What Brokers Need to Know. Recent Developments June 2014

Transcription

1 What Brokers Need to Know Recent Developments June 2014

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3 In this issue we look at the following: Revenue Changes to the Standard Fund Threshold (SFT), Personal Fund Threshold (PFT) and the new method of PFT Notification...Page 1 New Capitalisation Factors for Defined Benefit Schemes... Page 2 AVC 30% Encashment Reminder - 2 more years of access facility...page 5 AMRF Reminder - 2 more years of reduced AMRF Limits AMRF Specified Fund Amount and AMRF Guaranteed Lifetime Income...Page 7 Trustee Training Reminder - renewal requirement...page 7 Department of Social Protection Host Mailing Service for tracing former Pension Scheme Members...Page 8 Element Six case...page 8 Got a technical query? Talk to a member of our Technical Services team. See page 10 for details.

4 1. Revenue changes to the Standard Fund Threshold (SFT), Personal Fund Threshold (PFT) and the new method of PFT Notification. As you know, there is a maximum Revenue limit on the total capital value of pension benefits that an individual can draw in their lifetime from tax-relieved pension products, where those benefits came into payment for the first time on or after 7 December There are also significant additional Chargeable Excess tax liabilities if the relevant limits the Standard Fund Threshold (SFT) or Personal Fund Threshold (PFT), (if applicable) are exceeded. SFT Regime Changes The Finance (No. 2) Act 2013 introduced a further reduction to the maximum allowable pension fund at retirement (SFT) from 2.3m to 2m on 1 January PFT Regime changes In certain situations an individual can apply for a PFT. A PFT is an increased maximum tax relieved pension fund which may apply instead of the SFT. It can apply where the capital value of an individual s pension rights on 1 January 2014 exceeded 2.0m (a similar provision applied when the SFT was first introduced in 2005 and again when it was subsequently reduced in December 2010). Individuals with pension rights whose capital value as at 1 January 2014 exceeded 2.0m can protect that higher capital value (up to an amount not exceeding the previous SFT of 2.3m) by applying to the Revenue Commissioners for a PFT Certificate to 'lock-in' the higher amount. An individual who previously received a PFT certificate continue to be entitled to the amount on the PFT certificate as amended in line with the earnings adjustment factors applicable since the PFT was granted. PFT Notification Form and online method of PFT notification If an individual has a PFT the Legislation now requires them to notify Revenue using online submission. This notification needs to happen within 12 months of the online system being made available (and in any event before the individual first accesses his/her retirement benefits). A new PFT Notification Form is available on revenue.ie (together with some guidance notes). The 'paper' form should ONLY be used if the member is retiring before the online notification system is in place. (This is expected in the next few months). In the meantime PFT applicants should obtain the relevant statements as it will be necessary to have all the information to hand when making the online notification. Any queries regarding PFT Notification should be addressed by to lcdretirebens@revenue.ie IMPORTANT NOTE - DB Valuation Statements All PFT applicants should obtain Valuation Statements from each of their Pension Schemes (DB & DC) as at 1 January All members with benefits in DB Pension Schemes (Current or Deferred) should obtain Valuation Statements from each DB Scheme as at 1 January The Valuation Statements should be sought even if it is not necessary to apply for a PFT at this stage. This is due to the increasing Capitalisation Factors as shown in point (2) overleaf. Please note: Although members may not need to apply for a PFT now, it is important for future pension planning to have a Valuation Statement/Certificate confirming the value of their accrued DB benefits as at 1 January 2014 and hence subject to a Capitalisation Factor of 20:1, rather than the higher factors shown in point (2) overleaf and if there happens to be any further reductions in the Standard Fund Threshold in the future. 1

