Reprioritisation of Benefits: the real winner is…?

5 years into the financial crisis that destroyed the Balance Sheet of almost all DB schemes  (and 18 months after a comprehensive solution backed by IBEC, ICTU and certain pension bodies was presented to the Minister) action has finally been taken to restructure the Priority Order.

Why that is necessary can be illustrated by looking at a scheme with 2 members (1 pensioner, 1 active), an insolvent employer and a fund value of €500,000:

A. Before Financial Crisis

Value of Pensioner liability   €350k

Value of Active liability        €150k

Funding for Actives             100%

B. After Financial Crisis

Value of Pensioner liability   €500k

Value of Active liability        €150k

Funding for Actives              0%

The deterioration was primarily caused by the decline in bond yields in Germany which meant annuities became more expensive and therefore more of the fund was allocated to pay pensioner benefits.

The new rules now mean (in scenario b above) that where both the employer and pension scheme is insolvent (Double Insolvency) the balance will be rejigged as follows:

C. After Minister’s announcement

Value attributable to Pensioner    €425k

Value attributable to Active         €75k

Shortfall                                     €125k

Earlier this year the European Court of Justice ruled that the Irish State had failed to provide adequate protection to members of such schemes. The net effect of this was that, under scenario b above, the State was facing a liability of at least €75k. This liability will now be Nil – the pensioner is picking up the tab.

Note that in the recent budget the Minister for Finance also raised an additional levy on pension funds to pay for this liability –money he can now use for other purposes.

The real winner is the Government!

Independent Trustee Company Budget 2014 Briefing Webinar, in Conjunction with the IBA

ITC, in conjunction with the Irish Brokers Association are hosting a briefing of the 2014 budget.  The briefing will be held via live webinar.  Aidan McLoughlin, Group Managing Director of Independent Trustee Company will focus on pension changes and members of the ITC Consulting team will cover capital taxes and retirement planning. 

Due to the popularity of our upcoming Budget 2014 Briefing, Independent Trustee Company and the Irish Brokers Association have decided to schedule a second webinar. We hope that you can join us for our second session as the first one is currently full. 

DATE: Wednesday, 16th October 2013
TIME: 10.00am - 11.30am
LOCATION: Online

CPD certificates will be circulated after the webinar.

Click here to register, places are limited so make sure that you book yours soon! If you have any queries please e-mail JustAsk@independent-trustee.com. The webinar will also be available as a recording after the event.

We look forward to your attendance.

www.independent-trustee.com

4 Reasons to Recommend ITC

Independent Trustee Company are delighted to announce that we have been shortlisted in four categories for the Irish Pension Awards 2013. The awards, which will take place on the 27^th of November 2013, aim to give recognition to pension funds and providers who have proved their excellence, professionalism and dedication to maintaining high standards of Irish pension provision.

The categories that we have been shortlisted for can be seen below.

• Pensions Consultancy of the Year (ITC Consulting)
• Pension Scheme Administration of the Year (ITC)
• Communication Award (ITC)
• Innovation Award (ITC) (ITL)

We are delighted to be shortlisted in the category nominations listed above. More information on the awards can be found here.

Job Vacancy: Minister for Pensions

Aidan McLoughlin speaks about the need for a dedicated pensions minister in Ireland on RTE Radio 1's 'Morning Ireland'.  

Aidan states "There has been much talk about Ireland emulating the pension regime of other countries, Australia and the UK in particular. Critically, each of those countries has a dedicated pensions minister at a time when reform was required."

Click here to listen to the full interview.

Aidan Mcloughlin on RTE’s Morning Edition discussing the impact of the recent European Court of Justice pension ruling

The court found that under EU law the State had an obligation to protect the pension entitlements of workers in the event of a company becoming insolvent.

To view the interview on RTE One's Morning Edition, on the 26th April 2013 please click here.

Meet our BOB!

ITC are delighted to announce the launch of our Buy Out Bond (BOB).

Our ITC BOB enables clients to take control of their existing employment related pension benefits and invest them in their own personally owned pension plan, to access at retirement.
 
 

It is not unusual for people to change employment many times during their career and a Buy Out Bond provides a vehicle for clients to manage their previous pension benefits and invest them in a way that suits their needs.

