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.