The Government published a Report of the Interdepartmental Pension Reform & Taxation Group (ITPRTG) on 13 November 2020. This group was formed in 2013 from various government departments and bodies and they looked at how to simplify pensions. The report itself is 145 pages long and can be read here. They have certainly recommended big changes to the industry, most of which we welcome.
At present, an individual can have a personal pension, Personal Retirement Bond (PRB) and a PRSA. They have slightly different rules and restrictions on transferring one to another. Under the proposals, there will just be a PRSA and the restrictions on transferring into it will be removed e.g. you can’t transfer from a PRB to a PRSA at present.
If you transferred benefits from an old occupational scheme, they will be ring fenced and you will be able to avail of the tax free lump sum based on years service and final salary (I don’t agree to it, it adds to confusion) instead of just 25% of the total fund value.
You will also be able to buy life cover under a PRSA, something that is currently not allowed. This is so people who currently have their life cover under Pension Term Assurance won’t lose out.
Those who have existing personal pensions and PRBs will not be forced to transfer their benefits, over time these policies will disappear as they mature.
While we welcome to streamlining of these pension products into just one pension, the ITPRTG has recommended the most expensive one for customers. Each PRSA offered has to be authorised by the Pensions Authority. It costs the provider €20,000 for the initial application and €5,000 for each additional product. There is also a €2,000 annual fee per product and 0.05% of total assets under management. This means that the charges of PRSA’s are less competitive and can be 0.55% p.a. more expensive than the pensions they are replacing. For €100,000 over 20 years, this is a difference of €30,000 in the pension value.
PRB holders and ex employees of pension plans could access their pensions from age 50. Existing members of pension schemes can also access their pension early if they leave the pension scheme but stay employed by the employer. Meanwhile, people with personal pension plans and personal PRSAs cannot access their pensions under age 60.
The proposed change is that the earliest anyone can access their pension is age 55. The ITPRTG propose having a lead in period for this so those who had plans to draw down their pension early aren’t caught on the hop.
This isn’t that big an issue. Not many people draw down their pensions at age 50. Those that do, tend to have a number of pension plans and they mature one at 50, using the lump sum to pay off a debt or help fund education costs as they have university fees to pay for at that age.
When I read this first, I thought “What? Are we going backwards? No one buys an annuity these days”. It’s nothing like that though. The PRSA product will simply stay in place post retirement. An ARF is in essence a pension fund that you can access. The money is invested just like a pension, so you will continue to do so under the PRSA. You can take your lump sum payment directly from the PRSA but won’t have to set up a new post retirement product. It is a lot simpler for people to follow. They have also recommended getting rid of the AMRF, something we have been saying for a long time.
Under occupational pension schemes, if you take your lump sum as a percentage of final salary, you must purchase an annuity. And if you take 25% of the fund value as your lump sum, you must invest in an ARF. This will be done away with and you can do whichever you want no matter how you take the lump sum.
Now, a part of the recommendations that I find egregious. Currently, where a child over age 21 receives the proceeds of an ARF on death of a parent, they pay income tax at 30% on the value of the fund. It does not count against their personal CAT threshold. Under the proposals, the ARF will be taxed as income in the hands of the policyholder in the year that they died. This could be up to 52% in income tax, USC and PRSI (stops at 66). It will then form part of inheritance and taxed under CAT rules. If the child has already used up their threshold on other assets they inherited, such as the family home, the full amount is taxed at 33%. Of an ARF worth €1,000,000 at death, the child could receive €321,600 with the government receiving €678,400!
Overall, the simplification of pension is welcomed. The current system is too confusing and puts people off. However, I am concerned that the customer will end up paying more for this simplification.
Let me know what you think. Drop me an email at steven@bluewaterfp.ie
Steven Barrett
23 November 2020