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Finance Act 2011 – An Assessment

By Clive Slattery, Pension Consultant, Friends First

Now that we actually have a Finance Act, it is an opportune time to review exactly what has been legislated for. The curtailments of personal reliefs and the reductions in both lump sum and Fund Threshold limits have been well documented. It is suffice to note that all the bad news announced in the Budget is now law. The one exception is that the proposed change in the tax return filing date didn’t happen.

Extension of ARF Options & Changes to AMRF Rules

The one element of good news is that the full range of ARF options is now available to all members of DC schemes, including individuals who availed of the deferred annuity purchase option during the last 2 years. Anyone exercising an ARF option (except members of DB schemes using an avc fund) may take up to 25% of the fund as a tax free lump sum.

The specified income amount is increased to a variable amount equal to 1.5 times the State Contributory Pension. This raises the specified income amount from €12,700 to just under €18,000.

The set aside AMRF amount is increased to a variable amount equal to 10 times the State Contributory Pension. This increases the amount from €63,500 to €119,800.

If the specified income amount can be satisfied at some later date, the AMRF becomes an ARF. For individuals who have retired and who have an AMRF before the passing of the Finance Bill, the “old” specified income and AMRF amounts apply.

 

Points to consider

  • Employer contributions to a PRSA will attract a USC liability, (7% on income over €16,016 p.a.) and employee PRSI (4% on amounts over €127 per week) This makes employer contributions to an Occupational Pension Scheme more attractive when compared with contributions to a PRSA. When seeking to accumulate a fund, using a scheme makes more sense but in some cases the flexibility associated with switching to one or more PRSAs should be considered.
  • Individuals should consider switching to a PRSA prior to retirement if the 5% imputed ARF distribution is an issue. The imputed distribution rules will not be an issue for individuals with modest funds who require a regular income. The imputed distribution rules to not apply to AMRFs.
  • Does the client need to apply for a Personal Fund Threshold Certificate? Clients who have existing DB pension benefits in excess of €115,000 p.a. or a DC fund worth more than €2.3M need to apply before 7 June 2011.
  • Whilst the ARF options were not extended to members of DB schemes, it is possible for members of DB schemes to access ARF options by transferring to a Buy Out Bond or DC scheme prior to retirement. The subsequent transfer of a significant cash sum to an ARF may be attractive to some individuals.
  • Check the tax free lump sum position before opting for an ARF. When you opt for an ARF, the lump sum is 25% of the fund. This is compared to up to 1.5 times salary when using the traditional annuity purchase route. Individuals retiring from a DB plan must use the traditional calculation even if they wish to ARF an AVC fund.
  • Existing AMRF holders should check to see if they now meet the specified income amount. This provides an opportunity for the AMRF to become an ARF and could be of interest to those seeking to access AMRF funds.
  • Individuals intending to retire will need to check their lump sum position. Have they previously received a retirement lump sum? If taking a lump sum brings them over the €200K limit what are their options?
  • The reduced limits for personal contributions bring an even bigger focus on the merits of incorporation. Is there an opportunity to employ a spouse or other family member? Remember each individual can have a tax relieved fund up to the revised SFT of €2.3M and can take €200K as a tax free lump sum plus a further €375K taxed @ standard rate.

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