Public Sector Employees Approaching Retirement

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1 Public Sector Employees Approaching Retirement Sub-Title taking care of you...

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3 Planning for retirement Contents Planning for retirement 4 Retirement Lump Sum 5 Additional Pension 6 Sample Illustrations 8 Approved Retirement Fund (ARF) 10 Approved Minimum Retirement Fund (AMRF) 12 Executive Pension Plans are often used by senior employees/directors in preference to a PRSA or a Personal Pension because of their scope for higher contributions and their potential to offer a higher lump sum at retirement. Taxable Cash 12 Investment Options 14 Fund Choice 15 Are you ready for retirement? 16 Next steps 17 About New Ireland 18 3

4 Planning for retirement Introduction As your retirement approaches, now is an ideal time to review your financial position and to see what your likely retirement benefits will be. You have already had the foresight to make Additional Voluntary Contributions (AVCs) and when you retire the value of these will be available to top up the benefits available to you under your main Superannuation Scheme. Depending on your particular circumstances the options available to you at retirement in relation to your AVC fund may include one or more of the following: 1. A retirement lump sum 2. An additional pension for you and your dependants on your death in retirement 3. An Approved Retirement Fund (ARF)/ Approved Minimum Retirement Fund (AMRF) 4. Taxable cash 4

5 Retirement Lump Sum One of the most attractive features of the Superannuation Scheme is the retirement lump sum (also called Gratuity) that is payable when you retire. Typically this will amount to 3/80ths of your pensionable earnings for each year of service you have completed, to a maximum of 40 years service. Depending on your particular circumstances you may also be able to take part or all of your AVC Fund as a tax free lump sum subject to an aggregate cap of 200,000*. For example, if you have completed at least 20 years service in the public sector by the time you get to normal retirement, Revenue will allow you to take a tax free lump sum of 1.5 times your final salary. Please note that this includes the gratuity (retirement lump sum) from the Superannuation Scheme. In this situation there is scope for you to take all or part of your AVC fund as a tax free lump sum. Example Pensionable salary at retirement 50,000 Service completed 25 years Maximum lump sum allowed by Revenue ( 50,000 x 1.5) 75,000 Lump sum from Superannuation Scheme (25 x 3/80ths) 46,875 Potential additional tax free lump sum that may be taken 28,125 The example is for illustration purposes only. Actual benefits available will depend on your specific circumstances and may be different. *This cap applies to the aggregate lump sum received from all pension schemes since 7 December 2005 including the Superannuation Scheme and AVC Scheme. Any balance over 200,000 and up to 500,000 is subject to tax at the standard rate (currently 20%). Any amount paid out in excess of this is taxed at the individual s marginal rate. Revenue terms and conditions apply. 5

6 Additional Pension Your main source of income in retirement will probably come from the Superannuation Scheme together with the State Pension (Contributory) if you qualify for it i.e. have paid the required level of PRSI contributions. Your Superannuation Pension may increase each year in line with the salary applicable to your grade at the date you retire or the Consumer Price Index (CPI). The State Pension (Contributory) is usually reviewed by the Government each year. You can use your AVC fund to provide yourself with an additional pension income (annuity) in retirement. If you decide to use some, or all, of your AVC fund to provide yourself with an additional pension income there are a number of options available to you. The type of pension you decide to buy and the annuity rates (cost of buying a pension) applicable when you retire will determine the level of income you can obtain. For example, you may decide to use your AVC fund to purchase a pension with one or more of the following options: Level pension Your pension is fixed at the outset and does not increase each year. Escalating (increasing) pension Your pension increases annually by a fixed amount, for example 3% p.a. An escalating pension will provide a lower level of income at the outset compared to a level pension. Guarantee period Your pension can be guaranteed to be paid for up to 10 years. If for example you die during a 5 year guarantee period, then the remaining pension payments (within the relevant guarantee period) will be paid to your estate. Example: Mr. Smyth retires at age 65 and purchases a pension of 5,000 p.a. with a 5 year guarantee period. He dies on his 66th birthday. The remaining pension payment due for the balance of the guarantee period (4 years) will be paid to his estate as a lump sum. Dependant s pension A dependant s pension enables you to specify a percentage of your pension to continue to be paid to your spouse, civil partner or dependant when you die in retirement. 6