Our ITC BOB provides 4 key features:

• Control
• Transparency
• Flexibility
• Security

To find out more about  ITC’s BOB download our Brochure & Terms and Conditions.

 
 

 

For further information contact our team to discuss:

• Michael Keyes (01) 614 8045 / michael.keyes@independent-trustee.com
• Sean Mc Loughlin (01) 614 9220 / sean.mcloughlin@independent-trustee.com
• Martin Glennon (01) 603 5130 / martin.glennon@independent-trustee.com

www.independent-trustee.com

Fianna Fail Launches Pension Strategy Paper

The Fianna Fail pension strategy, launched today by Willie O’Dea, deals with several issues close to our heart:

1.       The funding requirements for DB schemes

2.       The priority order for DB schemes on wind up

3.       Early Access to Pensions and

4.       The issue of Pension Charges

As chair of the Pensions Committee of the IBA I have actively involved in communicating with politicians of all shades on the issues facing pensions. The paper launched by Willie O’Dea is testament to the fact that patient and consistent dialogue does have an impact.

The funding levels DB schemes have to met is set at artificially high levels due to:

1.       the historically low level of bond yields and

2.       the additional reserve requirement imposed by the current government

The Paper proposes that this be addressed by easing the funding requirements and allowing greater flexibility as to when and if annuities are purchased.

In relation to the priority order the Paper suggests that, once a certain level of pension has been guaranteed in priority to pensioners the balance should rank equally with other members of the scheme. This would address the big gap in benefit that can exist between members either side of retirement age.

The current early access regime is too restrictive (as it only applies to AVCS) and mean spirited (as it imposes an additional 41% tax on those in difficult financial circumstances). The solution proposed is to replace it with an option to take some or all of your tax free lump sum at any stage in your life. There is no loss of tax to government and the greater flexibility enhances the attractiveness of pensions and gives relief where it is due.

On pension charges the Paper proposes the development of a Total Expense Ratio so that fund manager costs can be more easily identified. Also greater transparency on other costs is advocated.

 

To view the full paper click here.

Written by Aidan McLoughlin

Independent Trustee Company

Managing Director

Where’s the money going?

One of the most common questions I get asked when on my visits to Advisors is - “What are people doing with the money once they’ve set up an ITC self-administered structure?”

Let me state first that what follows is an observation of movement of existing and new money. As you know, ITC does not offer investment advice, so please don’t confuse the following as a recommendation. If you require any advice in relation to the following, please contact your Advisor.

With our compliance department now satisfied, I think the best way to answer the above question this is to look at the main areas of client interest in 2012.

 

Area 1 - Deposits

The banks thirst for deposits during 2011 and average inflation at 1.65%, made it very easy for investors to achieve “Real” growth with little or no risk.

It was noticeable in 2012 that the banks had changed their tune and were pushing headline rates down and this is expected to continue throughout 2013.

Despite the downward pressure on deposit rates, demand from clients has remained strong and an expected inflation rate for 2013 of 1.3% (HICP) is unlikely to dent this demand.

What we have seen, however, is a shift from short term deposit accounts to the more long term.

These trends are backed up by statistics from the Dept. of Finance.

• Deposits from Insurance Corporations and Pension funds increased by 6.9% in 2012.
• Shorter term deposit rates (less than 2 years) reduced from 3.57% in Jan 2012 to 3.35% in Nov ’12.
• Longer term deposit rates (more than 2 years) increased from 2.37% to 2.42% over the same period.

It’s no surprise that ARF clients are the biggest supporters of deposit strategies. Their age profile means that they have less appetite for risk. This has resulted in over 60% of ITC ARF funds being held in deposits.

We contacted the insured companies towards the end of 2012 regarding the charging structure of their ARF products. An annual management fee of 1% is very common.

This probably explains the inflows to the ITC ARF. Choosing an annual management charge of 0.5% gives most clients a reduction in fees, full access to the deposit markets and covers the Advisors continued work of research, recommendation and implementation.
 

Area 2 - Broker Portfolios

What I’m talking about here is where the Advisor has built their own offering for clients through the use of insured funds, stockbroking accounts and funds, deposit agencies etc.

