NEST: Protecting their young?

The UK government is making changes to encourage people to save for retirement. The Pensions Act 2008 introduced new duties on employers to provide access to a workplace pension scheme. All employees will be automatically enrolled into an occupational pension (unless they opt out) and where employers do not already have a scheme, people’s money will be invested in NEST. NEST (National Employment Savings Trust) will be a universal, defined contribution scheme, accumulating a fund during a workers life to purchase an annuity on retirement.  It is due to commence in October 2012.

Much scrutiny has been given to the investment choices that NEST will make available to their members. When it comes to the funds that NEST invests their members in in the early years this differs substantially to what is typically used in standard Defined Contribution Lifestyle funds in Ireland. 

NEST carried out extensive research and consultation and as a result they found that when it comes to younger members- those under 30- that they’re especially sensitive to volatility and loss and are most likely to act adversely in the face of such volatility.  NEST will invest younger members- in their 20’s - initially in funds that will target investment returns that look to match inflation after all charges have been taken out.  The next phase where members will spend the majority of their time circa 30 years, will target returns of inflation plus 3% after charges, the final stage is designed to manage the risk of shocks closer to retirement.

Niamh Quirke

Independent Trustee Limited

The Pensions Board publishes funding rules for defined benefit pension schemes

Yesterday, the Pensions Board published revised rules for defined benefit schemes and announced the deadlines by which trustees must submit funding proposals to the Board to deal with scheme deficits.

The full Press Release on the revised rules can be found on the Pensions Board website. 

Sovereign Annuities – How will they work?

The scale of the funding crisis in Defined Benefit Schemes has been a topic of much debate for the last number of years. One of the solutions proposed by government was to introduce a Sovereign Annuity option. As the yield on Irish Government bonds is higher than the yield on the bonds normally used to back annuity the effect should be to reduce the scheme’s liabilities. Thus a sovereign annuity is designed to ease funding pressures on a Defined Benefit scheme, provide a source of funds to the State and also to adjust the priority rules in a more acceptable manner.

The first sovereign annuity product is due to be launched in the coming weeks. Initially, this sovereign annuity product will be based on Irish and French bonds. It is expected that this will mainly be of interest to schemes which are in wind up and in some cases where the employer company is also in liquidation. It is estimated that the total value of the sovereign annuity market will be approximately €2-3 billion.

However this sovereign annuity product will only be available to pensioners and not to active and deferred members. This causes a dilemma for the trustees: are you disadvantaging pensioners (by linking their pensions to sovereign annuities) to improve the position of other member classes (by increasing the amount of the fund available to pay for their benefits)?

So it remains to be seen how sovereign annuities will work in practical terms. It will be interesting to see how trustees and pension scheme members will react to this new and long awaited product.

Aisling Daly

Independent Trustee Limited

Is the State likely to provide your pension expectations?

At the recent IAPF Annual Defined Contribution Conference some of the findings of the IAPFs Financial Literacy and Pensions Research Report (April 2012) were announced.  This report revealed that almost half of all adults (47%) believe the state pension will be their main source of income in retirement. When asked how much of their current income they think they will require in retirement below were the responses.

Level of current income required in retirement	Percentage of respondents
Less than 30%	11%
31-50%	22%
51-70%	31%
More than 70%	23%
Don’t know	12%

The current state pension is just shy of €12,000 per annum or about one third of the average wage(€35,849, CSO 2011).  The findings from the IAPF report highlight the huge gap between what people expect to have in retirement and what the State will actually provide. This gap is likely to get wider with increasing pressure on the State to reduce costs. 

This means that people will either have to make a reduction in their post retirement income expectations or increase their private pension savings dramatically.

Niamh Quirke

Independent Trustee Limited

ITI Annual Conference Main Tax Points

As mentioned in our previous post, ITC recently sponsored the Irish Tax Institute Annual Conference. The Conference provides an opportunity to discuss issues that other advisors come across with their clients. 

One topic of conversation was the change in language in the latest update of the EU/IMF Programme of Financial Support for Ireland published in February. Previous versions have proposed the reduction of private pension tax reliefs as one of its revenue-raising measures, but the February update omits any reference to such a reduction. This coincides with previous comments, so it seems that marginal rate tax relief on pension contributions is safe, for now at least. That is very good news for those making personal pension contributions.

