Budget 2013 - Pension Related Changes

In his budget speech, Minister Noonan declared that it was in everyone’s best interest that the Government encourage as many citizens as possible to continue to invest in pension schemes.  This does not seem to have been the Government’s view over the last few years with, among other things the introduction of the pensions levy and talk of cutting tax relief on contributions introducing a lot of uncertainty into the market.  A number of industry bodies over the last 12 months have been lobbying government in an effort to bring some certainty back in to the market. Now the minister appears to have delivered in this regard.  The positive news from a pension’s perspective in the budget was the clear statements that:

 

• The Pensions Levy will not be renewed after 2014; and
• Tax relief on pension contributions will continue to be available the marginal rate.

These are welcome statements as they will serve to lift some of the cloud that has been hanging over the pensions industry over the last few years.

The minister did announce, however, that future tax relief on pension contributions would only serve to subsidise pension schemes that deliver an income of up to €60k per annum.  These changes will not take effect until 1^st January 2014.  Therefore for now, the question remains as to how this measure will be implemented.  The minister appears to be leaning towards a further reduction in the Standard Fund Threshold (SFT), which currently stands at €2.3m and the minister described as being “very generous”. 

The question remains as to how €60k per annum will be valued for this purpose?  If the same valuation rules as were used for the calculation of the €2.3m threshold were followed, then the capital value of €60k per annum would result in a SFT of €1.2m.  The minister did state that the Government would engage in consultation with the industry on the specific changes required.  This dialogue has in fact already commenced and the proposal from the industry is to capitalise the €60k at a factor of 30 times plus the lump sum to give an SFT of €2m.  If this proposal is implemented, it is estimated that it will affect around 17,000 individuals.  When we consider that the average pension fund is around €100k, a reduction in the SFT should not discourage the majority of the market from continuing to fund for retirement.

The final pension-related change of significance is the provision allowing pension investors to withdraw up to 30% of the value of their AVCs for a three year period from 2013.  Income tax at the marginal rate will be payable on the funds accessed.  The Government estimates that €200m of funds will be accessed in this way over the three year period.  It remains to be seen whether this will apply solely to AVC’s or whether personal pension contributions will be included.  We will have to wait for the Finance Bill in the new year for the detail in that regard.

Overall, it appears that the Government are making a significant attempt to restore some certainty to the pensions market and to encourage investment in pension schemes once again.  While we will have to wait until 2014 for the detail in relation to the maximum tax relieved pension of €60k per annum, the forewarning provides an opportunity for those who may be affected to take action over the next 12 months.

Jennie Faughnan

Tax Consultant

ITC Consulting

Budget - Lucky 13

For advisors and financial planners the Budget offers a number of planning opportunities. By far the most significant is the confirmation of the importance of pensions and the formal statement on two significant tax matters:

1. The removal of the Pensions Levy in 2014
2. The retention of marginal rate tax relief on contributions.

Other ideas are outlined below.

1. EII – Fun(d) for all the Family?The Employment and Investment Incentive or EII is the new name for BES. In 2011 the relief available was overhauled and made more attractive but hasn’t been extensively used. This year the proposal is to extend the relief (subject to EU approval until 2020).

Why is it of interest?

With the increases in tax on savings and the reduction of interest rates on deposits clients will be looking for alternatives – EII could be an option.

From the point of view of corporates EII represents a possible source of finance. Particularly for small scale sums up to €500k it is possible to structure an arrangement for “family and friends” which delivers a cost effective and available alternative to bank finance.

EII should be added to the discussion Advisors have with any SME looking for finance.

2. REITs – a new market for brokers?

Real Estate Investment through REITS is big business globally. As of mid-2012, the global index included 414 public real estate companies from 37 countries representing an equity market capitalization of about $1 trillion (with approximately 68% of that total from REITs).(Source Wikipedia)

The key features of a REIT are that it is:

1.  a quoted company
2. Invests exclusively in property
3. Is tax exempt/tax transparent

The benefits to the Irish economy are the potential for NAMA and the Banks to tidy up their property debt portfolios.

For private individuals the attractions are likely to be:

1. Access to a new investment option to diversify investment portfolios.
2. An opportunity for larger scale property investors to warehouse their investments in more tax efficient structures.

For all clients with a current or prospective interest in property REITs will now be an essential part of the discussion.

3. High Noon(an) for Film Finance?

The Minister for Finance has made clear that tax relief for Film production will continue but that the individual investor will be eliminated from the process by 2016.

This tax break therefore has a limited remaining shelf life.

Any advisors dealing with clients in this area need to be aware that the end is nigh.

4. Deposits and Life Company Investments

The increase in tax to 36% for rolled up investments is a significant negative. The hunt will now be on for better alternatives leaving advisors with the job of rejigging client portfolios. Alternatives will include:

1. Tax exempt Post Office Investments.
2. EII and REITS mentioned above.
3. Pension funding.

The availability of tax free growth coupled with the confirmation of the levy ending makes pensions more attractive than ever. Whilst the ultimate Fund limit is not yet known the fact is that the average pension fund has only €100k value. It will take a lot of saving to come anywhere near the fund limit. Equally clients should have more comfort about this type of saving due to the reassurances on tax given by the Minister for Finance.

