Pensions perspective - Finance Bill 2013
by Patrick Cosgrave, Director, Total Rewards and Benefits
T: +353 1 4172422
The important elements of last December’s budget speech as regards pensions were to confirm that tax relief on personal contributions would remain at the marginal rate and that the pension levy would not be renewed after it expires in 2014. The Finance Bill 2013 does not row back on these important commitments.
The Bill does allow for implementation of a facility which will provide a once off ability to exercise an option in a three year period from the passing of the Act, to withdraw up to 30% of an individual’s Additional Voluntary Contributions (AVCs). The proposal is substantially as was outlined in December.
Despite various requests for the scope of the facility to be extended to the self-employed and other categories of pension savings, the legislation sets out a tight definition of eligible AVCs. Employer paid contributions, regular employee contributions, self-employed personal pensions and normal Personal Retirement Savings Account (PRSA) contributions are excluded, as are AVCs which are being made for the purposes of purchasing notional added years.
Any AVC refunds will be taxable at marginal income tax rates, so there is no tax incentive rationale driving early access for most individuals. As a result, this facility may make sense only in limited circumstances such as where someone’s income has dropped very substantially or where the individual may otherwise exceed their Personal or Standard Fund Threshold.
Pension scheme administrators will face an extra burden in providing the necessary information to members who are considering this option and will also be liable for tax deduction and submission of quarterly reporting to the Revenue Commissioners.
A surprise in the Bill is the reduction in the minimum specified income threshold used to determine whether an individual at the point of retirement is obliged to purchase an annuity or lock-up part of their pension funds to age 75 in an Approved Minimum Retirement Fund (AMRF), from €18,000pa back to €12,700pa. The amount that must be locked away in an AMRF is also reduced back to €63,500 from the current level of €119,800.
The Finance Bill reverses the increase in specified income and AMRF limits that were implemented in Finance Act 2011. Those who have established an AMRF between then and the passing of the 2013 Act will now be required to transfer assets from their AMRF (or equivalent vested PRSA) to an Approved Retirement Fund (ARF) as if the lower limits had always been on place.
This retrospective adjustment would generally be welcomed were it to be an option rather than a mandatory requirement. The mandatory nature of the requirement may well give rise to practical difficulties for Qualified Fund Managers and/or PRSA providers - obvious difficulties will arise where there are multiple providers involved and/or where the AMRF funds are invested in term deposits or other structured investment products.
The reduction in the income/AMRF limits will provide greater access to pension funds for some who are about to retire from defined contribution pension arrangements. However, it will also mean that individuals will have less long term security as more of their savings will be subject to the 5% minimum imputed income tax liability.
The pension changes contained in the Finance Bill, whilst not hindering things to any great degree, do not address the serious challenges facing many individuals and pensions schemes in achieving a safe and secure retirement income. The forthcoming Social Welfare and Pensions Bill may go much further in that regard, so watch this space.