As you aware, substantial changes to pensions tax relief and benefit structures have been proposed in recent months. Whilst it is not possible to give advice based on speculation, many Brokers may wish to highlight possible threats to clients ahead of December’s budget – especially those nearing retirement age.
The key areas to focus on are:
(1) The Tax Free Lump Sum – proposed cap at €200K (with balance taxed at standard rate up to current limits). This will affect anyone whose fund is more than €800K (personal pension, PRSA, 5% director) or where the 1.5 times salary limit (or appropriate multiple given service) is in excess of this.
(2) Specified income of €18K. This is effectively a compulsory annuity. Its interaction with the social welfare pension is unknown, meaning someone retiring prior to state pension age may have to buy an annuity for the full amount or may be able to buy a partial annuity to state pension age. To buy an annuity of €18K may cost up to €400K meaning that (with tax free lump sums) this will eliminate the ARF option for funds under €500K.
(3) Standardisation of tax relief at 33%. This is stated government policy which PIBA and most industry bodies oppose. If you client has “spare” funding capacity for tax relief (and spare funds!) it may be worthwhile discussing single premium options with your client to accelerate tax relief at the marginal rate.
(4) State pension age. The increase in state pension age from 65 to 68 over the period to 2028 needs to be factored into clients’ retirement planning (2014 transition pension eliminated – all persons at 66; 2021 – 67; 2028 – 68).
One further area to watch is the reconstruction of defined benefit (DB) pension schemes in deficit before the deadline to submit funding or alteration plans to the Pensions Board (30 November 2010). This may lead to opportunities to advise firms that are winding up DB schemes and switching to defined contribution.
It is impossible to predict the course of public policy and what change (if any) will take effect in December’s budget. The tax free lump sum and ARFs are most likely candidates give the relatively simplicity to implement. Also the 2 year deferral of compulsory purchase of annuities for DC schemes expires at the end of December meaning some policy development around annuities/ARFs is likely in the coming months. Standardisation of tax relief would (for a fair system) require BIK on state/employer contributions and this may be administratively complex especially to value DB/state “implicit” contributions. Having said that there is no guarantee that the government won’t proceed in some simplified format in the next budget.
Diarmuid Kelly MA (Econ) Chief Executive
Professional Insurance Brokers Association Ltd.,
Unit 14B, Cashel Business Centre, Cashel Road, Crumlin, Dublin 12.
Tel: +353 (0)1 492 2202
Fax: +353 (0)1 499 1569