The document discusses several issues related to pensions in Ireland arising from the 2011 Finance Bill, including:
1) Key changes such as reduced earnings caps, lower tax-free lump sum limits, and changes to Approved Retirement Fund rules.
2) Implications of these changes for Pension Adjustment Orders (PAOs), such as more options for non-members of defined contribution schemes.
3) Risks defined benefit schemes pose for PAOs due to potential benefit reductions or inability to fulfill promises.
4) The role of specialist pensions input in divorce cases to alleviate risks and focus on legal outcomes.
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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