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Ronan McGrath BFS, QFA, FLIA, AIIPM Sales & Business Development Manager IMO Financial Services. What now for pensions……. Agenda…. Recent Changes Standard Fund Threshold & Personal Fund Threshold Revenue Maximum Limits Maximising your Tax Reliefs AVC Options Spouses Pensions - PowerPoint PPT Presentation
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Ronan McGrath BFS, QFA, FLIA, AIIPMSales & Business Development ManagerIMO Financial Services
What now for pensions……
Agenda….• Recent Changes • Standard Fund Threshold & Personal Fund Threshold• Revenue Maximum Limits• Maximising your Tax Reliefs
AVC Options Spouses Pensions
• Making the right decisions in retirement – Annuity v ARF
A time of change……
Today
1967 Income Tax Act 1972
Finance Act
Pensions Act 1990
TCA 1997
2002 PRSA
FA 2006 Imputed
DistributionARF
FA 2006 €5m PFT
FA 2008 €150,000
CAP
2003 Pensions
Ombudsman
1998 NiPPI
2002 - €254k contribution
CAP
2010 €115,000
CAP
Past
2010 National Pensions
Framework
1991 Joined
Industry
Pensions Levy
introduced
2011 ARF
Options all
schemes
2014PFT €2m
Changes….
Positive ones• Pensions Act (Preservation)• Introduction of ARFs• Introduction of PRSAs• Pensions Ombudsman• Relaxation of borrowing
restrictions• Age related contribution limits
Negative ones• Fund threshold reduction• Dual income restrictions• Reduction in Earnings cap• Imputed distribution introduction• Pensions levy• Extension of State Pension Age• Increased Regulation raising costs• Restriction on overseas transfers• Restriction on lump sum• ARF - Increase tax on death• Loss of EE & ER PRSI relief
Recent Budget Changes
DIRT up to 41% plus PRSI of 4%
Exit tax up to 41%
Income tax remains at 41%
CGT remains at 33%
Funding Threshold reduced from €2.3 million to €2 million
Pensions remain EXEMPT from investment taxes
Evolution of the Standard Fund Threshold
Evolution of the Standard Fund Threshold and Imputed Distribution
1999
ARF is born
7 December
20107 December
2005
€2,300,000
Limit on Pension Funds
€5,000,000
Limit on Pension Funds
No Imputed Distribution
No
Limit on Pension Funds
€2,000,000
Limit on Pension Funds
5% Imputed Distribution
1 January 2014
€100,000,000 €100,000,000 €100,000,000
Origins of the €2,000,000 limit• New Age Related system for valuing defined benefits
Age Capitalisation Factor
Age Capitalisation Factor
50 37 61 2951 36 62 2852 36 63 2753 35 64 2754 34 65 2655 33 66 2556 33 67 2457 32 68 2458 31 69 2359 30 70 2260 30
Origins of the €2,000,000 limitNew Age Related system for valuing defined benefits
Age Capitalisation Factor
Age Capitalisation Factor
50 37 61 2951 36 62 2852 36 63 2753 35 64 2754 34 65 2655 33 66 2556 33 67 2457 32 68 2458 31 69 2359 30 70 2260 30
(€60,000 x 30) + €200,000 = €2,000,000
How the new Threshold will be implemented going forward
Before After
All benefits valued using a capitalisation factor of
20
1 January 2014
All benefits valued using age related capitalisation
factors
Consultants with HSE pension need to take
note of this!!
What happens if you have €2,001,000
The chargeable excess which is liable to tax at 41%
This leaves €590 which would be transferred to the ARF
The ARF would be liable to tax, USC and PRSI meaning that the net proceeds would be €283
€1,000
€590
€283
The effective tax rate is 72%
So to be clear.…
• Everyone in the room will be limited to a pension fund of €2m from 1st Jan 2014 (unless your fund is already higher and you have applied for your Personal Fund Threshold)
HSE Consultant - both HSE Pension and Private Pension income accessed – Benchmark all existing DB benefits before 1/1/2014
GPs - both GMS and Private Pension income accessed
Pensions levy
“The levy – consider it gone, history, dead as a doornail, kaput, finito, buried
– trust me”
• Retire before 30 June
• Postpone contributions until after this point
• 0.75% for 2014
• 0.15% for 2015
Tax relief at marginal rate on contributions PRSA AVC contributions for GMS Pension Private Pension Contributions
Dual Income earners have to maximise contributions on their GMS earnings before funding through a Private
Pension• Tax Free Growth on pension funds• Tax Free Lump on retirement• You can retire your private pensions anytime from age 60
Spouses Pension funding
Now for the positives
Why pensions still make sense….
• Tax relief up to earnings cap of €115,000 based on an age related limits
• Tax Free Lump Sum of up to €200,000 with balance up to €500,000 taxable
at 20% i.e. €200,000 Tax Free with €300,000 x 20%.
• Tax Free Growth on Funds
• Spouses Pension funding
• Life cover can be set up for you and your spouse (if employed in the
practice) and tax relief at 41% available on premiums
Tax Free Lump Sum
• Applies to all - GP with GMS / Private Pension earnings or HSE consultant
with HSE / Private Pension earnings
• Total Tax Free Lump Sum of up to €200,000 from all pensions in your
lifetime.
