related factors).

6. Clarification of the early access to AVCs

The bill provides clarity for members of occupational pension schemes/PRSAs regarding the option to withdraw up to 30 per cent of the accumulated value of additional voluntary contributions. The bill is amended to address concerns that the existing override provisions in the section may not give scheme trustees and PRSA administrators sufficient scope to allow such withdrawals where the trust deed and scheme rules or the PRSA contract terms prohibit them. The amendment specifically provides that the option may be exercised by an individual, notwithstanding the rules of the retirement benefits scheme or the terms of the PRSA contract concerned. This will obviate the need for scheme rules or contract terms to be changed to facilitate the withdrawal option. The change applies to options exercised on or after 27 March 2013, the date Finance Act 2013 became law.

Of course, we are all hoping this is the end to what has become an annual event whereby amendments are made to the Irish Pension Regime. However, lessons from the levy show we should not be too optimistic.

Paul Gilmer

Director

ITC Consulting

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.”