The ITC products work really well in providing Advisors and clients the structures for choice and control of investments.  

The Advisor assists the client in understanding their attitude to risk/loss, and then builds an agreed portfolio around their goals and objectives.

The strengths of this approach are obvious. The client has a better understanding and more involvement in the process. This gives the client more clarity and control. There are more touch points with the client which, results in a much stronger relationship between the client and Advisor.

For many reasons (to be covered in a future blog), we believe that this type of strategy will continue to grow in 2013 and beyond.
 

Area 3 – Property

We’ve seen a significant pick up in activity for both Commercial and Residential property and the following gives an indication why we have had this activity from existing clients and new clients moving away from traditional insured funds.

• The consensus from the major estate agents is that for prime commercial property in the major cities, prices have stabilised.
• Residential property continued to fall in 2012. In Dublin it was down 2% and down 9% for the country as a whole. But South County Dublin saw an average increase of 3.1%. (Daft.ie)
• Rental yields are averaging 8.8% and the average residential property price was €140k. (Allsop Space/Goodbody 8/12)

The one thing we haven’t seen is leverage. The lenders experience of negative equity and overall impairments has obviously affected their appetite to lend. Will lending to pensions happen again? Yes, I believe so, but in prime property and with lower loan to value ratios.

Martin Glennon QFA CFP® 

Corporate Account Manager
Independent Trustee Company

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

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. 

VOTE Aidan McLoughlin - Irish Pension Personality of the Year Award

We are delighted to announce that ITC Managing Director Aidan McLoughlin has been shortlisted for the Irish Pension Personality of the Year Award. The Award, taking place as part of the Irish Pension Awards on November 21st, aims to recognise those individuals that have truly made their mark in the Irish pensions space in recent years. The voting proccess for this award is slightly different than the rest as the winner is decided through a public vote. We would appreciate your support on this and you can vote for Aidan at the link below. Voting closes on November 7th.

A leading visionary and thought leader in the Irish pensions Industry since 1987. As a solicitor and tax consultant Aidan has pioneered the self-administered pensions market. He passionately combines managing ITC alongside his tireless work with industry bodies developing the Irish pensions Industry.

 

Aidan passionately combines managing ITC alongside his tireless work with industry bodies developing the Irish pensions Industry.

His achievements include:

• Fellow of the Irish Taxation Institute and Irish Association of Pensions Management 
• Founding Chairman of the Association of Pensioneer Trustees of Ireland 
• Chair of the Irish Brokers Association Pensions committee 
• Editor of the Irish Taxation Institute’s Pensions - Revenue Law & Practice
• Member of the Association of Pension Lawyers of Ireland

Many thanks,

 

Michael Keyes

Sales and Marketing Director

Independent Trustee Company

OECD Review of Pensions in Ireland

At a recent consultation forum in Farmleigh House, the OECD presented the first part of their review of pension policy in Ireland. The presentation, which focused on the initial stage of the review; assessment and evaluation, was presented by John Martin and Ed Whitehouse. ITC's Managing Director Aidan McLoughlin attended the forum and over the coming weeks we will bring you some of the main points discussed. 

As mentioned, the initial stage of the review is the assessment and evaluation stage. The second stage which will presented at the end of the year will see recommendations from the OECD.

The OECD set out a three-pronged strategy for achieving both adequacy and sustainability:

• longer working lives
• greater private-pension savings
• better targeting of public retirement- income provision on those most in need

They ask how does Ireland's policy stance measure up against key criteria?

A key test was the performance of the Social Insurance Fund. This is where PRSI contributions are paid and which will ultimately provide contributors with Social Welfare pensions. Its ability to do this depends on its solvency. As the following slide illustrates the view of 2010 (as projected in 2007) and the actual outcome is radically different – a 30% deficit has now materialised. This fundamentally challenges the ability of the State to continue to deliver Social Welfare pensions at current levels. Those relying on the State for a significant portion of their retirement income should think again.

Over the coming weeks we will discuss the steps taken to resolve this significant deficit and see overseas comparisons in relation to pension provision. 

Source: OECD Review of Pensions in Ireland, 14.09.2012. John Martin, Edward Whitehouse, Anna D'Addio, Andrew Reilly.