The 2011 Finance Act was passed in to law on 6th February and with it has brought in a number of changes to Pensions.
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Approved Retirement Funds have been extended to members of Defined Contribution Schemes however with it comes an increase in the guaranteed income requirement from €12,700 to €18,000. If this cannot be met the lesser of the fund value and 10 times the annual rate of state pension which is €119,800 for 2011 tax year must be invested in an Approved Minimum Retirement Fund.
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The ARF Deemed distribution has increased from 3% to 5%.
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The Earnings Cap for tax relief has reduced from €150,000 to €115,000 – while the earnings cap has reduced for personal contributions no similar restriction has been put on employer contributions.
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PRSI & USC relief is not available on employee contributions and Employer’s PRSI relief has been halved.
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The Standard Fund Threshold has been reduced to €2.3 million
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Tax Free Lump Sums are now limited to €200k, the next €375k is taxed at 20% with anything above that taxed at the marginal rate. This figure will be inclusive of any tax free lump sum taken since December 2005.
In the Governments National Recovery Plan issued last November they outlined that there would be a phased reduction in pension contribution tax relief from 41% to 34% in 2012, 27% in 2013 & 20% in 2014.
The State Age Pension has been extended through phased basis. It will be extended to age 66 in 2014, 67 in 2021 and to age 68 in 2028.
Fine Gael have set out in their 5 point plan, their changes to Pensions taxation. They are proposing to keep the pension contribution relief as it currently is and propose a combination of alternative methods of tax savings. These include:
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A temporary 0.5% annual contribution on all private pensions
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The Abolition of PRSI relief on employer pension contributions
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Allowing defined contribution members access to funds early, within reasonable limits to meet business & personal responsibilities. These drawdown’s would be taxed.
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Cutting tax free lump sums to €250,000
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A cut in Standard Fund Threshold to €1.5 million for public and private sector workers.
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An increase in the deemed distribution rate on large ARF to avoid their use for inheritance tax planning.
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Applying from 2012 marginal rates of income tax rather than Capital Acquisitions Tax to ARF’s on the death of the beneficiary to avoid their use for inheritance tax planning. This may be accompanied by a one year window to accelerate withdrawals from ARF’s at a rate of 35%.
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The objective of Fine Gael’s changes as they see it is to cap taxpayers contributions to pension schemes that deliver pension greater than €60,000 in retirement while maintaining adequate incentives for younger middle income families to continue saving for retirement.
The Labour Party has outlined in their Plan for Stability & Growth that the tax relief system in place is no longer supportable and distribution of relief in not fair & equitable. They would propose capping tax relief on pension contributions from both employees and employers, reducing the maximum tax free lump sum and reducing the maximum pension fund and finally including pension tax relief in the minimum effective tax rate.
There is no denying that with a new government in place we will see significant changes in the provision of pensions in the future & the relief’s that were once enjoyed will no longer be available. For those of you today who have an ARF or are providing an occupational pension scheme for your employees, big changes are afoot. Should you wish to discuss the above in more detail please do not hesitate to contact me on 021 4350806 or csheehan@accuro.ie [1].
[1]This publication is intended only as a general guide and not a detailed analysis. Information has been taken directly from the political party manifestos. The information is provided “as is” without warranties of any kind. Accuro will not be liable for any damages arising out of or in connection with the information provided in this document.