5 2. New Capitalisation Factors for DB Schemes For SFT and PFT calculation purposes, Defined Benifit (DB) Schemes use a Capitalisation Factor to place a monetary value on the accumulated DB benefits at a Benefit Crystalisation Event. Since 1 January 2014, the previous single valuation factor of 20 has been replaced with a range of higher factors varying with the age at which the pension is drawn down (please see new Table of Capitalisation Factors on page 3). Where part of a DB pension has been accrued pre-1 January 2014 and accrued post-january, transitional arrangements apply to allow at retirement for the part accrued up to 1 January 2014 to be valued at a factor of 20 and for the remaining pension to be valued at the higher age-related factor. As you can see from the table on page 3, the higher factors range from 37 for DB pension entitlements drawn down at age 50 or under to a factor of 22 for those drawn down at age 70 or over. Where the SFT (or PFT, if applicable) is exceeded, the excess is subject to an effective income tax rate of 65% (excluding any USC or PRSI) thus clawing back any tax relief which helped fund the excess. Individuals in Defined Contribution (DC) pension arrangements with pension savings valued at less than 2m can save for a lifetime pension fund of 2m without triggering an excess chargeable to higher taxation. For DC type pension arrangements, the capital value of the pension rights on 1 January 2014 remain, as before, the value of the assets in the arrangement that represent the member's accumulated rights on that date i.e. the value of the fund. The 65% tax rate - where does it comes from? Value of Benefit Crystalisation Event (A) 3,000,000 Standard Fund Threshold (B) 2,000,000 i.e No PFT Chargeable Excess (C) = (A)-(B) 1,000,000 Chargeable Excess Tax (D) = (C)x41% 410,000 Net Balance (after deducting C/E Tax) (E) = (C)-(D) 590,000 Tax on Net Balance (F) = (E)x 41% 241,900 Excl. USC and PRSI Total Tax (G) = (D)+(F) 651,900 Excl. USC and PRSI Equivalent Tax Rate on C/Excess (H) = (G) / (C) 65.19% 2

6 New Capitalisation Factors Age Up to and including 50 The change to higher valuation factors varying with age means that in future DB pensions at lower values will be impacted by the reduced SFT. What do these changes mean in practice? (i) 'Post-2014' Regime Under the 'Post-2014' regime, a DB pension of over 60,606 per annum accrued in the future under the new regime and taken at age 60 with a separate retirement lump sum will be impacted by the SFT Example Salary = 121,212 Relevant agerelated factor and over 22 Pension = 60,606 (assume, 50% of Salary) Retirement Lump Sum (1.5 times Salary) 60,606 x ,818 x 1.5 = 2,000,000 (ii) 'Pre-2014' Regime Under the 'Pre-2014' regime, a DB pension of up to 100,000 with a separate lump sum could be accrued before the previous SFT of 2.3m would be exceeded. Example Salary = 200,000 Pension = 100,000 (assume 50% of Salary) Retirement Lump Sum (1.5 times Salary) 100,000 x ,000 x 1.5 = 2,300,000 (iii) New table of DB Capitalisation Factors based on age and pension The level to which DB pension entitlements can be accrued under the revised SFT regime before being impacted by the threshold now varies depending on the age at which the benefits are taken. Please note that the revised arrangements after the transition phase will generally not impact on individuals whose gross DB pension is of the order of 54,000 per annum or less. Example Annual Pension = 54,000 Capitalisation Factor = 37:1 (at age 50) Capital Value = 54,000 x 37 = 1,998,000 (ie just under 2,000,000) It would be expected that those higherearning individuals affected by the changes to the SFT regime will (provided their pension scheme allows them to do so) cease contributing to pension savings or accruing additional pension entitlements in order to avoid exceeding the revised 2m SFT or a PFT, as appropriate. (iv) Can you have a fund of more than 2m and still not pay any Chargeable Excess Tax? Yes, this is possible provided Revenue Maximum Benefits limits based on salary and service are not exceeded. The following example shows how it is possible for a Retirement Fund of 2,146,341 to pay the same tax as a fund of 2,000,000. This is due to the fact that the tax payable on a retirement lump sum of 500,000 equates to 60,000 and this amount can be offset from the Chargeable Excess Tax payable at 41% of any fund above 2,000,000. 3

