Dail Drawdown

Yield from the taxation of the annual imputed distribution of ARF assets 2007 – 2012

Year	Yield (€ million)
2007 (earliest available)	2.75
2008	6.5
2009	7.9
2010	10.3
2011	11.6
2012	11.5

Finance Act 2013 - The Bill, Part 2

Following the budget in early October, the Government have wasted no time in introducing Finance Bill 2013 (2) which, among other things, makes provision for how Noonan’s pension amendments are to take effect. Paul Gilmer sets out some of the key points from the first draft of the bill:

1. New Standard Fund Threshold (SFT)

As expected, the SFT has been reduced, but by a lot less than most expected. Finance Bill 2013 (2) reduces the €2.3 million cap down to €2 million with effect from 1 January 2014. However, as on previous occasions, an individual who has pension rights in excess of this new lower SFT limit on 1 January 2014 may claim a Personal Fund Threshold from the Revenue Commissioners (see note 2).

The new lump sum rules are:

1. Maximum tax relieved lump sum at 25% of €2,000,000 = €500,000
2. The first €200,000 tax free.
3. €300,000 taxed at 20%


Individuals with the capacity to fund to the €2.3 million mark should act before the 31 December 2013.

2. New .15 Levy

Minister for Finance Michael Noonan has followed through on the Government’s commitment to end the pension levy  of 0.6 per cent a year but disappointingly didn’t waste any time in introducing a new levy of .15 per cent for the years 2014 and 2015. Unfortunately, it seems that the levy is going to be a feature on the pension landscape for the foreseeable future.


3. Revenue are introducing e-filing for the new round of Personal Fund Thresholds (PFTs):

In order to make a PFT notification to Revenue, an individual will be required to obtain from the administrator of each pension arrangement of which he or she is a member, a statement certifying, among other things, the amount of the individual’s pension rights on 1 January 2014 relating to that arrangement. A PFT notification will have to be made electronically on a system being developed by Revenue and the time period for notification will be 12 months after the date on which the electronic system is made available.

A PFT notification made by electronic means shall be deemed to include a declaration to the effect that the notification is correct and complete.

Revenue will also accept a PFT application in the normal way for those retiring before the electronic system in place.

4. Another benefit to the public sector high earners:

The reimbursement options, introduced in Finance Act 2012, for public servants affected by chargeable excess tax (who, unlike affected individuals in the private sector, cannot generally minimise or prevent the breaching of the SFT or PFT by ceasing contributions and benefit accruals) are being amended and extended.  This will reduce the amount that can be recovered upfront from the net retirement lump sum payable to the individual to a maximum of 20 per cent (from 50 per cent) and to include the option of reimbursement of the pension fund administrator solely by way of a reduction in the gross pension payable over a period not exceeding 20 years.

5. There is more detail on the new rules for valuing pension benefits:

The valuation factor to be used for establishing the capital value of an individual’s defined benefit (DB) pension rights at the point of retirement, where this takes place after 1 January 2014, is being changed from the current standard valuation factor of 20 to a higher age–related valuation factor that will vary with the individual’s age at the point at which the pension rights are drawn down. The age–related valuation factors range from 37 for DB pension rights drawn down at age 50 or under, to a factor of 22 where they are drawn down at age 70 or over.  The valuation will also distinguish between benefits accrued before 1 January 2014 (still valued at 20 times) to those accruing after 1 January 2014 (valued based on the age related factors).

6. Clarification of the early access to AVCs

The bill provides clarity for members of occupational pension schemes/PRSAs regarding the option to withdraw up to 30 per cent of the accumulated value of additional voluntary contributions. The bill is amended to address concerns that the existing override provisions in the section may not give scheme trustees and PRSA administrators sufficient scope to allow such withdrawals where the trust deed and scheme rules or the PRSA contract terms prohibit them. The amendment specifically provides that the option may be exercised by an individual, notwithstanding the rules of the retirement benefits scheme or the terms of the PRSA contract concerned. This will obviate the need for scheme rules or contract terms to be changed to facilitate the withdrawal option. The change applies to options exercised on or after 27 March 2013, the date Finance Act 2013 became law.

Of course, we are all hoping this is the end to what has become an annual event whereby amendments are made to the Irish Pension Regime. However, lessons from the levy show we should not be too optimistic.

Paul Gilmer

Director

ITC Consulting

Dail Drawdown

Minister Noonan went on to say “I considered that I was in a position to make these significant commitments on foot, among other things, of proposals in late 2012 from the pensions sector for changes to the Standard Fund Threshold (SFT) regime, as an alternative to standard rating of pension tax relief, which it was claimed would yield savings and tax revenues in the region of €400 million. Pending further analysis of this claim, I included a much lower figure of €250 million in the Budget 2013 arithmetic. That analysis has since revealed significant downside risks to the achievement of even this lower level of yield or savings. The estimate of the yield from the changes to the SFT regime which I announced in last week’s Budget is €120 million. These changes differ in some respects from those proposed by the pensions sector and reflect, on legal advice, the requirement to protect pension rights at the date of change. In addition, valuation factors to place a value on Defined Benefit pensions for SFT purposes will vary with the age at which the pensions are drawn down thereby improving equity within the regime.

I would not categorise my engagement with the pensions sector on this matter as a “deal”, in the manner suggested by the Deputy. However, the assessment that the changes to the SFT regime required to deliver on the Budget 2013 commitment to cap taxpayer subsidies to higher value pensions would have a considerably lower yield than originally put forward, meant that the achievement of the overall budgetary objectives (including the continuation of the reduced VAT rate for the tourism sector and to make provision for potential State liabilities which may emerge from pre-existing or future pension fund difficulties) necessitated the imposition of the additional 0.15% pension fund levy for 2014 and 2015.”