7 Overlap If you die during the guarantee period the dependant s pension will be paid immediately and the guarantee pension will also continue to be paid. If the guarantee period is longer than 5 years, the dependant s pension will not commence until the end of the guarantee period (i.e. no overlap). Purchasing a pension provides you with security of income during your retirement years. Will my pension be taxed? Your pension will be subject to Income Tax, PRSI and USC where applicable. New Ireland will deduct these taxes at source based on your personal taxation position. Benefits of purchasing a pension Purchasing a pension provides you with security of income during your retirement years. In the past, purchasing a pension was the only option available on retirement after taking a retirement lump sum and, for many people, it continues to be a very attractive option. In particular, purchasing a pension is a good decision if: your major priority in retirement is a secure income. you are relatively cautious about the risks of stock market investments. Some potential disadvantages of purchasing a pension: once purchased a pension cannot be changed - it is inflexible annuity rates are currently low which makes purchasing a pension potentially expensive if you are in ill health you may die before many pension payments are made and if you have not selected a minimum or guarantee payment period your pension will cease to be paid. if you have not selected for your pension to index (i.e. increase every year) then inflation may erode the value of your fixed pension payments What happens to my pension on my death? This will depend on the type of pension you purchase at retirement. Your pension payments will cease on your death if you don t choose the guarantee period option, a dependant s pension, or the overlap option. If you have dependants, you may want to consider buying a pension with one of these options. If you choose the guarantee period option, and you die during the guarantee period, your pension payments will be paid for the remaining guarantee period (see page 6 for further details). If you choose a dependant s pension, following your death in retirement a pension will be paid to your dependant for the remaining period of their lifetime. However, should your dependant predecease you then no dependant s pension will be paid. The overlap option pays the dependant s pension immediately if you die during the guarantee period and the guarantee pension will also continue to be paid. Overlap does not apply if the guarantee period is longer than 5 years. 7

8 Sample Illustrations Planning for retirement Pension options: The following table demonstrates the various levels of annual pension income that could be received based on some different pension options. Male Life, Age 65 with an AVC Fund of 100,000 Pension 50% Annual Spouse s Pension Level /Escalating Annuity Rate 4,804 No Level 4.8% 3,694 No Escalating at 2% 3.69% 4,194 Yes Level 4.19% 3,104 Yes Escalating at 2% 3.10% A 5 year guarantee period is assumed. Where a spouse s pension is included, she is assumed to be aged 62. These figures are for illustration only and are based on annuity rates as at October Female Life, Age 65 with an AVC Fund of 100,000 Pension 50% Annual Spouse s Pension Level /Escalating Annuity Rate 4,464 No Level 4.46% 3,384 No Escalating at 2% 3.38% 4,224 Yes Level 4.22% 3,174 Yes Escalating at 2% 3.17% A 5 year guarantee period is assumed. Where a spouse s pension is included, he is assumed to be aged 68. These figures are for illustration only and are based on annuity rates as at October Warning: These figures are estimates only. They are not a reliable guide to the future performance of this investment. 8

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10 Approved Retirement Fund (ARF) With your AVC fund you have an option to invest in an Approved Retirement Fund (ARF) / Approved Minimum Retirement Fund (AMRF). The main advantage of an ARF/ AMRF is that you will keep control over your AVC fund when you retire. What is an Approved Retirement Fund? An Approved Retirement Fund, or ARF, is an investment plan that allows you to manage and control your AVC fund following your retirement and is designed to suit your own needs. There are many advantages to investing in an ARF: Tax free growth: Your ARF invests in funds that benefit from tax free growth under current legislation. Inheritance planning: You can pass your ARF on to your dependants/next of kin. Investment options: An ARF offers you a wide range of investment funds to choose from. Under each of these funds, we offer you differing levels of potential growth versus security. Access to your fund: You own your ARF and the money invested in it. This means that you can take out cash lump sums from your fund whenever you need to. An ARF is not like other types of investment funds where you can be tied to leaving your fund invested for a fixed period. All withdrawals from your fund are liable for income tax, PRSI and USC where applicable. Regular income: You can set up your ARF in such a way that it pays you a regular income. Required withdrawal: Please note, you are required to take a withdrawal of a certain amount each year from your ARF. This is 6% p.a. if the total ARF/ Vested PRSA value exceeds 2 million. Where the total ARF/Vested PRSA value is 2 million or less, the required withdrawal is 4% p.a. if you are aged between 60 and 70 years, or 5% p.a. if you are aged 70 years or over for the full tax year. 10

