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!!

TV3s Midweek - Where have our pensions gone?

Colette Fitzpatrick of TV3's Midweek programme last night looked at why so many people have lost money on their pension since the financial crisis and where exactly they gone.

Aidan McLoughlin was interviewed on the recently introduced pension levy. Based on our experience of temporary levies, Aidan commented that the four year levy may well become a permanent tax. He also commented on the unfairness of the pensions levy as it only applies to those who are now working. The bankers, property developers and politicians who created the current situation are not subject to the levy.

Aidan also noted that there are real concerns that the level of pension coverage in to the future could fall dramatically. The government's answer to this seems to be mandatory pensions. However, experience of nations that have taken this approach would suggest that it does not work. Invariably what happens is that people treat mandatory schemes as tax and so put in the minimum amount required. Obviously, this would not be an ideal outcome.

Click here to hear the full show. The pensions section starts at 17.30 minutes. Aidan is on at 19.25 minutes and again at 22.20 minutes.

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.