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Ronan McGrath BFS, QFA, FLIA, AIIPM Sales & Business Development Manager IMO Financial Services

Ronan McGrath BFS, QFA, FLIA, AIIPM Sales & Business Development Manager IMO Financial Services

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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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Page 1: Ronan McGrath  BFS, QFA, FLIA, AIIPM Sales & Business Development Manager IMO Financial Services

Ronan McGrath BFS, QFA, FLIA, AIIPMSales & Business Development ManagerIMO Financial Services

Page 2: 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

• Making the right decisions in retirement – Annuity v ARF

Page 3: Ronan McGrath  BFS, QFA, FLIA, AIIPM Sales & Business Development Manager IMO Financial Services

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

Page 4: Ronan McGrath  BFS, QFA, FLIA, AIIPM Sales & Business Development Manager IMO Financial Services

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

Page 5: Ronan McGrath  BFS, QFA, FLIA, AIIPM Sales & Business Development Manager IMO Financial Services

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

Page 6: Ronan McGrath  BFS, QFA, FLIA, AIIPM Sales & Business Development Manager IMO Financial Services

Evolution of the Standard Fund Threshold

Page 7: Ronan McGrath  BFS, QFA, FLIA, AIIPM Sales & Business Development Manager IMO Financial Services

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

Page 8: Ronan McGrath  BFS, QFA, FLIA, AIIPM Sales & Business Development Manager IMO Financial Services

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    

Page 9: Ronan McGrath  BFS, QFA, FLIA, AIIPM Sales & Business Development Manager IMO Financial Services

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

Page 10: Ronan McGrath  BFS, QFA, FLIA, AIIPM Sales & Business Development Manager IMO Financial Services

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!!

Page 11: Ronan McGrath  BFS, QFA, FLIA, AIIPM Sales & Business Development Manager IMO Financial Services

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%

Page 12: Ronan McGrath  BFS, QFA, FLIA, AIIPM Sales & Business Development Manager IMO Financial Services

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

Page 13: Ronan McGrath  BFS, QFA, FLIA, AIIPM Sales & Business Development Manager IMO Financial Services

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

Page 14: Ronan McGrath  BFS, QFA, FLIA, AIIPM Sales & Business Development Manager IMO Financial Services

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

Page 15: Ronan McGrath  BFS, QFA, FLIA, AIIPM Sales & Business Development Manager IMO Financial Services

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

Page 16: Ronan McGrath  BFS, QFA, FLIA, AIIPM Sales & Business Development Manager IMO Financial Services

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.

Page 17: Ronan McGrath  BFS, QFA, FLIA, AIIPM Sales & Business Development Manager IMO Financial Services

• 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

Page 18: Ronan McGrath  BFS, QFA, FLIA, AIIPM Sales & Business Development Manager IMO Financial Services

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

Page 19: Ronan McGrath  BFS, QFA, FLIA, AIIPM Sales & Business Development Manager IMO Financial Services

• 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?

Page 20: Ronan McGrath  BFS, QFA, FLIA, AIIPM Sales & Business Development Manager IMO Financial Services

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

Page 21: Ronan McGrath  BFS, QFA, FLIA, AIIPM Sales & Business Development Manager IMO Financial Services

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?

Page 22: Ronan McGrath  BFS, QFA, FLIA, AIIPM Sales & Business Development Manager IMO Financial Services

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?

Page 23: Ronan McGrath  BFS, QFA, FLIA, AIIPM Sales & Business Development Manager IMO Financial Services

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?

Page 24: Ronan McGrath  BFS, QFA, FLIA, AIIPM Sales & Business Development Manager IMO Financial Services

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?

Page 25: Ronan McGrath  BFS, QFA, FLIA, AIIPM Sales & Business Development Manager IMO Financial Services

• 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?

Page 26: Ronan McGrath  BFS, QFA, FLIA, AIIPM Sales & Business Development Manager IMO Financial Services

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

Page 27: Ronan McGrath  BFS, QFA, FLIA, AIIPM Sales & Business Development Manager IMO Financial Services

Conclusion….

A Greater need than ever for the right advice and a Trusted Advisor

Questions