Employing your spouse...what to keep in mind.

The idea of employing your spouse in your business can give rise to many advantages, but care needs to be taken in relation to how this is set up. There are many advantages to employing your spouse in your business; the greatest one is usually flexibility in terms of working hours! The fact that there is a direct personal and financial interest in the success of the business has a huge impact, although many businesses do not recognise the value of services provided by the ‘non-principal’ spouse, so the question of even a basic wage is never considered...Consider these questions to see whether this is something relevant to you:-

• Is your spouse assisting you in the business in an 'invisible' way – perhaps answering phones, taking orders, keeping the books, filing tax returns, doing payroll or indeed simply acting as a company director (more on that below)?
• Has a comprehensive list of what your spouse does ever been drawn up, or are diaries kept? Perhaps have them keep a diary for a month or so, which should give a good indication of the type of work they are doing, and how long it typically takes them to do it.
•  There is an intrinsic value in having someone available at times when you are not, does your spouse fill this description? When business contacts deal with your spouse, do they consider that they are still dealing with the business itself?
• If your spouse is a company director, this is a significant role of itself, as your spouse cannot delegate this responsibility to you. They are fully responsible for the activities of the company. No-one else would carry this responsibility for no pay, why should your spouse?

You may feel that your business cannot afford to pay your spouse – but perhaps wages or a salary could be accrued in your company accounts until times are better or more cash is available. This acknowledges the value brought by your spouse. No-one else would do this without payment! Some pointers for doing this:-

• Have a contract of employment drawn up for your spouse to include a full description of the role carried out by them
• Agree a structured payment and notify Revenue of the position. There are tax savings that can be generated by doing this, rather than having all allowances and credits claimed through one spouse.
• Do consider whether there are PAYE issues to be addressed. Bear in mind the impact of the USC which takes effect for anyone earning more than €77pw.
• In light of recent pension changes, consider whether it might be useful to have a separate pension structure for your spouse.

The bottom line here is that if you are going to do something, do it in a way that brings maximum benefits, taking care of all the details. Last thing anyone needs is a debate with Revenue over whether a spouse’s salary is justified!

If any of these issues are relevant to you and you would like more details please call (01) 6611022 or email justask@independent-trustee.com

Sonia McEntee

Are private pensions up for grabs?

Kathleen Barrington, of the Sunday Business Post Online, discusses the threat of the government raiding private pensions to fill the gaps in the Irish bank and government balance sheets.

The Constitution of Ireland protects property ownership, and citizens of the state are guaranteed that no laws will be passed to abolish property rights. Property rights can be limited by reference to the ‘common good’, so the question here is; what action could be justified in the ‘common good'?

The proposed levy on pension funds is already an attack on these rights as it is essentially a penalty on accumulated funds, rather than a tax on funds contributed afterwards. The rate of the levy, if it is introduced, will  be set at a level where a challenge would be unlikely. Remember the furore over the restriction of property-related tax incentives announced in the budget? If a levy raises the ire of the motivated, that in itself may be challenged before any consideration is given to ‘privitisation’.

Click here to view Kathleen Barrington's post.

Comments by Sonia McEntee

Grandfathering



Grandpa Simpson

Despite the various representations made by representative bodies it would appear that the Central Bank is committed to its plan to kill off all grandfathers in Financial Services.

It remains committed to this final solution despite the fact that it has acknowledged the following:

1.       There will be no improvement in the service received by clients

2.       There will be a €5m cost to the Broking profession which will be an additional cost to clients

An approach of this nature is not only contrary to the Principles of Good Governance  as enunciated by the Irish Government (it breaches the principles of Necessity, Effectiveness and Proportionality), it is also potentially in breach of  EU law.

Why?

Because the only industry professionals who will not have their experience recognised by the Central Bank are those that have developed that experience in Ireland. Experience gleaned in all other EU states will be recognised as those individuals will be eligible to provide services here based on the requirements of other EU states.

The concept of mutual recognition of qualifications is developed law in the EU.

In all such cases, where an individual falls short of the relevant educational standard, the host state is required to take into account the experience the person has gained within the EU. In the Bobadillo case the ECJ held that where a qualification wasn’t recognised it was necessary to look to the Professional Experience of the person to see if it was equivalent.

