The Government published Finance Bill 2013 on 13th February 2013.

In the area of pensions, the Government introduces new thresholds to the regime for ARFs and vested PRSAs. The measures are significant because they contravene previously introduced efforts at securing pensioners’ retirement income in old age.   The new thresholds, which had not been flagged by the Minister in his Budget speech in December, means that the thresholds which applied to ARFs pre-Finance Act 2011 will now see a comeback.

Since Finance Act 2011, members of Occupational Pension Schemes and contributors to Personal Pensions and PRSAs who have an annual pension income of €18,000 can take the entirety of their pension benefits into an ARF.  Those who do not have sufficient pension income must first set aside pension benefits to the value of €119,800 in an AMRF - or buy an annuity for that amount. The AMRF has to be kept until age 75, or until such times as the pensioner becomes entitled to an annual pension income of €18,000 (whichever is the earlier).

However, from the passing of the Finance Act, the requirement of a €18,000 pension income will be reduced to €12,700. This means that recipients of the Old Age Pension (currently around €12,000) who have very limited additional pension income, no longer have to put money aside for very old age. Accordingly, Finance Act 2013 effectively marks the beginning of the end for the prudence of thinking which infused the AMRF concept.

Furthermore, from the date of the passing of the Finance Act, the max value of the AMRF will be reduced from €119,800 to €63,500.  But it is perhaps more precise to say that the value of ARFs will be increased by the difference, namely €56,300. This is significant because ARFs are subject to imputed distributions which, in turn, are subject to income tax - while AMRFs are not. So, bigger ARFs, bigger income for the Exchequer. While there can be no other reason for decreasing the value of the AMRF other than to improve the tax take for the Exchequer, the measure is, seen in isolation,  perhaps of little importance as the AMRF regime is on the way out – as already argued.

Another measure, one which was flagged in the Budget, is the access to AVCs prior to retirement in certain circumstances.  An individual who has made AVCs can make a once-off withdrawal of up to 30% of the value of their AVCs prior to reaching retirement.  This is restricted to AVC funds. Access to other types of pension arrangements, such as personal pensions, is not available.  The access to AVCs will be available for a period of 3 years from the passing of the Finance Act 2013.

Funds withdrawn in this manner will be subject to income tax at 41% but will be exempt from USC and PRSI.  If an individual can provide a certificate of tax credits or evidence that they are subject to income tax at the 20% rate, the tax payable may be less than 41%.

While this would appear to be a welcome measure at first glance, on reflection it could once again signal the government’s shift to short-sighted policies to increase the short term tax take from pension funds.  As with the changes to the AMRF regime, allowing early access to AVCs only serves to reduce the benefits available to fund an individual’s retirement which may once again leave them dependant on the State later in life.

 


Written by Tommy Nielsen & Jennie Faughnan
Independent Trustee Company

 

*Please note this content is the view of the author and not of Independent Trustee Company


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