What is the impact of the budget on your pension?

Introduction

The government announced a number of proposed changes to pensions in the recent budget. However, assessing the impact of these changes on an individual and what steps should be taken can sometimes be difficult to understand. This article will outline the main changes, and seek to explain the impact on individuals who are still working and those who are retired.

Key pension changes in the 2013 budget

1. Once off Additional Voluntary Contributions (AVCs) access
   Pension holders with be allowed a once off opportunity to access up to 30% of their AVCs. This option will be available for three years from the passing of the Finance Bill in 2013. Any withdrawals will be subject to the individual’s marginal rate of tax.
   
2. Universal Social Charge (USC) increase
   The USC for an individual, who is over seventy years of age (or has a full medical card) and has an aggregate income of €60,000 or more, has increased to 7%. This represents an increase of 3%.
   
3. Maximum pension fund
   The budget confirmed that the current Standard Fund Threshold (SFT) would remain at €2.3 million for 2013. However, it noted that changes would be implemented in 2014 that will cap taxpayer subsidies for pension schemes which deliver pension income of more than €60,000 per annum.

Key rules that will remain in force for 2013

On a positive note, the minister did not alter a number of pension limits and requirements for 2013 relating to pension legislation, details of which are listed below.

• Tax relief on individual pension contributions
  Marginal tax relief will remain on individual pension contributions in 2013.
  
• The pension levy
  The pension levy, 0.6% of an individual’s pension fund value, will not continue after 2014. There are two more payment dates, the 30 June 2013 and the 30 June 2014.
  
• The tax free retirement lump sum limit will remain at €200,000
  
• The maximum lump sum limit will continue at €575,000
  
• The earnings limit for personal contributions will remain at €115,000
  
• Approved Retirement Fund (ARF) and Vested Personal Retirement Savings Account (PRSA) qualifying requirements were not altered
  
• ARF and Vested PRSA holders will still require an Approved Minimum Retirement Fund (AMRF) or inaccessible vested PRSA amount of €119,800 or guaranteed income of €18,000.
  
• There was no change to the imputed distribution percentage
  The imputed distribution for ARFs and Vested PRSA’s remain at 5% where the fund value is less than €2 million and 6% if it is greater than €2 million.

The removal of the Pensions levy from 2014 combined with the increase in taxation on other wealth accumulation vehicles and the introduction of PRSI on unearned income¹ for employees from 2014, further enhances the attractiveness of a pension compared to alternative wealth accumulation vehicles. Funding up to the maximum threshold within a pension vehicle is now the most tax efficient wealth accumulation strategy for individuals.  

What is the impact for retired individuals?

The budget had a limited impact for the majority of individuals who had already retired from their pension vehicles. However, for those with income of more than €60,000 per annum and who are over age seventy (or who hold a full medical card); there has been a 3% increase in the rate of USC applied. This will result in a material reduction in net income for affected individuals.

What is the impact for individuals who are still working?

Key conclusions from the budget include:

1. As personal contributions will continue to receive tax relief at their marginal rate of tax, individuals who can retire prior to 2014 should continue to fund a pension up to the point that their benefits will reach the Governments new income cap.    
   

2. The Standard Fund Threshold (SFT)² will remain at €2.3 million in 2013. It is unclear at this point how the government intends to implement their proposal to remove tax relief on pension schemes that deliver pension income above €60,000 per annum in 2014.  

   The current conversion factor used to calculate the notional capital value of defined benefit income is 20. Therefore, the notional capital value of €60,000 of pension income is €1.2 million. There is speculation that the conversion factor will change in the future but we have to await the details. Regardless, individuals who are currently making significant AVCs and/or whose notional capital value is in excess of €1.2 million by the end of 2013 should carefully consider their plans and seek advice now.

3. The early access option for AVCs may be a useful option for some individuals. However, given the withdrawal will be subject to the marginal rate of tax, and, have potential knock on effects on other matters, an individual should carefully consider this option prior to acting. Advice should be sought to ascertain the most tax efficient course of action. It is not clear as yet, if the early access option will be made available to PRSA’s or Personal Pensions.

Please note the content above is the opinion of the author and does not constitute financial advice. This document is based on current legislation and is subject to change.

For more information, please contact:

Shane McInerney Manager, Pension & Reward Services + 353 1 417 3889 smcinerney@deloitte.ie

¹Unearned income includes Rental income, investment income, dividends and interest on deposits.
²The SFT is the maximum pension fund an individual can amass over their working life.