Finance Act 2013 – the Bill

The Government published Finance Bill 2013 on 13^th February 2013.

In the area of pensions, the Government introduces new thresholds to the regime for ARFs and vested PRSAs. The measures are significant because they contravene previously introduced efforts at securing pensioners’ retirement income in old age.   The new thresholds, which had not been flagged by the Minister in his Budget speech in December, means that the thresholds which applied to ARFs pre-Finance Act 2011 will now see a comeback.

Since Finance Act 2011, members of Occupational Pension Schemes and contributors to Personal Pensions and PRSAs who have an annual pension income of €18,000 can take the entirety of their pension benefits into an ARF.  Those who do not have sufficient pension income must first set aside pension benefits to the value of €119,800 in an AMRF - or buy an annuity for that amount. The AMRF has to be kept until age 75, or until such times as the pensioner becomes entitled to an annual pension income of €18,000 (whichever is the earlier).

However, from the passing of the Finance Act, the requirement of a €18,000 pension income will be reduced to €12,700. This means that recipients of the Old Age Pension (currently around €12,000) who have very limited additional pension income, no longer have to put money aside for very old age. Accordingly, Finance Act 2013 effectively marks the beginning of the end for the prudence of thinking which infused the AMRF concept.

Furthermore, from the date of the passing of the Finance Act, the max value of the AMRF will be reduced from €119,800 to €63,500.  But it is perhaps more precise to say that the value of ARFs will be increased by the difference, namely €56,300. This is significant because ARFs are subject to imputed distributions which, in turn, are subject to income tax - while AMRFs are not. So, bigger ARFs, bigger income for the Exchequer. While there can be no other reason for decreasing the value of the AMRF other than to improve the tax take for the Exchequer, the measure is, seen in isolation,  perhaps of little importance as the AMRF regime is on the way out – as already argued.

Another measure, one which was flagged in the Budget, is the access to AVCs prior to retirement in certain circumstances.  An individual who has made AVCs can make a once-off withdrawal of up to 30% of the value of their AVCs prior to reaching retirement.  This is restricted to AVC funds. Access to other types of pension arrangements, such as personal pensions, is not available.  The access to AVCs will be available for a period of 3 years from the passing of the Finance Act 2013.

Funds withdrawn in this manner will be subject to income tax at 41% but will be exempt from USC and PRSI.  If an individual can provide a certificate of tax credits or evidence that they are subject to income tax at the 20% rate, the tax payable may be less than 41%.

While this would appear to be a welcome measure at first glance, on reflection it could once again signal the government’s shift to short-sighted policies to increase the short term tax take from pension funds.  As with the changes to the AMRF regime, allowing early access to AVCs only serves to reduce the benefits available to fund an individual’s retirement which may once again leave them dependant on the State later in life.

 

Tommy Nielsen & Jennie Faughnan

Independent Trustee Company

Dáil Drawdown - Pension Industry Charges Working Group

In this weeks instalment of Dáil Drawdown, Minister Noonan discusses the pensions working group. Let us know your thoughts. 

Minister Noonan went on to say: I understand that the report of this group is currently being finalised and will then be presented for consideration to my colleague, Ms Joan Burton TD, the Minister for Social Protection before being submitted to Government and published. Appropriate decisions will be made on the report’s contents and recommendations, and among other things, on the scope for productive interaction with the pensions industry in relation to offsetting the impact of the pension fund levy through reductions in fees or charges.

Source:www.oireachtas.ie

Dáil Drawdown - Early release of pension funds

In another instalment of Dáil Drawdown, early release of pension funds is discussed. Let us know what you think of Deputy Patrick O' Donovan's proposal. 

Deputy Michael Noonan went on to say:

"A number of proposals have been made that individuals should be allowed access to their pension savings prior to retirement. Various rationales have been advanced to justify these proposals, including that such access would allow those individuals to pay down mortgage and other debt and would otherwise provide a boost to economic activity.

This is not a simple matter. During 2011, at the request of the Government’s Economic Management Council (EMC), an ad-hoc group was established under the chairmanship of the Department of Social Protection to consider the idea of allowing people to access their pension savings before pension age in order to assist them in paying down debt. The ad-hoc group presented a detailed report to the EMC in September 2011. The conclusions of the Aa-hoc Group report were that:

Ø There is no evidence that, in general, the group likely to be most affected by mortgage debt (or other debt) has access to sufficient pension savings to make a difference to their situation.

Ø The legislative and administrative implications for such a scheme would be extremely complex and would appear excessive given the overall impact.

Ø Longer term difficulties whereby people are not making adequate provision for their retirement would be exacerbated, with potential for increased demands on the State.

Ø Individuals cashing in their pension savings now would get poor value in current circumstances which they would struggle to replace in the future.

The “Keane Group” on mortgage arrears did not dispute these findings and early access to pension savings did not feature among the recommendations of that Group. A more general scheme of early access to pension savings would present significant problems in terms of the proper targeting of the use of accessed funds and controls over potential abuse.

The tax treatment of pension savings for which I have responsibility is only one aspect of the broad policy of encouraging people to provide for an adequate income in retirement beyond the basic State pension. This policy area is the responsibility of my colleague, Ms Joan Burton TD, Minister for Social Protection, who I know is also aware of the proposals being made for early access to pension savings. The OECD is currently carrying out an independent review of long term pension policy in Ireland on behalf of the Minister for Social Protection. I have been advised, in response to a request from me in this matter, that the terms of reference of the independent review are such as to facilitate consideration of the issue of early access to pension savings and I would expect that the OECD review would deal with this issue".

Dáil Drawdown - NPRF

In this installment of Dáil Drawdown, Deputy Michael McGrath asks the Minister for Finance for more information on the National Pensions Reserve Fund.

Source:www.oireachtas.ie