7 Chargeable Excess Tax In this example, the Chargeable Excess Tax on 146,341 ( 2,146,341-2,000,000) = 146,341x41% = 60,000 The Chargeable Excess Tax can be reduced by the Retirement Lump Sum Tax. If the Retirement Lump Sum is 500,000 (i.e. 25% of 2,000,000) then the Retirement Lump Sum Tax is calculated as follows: Thus, in this situation, it is possible to have a Retirement Fund of 2,146,341 and the tax payable ( 60,000) is the same as the tax payable on a fund of 2,000,000. Rate Tax Due So, in this case the Chargeable Excess Tax ( 60,000) can be reduced by the Retirement Lump Sum Tax (also 60,000) and the Net result is a NIL Chargeable Tax Liability Retirement Lump Sum Tax Band Tax Rate Tax Due First 200,000 0% Nil (assuming no TFCS since 7 Dec 2005) Next 300,000 20% 60,000 TOTAL RETIREMENT LUMP SUM TAX 60,000 4

8 3. AVC 30% Encashment - 2 more years of early access facility A facility was introduced in 2013 to provide early access to Additional Voluntary Contributions (AVCs) before retirement. It is currently possible for up to 30% of the AVC fund to be accessed. Clients with AVCs and PRSA AVCs can withdraw up to 30% of their accumulated value. Any amounts withdrawn will be subject to tax at the individual's marginal rate, but USC or PRSI will not apply. The option is available for three years from 27 March 2013 (i.e. date of passing of Finance Act 2013) until 26 March 2016 so there are less than 2 more years remaining. The scope of Early Access to AVCs is as follows: Included Defined Contribution AVCs, PRSA AVCs and the AVC element within a Buy-Out Bond provided the AVC is clearly identifiable. Excluded Retirement Annuity Contracts (RACs), Personal Retirement Savings Accounts (PRSAs), Defined Benefit AVCs (Added Years) and AVC (Term Life cover). Issues to be considered in relation to the AVC Early Access facility: Scope An individual can take up to 30% of AVC / PRSA AVC value available during the next 3 years. Only one payment of up to 30% will be allowed rather than, say, 3 amounts of 10%. Multiple AVC policies If there are Multiple AVC policies for one client (all with Zurich Life or with other Life Offices) then 30% of the AVC value can be paid from each policy. The 30% applies to each policy / scheme in isolation. There is no facility to pay more from one provider (and a lower amount from another). Clients can access each policy / scheme at different times (subject to a maximum of 30% per policy / scheme). Clearly Identifiable The AVC element needs to be clearly identifiable - especially if there are Employer / Employee / AVC contributions within one policy / scheme. 5

9 Definition of an AVC For the purpose of the Early AVC Access facility, relevant AVC contributions are defined as AVC Contributions within the meaning of section 770(1) which essentially includes: contributions made by a member of a scheme under a rule of the main scheme permitting such contributions, and contributions made by a member under a separately arranged AVC scheme linked to the main scheme; AVC PRSA contributions are Additional Voluntary PRSA Contributions within the meaning of section 787A(1) which essentially includes: contributions made by a member of a scheme under a rule of the main scheme permitting the payment of voluntary contributions to a PRSA, or such contributions made under a separately arranged scheme linked to the main scheme and which allows voluntary contributions to a PRSA. Importantly, the definition of relevant AVC contributions includes such AVCs representing a transfer of AVCs - that may have been made by an individual to a previous employer s scheme or to a previous AVC PRSA. Transfers-In As above, if transfer values had been received from other Occupational Pension Schemes, then the AVC element included in any such transfer values must be clearly identifiable. And it must relate to actual AVC contributions as defined above i.e. it is necessary to look through the payment and confirm that they were paid as AVC contributions. For example, if a PRSA was transferred into an Occupational Pension Scheme, then although this would be recorded as an AVC contribution, the PRSA contributions were not made as "AVC Contributions". In this situation they do not qualify for the early access facility - it is only genuine AVC contributions and PRSA AVC contributions that are within scope. Advice Issues For Financial Advisors, Life Offices and Trustees (of trust based AVC), there could be advice issues. A refund may not be in a client s best interest (or even possible depending on fund choice). Is it good advice, for example, to take a taxable payment shortly before NRA, compared to a Tax-Free payment at NRA? Are there early surrender / encashment penalties? Clients will need to make their own decision based on their own individual circumstances. If your clients are considering this option they will need financial advice before making a decision. In particular they should consider the following: Any amounts withdrawn now to meet shortterm financial needs will reduce the income they receive in retirement Any withdrawal will be subject to the terms and conditions of the insurance contract and/or the investment manager and may result in early encashment penalties or loss of guarantees Any withdrawal will be subject to income tax but not PRSI or Universal Social Charge (USC) Under current legislation, the benefits taken at retirement may include a tax free lump sum of up to 200,000, compared to the income tax payable on any AVC amount withdrawn now. Important Notes i) If your clients have AVCs in more than one scheme or insurance contract, the 30% maximum applies separately to each arrangement. ii) The amount available to withdraw will be based on the value of their AVC fund as at a specific date determined by the Trustees or Administrator in accordance with the normal terms and conditions of the insurer/ investment manager (if relevant). iii) If your clients have a Pension Adjustment Order then they will need to contact their Trustee or Administrator for further instructions. Life Offices will not be able to progress any AVC early encashment instruction until the Pension Adjustment Order has been reviewed and processed. iv) If the AVC fund is subject to a Pension Adjustment Order, the Scheme Member/ Policy Owner, and their spouse (or former spouse or civil partner or former civil partner) may exercise the option independently in respect of their respective share of the AVCs. v) The withdrawal amount will be treated as a payment of emoluments to the member and is taxed under PAYE. Payments are not liable to PRSI or USC. Life Offices are required to deduct tax at the higher rate (41% in 2014) unless we have received from Revenue a Certificate of Tax Credits and Standard Rate Cut-Off Point in respect of the member for the year of payment. Any claim for adjustment of the tax deducted should be addressed to the Revenue Commissioners. 6

