Planning points after the Personal Fund Threshold applications. Part 3

The third common query that I want to address in this series of posts is around a guaranteed annuity rate when considering the PFT.

Where a person has a pension with a guaranteed annuity rate in excess of 5%, do you use:

a.    20 times multiplier of the guaranteed sum, or

b.    multiplier based on actual annuity rates as at 7^th December 2010?

For Defined Benefit (DB) schemes the valuation basis provided for, by the legislation, is 20 x Pension. For a Defined Contribution (DC) scheme where the insurance contract contains an entitlement on retirement at Normal Retirement Age (NRA) to a minimum guaranteed annuity rate, a number of questions arise:

1.    Does the existence of the guaranteed annuity rate convert this into a Defined Benefit scheme? In my view the answer is no.

2.    If not, should the contract still be valued using the 20 x valuation system? Again my view is no. Typically market annuity rates will give a better value.

3.    Are market rates the only way to value? No. Consideration should be given to other value options e.g. Discounted cash flow.

If you have any queries on any of the queries raised in this series of blog posts, please contact us on (01) 661 1022.

Aidan McLoughlin

Planning points after the Personal Fund Threshold applications. Part 2

Continuing on with the common queries around the Personal Fund Threshold (PFT), another key issue raised was expressed well in this example:

If a hospital consultant has worked for 20 years as at 7^th December 2010 and expects to work for a further 20 years, is the capital value of the pension

a.    pensionable salary x (20/80) x 20 or

b.    pensionable salary x (40/80) x 20?

This question goes to the heart of the PFT valuation issue. The rules for valuing Defined Benefit (DB) scheme benefits, as outlined by the Revenue Commissioners, are clear that the value is outlined under Option A above.

Some advisors have taken a different view of the legislation. In particular, the assumptions used under Schedule 23B suggest the value should be achieved on the basis of no reduction due to early retirement. This is the basis of the valuation under Option B above.

An alternative view is to value the existing benefit under Option A and to then provide a second valuation for future benefits. As this falls outside the formal valuation methodology suggested by Revenue, it provides more scope for an advisor to look at alternative valuations.

Aidan McLoughlin

Planning points after the Personal Fund Threshold applications. Part 1

Over the last few weeks we have been giving a pensions update to advisors at the joint LIA/ITI events. Some of the common queries that were consistently raised at the events revolved around the Personal Fund Threshold (PFT). Some of the queries raised are good examples for the basis of calculating a PFT.  I will be discussing some of these over the next few blog posts.

The first query put to me was; if you value a PFT on a gross basis and the asset is subsequently sold with the debt repaid, can you make further contributions up to the PFT level?

The allowance available under the PFT legislation is an extremely valuable asset.  Say you are granted a PFT for €3.3million, this equates to a €410k reduction in your tax bill.  Whilst the allowance is granted based on the value of assets held as at 7^th December 2010, there is no requirement that those assets should continue to be held.  Thus, by the time you retire, your Fund could comprise of entirely different assets.

For example, a property worth €3.3million on 7^th December 2010 could have €2million in debt attaching to it.  Whilst a PFT of €3.3million could be applied for, the actual Fund is, in practice, worth €1.3million.  If that asset is disposed of today and the debt is paid off, it becomes clear that the Fund is €2million below the PFT.  This can then be built up with further contributions. 

It should be noted that Revenue have recently issued a letter stating that in their view, PFTs should be valued on a net basis.  We are aware of a number of applications that proceeded on a gross basis and await, with interest, the outcome of those.

Aidan McLoughlin



As an advisor, how will the pensions levy affect your business?

Independent Financial Advisors provide advice on 70% of all contributions into private sector pensions in Ireland and, as professionals, are at the forefront of advising the Irish public to provide for income on retirement.

A poll conducted by Independent Trustee Company has revelaed that the vast majority of financial advisors believe that the pensions levy will negatively affect the amount contributed to private sector pension funds in one way or another over the next few years.

The question put to top Financial Advisors was “Following the new pension levy, how will this affect your clients’ future decisions to contribute to their pension fund?”

The results of the poll are highlighted below.

Pensions coverage in Ireland is still at an alarmingly low level with voluntary private pension coverage at 53% for people aged between 25-34 years. Adequacy of pensions savings is a major issue for people aged between 45-65 years. This is a long term issue that needs to be tackled and not exacerbated by a short-term need for cash. The government needs to support and incentivise people who are prepared to save for their later years. Tax relief on contributions is crucial to this and must be maintained and these benefits must also be highlighted to the Irish public.

Pensions, despite the levy, are still the most efficient way of saving for retirement.

Michael Keyes

Jobs Initiative announced - introduction of the Pension Levy

Last Tuesday (May 10^th) the government introduced the anticipated pensions levy as part of the Jobs Initiative. The government is imposing an annual levy of 0.6% on the value of the assets in private sector pension schemes. Approved Retirement Funds (ARFs) are excluded from this levy but are taxed in a different manner through the imputed distribution. Public Sector pensions are exempt.

The levy, which is to be backdated to January of this year, will be paid each year for four years and is expected to raise €470m a year, a total of €1.9 billion by the end of the 4 year period.

The levy has not been put into legislation as of yet but is expected in the coming days. We will keep you informed on any developments.

Deadline for Personal Fund Threshold applications fast approaching

The deadline for applications for Personal Fund Thresholds (PFT) is now only one month away. June 7^th is the latest date that Revenue will accept applications for a PFT and to date less than 150 enquiries have been made to Revenue. It is estimated that over 6,000 individuals could be affected.

With the deadline fast approaching the key is planning; firstly to obtain the correct Personal Fund Threshold for your clients and secondly, to plan in order to minimise the impact of the threshold.  The traditional advice around pension planning may have to be adjusted based on your clients’ circumstances.

If you have a query regarding PFT you can contact our PFT Helpdesk on (01) 603 5199 or email pft@independent-trustee.com for an initial free assessment on your clients’ potential exposure.

Chief Justice raises pension tax concerns with Kenny

In a meeting with Enda Kenny recently, the Chief Justice raised concerns about how the reduction in the standard fund threshold to €2.3m would affect judges’ pensions.

An article in the Irish Times yesterday, 27th April, alludes to the fact that there is a difference between the valuation methods used for public and private sector pensions.  What it doesn’t highlight, however, is the effect of these differing valuation methods.

For an individual in the public sector, the threshold equates to an annual income in retirement of €115,000.  For someone in the private sector with a defined contribution pension scheme, the same fund threshold equates to an annual income in retirement of €60,000.  It would be interesting to know how they justify this difference in treatment.

I also wonder whether the Chief Justice asked Enda Kenny about the plans in the Fine Gael manifesto to further reduce the standard fund threshold to €1.5m.

Jennie Faughnan