The Irish Brokers Association has proposed working with the Central Bank to develop a system which would recognise professional experience – in compliance with the basic principles of EU law.

To date this approach has not been accepted.

If we are to learn anything from the current financial crisis it must surely be not to have to rely on the EU to tell us how to run our own country.

I have no doubt we will come through the current financial crisis stronger than ever. And in years to come our civil servants will be travelling the world to see their services as to how this major economic problem was overcome.

The key asset they will be selling will be their experience.

What price can you put on that.

Aidan McLoughlin

Investment in Ireland

When you consider the level of investment needed in Ireland to:
1. Pay for the banking crisis

2. Fund the government deficit

     3. Provide finance to long suffering businesses


You would think every aspect of our investment regime would be structured to maximise the flow of funds. In fact, the exact opposite is happening!

Irish pension funds are sitting on €80 billion in assets. A reducing amount of this is invested in Ireland.

Concerns about the level of equities in Pension Funds means they are selling equities. The volatility of Irish government debt means they cannot invest in this either. SME investment is handicapped by a range of Revenue rules dealing with close companies.

Even the annuity market cannot claim to be immune: whilst the yield on Irish Gilts rocket upwards annuity rates remain depressed because of the need to back them with German Bonds.

To borrow loosely from Coleridge: “Money Money everywhere and Everyone Going Broke”.


Author: Aidan McLoughlin


_________________________________________________________________________

Disclaimer: 

• The opinions expressed are those of the individuals rather than Independent Trustee Company.
• Independent Trustee Company does not take responsibility for the accuracy of any content.
• The contents cannot be construed as advice.
• We would strongly suggest that any information provided should be discussed with your financial adviser before any action is taken.

The Bigger Picture

Introducing the Green Paper on pensions back in 2007, the then Minister for Social & Family Affairs had this to say:

“We are living longer, and in better health….However, while Ireland currently has a younger population than most European countries, over the longer term the impact of population ageing in this country will be considerable. According to new data in this Green Paper, the number of people of working age for each person over age 65 will fall from 6 in 2006 to 2 in 2050. Taking account of the fact a proportion of those of working age will not be in employment, the ratio of workers to people aged 66 and over in 2050 will be 1.5 to 1…”

1.5 workers for every individual entitled to a social welfare benefit….astonishing statistic, isn’t it? Here are a few more:

·    The population aged 65 and over will increase by 59% by 2021 and by a further 142% by 2061.

·    Since 1998, the proportion of pensioners receiving a state pension has increased from 61% to 71% in 2000 and is projected to increase to 98% by 2056.

·    Adequacy is primarily a private sector issue: most public service pension schemes will provide benefits after long service which, when added to any social welfare pension entitlement, will provide a retirement income at least equal to 50% of pre-retirement income.

·    Current costs of providing state pensions stands at 3.2% of GNP - this figure is projected to grow to 10.1% in 2060.

These statistics are just some of the factors contributing to an enormous headache for the State and are the reasons behind the publication of 4 major papers on pensions, culminating in the National Pensions Framework in 2010. However, the current difficult times have caused our great public servants to ignore the ticking time bomb outlined above, and they have proceeded to roll back incentives that were introduced to increase private pension coverage. The threat of an annual levy on pension funds together with a further reduction of benefits represents the subjugation of tomorrow’s concerns in order to pay for today’s.

This has happened once before in our history. In a time of great calamity our ancestors ate the seed potatoes and were left bereft shortly thereafter. We should avoid doing the same. Otherwise the only thing we will have learned from history is that we have not learned from history.

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

Pensions and the Sex-Factor

The decision of the European Court of Justice last week which has determined that using sex as a factor in assessing insurance premium levels will no longer be allowed provided plenty of newspaper coverage last week, much of which focused on increased motor insurance premiums for women into the future.

For pension purposes however, the news may be slightly better, assuming that the ‘discrimination’ applied in the purchase of annuities has traditionally favoured men. While on the motor insurance front, it is clearly being assumed that while the cost of insurance for women will definitely rise, the cost of insurance for men may not fall to meet it in the middle. Applying this presumption to the pension market would mean making pensions significantly more expensive for men.