A couple of other themes that came up time and again with advisors, whether speaking from the podium or in private, were:

     1.    Inheritance Tax

Clients are realising that inheritance tax is now for everyone.  Well, “for everyone” was the phrase used by one practitioner and it is somewhat exaggerated, but inheritance tax affects far more people than it did four years ago. 

You can see the massive differences for someone with an estate of €3 million with three children.  The respective tax bills are:

2008 tax bill:                €287,000

2012 tax bill:                €675,000

Additional tax:             €388,000

That’s a hike in the tax take of over 130%!  It’s certainly enough to get people considering estate planning when a few years ago they would not have considered it was for them.

      2.    Capital Gains Tax

One of the more interesting aspects of the Budget last December, which has since been enshrined in the Finance Act, was the CGT exemption for property.  It seems that people are just not familiar with it as it was not highly publicised, but it provides excellent opportunities, including in the family context.

What the exemption means is that, for a property acquired between 7^th December 2011 and 31^st December 2013 and held for more than 7 years, on the sale of  that property no CGT will be payable on the gain attributable to that 7 year period.

A couple of interesting points: 

• The exemption applies to any property within the EEA, i.e. the EU, Norway, Iceland and Liechtenstein.  A particular popular destination for property purchasers at the moment is Germany – the exemption would work there.

• The exemption also applies where there is a gift element in relation to children.  If consideration is paid of 75% or more of the value of a property by a child to a parent, the gain over the 7 year period will be CGT free to the child.  Of course, stamp duty has to be factored in, but it is now at much more favourable rates.

Despite the recurring uncertainties in which we live these days, the certainty of tax does at least throw up some opportunities for advisors.

Jeremy Mitchell

Director

ITC Consulting

ITI Annual Conference. Fund your Bucket List with an ITC Pension

ITC were proud to sponsor the Irish Taxation Institute Annual Conference last weekend in Galway where over 370 delegates attended. Bucket List's were a hot topic throughout the Conference as we invited delegates to share their's with us in the hope of winning a New iPad. 


An ITC Pension can ensure that you make the most out of your retirement. Our bucket will be seen at many more events in the coming months so be sure to have your list at the ready. A sample of some of the  entries we received:

"To dance the Argentine Tango with Antonio Bandero"

"To become the No. 1 Formula One Driver"

"To star in a musical on the West End"

"To visit the 7 Ancient Wonders of the World"

The seminar topics ranged from a general update on the 2012 Finance Act to more specific topics such as Capital Taxes, Business Taxes and Property Taxes.

One of the more interesting topics for the delegates from ITC was the Pensions seminar. Most of the key take home points have been the subject of ITC Blogs over the last number of months, and the top five to consider are:

1. Fund to SFT as soon as possible

Individuals whose pension fund is currently less than €2.3m should consider funding their pension to €2.3m (taking account of a buffer for future investment returns within the fund up to retirement) in light of announcements to decrease tax relief on pension contributions and other potential changes that may be introduced in the future. 

2. Consider de-risking pension if close to SFT

For individuals that are close to the SFT, consideration should be given to reducing investment risk (employing a de-risked pension investment strategy – e.g. cash/bonds), with increasing urgency depending on how close one is to the SFT.

3. Critical that pension funds are monitored re SFT ceiling

Advisors should consider putting a tracking system in place to determine when an individual’s pension fund may be coming close to the SFT so that alternatives can be considered in advance.

4. Maximising lump sum at retirement remains attractive – 13% effective tax up to €575K. Tax credit up to the amount of tax paid on the lump sum is available against tax payable on any chargeable excess over SFT. 

5. Employer Pension Contributions – Incorporation of business can increase the level of pension contributions allowed and can involve family members in the business.

We will provide worked examples of these main points in the next few blog posts.

All great changes are preceeded by chaos - Deepak Chopra

Over 100 advisors around the country participated in our recent webinar which focused on the future of the pensions industry in Ireland and ideas on how to adapt your business to meet the changing environment.

During the webinar, we surveyed the attendees on topical industry issues which produced some interesting results.

• 71% of advisors feel asset security is most important to their clients.
• 60% of advisors feel that there will be 5-6 Life Companies left in the Irish marketplace within the next 5 years. 30% believe there will be less than 5.
• 20% of advisors feel that they have a well planned business strategy in place. 65% are constantly reviewing their business.

If you would like to view the webinar please click here or if you would like to attend our next webinar please mail JustAsk@independent-trustee.com.

Michael Keyes
Sales & Marketing Director