10 4. AMRF - 2 more years of reduced AMRF Limits; AMRF Specified Fund Amount and AMRF Guaranteed Lifetime Income As per our update in March 2013 (Immediate changes to ARF/AMRF New Business Procedures), the AMRF limits (AMRF Specified Fund Amount and AMRF Guaranteed Lifetime Income) for AMRFs have been reduced. This reduction will allow more people to access funds that would otherwise have remained as AMRF Funds and Vested-PRSA-AMRF funds until age 75 (when AMRFs automatically become ARFs). Temporary Reduction The previous AMRF limits for post Finance Act 2011 AMRFs (since 6 February 2011) were 119,800 and 18,000 p.a. These amounts were reduced down to the earlier limits of 63,500 and 12,700 for a limited period of 3 years from 27 March 2013 (the enactment date of the Finance Act 2013) until 26 March Retrospective Changes To ensure that individuals who were affected by the higher limits were not disadvantaged by the subsequent reduction, the Finance Act 2013 also made provision to convert certain excess amounts in AMRFs and Vested-PRSA-AMRFs. For Zurich Life, this was a once-off (conversion) exercise involving thousands of AMRFs and Vested-PRSA-AMRFs (and corresponding ARFs and Vested-PRSA-ARFs). This exercise was completed in October Trustee Training - Renewal Requirement With affect from 1st February 2010 all pension scheme trustees became legally required to undergo appropriate trustee training on a regular basis. For new trustees the initial Trustee Training needs to be completed within six months of their appointment as trustees. All trustees are required to repeat their training every two years and the employer must arrange for all trustees to receive appropriate training. Failure to comply with this obligation may result in an on-the-spot fine of 2,000 per trustee as well as having to undergo appropriate Trustee Training. 7

