Ronan McGrath BFS, QFA, FLIA, AIIPM Sales & Business Development Manager IMO Financial Services

What now for pensions…… Agenda…. Recent Changes Standard Fund Threshold & Personal Fund Threshold Revenue Maximum Limits Maximising your Tax Reliefs  AVC Options  Spouses Pensions Making the right decisions in retirement – Annuity v ARF

A time of change…… Today 1967 Income Tax Act 1972 Finance Act Pensions Act 1990 TCA PRSA FA 2006 Imputed Distribution ARF FA 2006 €5m PFT FA 2008 €150,000 CAP 2003 Pensions Ombudsman 1998 NiPPI €254k contribution CAP 2010 €115,000 CAP Past 2010 National Pensions Framework 1991 Joined Industry Pensions Levy introduced 2011 ARF Options all schemes 2014 PFT €2m

Changes…. Positive ones Pensions Act (Preservation) Introduction of ARFs Introduction of PRSAs Pensions Ombudsman Relaxation of borrowing restrictions Age related contribution limits Negative ones Fund threshold reduction Dual income restrictions Reduction in Earnings cap Imputed distribution introduction Pensions levy Extension of State Pension Age Increased Regulation raising costs Restriction on overseas transfers Restriction on lump sum ARF - Increase tax on death Loss of EE & ER PRSI relief

Recent Budget Changes  DIRT up to 41% plus PRSI of 4%  Exit tax up to 41%  Income tax remains at 41%  CGT remains at 33%  Funding Threshold reduced from €2.3 million to €2 million Pensions remain EXEMPT from investment taxes

Evolution of the Standard Fund Threshold

Evolution of the Standard Fund Threshold and Imputed Distribution 1999 ARF is born  7 December December 2005 €2,300,000 Limit on Pension Funds €5,000,000 Limit on Pension Funds No Imputed Distribution  No Limit on Pension Funds €2,000,000 Limit on Pension Funds 5% Imputed Distribution 1 January 2014 €100,000,000

Origins of the €2,000,000 limit New Age Related system for valuing defined benefits AgeCapitalisation Factor AgeCapitalisation Factor

Origins of the €2,000,000 limit New Age Related system for valuing defined benefits AgeCapitalisation Factor AgeCapitalisation Factor (€60,000 x 30) + €200,000 = €2,000,000

How the new Threshold will be implemented going forward Before After All benefits valued using a capitalisation factor of 20 1 January 2014 All benefits valued using age related capitalisation factors Consultants with HSE pension need to take note of this!!

What happens if you have €2,001,000 The chargeable excess which is liable to tax at 41% This leaves €590 which would be transferred to the ARF The ARF would be liable to tax, USC and PRSI meaning that the net proceeds would be €283 €1,000 €590 €283 The effective tax rate is 72%

So to be clear.… Everyone in the room will be limited to a pension fund of €2m from 1 st Jan 2014 (unless your fund is already higher and you have applied for your Personal Fund Threshold)  HSE Consultant - both HSE Pension and Private Pension income accessed – Benchmark all existing DB benefits before 1/1/2014  GPs - both GMS and Private Pension income accessed

Pensions levy “The levy – consider it gone, history, dead as a doornail, kaput, finito, buried – trust me” Retire before 30 June Postpone contributions until after this point 0.75% for % for 2015

Tax relief at marginal rate on contributions  PRSA AVC contributions for GMS Pension  Private Pension Contributions Dual Income earners have to maximise contributions on their GMS earnings before funding through a Private Pension Tax Free Growth on pension funds Tax Free Lump on retirement You can retire your private pensions anytime from age 60 Spouses Pension funding Now for the positives

Why pensions still make sense…. Tax relief up to earnings cap of €115,000 based on an age related limits Tax Free Lump Sum of up to €200,000 with balance up to €500,000 taxable at 20% i.e. €200,000 Tax Free with €300,000 x 20%. Tax Free Growth on Funds Spouses Pension funding Life cover can be set up for you and your spouse (if employed in the practice) and tax relief at 41% available on premiums

Tax Free Lump Sum Applies to all - GP with GMS / Private Pension earnings or HSE consultant with HSE / Private Pension earnings Total Tax Free Lump Sum of up to €200,000 from all pensions in your lifetime. Balance above this up to €500,000 taxable at 20% i.e. €200,000 Tax Free with €300,000 x 20%. Benefits from Private Pensions can be taken from age 60 all in one go or on a staggered basis.