Portfolio reviews should be scheduled for all clients in the new year.

5. Termination Payment Magic – a Non Disappearance before your very eyes!

The current tax code allows €200k to be paid on termination of employment without tax. Thereafter tax is imposed at a special rate due to top slicing relief. This ensures that the tax paid is reduced to the average tax paid by the individual for the previous 3 years.

Budget 2013 proposes the removal of Top Slicing Relief with effect from 1 January 2013. In other words it is still available for the rest of this month.

When you recognise that termination payments can be made to individuals who haven’t actually ceased employment you realise your clients should be made aware of this before it disappears.

Don’t write – email TODAY  to ensure clients have considered this option.

6. Capital Tax Increases - a Laboured Delivery?

Given the composition of the government increases in capital taxes were a given, the surprising thing is the range of breaks that weren’t closed off. These include:

           1. Over 55 Retirement Relief – still available at €750k (until 2014 for those aged over 66). This        means you can enhance your retirement with an additional €750k in tax free cash.

Any advisors who haven’t built this into their own financial plans need to set aside some personal planning time over Christmas.           2. Business Property Relief - this allows a 90% reduction in the value of Business assets for CAT  purposes. With the reduction in allowances and the increase in rates every business owner needs to look at this.

 Every business owner needs to know about this – and the fact it could disappear.

7. CGT losses – a valuable asset?

We all know individuals who have suffered significant losses on investment portfolios with bank shares perhaps being the most infamous. Yet we all hang in there in the belief that one day they will recover.

A smarter way of doing this would be to crystallise the loss now for use against other gains – saving 33% on all gains. The shares can then be repurchased by a self-administered pension ensuring the recovery is also tax free.

Turning the black cloud of the Budget into a Tax Refund is a guaranteed stocking filler this Christmas.

8. ARF a Loaf is better than no loaf at all

The assets of an ARF can ultimately pass on to children at a tax rate of 30%. The alternative route is much more taxing - the same benefit passed on in cash could be subjected to income tax of 52% (on extraction from a business) and CAT at 33% (on passing to the next generation).

Clients developing an estate plan need to give serious consideration to the benefits of ARFs. Unlike other pension vehicles they allow the transfer of specific assets to the next generation. The certainty provided by the Minister for Finance on Pensions also means that clients have more security using these types of vehicles for planning purposes.

A compulsory point for every estate planning discussion.

9. PFT Planning – A Personal Tax Free Zone?

The Minister for Finance confirmed that the pension limit will be €60,000. However discussions are still on-going with the pension industry as to the level of fund this will permit in practice. These won’t become law until 2014.

Assuming current rules applied the maximum allowable fund would drop to €1.2m. On the other hand the pension industry has suggested:

1. A factor of 30:1 should be used
2. The tax free lump sum should be added to this.

In practice this would give a maximum fund of €2m.

Rather than waiting to see how things will turn out, those clients that are close to these limits can take matters into their own hands. All previous Fund Thresholds have provided an exemption for those with funds in excess of the new limit. Therefore it makes sense for clients to pay in as much as possible in the next 12 months if it will increase their funds over €1.2m. This can then form the basis of their new PFT application in 2014.

Nobody minds a tax if it someone else who is paying. Talk to clients with substantial pension funds in 2013.

10. PFT – Avoiding Excesses this Christmas?

For existing clients who already have PFTs the question arises as to how to manage the excess. The cumulative tax rate on the excess is 79%. However Budget 2013 may offer an opportunity to avoid this.

30% of AVCs can be withdrawn and taxed at a marginal rate at any age. A client with a PFT excess may be able to remove the excess using this mechanism and thereby avoid the 70% rate.

Client with a PFT needs special care – make sure they hear about this idea from you first.

11. 6% ARFs – Nice ARF: shame about the Drawdown!

ARFs worth more than €2m are subject to an extra drawdown requirement of 1%. – That’s an extra €20k in taxable income.

Taking the excess money out before you ARF would make sense and the AVC encashment option is one way of doing this.

Clients building up their PFTs need to watch this – add it to your planning list for large pension clients.

12. AVCs – a three year cooling off period

We all know individuals who can and should invest more in pensions. However, in the current environment, they are reluctant to commit to a long term financial issue in case they need the cash in the short term. The AVC encashment option provides a realistic way of managing this. You can now advise clients:

“commit for 1,2 or 3 years. You will avoid tax on the money invested. If you need the money back in the next 3 years you can pay tax at that stage and get 30% back. If you don’t need it in the next 3 years you can probably let it roll tax free until retirement”

A key market for AVC PRSAs will be the public sector. Time to add them to your 2013 to-do list.

