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Fam Law Assoc Pres


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Presentation on Pensions & PAO issues to Family Lawyers Association, Cork, 24th Feb 2011

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Fam Law Assoc Pres

  1. 1. Budget 2011 and Pensions IssuesGeorge Hannan BComm QFA George Hannan t/a Hannan Financial is regulated by the Central Bank of Ireland 1
  2. 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 2
  3. 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 3
  4. 4. Principal ChangesRelevant Earnings cap reduced to €115kTax free lump sum capped at €200kStandard Fund Threshold reduced to €2.3mAbolition of employee PRSI & HL reliefApproved Retirement Fund (ARF) rules adjusted 4
  5. 5. Earnings Cap Reduction Cap reduced from €150k to €115k Works in conj. with age related % limitsAge 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 5
  6. 6. Pension Adjustment Order ExampleMarried, age 30 & €10,000 pa DC schemeTerm 35y, Avg growth 6%, Projected fund c. €1.11MAge, say, 48 Fund c. €300,000Now: say Jud Sep / Div PAO Period: first 18 yrs & Percentage: 50% sayMem fund now effectively: €150k at age 48Without 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. 7. Earnings Cap Reduction Example 150K 115KAge Related Limits <30 15% 30-39 20% 40-49 25% 50-54 30% 55-60 35% >60 40% 7
  8. 8. Tax-Free Lump SumCapped 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 €800kNote: better to take lump sum between €200k and €575k & pay20%, than take as income due to PRSI/USC if taken as income. Potential PAO issues: 8
  9. 9. Tax-Free Lump Sum PAO Example:DC fund of €1M, split 50/50 by PAOMember €500k, non-Member €500kRevenue 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 countsNote: any Interest Only Pension Mortgages? 9
  10. 10. Standard Fund Threshold Reduced from €5.4M to €2.3M except: where higher PFT appliesEven the new lower target is still ambitious for mostLimit applies before any PAO designated benefits are paid 10
  11. 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 11
  12. 12. ARF Option ExtensionARF options now apply to: - all DC schemes as well as - private pension arrangements and - AVC arrangementsMinimum Guaranteed Pension increased to €18k paAMRF fund increased to c. €120kIn reality, limits AFR/taxable cash options to large funds PAO issues (some still to be clarified):options & limits apply to each individualmore flexibility for non-memberavoids annuity capital forfeiture on death Example: 12
  13. 13. ARF Option ExampleDC fund €400k, say split 50/50 through PAOnon-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 13
  14. 14. • Finance Bill 2011 issues • Non-member options re PAO’s • effect of changed member circumstances • DB schemes – some issues • role of specialist pensions inputTick 1 14
  15. 15. PAO’s - Non-Member OptionsDesignated 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 vehicleIssues: - 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. 16. PAO’s - Non-Member OptionsDesignated Retirement Benefit on DC Scheme - decision at trustees’ sole discretion - normally transfer out - into another scheme or pension vehicleIssues: - more straightforward - investment risk choice at non-member discretion - independent of member decisions - fund & transfer value transparent 16
  17. 17. PAO’s - Non-Member OptionsDesignated 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 retirementIssues: - limited benefit 17
  18. 18. Changed Member CircumstancesChanged Member Circumstances - DB scheme member? - early retirement with employer’s consent (or late?) - ill health early retirement - redundancyPotential Effects on Non-Member - remove any independent benefit or transfer options - compromise actual entitlements - change time frame of entitlementsSuggested Non-Member Strategy - remain alert & informed re member & employer - consider transfer out ahead of likely pivotal events - take professional advice 18
  19. 19. Member – Measures to Rebuild:Professional / Self Employed - Avail of existing limits - Incorporate where possible (consultants: special situation) benefit from larger employer contributionsEmployed - Avail of limits (AVC’s) - Key employees: special employer contributions) 18
  20. 20. Topical Issues – DB Schemesc. 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. 21. DBS Issues / Risks – PAO’sCurrently, Transfer Values very lowRisk: Scheme poss. unable to fulfill promises at retirement dateRisk: Possible reduction in benefits at retirement dateRisk: Change of member plans / circumstancesFunding ProposalsRemain alert & informed (re member & employer) 20
  22. 22. Pensions Specialist - RoleAs 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 21
  23. 23. • Finance Bill 2011 issues • Non-member options re PAO’s • effect of changed member circumstances • DB schemes – some issues • role of specialist pensions inputTick 2 22