1. Budget 2011
and Pensions Issues
George Hannan www.hannanfinancial.ie
BComm QFA
George Hannan t/a Hannan Financial is regulated by the Central Bank of Ireland 1
2. Equipped to deliver the service:
General Pensions Family Pension Assets
UK CII IFA since 2001 Exising clients
QFA bridge since 2006 Life Office Specialists
HF Authorised & PI late 2009 Rel. Literature in public domain
LIA, PIBA, ongoing CPD Law Society guides
Expert publications
(ie G Shannon & Pensions Board)
Testimonials Business
Based on work already done Tech, marketing, managerial: c.20yrs
Commercial & Technical qualifications
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3. We’ll look at:
• Finance Bill 2011 - pension & PAO issues
• Non-member options re PAO’s
• PAO’s, effect of changed member circumstances
• DB schemes – some issues
• role of specialist pensions input
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4. Principal Changes
Relevant Earnings cap reduced to €115k
Tax free lump sum capped at €200k
Standard Fund Threshold reduced to €2.3m
Abolition of employee PRSI & HL relief
Approved Retirement Fund (ARF) rules adjusted
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5. Earnings Cap Reduction
Cap reduced from €150k to €115k
Works in conj. with age related % limits
Age Related Limits
<30 15% Greater effect on professional & self empl.
30-39 20%
40-49 25% Less so on employed & middle income
50-54 30%
55-60 35% Some effects: PAO’s & AVC’s
>60 40%
see worked examples
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6. Pension Adjustment Order
Example
Married, age 30 & €10,000 pa DC scheme
Term 35y, Avg growth 6%, Projected fund c. €1.11M
Age, say, 48 Fund c. €300,000
Now: say Jud Sep / Div PAO
Period: first 18 yrs & Percentage: 50% say
Mem fund now effectively: €150k at age 48
Without further contribs, should become c. €400k at 65, or,
continuing €10k pa for next 17y, should become c. €680k
drop of c. €420k or 38% 6
7. Earnings Cap Reduction
Example
150K 115K
Age Related Limits
<30 15%
30-39 20%
40-49 25%
50-54 30%
55-60 35%
>60 40%
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8. Tax-Free Lump Sum
Capped at €200k
& bal up to €575k at 20%
Potentially affects:
Employees with sal >€133k pa & 20y or more service, &
Prof / Self Emp. with fund value more than €800k
Note: better to take lump sum between €200k and €575k & pay
20%, than take as income due to PRSI/USC if taken as income.
Potential PAO issues:
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9. Tax-Free Lump Sum
PAO Example:
DC fund of €1M, split 50/50 by PAO
Member €500k, non-Member €500k
Revenue Rule: TFLS 25% of fund, ie €125k per party
below limit?
NO!
€200k limit on plan, above €100k taxed at 20%
and:
any other TFLS taken after Dec ’05 counts
Note: any Interest Only Pension Mortgages?
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10. Standard Fund Threshold
Reduced from €5.4M to €2.3M
except: where higher PFT applies
Even the new lower target is still ambitious for most
Limit applies before any PAO designated benefits are paid
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11. PRSI, etc
Employee: PRSI & HL relief abolished on contribs
Prof / Self Empl: never had these
PAO issues:
more expensive for employee member to rebuild fund
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12. ARF Option Extension
ARF options now apply to:
- all DC schemes as well as
- private pension arrangements and
- AVC arrangements
Minimum Guaranteed Pension increased to €18k pa
AMRF fund increased to c. €120k
In reality, limits AFR/taxable cash options to large funds
PAO issues (some still to be clarified):
options & limits apply to each individual
more flexibility for non-member
avoids annuity capital forfeiture on death
Example: 12
13. ARF Option Example
DC fund €400k, say split 50/50 through PAO
non-member, only State pension at €12k pa
- Takes €50k tax free lump sum
- Puts €120k into AMRF (converts to AFR at age 75)
draws interest / growth from AMRF as income
- Puts €30k into AFR, with 5% deemed distribution
- & Consider PRSA/PRB if income not needed
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14. • Finance Bill 2011 issues
• Non-member options re PAO’s
• effect of changed member circumstances
• DB schemes – some issues
• role of specialist pensions input
Tick 1
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15. PAO’s - Non-Member Options
Designated Retirement Benefit on DB Scheme
- decision at non-member’s sole discretion
(except where member leaves scheme)
- leave designated benefit combined with member benefit
- create independent entitlement in member’s scheme
- split entitlement out into another scheme or pension vehicle
Issues:
- DB schemes no longer considered risk-free
- benefits include legal trust, funding obligations, generally lower costs,
etc
- current transfer values heavily discounted
- dependency on member decisions 15
16. PAO’s - Non-Member Options
Designated Retirement Benefit on DC Scheme
- decision at trustees’ sole discretion
- normally transfer out
- into another scheme or pension vehicle
Issues:
- more straightforward
- investment risk choice at non-member discretion
- independent of member decisions
- fund & transfer value transparent
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17. PAO’s - Non-Member Options
Designated Contingent Benefit (DIS), DB or DC Scheme
- apply within 12 months of decree date
- no variations
- lapses on remarriage of non-member
- lapses if member leaves scheme
- lapses on member retirement
Issues:
- limited benefit
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18. Changed Member Circumstances
Changed Member Circumstances
- DB scheme member?
- early retirement with employer’s consent (or late?)
- ill health early retirement
- redundancy
Potential Effects on Non-Member
- remove any independent benefit or transfer options
- compromise actual entitlements
- change time frame of entitlements
Suggested Non-Member Strategy
- remain alert & informed re member & employer
- consider transfer out ahead of likely pivotal events
- take professional advice 18
19. Member – Measures to Rebuild:
Professional / Self Employed
- Avail of existing limits
- Incorporate where possible (consultants: special situation)
benefit from larger employer contributions
Employed
- Avail of limits (AVC’s)
- Key employees: special employer contributions)
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20. Topical Issues – DB Schemes
c. 80% DBS’s closed or closing to new members (Oct ’10)
> 70% now in deficit ref min funding standard (excl. PSS)
Some Issues for DB Schemes:
funding proposals
vastly increased life expectancy
inbuilt rules, harshest being statutory escalation of benefits
affordability for employers (cost / competitiveness)
investment performance
onerous trusteeship & admin regulations 19
21. DBS Issues / Risks – PAO’s
Currently, Transfer Values very low
Risk: Scheme poss. unable to fulfill promises at retirement date
Risk: Possible reduction in benefits at retirement date
Risk: Change of member plans / circumstances
Funding Proposals
Remain alert & informed (re member & employer)
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22. Pensions Specialist - Role
As Outsourced Service:
• Pensions – Professional Risks alleviated
• Convenience of a Packaged Service:
Experienced, qualified, insured
Summary Info straight into FLCB / AOM
Single point of contact re pensions
Regular Updates on case progress
Reduced emotives
• Focus on legal outcome
• Quicker case turn-around & paperwork saving
• Defined fee structure
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23. • Finance Bill 2011 issues
• Non-member options re PAO’s
• effect of changed member circumstances
• DB schemes – some issues
• role of specialist pensions input
Tick 2
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