BUDGET 20 14 Alan Bigley
W ha t the Minister sa id Sta nd a rd Fund Threshold (SFT) red uced to € 2m Gra nd fa thering of existing entitlem ents Confirm ed m a rgina l ta x relief still a p p lies DC v a lua tion m ethod ology uncha nged DB benefits a ccrued p rior to 31/ 12/ 20 13 v a lued a t 20 x DB benefits a ccrued p ost 31/ 12/ 20 13 v a lued ba sed on a ge a t retirem ent rela ted fa ctor ra nging from 37x a t 50 to 22 x a t 70 Pension lev y of 0 .75% in 20 14 a nd 0 .15% in 20 15 Budget 2014 November 2013 PwC 2
W ha t the Fina nce Bill cla rified Pre-Com m uta tion Va lues Contribution lim it € 115,0 0 0 Lum p sum – 25% of new lim it of w hich € 20 0 ,0 0 0 ta x free PFT Certifica tion p rocess Budget 2014 November 2013 PwC 3
W ha t the Minister d id not m ention Ind exa tion of new € 2.0 m lim it Ind exa tion of old € 5.4m a nd € 2.3m lim its Budget 2014 November 2013 PwC 4
Red uction in lim its PwC pre budget survey • Low awareness of potential changes – 59% • High awareness among HR & Finance professionals – now a challenge to educate those affected • Much wider range of organisations affected • Over 80% of respondents still view pensions as an important part of total remuneration Budget 2014 November 2013 PwC 5
W ha t is the new lim it? • €60,000 per annum? Budget 2014 November 2013 PwC 6
W ha t is the new lim it? • €60,000 per annum? • Not for some time! • DB pension of €60,000 accrued at 31/ 12/ 2013 still leaves €800,000 of potential additional funding Budget 2014 November 2013 PwC 7
The a bolished a nd re-introd uced lev y Year % 2014 0.75% 2015 0.15% 2016 ? “Fund the Jobs Initia tiv es a nd to m a ke p rov ision for Sta te lia bilities w hich m a y em erge from p re-existing or future p ension fund d ifficulties” • Sam e basis as before • Raise €135m in 2015 Budget 2014 November 2013 PwC 8
W here a re w e now ? • Greater certainty • But challenges to navigate • Compounded by: Multiple Various forms Various Various pension (DB, DC, RAC, arrangements providers in in with pots PRSA, AVC’s...) Budget 2014 November 2013 PwC 9
W ho is a ffected ? Breached pre Breaching at 1 Budget 2013 January 2014 Likely to breach limits in future Will never reach the 1. Am I breaching? limits 2. Will I breach in the future? 3. What flexibility do I have to manage my position? Budget 2014 November 2013 PwC 10
Pension “hell” Age: 50 Pension assets: €2 million Normal retirement age: 60 Unable to access benefits early Scenario Projected value @ 60: €3.25m Outcom e Tax bill @ 60: €512,500 Pension levy: 0.75% in 2014 0.15% in 2015 (€18,000) Reduction in Tax Free Lump Sum? No future ability to draw €300,000 at 20%? Notes: 5% pa grow th, no future contributions Budget 2014 November 2013 PwC 11
Pension “hell” Pension “hea v en” Age: 50 Pension assets: €2 million Normal retirement age: 60 Access benefits at 50: Unable to access benefits early Scenario • Immediate €200k TFLSum • Immediate €300k @ 20% • €1.5m invest in an ARF Projected value @ 60: €3.25m Projected value @ 60: €3.25m Outcom e Tax bill @ 60: €512,500 Tax bill @ 60: Nil Pension levy: 0.75% in 2014 Pension levy: Nil in 2014 0.15% in 2015 Nil in 2015 (€18,000) Reduction in Tax Free Lump Sum? No future ability to draw €300,000 at 20%? Notes: 5% pa grow th, no future contributions Budget 2014 November 2013 PwC 12
Abov e the lim it € 2.0 m +, € 2.3m +, € 5.4m + Employer approach • Who affected? • What level of support? • What planning facilitated? • Corporate governance concerns? • No longer a retention tool • Bespoke arrangements? • Likely future remuneration model Budget 2014 November 2013 PwC 13
Abov e the lim it € 2.0 m +, € 2.3m +, € 5.4m + Alternative to pension accrual • Need to maximise the value of the available capacity – whether capital sum, pension for life or a combination • Cash alternative yields € 43.30 after tax, USC and PRSI per €100 spend • UK experience DB alternate is around 25% to 30% of salary Budget 2014 November 2013 PwC 14
PFT Certifica tion Process • Valuation of benefits from scheme administrator • Electronic system being designed • 12 months to file from system becoming available • Revenue will issue a PFT certificate to individuals • Transitional rules where benefits crystallise before new system established Budget 2014 November 2013 PwC 15
Abov e the lim it € 2.0 m +, € 2.3m +, € 5.4m + Exit pension arrangements • Facilitate DB transfers out • Potential early retirement • Transfers to ARF • Careful planning – Order of access can influence result – DB often accessed last – Tax met from DB pot – Commutation rates may be uncompetitive • Investment of non pension assets Budget 2014 November 2013 PwC 16
Below the lim it but likely to brea ch • Accumulation to €2.0m still great planning Employer cost €100.00 Net €43.30 Dirt 41%, Dividends 50%+ Pension €100.00 Gross roll up Lump sum drawdown ARF access Tax on drawdown net effective rate 25% * Estate planning * Assumes drawdown by a married couple Budget 2014 November 2013 PwC 17
Below the lim it but likely to brea ch Other factors • Age related factors apply – But how significant? – DB only • Planning around reaching the cap – AVC refunds – Cease employee contributions • Increase in State retirement age • Mix of DB and DC at retirement can be beneficial • Future for DB plans – priority order changes • Treatment of this group likely impacted by policies adopted for earlier group Budget 2014 November 2013 PwC 18
Bud get 20 14 Administrators Ta x joint a nd sev era l lia bility Sta tutory Decla ra tion on Ad m inistra tor required before relea se of fund s Offset of 20 % ta x a rising on lum p sum DB p ension red uction – com m uta tion fa ctor? Ta x p a id w ithin Cum ula tiv e ca lcula tions of three m onths p ensions, ca p ita l v a lues a nd lum p sum s Budget 2014 November 2013 PwC 19
Conclusion Now m ore certa inty to the rules – v ery w elcom e How ev er ca p now im p a cts a m uch grea ter ra nge of ind iv id ua ls Pensions still m a ke sense up to the lim it Lev y still a fa ctor Multip le em p loy m ents = m ultip le a rra ngem ents Op p ortunity to m a xim ise benefits how ev er ca reful thought a nd p la nning required Budget 2014 November 2013 PwC 20
www.iapf.ie THANK YOU Alan Bigley, PwC
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