Given that pension coverage for men is much greater than for women, this may seem unlikely, as the impact on such a large proportion of the market would, not only result in a fall in business, but would result in lower incomes come retirement age. While many questions were asked last week about whether increased premiums would result in fewer women drivers, it’s far more likely that to increase the costs of making pension provision will have the immediately knock-on effect of reducing the numbers applying for it.

Would a drop in the costs encourage more women to take command of their own pension provisions? Today, for a woman aged 60 to purchase an annuity to provide an income of €30,000 will cost approximately €670,000. The equivalent cost for a man would be approximately €645,000.

So we can look at this ECJ decision in a positive light, while it may cost a 40 year old woman more per year to insure her car, the reduced cost of providing for retirement may far outweigh this.

Sonia McEntee

Fine Gael's Pension Policy Summary

While it’s still unclear whether the new government will be a Fine Gael/ Labour coalition or if Fine Gael can make up a new government with the support of Independents, we know that Fine Gael will be the majority party in government. See below Fine Gael’s Pension Policy Summary from their election manifesto:

• A temporary, annual 0.5% contribution for all private pension funds, so that older beneficiaries of past tax relief make some contribution to deficit reduction. An equivalent reduction could be applied to public and private sector defined benefit entitlements.
• Abolition of PRSI relief on employer pension contributions.
• Allowing defined contribution pension savers to access funds early to meet their current business and personal responsibilities (and taxing the draw-downs).
• A cut in the standard fund threshold for pensions to €1.5 million for public and private sector workers, while also increasing the notional annuity cost of defined benefit, final salary schemes from the current 20:1.
• An increase in the “deemed distribution” rate on large (Annual Retirement Funds ARFs) to avoid their use for inheritance tax planning.
• The net objective of changes will be to cap taxpayer contributions to existing public and private sector schemes that deliver pensions of greater than €60,000 in retirement, while maintaining adequate incentives for younger, middle incomes families to continue to save for their retirement.
• There will, per usual, be transition arrangements for those approaching retirement.
• Put the tax treatment of employer contributions to Personal Retirement Savings Accounts (PRSAs) on an equal footing with employer contributions to occupational pension schemes.
• We will also fix the regulatory problems to allow private pension funds to invest more in Irish business.
• By cutting down on waste and inefficiency Fine Gael will keep the Old Age Contributory and Non-Contributory pension at its current level.

Why the new EII may not be the job creation initiative it appears to be........

Sonia McEntee comments on the introduction of the Employment and Investment Initiative (EII) in the Sunday Business Post

PRSAs and USCs – How not to do it!

The PRSA was introduced to increase private pension coverage - it’s a consumer-friendly product, very transparent, mobile and above all flexible.

Both an employer and employee can contribute to a PRSA and from an employer perspective there is no need to create a group pension fund. Employers, particularly multinationals, had started to favour PRSA’s as a part of an overall remuneration package.

In the context of pension schemes, employer contributions to PRSAs are taxable on the employee as a benefit-in-kind. However, the employee could claim tax-relief up to the normal age-related pension limits, so in general there was no tax liability arising.

With the passing of the 2011 Finance Act, which saw PRSI extended to certain types of pension contributions, and the introduction of the Universal Social Charge (USC), the unfortunate employee, with a PRSA as his company pension vehicle, gets hit with a double whammy - the employer and the employee contributions are subject to both PRSI and USC.

As employer contributions are treated as if they were made by the employee and effectively added to the pay of the employee, employer contributions to a PRSA now attract a USC liability ranging from 2% of the first €10,036 up to 7% on sums over €16,016 plus PRSI of 4% (on amounts over €127 per week).That’s an 11% hit on pension contributions for virtually all employees on monies they will not be receiving until they retire.

Meanwhile employer contributions to a self administered pension scheme are, quite rightly, not subject to either the USC or PRSI.   

The impact of a potential 11% hit on PRSA contributions by an employer was probably unintentional.  However it will very quickly kill that market.

An example of how not to do it – we live in hope that the new government will realise the damage that is being caused and reverse the Finance Act changes.  

Paul Gilmer

Three Strikes - Are We Out. Follow up Interview

If you have trouble viewing this video through the blog, please click here

Finance Bill protects TDs

An Independent Trustee Company study has recently brought to light the huge costs of ministers’ pensions to the taxpayer but as if to add salt to the wounds this has been vindicated by a provision in the Finance Bill, which protects these generous ministers’ pensions.