11 Approved Retirement Fund (ARF) What are the risks of an ARF? When you purchase a pension, you have the comfort of a secure income for the remainder of your life. However, when you buy an ARF, there is no guaranteed income and the length of time that your fund will be available depends on a number of factors including all withdrawals made, regular income taken, and the investment performance of your fund or funds. For example, if a high level of withdrawals and/or regular incomes are made by you relative to the growth achieved, there is a risk that your fund could run out before death. You should also note that in order to achieve good returns, it is likely that an ARF will invest at least partly in assets such as equities and properties. The value of these assets may fall as well as rise, particularly in the short term. Are there any restrictions to investing in an ARF or taking taxable cash? In order to invest in an ARF, you must have a guaranteed income for life of at least 12,700 p.a. (2015). This can include your Superannuannuation Pension and State Pension (single person rates only) if you qualify for it. A pension from a previous pension arrangement would also count. You can use all or part of your AVC fund to buy a pension to bring your guaranteed income up to 12,700 p.a. If you do not have a guaranteed income for life of at least 12,700 a year before taking out an ARF, you must use 63,500 (2015) of your AVC fund to invest in either an Approved Minimum Retirement Fund (AMRF) or to purchase a pension. If your retirement fund is less than 63,500, then the whole amount must be used in this way. Guaranteed income for life does not include income from sources such as investments, businesses, rents or employment. Warning: The value of your investment may go down as well as up. Warning: If you invest in this product you may lose some or all of the money you invest 11

12 Approved Minimum Retirement Fund (AMRF) What is an AMRF? An Approved Minimum Retirement Fund, or AMRF, essentially operates in the same way as an ARF, except that you may only draw down up to 4% of the value of the assets of the AMRF each year, subject to taxation at the marginal rate. An AMRF becomes an ARF: When you reach age 75 OR If you satisfy the specified pension income requirement as set out by the Revenue before age 75 OR If you die before age 75 whichever event occurs first. Please note that if your AMRF becomes an ARF then the annual required withdrawal will then apply (see page 10). You must notify us should this happen so that we can deduct the correct tax in a timely manner. What happens to the value of your ARF and/or AMRF when you die? When you die, your AMRF becomes an ARF and the remaining value of your ARF is available and can be left in your will as part of your estate. The proceeds can also be transferred into an ARF in the name of your spouse/civil partner. The tax treatment of your ARF when you die depends on the relationship between yourself and the person you leave it to. If you are in any doubt as to the tax treatment of any particular situation, please contact your New Ireland Financial Broker or Advisor. Warning: The value of your investment may go down as well as up. Warning: If you invest in this product you may lose some or all of the money you invest Taxable Cash Another option you may have in relation to your AVC fund is to withdraw the balance of the fund less income tax and PRSI / USC levies where applicable. This could be an attractive option for you if you require access to cash at retirement. 12

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14 Investment Options Planning for retirement Investment of AVCs It is really important as part of your retirement planning process that you review your own circumstances now, and in particular establish in what way you are likely to take your AVC fund when you retire. Depending on the answer to this, you should also review your investment strategy and match the likely benefits you are going to take with the most suitable investment fund or funds between now and your retirement and is not suitable as a medium to long term investment as the annual charges may cause your cash fund to actually lose money. Possible scenarios 1. If a large portion or all your AVC fund can be taken as a retirement lump sum or as taxable cash then you might want to consider whether you should switch to a cash fund at a point close to retirement. Although a cash fund may only provide you with a very modest rate of return it is designed to protect the value of your AVC fund from abrupt market fluctuations as your retirement date approaches. 2. If you intend to use most/all of your AVC fund to buy an additional pension then New Ireland s IRIS strategy may be the best option*. With IRIS there is a gradual switch from equities to government securities (fixed interest bonds) and cash in the run up to your proposed retirement age with the objective of protecting the purchasing power of your AVC fund as well as providing a tax free lump sum. If you intend to retire at a different age from that specified, you must inform us in writing. 3. If you intend to avail of the ARF option at retirement then you need to select an investment fund or funds that suit your particular circumstances and attitude to risk. * It should be noted that the IRIS strategy may not be an appropriate option if you intend to invest in an AMRF/ARF or if you are likely to take all your AVC fund as a retirement lump sum or taxable cash. Warning: The value of your investment may go down as well as up. Warning: If you invest in this product you may lose some or all of the money you invest 14

