Standard Fund Threshold (SFT)

·       Reduced from €5.4M to €2.3M per individual. Effective from yesterday. This is a very significant decrease of 57% on previous threshold and effectively ties in with a maximum fund of €2.3M representing 30 times a max pension of 2/3rds of the new earnings cap of €115,000.

Implications:

Any client with funds of this size based on todays valuation may apply for a Personal Fund Threshold (PFT) to retain this amount going forward. Application must be made to Revenue within 6 months.

Very important for clients with significant funds spread across multiple pension arrangements to check position quickly.

If close to new SFT need to consider implications for future funding and / or earliest benefit access.

Redirection of future funding in favour of working spouse must be considered.

Tax Free Cash

·       With effect from 1st January 2011 pension lump sums in excess of €200,000 will be taxable at standard rate up to €575,000 and at marginal rate for amounts in excess of €575,000.

·       Aggregate of previous pension lump sums received since 7^th December 2005 will count in determining the threshold and tax rate applicable in respect of future lump sums.

Implications:

Clients with lump sum entitlements in excess of €200k may wish to consider taking retirement options immediately.

Where both spouses work and have pension funding facilities redirection of future funding may be a consideration in order to optimise tax free cash entitlements for both spouses.

ARFs – Imputed Distribution Tax

·       The amount on which imputed distribution will be calculated has been increased from 3% to 5% of ARF fund value from valuation date at 31^st December 2010. As such Qualified Fund Managers will be required to deduct income tax in January / February 2011 on the balance of this amount less taxable drawdowns taken by clients from their ARFs during 2010. A change of this significance was not widely anticipated.

Implications:

ARF clients who wish to avoid the imputed distribution tax deduction in early 2011 may wish to consider additional drawdown before year-end. As we are now into the second week in December clients will need to act quickly as year-end processing deadlines are fast approaching. Detail is light in the Summary of Budget Measures published today.

ARF clients may need to review investment portfolios going forward with a view to considering liquidity of ARF investments available to meet future drawdowns of 5% per annum.

Summary of Budget Measures makes no reference to imputed drawdown tax implications for PRSAs at this stage!

ARFs – New Access Rules for 2011

·      The National Pensions Framework signalled changes in ARF access rules from 2011 as an integral part of extending these options to all members retiring from defined contribution schemes. Appendix E of the Summary of Budget Measures introduces these changes as becoming effective from date the Finance Bill 2011 becomes law. Non directors may continue to defer annuity purchase until new provisions are enacted.

·      The current specified income limit of €12,700 will be increased to 1.5 times the rate of the contributory old age pension (approx €18,000 per annum).

·      The AMRF option will be retained but the amount required to be invested in the AMRF will be increased to approx €120,000 being an amount representing 10 times the contributory old age pension.

·      Current AMRF holders will have the option of resitting the specified income test at €12,700 pa for up to 3 years after new provisions are enacted in order to transfer to an ARF. After that transfer to an ARF will only be available to those who pass the €18,000 pa test.

Implications:

Current ARF access rules based on AMRF investment of only €63,500 or specified income on €12,700 pa will apply until year end and later until Finance Bill 2011 is enacted. Clients with funds maturing in near future need to consider the current more favourable ARF access regime where access to funds is possible. The Budget measures finally provide clarity in this matter but confirm less favourable ARF access rules ahead.

Employees in Defined Contribution arrangements approaching retirement may now consider the new options which will be available and investigate suitable solutions.

Employee and Self-Employed Pension Contributions

·      Importantly income tax relief will continue to be available at marginal tax rate up to 41% for 2011.

·      Earnings Limit Cap for 2011 is reduced to €115,000 from €150,000. This lower limit applies not only to contributions paid in 2011 and claimed against income tax liability in 2011 and also to contributions paid in 2011 where backdated relief will be claimed against 2010 income tax liability.

·      Employee contributions paid in 2011 will no longer qualify for relief against PRSI or against the new Universal Social Contribution (USC) which replaces the current health and income levies.

·      Where employee pension contributions are deducted at source from salary under the Net Pay Arrangement the Employer is currently exempt from employer PRSI contributions on this amount. From 1^st January 2011 the Employer PRSI exemption will be reduced to 50%.

Implications:

Self employed and employee clients who have not used up their full pension allowance for 2010 should consider maximising their allowance before year end December 2010. This way they may still utilise the €150k earnings cap whereas if they wait until after 1^st January 2011 the earnings limit will be reduced to €115k regardless as to whether relief is claimed against 2010 or 2011.

Employees will lose out on PRSI relief from 2011 so again should maximise 2010 position via salary deduction if possible before December 2010 year end.

Employers should encourage last minute employee contributions this year as Employer will also save PRSI on 100% of the employee pension contribution via salary deduction before year end compared to a 50% exemption from 1^st January 2011.

Sovereign Annuity Proposal

·       The Budget announced Government agreement to proceed with measures allowing Irish pension funds to invest in longer term Irish bonds offering higher yields and to price liabilities to pensioners accordingly. Further details are awaited. Bonds will be offered by NTMA after necessary measures are introduced by the Minister for Social Protection.

Implications:

Too early to call but in longer term may have dual pricing implications for annuity based liabilities.