An article in the Irish Sunday Times highlights a starring contradiction in the Finance Bill to the Budget.

Click here to view the article that appeared in this Business section of this week’s Irish Sunday Times.

Three strikes - are we out?

The Budget announced new provisions to withdraw property-related tax incentives. Before being introduced, an assessment will be carried out to look at the impact. The question is will it take into account the impact on NAMA bound properties as well as the full extent of unsold tax-incentive properties across the country.  

There really is so much more at stake here than a populist withdrawal of tax-relief from individuals. High-earners already had the annual benefits of these reliefs curtailed dramatically. If the changes are enacted, we will see many of the 'elite' property owning class find themselves in a situation where they simply cannot re-pay mortgages. 

Now, many landlords are facing further rent reductions, further hikes in interest rates and most likely reduced earnings as well. You would imagine that the only other thing that could possibly go wrong is for the tax relief to be withdrawn. But there's more. If the ability to pass on the tax relief to a new purchaser within the original tax-life of the property is also withdrawn, this will have a further significantly detrimental effect.

Who else will suffer?

Oh yes, the Exchequer, i.e. We the taxpayers. While the value of the reliefs may be saved (and this is a declining value every year as reliefs are exhausted), there will be:

• reduced stamp duty payments,
• reduced flow of VAT from sales of new properties,
• no corporation tax, and
• no capital gain tax as everyone in the supply chain loses money.

Hopefully the assessment will take full account of these figures too.

Secondly, we'll suffer even further as many of these properties find their way into NAMA, never to recover even close to what they cost.

And thirdly, we'll suffer even further, as the banks that we own, take massive further losses on small landlords. Even Joan Burton, one of few politicians fully on top of their brief at all times, fails to see that many of her own constituent class took this route as well.

So three strikes - can we recover from that? There are currently over 300,000 vacant housing units in the country. Is there any glimmer of hope at all?? Remember the closing of the stamp duty loophole for developers? Back in 2007? The one that was, well, never actually closed....................

Sonia McEntee

Canvassing Irish Government on Pensions Issues

Pension Adjustment Orders

The new standard threshold for pension funds introduced by Budget 2011 has caused some consternation among pension holders, particularly those who are near or above the €2.3 million cap and have not yet planned to retire. Apart from those concerns, the new threshold also brings into focus some of the rules for a pension scheme where a pension adjustment order (PAO) is in place.

A case I am currently dealing with involves a client (43), with a pension of €1.8 million, who is currently going through a divorce and where the court has indicated that 50% of the client’s pension benefits are to be awarded to the client’s estranged spouse. You would think that the client would then be allowed to fund for an additional €1.4 million to take the client’s fund up to the €2.3 million cap. But you would be wrong. Revenue’s view is that, for the purposes of the client’s funding, the estranged spouse’s interest must be taken into account. On the flipside, when calculating the estranged spouse’s funding levels, you ignore the benefits under the PAO. So the client will only be able to retire with a maximum pension fund of €1.4 million and the estranged spouse can legitimately retire with a maximum fund of €3.2 million.



This situation reminds me of a famous quote- “The difference between genius and stupidity is that genius has its limits”

Paul Gilmer

Definition of Madness...

Here we are again, the start of a new year.

What can we expect in 2011; we know about the Budgetary changes, we know there will be an election & we know that there will be a new government.

However we are still in a state of flux with our economy and planning 3-5 years out remains difficult. I suspect most of the general public are looking at their current financial situation & at a minimum are looking to learn from the past. Less consumer debt, more saving etc …

Clients we meet are far more aware of their financial world and what represents value for money. Despite this, the majority of the Irish public continue to invest with fund managers who average negative returns over 3 and 5 years. The average managed fund return is -4.1% per annum over the past three years. The five year returns to the end of December are mostly negative, with an average return of -0.6% per annum over this period.

This begs the question: where is the value for money in this relationship, particularly with an average annual management charge of 1% per annum?

Everyone is aware of the well worn definition of madness, doing the same thing but expecting different results. This also applies to pensions!

Michael Keyes