15 Fund Choice Planning for retirement The following list of funds are currently available: 1. IRIS Retirement Fund 2. Pension Consensus Fund 3. Pension Managed Fund If you would like further information on any of these funds, please ask for a copy of the Public Sector Investment Choice Guide. 4. Pension Evergreen Fund 5. Ethical Managed Fund 6. Protected Assets Fund 7. Elements 8. BNY Mellon Global Real Return Fund 9. Pension Equity Fund 10. Pension Innovator Fund 11. Pension Gilt Fund 12. Pension Cash Fund Warning: These funds may be affected by changes in currency exchange rates. Warning: The value of your investment may go down as well as up. 15

16 Are you ready for retirement? These are the types of questions you need to ask yourself so that you can be ready for retirement. In order to plan now for drawing down retirement benefits from your AVC fund you should consider the following: 1. What will be the estimated value of my fund by the time I retire? 2. Will I be able to take some or all of my AVC fund as tax free cash? 3. Would I like to have an additional income in retirement? 4. Would I like to take the balance of my AVC fund as a taxable lump sum? 5. Would I like to have a fund (ARF) that I could draw on for non routine expenses when I retire e.g. holidays/ changing car etc? 6. Do I need to review where my AVC is invested? If you would like to change your investment fund at this stage or would like to discuss your retirement options in more detail please contact your Financial Broker or Advisor. Tax relief The maximum pension contributions that you will be entitled to income tax relief on, in any tax year, are based on your age and total earnings as follows: Age attained Max contribution as % of earnings Under 30 15% % % % % 60 plus 40% An earnings cap of 115,000 currently applies for tax relief purposes. These limits include any AVCs you are already paying as well as the contributions you are making to your existing Superannuation Pension Scheme. The limits are not affected by the pension levy introduced in March Each year, you also have the opportunity of maximising your AVC payment for the previous tax year. Before the end of October you can make a once off AVC payment and claim tax relief for the previous year (up to the max allowable for that year).* *It is important to note that tax relief is not automatically granted, you must apply to and satisfy the Revenue requirements. 16

17 Next Steps Talk to us today Planning for your retirement involves a financial commitment over a long period of time. It makes sense to give your retirement careful consideration, so start planning for your retirement today. To find out more about any aspect of pension planning, contact your Financial Broker or Advisor. M info@newireland.ie 17

18 About New Ireland Looking after tomorrow Established in 1918, New Ireland Assurance is one of the country s leading life assurance companies and provides a range of innovative pension, investment and protection products. Since December 1997, it has been a wholly owned subsidiary of Bank of Ireland. New Ireland is actively involved in the growth and development of the retirement planning market and caters for a wide range of individuals and groups. We pride ourselves on providing exceptional service to our clients throughout the duration of their retirement plans. New Ireland Assurance 9-12 Dawson Street, Dublin 2. T: F: E: info@newireland.ie W: Noel Hackett QFA, Pensions Consultant New Ireland Assurance, Atlanta House, 36 Dominick Street, Galway. T: (091) M: E: Noel.hackett@newireland.ie Noel Hackett is a tied agent of New Ireland Assurance Company plc. 18

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20 Warning: If you invest in this product you may lose some or all of your money. Warning: This product may be affected by changes in currency exchange rates. Warning: Past performance is not a reliable guide to future performance. Warning: The value of your investment may go down as well as up. Revenue limits, terms and conditions apply. Tax relief is not automatically granted, you must apply to and satisfy the Revenue requirements. Except where otherwise indicated, this brochure is based on our understanding of current legislation and Revenue practice as at January While great care has been taken in its preparation, this brochure is of a general nature and should not be relied on in relation to a specific issue without taking financial, insurance or other professional advice. If any conflict arises between this brochure and the policy conditions, the policy conditions will apply. Noel Hackett is a tied agent of New Ireland Assurance Company plc. New Ireland Assurance Company plc is regulated by the Central Bank of Ireland. A member of Bank of Ireland Group. New Ireland Assurance Company plc Dawson Street, Dublin 2. T: F: E: info@newireland.ie W: V