An Overview on its Impact on Pensions, Savings and Risk Management Plans
The Budget 2012 was announced yesterday and our resident
Expert(Gavin Gilmore QFA FLIA TMIT)has reviewed its contents with a
view on possible considerations and impacts it will have on
financial planning, pensions, life cover, income protection,
savings and investments.
Pensions
By and large these have been untouched and the really good news
is that the tax relief remains at the marginal rate of income tax
at 41%. The maximum pension lump sum and the maximum pension fund
threshold remain as before at €575,000 and €2,300,000 respectively.
The Minister did signal that at some time in the future the very
generous tax incentives will have to be reviewed, but for the
moment they remain.
The increased rate of DIRT (see below) and increased Capital
Gains Tax, and the fact that pension investment growth is largely
tax free, make pension plans all the more attractive.
Employer PRSI relief on employees contributions to pension has
been abolished. For 2011 the relief was 5.375%. Many employers
previously contributed to the pension plan a sum equal to 5.375% of
the employees amount, thus being revenue neutral from an employers
point of view. This will no longer be the case should the employer
continue to contribute. For those who are lucky enough to have
retired and have substantial (in excess of €2M) Approved Retirement
Funds (ARF), the Government have increased the requirement to draw
down a (taxable) income from the ARF from 5% to 6% of the fund per
annum. This is to ensure that the ARF is used for the proper
purpose of providing a retirement income, rather than a means of
passing on wealth in a tax efficient manner.
Previously where an ARF holder died and left the value of the
ARF to his child who is aged over 21 years, income tax was
applicable at 20% on the value of the ARF. The applicable tax has
been increased to 30%. There is no Capital Acquisitions Tax
threshold in this scenario. If however, the ARF is left to his
child who is under aged 21, the fund is a taxable inheritance under
CAT and can avail of the thresholds, with the excess being taxed at
30%.
Savings
DIRT has increased from 27% to 30%. This is hardly surprising
but does make tax free savings such as the Post Office Certificates
etc relatively more attractive. Exit tax on investment products is
now at 33%, and so the pressure is on insurance companies to design
attractive investment vehicles which are capital guaranteed which
have the potential to provide better returns (after tax) than can
be received from institutions such as the Post Office.
Risk Management Plans
A significant implication of the Budget will be the increased
liability to Capital Acquisition Tax. The increase in rate from 25%
to 30%, together with the reduced threshold, from €332,084 to
€250,000 will mean that many may leave behind a substantial
inheritance tax bill for those for whom they may bequeath assets.
This concern can be addressed in a tax efficient manner with the
provision of a life policy designed for the specific purpose to pay
the inheritance tax. It is likely that these sort of policies will
become popular once more.
Social Welfare Widows Contributory Pension
Previously in order to be in a position to qualify for the Widow
pension (which is €10,062) either you or your spouse must have paid
at least three years paid contributions and an average of 39 paid
or credited contributions in either 3 or 5 years before the death.
This seems to have been substantially increased to ten years paid
contributions with effect from July 2013. This increasein
qualification should prompt people to review their amount of life
cover, as it may be that a young wife, whose husband has died, may
not be in a position to benefit from the Contributory Widows
pension in the future.
Social Welfare Pension
The squeeze on the contributory pension continues. Currently a
person with an average of 20-47 PRSI contributions per year over
their working life receives a weekly State Pension of €4.50 less
than a person with a yearly average of 48 or more PRSI
contributions. A lower pension will be payable to new applicants
for State Pension who have a yearly average of less than 48 PRSI
contributions. (September 2012). Currently, late claims for certain
contributory pensions can be backdated on a reducing scale for up
to 5 years. This backdating period will be reduced to a maximum of
6 months. This applies to State Pension (Contributory &
Transition), Surviving Civil Partner's Contributory Pension and
Widow(er)'s Contributory Pension. (April 2012)
Summary
This is a brief summary of some points of the Budget and how it
may affect certain elements of financial planning. If you wish to
review your own circumstances in the light of any news contained
within the Budget then please do not hesitate to contact our office
(01 2799800). The two key points of the budget is that for the
moment the attractive pension relief from income tax remains, but
for how long? Availing of these benefits NOW seems wise. The second
point is that it is evident the value of the Social Welfare
Contributory pension is being eroded over time, and it is going to
be up to us all to provide for our own salary in retirement. Do not
fail to adequately provide for this.
