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 1st 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