13. AND FINALLY (Tongue in cheek)…….

With all the grief around flooded housing, lack of insurance cover etc it is good to know the Minister for Finance cares!

If severe flooding means your house now floats and you are known locally as Noah then you will be glad to know the Minister for Finance has deemed you exempt from the new Local Property Tax.

While the rest of us drown in debt you can sail happily into the sunset!!

Budget Briefing Webinar Recording and Slides

Our Budget 2013 Briefing in conjunction with the Irish Brokers Association took place this morning. The briefing aimed to give you some guidance around the changes in order to help you plan for 2013. If you missed the webinar you can access the recording here.

We hope that you find the content useful for the upcoming year and if you have any questions in relation to the presentation please e-mail JustAsk@independent-trustee.com.

You can also download the presentation slides here.

Aidan McLoughlin - Irish Pension Personality of the Year

Last night the Irish Pension Awards took place in Dublin's Burlington Hotel. The awards, only in their first year aim to honour the pension funds, small and large, DB and DC, as well as the investment firms, consultancies and pension providers and individuals that have set the professional standards in order to best serve Irish pension funds in these ever challenging times.

ITC are delighted to announce that Aidan McLoughlin won the Irish Pension Personality of the Year award. On behalf of all the staff in ITC we would like to take this opportunity to congratulate Aidan on this very well deserved award.

ITC were also shortlisted for the following awards:

• Administration Award
• Communication Award
• Pension Consultancy of the Year Award - ITC Consulting
• Innovation Award - ITC & ITL

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.

Agricultural Relief and Pensions

When we think of farmers we don’t generally think of pensions, but they clearly are of benefit, not only for the usual pension reasons, but also for tax planning reasons. Agricultural Relief is an example of this worth noting.

Agricultural Relief is a relief available to individuals who receive a gift or inheritance of agricultural property. If a person qualifies for Agricultural Relief, they will only pay Capital Acquisitions Tax (“CAT”) on 10% of the value of the agricultural property inherited. One of the main qualifying criteria for this relief is that at least 80% of the value of the person’s assets, after taking the gift or inheritance, is comprised of agricultural property.

The Revenue Commissioners have confirmed that an interest in a pension or pension fund can be ignored by the holder of this asset when calculating whether a beneficiary meets the 80% agricultural assets farmer test.

 

The effect of this is that a person could avail of significant CAT savings if they were to have long term savings in a pension fund, as opposed to holding these savings outside of a pension.

The examples below illustrate the potential CAT savings that could be made if a person has invested some of their assets in a pension, as opposed to holding them personally.

Example 1 – No Pension/ Pension Fund

Non-agricultural Assets                        €200,000

Agricultural Assets Inherited                 €700,000

Percentage of Agricultural Assets                78%

Person will not qualify for Agricultural Relief as less than 80% of their assets after taking inheritance are comprised of agricultural assets. Therefore, the person will be liable to CAT on the entire inheritance, leading to a substantial tax liability as can be seen below.

Agricultural Assets Inherited                  €700,000

CAT @ 30%                                         €210,000

Example 2 – With Pension/ Pension Fund

Non-agricultural Assets                         €150,000

Pension Fund                                       € 50,000

Agricultural Assets Inherited                  €700,000

Percentage of Agricultural Assets                 82%

Person will qualify for Agricultural Relief as in excess of 80% of their assets after taking the inheritance are comprised of agricultural assets. Therefore, the person will be able to avail of agricultural relief, resulting in a very significant tax saving.

Agricultural Assets Inherited                  €700,000

Less Agricultural Relief (90%)                €630,000

Liable to CAT                                       €  70,000

CAT @ 30%                                         €  21,000

As can be seen from the above examples, a person who has invested in a pension fund will pay 90% less CAT than the person who has not, as the pension is used to reduce the value of the person’s non-agricultural assets which results in the “80% test” being satisfied and therefore Agricultural Relief can be claimed on the inheritance.

Routing a person’s long term savings through a pension/ pension fund can therefore result in significant CAT savings, in addition to the benefit of being able to avail of income tax relief and the benefit of the pension asset increasing in value tax free with a tax-free lump sum at retirement. For anybody who has an expectation of receiving a gift or inheritance of agricultural property in the future, a pension should be strongly considered not only as a way to provide an income in retirement, but also as a potential tax planning tool.

Paul Wymes

ITC Consulting

We won't go to the same lengths as Will Ferrell...

Have you heard the good news? Aidan McLoughlin, Managing Director of Independent Trustee Company has been shortlisted for the Irish Pension Personality of the Year Award. The award, taking place as part of the Irish Pension Awards aims to recognise the individuals that have truly made their mark in the Irish pensions space in recent years.

The winner of this award is decided through a public vote and while we won't go to the same lengths as Will Ferrell, we would really appreciate your support!

You can vote for Aidan by clicking on the link below and if you could share the details to those within your organisation we would be grateful.