• Balance above this up to €500,000 taxable at 20% i.e. €200,000 Tax Free
with €300,000 x 20%.
• Benefits from Private Pensions can be taken from age 60 all in one go or on
a staggered basis.
• Where one spouse carries out services in relation to the others employment• Opportunity to fund for Tax Free Lump Sum and ARF/Annuity
Spousal Employment
Sch DClient
SpousePAYE
PENSION
If the spouse is aged 50 then you
can contribute 200% of earnings
PRSA AVC Options
• You can contribute to a PRSA AVC for your GMS earnings and receive
tax relief
• Options of a regular monthly or lump sum payment
• You decide what fund / provider to choose from and can switch at any
stage without penalty
• Clear breakdown of all costs and charges
• Range of funds to choose from asset classes
• AVC options can be transferred to an ARF at retirement
• Prior to 1999 you had to take on Annuity at retirement…introduction
of the ARF / AMRF Route
• Annuity Rates which determine how much a pension pays are at an
all time low
• Low interest rates and Rising Life Expectancy are increasing cost to
purchase an annuity
• The odds of getting your money back are significantly reduced if
inflation increases.
Retirement Options - Annuity or ARF which option is best for you?
Annuity or ARF which option is best for you?Male age at annuity
purchaseLevel annuity pa Annuity pa,
Increasing at 2% pa
60 €4,296 €3,203
65 €4,905 €3,816
70 €5,813 €4,723
75 €7,101 €6,011
Figures above based on a fund of €1000,000 Quote 1 - Level , single life, guaranteed 5 years annuity
Quote 2 – Allows for indexation at 2% pa
Payments discounted at 2% pa to convert them to today’s values.
Pensioner mortality assumptions used in SORP (Statement of Reasonable Projection).
* assuming future inflation of 2% pa
92 is the magic age; the projected age to which all our pensioners in this example must survive.
Male age at annuity purchase
Level annuity Annuity increasing at 2% pa
Projected payback age*
Probability of surviving to payback age
Projected payback age
Probability of surviving to payback age
60 92 38% 92 38%
65 92 39% 92 39%
70 92 40% 92 40%
75 92 43% 92 43%
Annuity or ARF which option is best for you?
Inflation Risk!!!! - Inflation is the real enemy of annuities.
The figures suggest that about 60% of current buyers of annuities will not live long enough to get their money back in real terms, in annuity
payments.
AgeLevel annuity Annuity increasing at 2% pa
Projected payback age*
Probability of surviving to payback age
Projected payback age
Probability of surviving to payback age
60 100 13% 98 18%
65 97 21% 95 28%
70 95 29% 94 32%
75 94 34% 94 34%
*assuming future inflation of 3% pa
Annuity or ARF which option is best for you?
Buying an Annuity
Advantages Disadvantages
• You are buying certainty/security.
• Guaranteed to be paid a known pension for the rest of your life – once provider is still solvent.
• No Investment Risk. The only risk is the risk of the life company defaulting.
• You may build in a guaranteed payment period, or dependent’s pension, etc.
• If you choose an equity-linked pension, you have the potential to achieve a higher level of income.
• Annuity rates are currently at a historic low
• Loss of access to capital and control.
• Inflation severely impacts over time.
• Lack of flexibility. You cannot change the level of your pension once you take it out.
• Your pension will stop when you die, unless you have built in a dependant’s pension and/or a guaranteed payment period which impacts on your benefits.
• You cannot pass on as part of your estate on death.
Annuity or ARF which option is best for you?
Buying an ARF
Advantages Disadvantages
• Flexibility and control over how your fund is invested.
• Invest in a wide range of assets, with the potential for your pension fund to continue growing (tax free).
• You decide the level of withdrawals you in excess of 5% each year.
• You can buy an annuity at a later stage.
• On death it passes to your estate.
• Draw 5% pa – can impact on fund value over the long term. If you withdraw more than the growth in your fund, your initial investment will reduce.
• You are taking on risk – which can be managed / reduced depending on your fund choice.
• Your fund could run out if returns are poor, or if you live longer than expected.
Annuity or ARF which option is best for you?
• An annuity’s real value to retirees is that it provides certainty; come what may, they will receive a regular income in the post or into their bank account every month, for the rest of their lives….assuming annuity provider is solvent.
• The figures suggest that at current annuity rates consumers are paying a high price for this insurance and are left very exposed to the inflation risk.
• ARF holders sitting on cash deposits or low risk funds waiting for annuity rates to increase may be shooting themselves in the foot.
• Get proper advice
Annuity or ARF which option is best for you?
Why pensions still make sense….
• Tax relief still available
• Tax Free Lump Sum
• Tax Free Growth on Funds
• Spouses Pension funding with Employer Funding
• Life cover can be set up for you and your spouse (if employed in the
practice) and tax relief at 41% available on premiums
• Most tax efficient way to save
Conclusion….
A Greater need than ever for the right advice and a Trusted Advisor
Questions