11 6. Department of Social Protection - Mailing Service for tracing pension members The Department of Social Protection recently updated their protocol for the host mailing service for tracing pension scheme members. This service can be used to assist companies in tracing pension scheme members who may have moved address. This is a contact only service whereby the Department will forward letters which contain minimal information to the last known address of a deferred pension scheme member. All other efforts to trace the pension scheme member must be tried first before companies can contact the Department of Social Protection to avail of their Host Mailing Service. Full details of the process and the information to be provided is shown in Appendix 1 on page 9 of this booklet. 7. Element Six case The recent case taken by members of the Element Six Contributory Pension Plan against the trustees shone a light on the operation of Irish pension schemes, and in particular pension scheme wind-ups. In 2011, Element Six Limited revealed its Defined Benefit Plan had a deficit of 129m on the statutory funding standard basis and, in their view, the only way of dealing with this was to wind-up the scheme. The proposed solution would see Element Six Limited make a final contribution to the plan of 23.1m on wind-up, to bring active and deferred members to 100% funded. An additional sum of 14m would be made available outside the plan to provide enhanced defined contribution benefits to active members. The company was required to give one month s notice to the trustees of its intention to terminate contributions into the plan, and once that notice had expired the trustees could not require the company to make any further contributions. The trustees were split three/three on the proposal with the chairman using his casting vote to accept the solution. However, 128 members of the plan claimed damages for breach of trust, breach of fiduciary duty, negligence and breach of duty (including breach of statutory duty) for accepting the company's proposal in full and final settlement of all sums payable by the company to the Plan, without issuing a contribution demand to the company to fund the total deficit in the Plan. The members also alleged that the trustees had been influenced by certain conflicts of interest in their decision-making process. The judgment, delivered by Justice Charleton at the High Court, found that the trustees of the pension scheme had at all times acted honestly and in good faith in the decision to accept the company s proposal to wind up its underfunded pension scheme. The Court held that the decision to accept the company s proposal was made solely in the best interests of the beneficiaries taking all relevant factors into consideration. The case illustrates how important it is for trustees to seek legal and professional advice at an early stage and to be able to stand over their decisions after the event. This decision gives some welcome legal clarity to employers, trustees and their respective advisers when faced with the difficulties that can arise in considering the termination of an underfunded pension scheme. 8

12 Appendix 1 Department of Social Protection - Host Mailing Service, January 2014 Introduction The Department of Social Protection provides a host mailing service to assist companies locate deferred pension scheme members. This is a contact only service whereby the Department will forward letters which contain minimal information to the last known address of a deferred pension scheme member. Any company availing of this host mailing service must exhaust all other efforts to trace the pension scheme member before contacting the Department of Social Protection s Host Mailing Service. Host Mailing Letter The letter to be forwarded to the deferred pension scheme member you are attempting to locate must only contain the following information: A single page letter with your contact details informing him/her that you are attempting to make contact folded into an unsealed and unmarked envelope stamped (not franked) with the standard letter rate (currently 60c, January 2014). The envelope must be plain, no return address or logo, no window and a maximum size A5, 23cm x 16cm. (Foreign agencies requiring Irish Stamps should log on to Each envelope must be marked with the appropriate client s name. Information required by the Department The following client contact details must also be provided by the company requesting the service: Forename and Surname; PPS Number (formerly RSI No) or old Insurance Number, if known; Date of Birth and; Last Known Address. This information must accompany all requests. Where a request relates to more than two clients then our Data Protection obligations requires that the client contact details must be sent in an encrypted format. In these circumstances the list of clients should be ed to data.access@welfare.ie. The Department uses the encryption package IRONPORT. Individual templates should also be password protected using a secure password sequence. In order to further support the confidentiality and security of such details, Client Identity Services will be trying to establish a single point of contact with pension companies when processing future requests. The contact person should be the person who transmits the . Host Mailing Requests The letter to be forwarded and the information required by the Department should be sent to: Client Identity Services Registration Department of Social Protection Shannon Lodge Carrick-on-Shannon Co. Leitrim Where the information required by the Department is in respect of more than two clients you must specify in your request the date on which the list of clients was ed to data.access@welfare.ie When these details are provided, the Department will provide a host mailing service. Please also note that a host mailing letter will not issue from the Department if the last known address provided by the company matches the address on the Department s Client Management System. Contact by phone: Annemarie Freeman Client Identity Services Please note that the Department of Social Protection will be monitoring this service and may apply a charge for the provision of this service in the future. 9

13 Need Further Information? If you have a query on any of the information contained within this booklet, please feel free to contact our Technical Services Team or your Zurich Life Broker Consultant. Tel: techsupport@zurich.com Mike Ainsworth, Manager, Technical Services June 2014T 10

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16 Print Ref: ZURL CSA Zurich Life Assurance plc Zurich House, Frascati Road, Blackrock, Co. Dublin, Ireland. Telephone: Fax: Website: Zurich Life Assurance plc is regulated by the Central Bank of Ireland. Intended for distribution within the Republic of Ireland. The information contained herein is based on Zurich Life s understanding of current Revenue practice as at June 2014 and may change in the future.