The headline announcements provided final confirmation that the controversial Government Pension Levy is to cease after the calculation date of 30th June 2015. This levy will be charged at 0.75% in 2014 and 0.15% in 2015. There was also the addition of a DIRT refund in respect of the savings of first time buyers, which as expected will be subject to certain conditions. Otherwise, the headline announcements offered very little else in this area.

However, when the Finance Bill was published, some other details emerged for the Pension Sector and although widely welcomed, there is definitely still some room for improvement.

The Finance Bill reduced the deemed distribution from an Approved Retirement Fund (ARF) from 5% per annum to 4% per annum where an individual is aged between 60 and 70 and has a fund value of less than €2 million.

Greater Control and Flexibility

An ARF is a post retirement alternative to Pension or Annuity purchase. ARF’s are vehicles managed by Qualified Fund Managers, in which you can invest the proceeds of your pension fund at retirement. This option may allow the holder potential future growth on their pension funds well into their retirement, providing the holder with greater flexibility and control. On death in retirement, the holders remaining assets can be passed not only to a spouse (as in the case of pension/annuity) but also to their estate (children).

Any distributions (income) drawn from an ARF are taxed at the holder’s marginal rate and in addition, current revenue rules state that an ARF holder is deemed to have drawn a minimum of 5% of their fund at the 30th November each year and must pay tax as if they had drawn 5%. No withdrawals are required up to age 60.

When this deemed distribution came into effect in 2007, it was at a rate of 3%, which at the time, while not welcomed, did not raise too many objections. However, since its increase in 2011 to a rate of 5%, financial advisors could see that this enforced 5% p.a. drawdown had the potential to significantly increase the risk of capital erosion and result in declining retirement income for the ARF holder.

To avoid this erosion, ARF holders may have considered taking a greater investment risk than they were comfortable with, in order to achieve returns that at least equalled the drawdown with the aim of preserving capital or avoiding run down.

The Details of the Changes

With this Finance Bill, the deemed distribution rule is being reduced from 5% to 4% with effect from 1st January 2015, where an ARF holder is less than age 70 and has an asset value of less than €2 million. When an ARF holder attains age 71, the rate of 5% will come back into effect. This initial rate of 4% to age 70 will increase the potential of capital preservation, but the industry should still lobby to reduce this further and to have it apply beyond age 70. The current rate of 6% deemed drawdown continues to apply to all ARF funds where the value is in excess of €2 million at the 30th November in any tax year.

The Approved Minimum Retirement Fund (AMRF) rules were also amended. An AMRF is required to enable entry to an ARF if the holder does not have the required guaranteed income for life of €12,700 per annum. Prior to this Finance Bill, the only drawdowns permitted from an AMRF before age 75 were on capital growth and not the investment itself. However, from this year, an AMRF holder may now elect if they so wish, to draw an income of 4% per annum from the value of the AMRF. This will also be based on the value of the AMRF as at 1st February each year. This change will be of particular benefit to individuals with lower pension fund values at the point of retirement.

Some other changes that applied to the ARF included Anti-avoidance rules that have been extended to circumstances where an ARF or the assets of an ARF are assigned to a third party, and to certain transactions where value shifts from a pension to an ARF or vested PRSA. Further clarity is yet to come on this.

Here to help you navigate your way to financial security.

The Milestone Advisory team are qualified financial services consultants. We specialise in helping professionals in the construction sector and related industries. Our team will work with you to review your finances, explaining your options in clear English.
No jargon – just the facts.

For further information please contact Susan O’Mara via email or phone: (01) 406 8020. Milestone Advisory DAC t/a Milestone Advisory is regulated by the Central Bank of Ireland.