Where one spouse carries out services in relation to the others employment Opportunity to fund for Tax Free Lump Sum and ARF/Annuity 17 Spousal Employment Sch D Client Sch D Client Spouse PAYE Spouse PAYE PENSION If the spouse is aged 50 then you can contribute 200% of earnings

PRSA AVC Options You can contribute to a PRSA AVC for your GMS earnings and receive tax relief Options of a regular monthly or lump sum payment You decide what fund / provider to choose from and can switch at any stage without penalty Clear breakdown of all costs and charges Range of funds to choose from asset classes AVC options can be transferred to an ARF at retirement

Prior to 1999 you had to take on Annuity at retirement…introduction of the ARF / AMRF Route Annuity Rates which determine how much a pension pays are at an all time low Low interest rates and Rising Life Expectancy are increasing cost to purchase an annuity The odds of getting your money back are significantly reduced if inflation increases. Retirement Options - Annuity or ARF which option is best for you?

Annuity or ARF which option is best for you? Male age at annuity purchase Level annuity paAnnuity pa, Increasing at 2% pa 60€4,296€3,203 65€4,905€3,816 70€5,813€4,723 75€7,101€6,011 Figures above based on a fund of €1000,000 Quote 1 - Level, single life, guaranteed 5 years annuity Quote 2 – Allows for indexation at 2% pa

Payments discounted at 2% pa to convert them to today’s values. Pensioner mortality assumptions used in SORP (Statement of Reasonable Projection). * assuming future inflation of 2% pa 92 is the magic age; the projected age to which all our pensioners in this example must survive. Male age at annuity purchase Level annuityAnnuity increasing at 2% pa Projected payback age* Probability of surviving to payback age Projected payback age Probability of surviving to payback age %9238% %9239% %9240% %9243% Annuity or ARF which option is best for you?

Inflation Risk!!!! - Inflation is the real enemy of annuities. The figures suggest that about 60% of current buyers of annuities will not live long enough to get their money back in real terms, in annuity payments. Age Level annuityAnnuity increasing at 2% pa Projected payback age* Probability of surviving to payback age Projected payback age Probability of surviving to payback age %9818% %9528% %9432% %9434% *assuming future inflation of 3% pa Annuity or ARF which option is best for you?

Buying an Annuity AdvantagesDisadvantages You are buying certainty/security. Guaranteed to be paid a known pension for the rest of your life – once provider is still solvent. No Investment Risk. The only risk is the risk of the life company defaulting. You may build in a guaranteed payment period, or dependent’s pension, etc. If you choose an equity-linked pension, you have the potential to achieve a higher level of income. Annuity rates are currently at a historic low Loss of access to capital and control. Inflation severely impacts over time. Lack of flexibility. You cannot change the level of your pension once you take it out. Your pension will stop when you die, unless you have built in a dependant’s pension and/or a guaranteed payment period which impacts on your benefits. You cannot pass on as part of your estate on death. Annuity or ARF which option is best for you?

Buying an ARF AdvantagesDisadvantages Flexibility and control over how your fund is invested. Invest in a wide range of assets, with the potential for your pension fund to continue growing (tax free). You decide the level of withdrawals you in excess of 5% each year. You can buy an annuity at a later stage. On death it passes to your estate. Draw 5% pa – can impact on fund value over the long term. If you withdraw more than the growth in your fund, your initial investment will reduce. You are taking on risk – which can be managed / reduced depending on your fund choice. Your fund could run out if returns are poor, or if you live longer than expected. Annuity or ARF which option is best for you?

An annuity’s real value to retirees is that it provides certainty; come what may, they will receive a regular income in the post or into their bank account every month, for the rest of their lives….assuming annuity provider is solvent. The figures suggest that at current annuity rates consumers are paying a high price for this insurance and are left very exposed to the inflation risk. ARF holders sitting on cash deposits or low risk funds waiting for annuity rates to increase may be shooting themselves in the foot. Get proper advice Annuity or ARF which option is best for you?

Why pensions still make sense…. Tax relief still available Tax Free Lump Sum Tax Free Growth on Funds Spouses Pension funding with Employer Funding Life cover can be set up for you and your spouse (if employed in the practice) and tax relief at 41% available on premiums Most tax efficient way to save

Conclusion…. A Greater need than ever for the right advice and a Trusted Advisor Questions