PIBA - Brokers Ireland · 2020-01-23 · PIBA Submission - Budget 2013 Budget 2011 increased the...

PIBA

PIBA Submission

Budget 2013

PIBA Submission - Budget 2013

Private Pensions tax incentives

Previous Budgets have already imposed significant restrictions and reductions in private pension tax

reliefs and benefits:

* Disallowance of employee pension contributions for PRSI

* Disallowance of employer PRSI relief in respect of employee pension contributions

* Disallowance of personal pension contributions for USC

* (200k limit on pension tax free lump sums, taken since 70 December 2005

* Reduction in earnings limit for personal pension contributions from £254k to £115k.

* Extension of imputed distributions to vested PRSAs

* Standard Fund Threshold reduced from (5.4m to £2.3m

* Increase in ARF/vested PRSA deemed distribution rate

o 3% pa to 5% pa,

O 6% where total ARFs/vested PRSAs held exceed (2m.

* Increase in income tax rate applying to ARF post death distributions to 30%

* Pension levy of 0.6% pa on private pension funds for 2011-14 period; this is currently

generating £500m pa of tax revenues.

The Tax Strategy Group (TSG) 11/23 Pensions Taxation Issues document states :

"3.1 The agreement reached with the EU/lMF in 2011 included implicit commitments to deliver

full year savings of £940m in tax relief in the broad pension area in the period to 2014.

3.3 Finance (No 2) Act 2011 introduced the pension fund levy which raised over £460 million.

When taken with the Budget 2011 measures, it means a total policy adjustment of £750

million has been made in 2011. This is equivalent to 32% of the estimated net cost ofpension reliefs in 2008.

The Minister for Finance said in his Budget Speech in December 2011 that :

"Although the EU/IMF Programme commits us to move to standard rate relief on pension

contributions, I do not propose to do this or make changes to the existing margino/ rate relief at this

time.

However, the incentive regime for supplementory pension provision will have to be reformed to make

the system sustainable and more equitable over the long term."


it is in the context of the Minister's objective that the incentive regime for supplementary pension

provision be sustainable and more equitable over the long term, PIBA makes a number of

suggestions and comments in relation to private pension provision

Standard rating pension tax relief

The implementation of standard rating tax relief on personal contributions to pension arrangements

would be inequitable on many fronts:

* the estimated annual savings arising (£680m pa2) are more than required to achieve the

targeted £940m pa of tax savings by 2014, as the total savings already achieved in 2011 are

£750m pa, leaving only an additional (190m pa of savings required.

The additional savings required to meet the 2014 target of £940m pa could be obtained by

standard rating the public service pension related deduction (PRD), which is estimated to

yield annual savings of £240m pa2, while retaining marginal rate relief for personal pension

contributions (both public and private sectors).

* the measure would impact on as many as 650,000' middle income earners who make

personal pension contributions, by increasing the net cost of such contributions by 36% for

higher rate taxpayers.

* the measure, without a corresponding reduction in the tax applied to taxable retirement

benefits, will actively discourage higher rate taxpayers from making any further pension

contributions.

Higher rate taxpayers would be faced with paying pension contributions after PRSI and USC

and with 20% income tax relief only, into a pension arrangement from which the taxable

retirement benefits would be subject to USC and to income tax at marginal rate. For many,

this equation won't make fiscal sense.

* the measure would impact most on middle income earners who fund most or all of their

private pension provision themselves, i.e.

o unincorporated self employed,

O AVCS,

0 employees in employer DC schemes, where they typically contribute about 50% of

the total contribution rate.

I See Table A.10.3, National Recovery Plan 2011-14.

2See Table A.10.3, National Recovery Plan 2011-14.

3IMF Country Review September 2012, page 47


A likely reaction from such contributors will be to terminate or reduce their contributions to

a level they can afford; e.g. a higher rate taxpayer would need to reduce their gross

contribution by about 26% , to have the same net outlay as before.

A reduction in employee contributions in employer DC schemes will drag down the employer

contributions in such schemes, as most employer contribution scales are set to match

employees contribution levels.

The impact will be to reduce the level of private pension provision in the private sector and

further amplify the difference in the level of private pension coverage as between the public

and private sectors.

The likely negative impact on private pension provision is recognised in both the TSG 11/23

document and in the recent IMF Country review:

TSG 11/23

"As the most important fiscal incentive to encouraging pension saving, a reduction of this

scale would also represent a major setback to the objective of improving the adequacy and

coverage of private pension provision."

IMF Country Review - September 2012

"The number of pensioners impacted cou!d be !orge {os many as 650,000) so that the

consequences of a large behavioral response that drives down long-term savings, could be

quite negative."

We therefore submit that :

* restrictions and the pension levy already implemented, along with reduced use of pension

tax reliefs through substantially reduced contributions, are already achieving (and even

exceeding) the targeted E940m pa of tax savings required by 2014. Hence there is no

justification for standard rating pension tax relief; if further tax savings are required, the

public service Pension Related Deduction (PRD), which is not technically a pension

contribution, could be standard rated to deliver £240m pa of additional tax savings while

preserving higher rate relief on private and public sector pension contributions.

i.e. from higher rate to standard rate relief


Proposed reduction in Standard Fund Threshold

Any proposed further reduction in the level of Standard Fund Threshold should only be considered in

the context of a move to a market and age related relevant valuation factor (RVF), away from the

current fixed 20: 1, in order to provide equity and fairness as between:

* Defined contribution and defined benefit benefits.

* Private sector and public sector defined benefits.

Many public servants retire on pension in their 50's under various incentivised early retirement

schemes. The use of a fixed 20: 1 factor to value their pensions for the purposes of the chargeable

excess taxation system significantly undentalues the value of such a pension.

For example:

* A public service pension of £50,000 pa at age 55 is currently valued for the purposes of the

Standard Fund Threshold limit as a national pension fund of £50,000 x 20 = (1,000,000,

which along with a gratuity of £150,000, is comfortably under the current £2.3m Standard

Fund Threshold limit. It would also be under a reduced £1.5m Threshold.

* However the current open market value of such a pension at age 55 would be circa £2.7ms

which along with a gratuity of (150,000, is significantly above the (2.3m and (1.5m

Threshold limits.

* A similar aged individual in a private sector DC arrangement would therefore need to

accumulate a fund of circa £2.85m, to secure the same pension and gratuity, but such a fund

would substantially exceed the (2.3m Threshold limit and cause a chargeable excess tax

charge.

We therefore submit that :

* a reduction in the Standard Fund Threshold amount without the introduction of a market

and age related RVF would magnify current inequities between DC and DB scheme

members and between public and private sector defined benefit pension benefits.

Amend the ARF/vested PRSA imputed distribution from a fixed 5% pa

Jrish Life Pensions Planet annuity quotation 10 October 2012 for a £50,000 pa CPI linked pension to a 55 yrold with 50% reversion to a dependant of similar age.


Budget 2011 increased the imputed distribution applicable to ARFs and vested PRSAs from its

previous level of 3% pa to 5% pa, and to 6% pa where an individual has combined ARFs and vested

PRSAs of over (2m.

ARF and vested PRSA holders are in reality forced to take sufficient actual withdrawals (i.e. at least5% pa) to avoid the imputed distribution applying, as there is an unrecoverable tax loss where animputed distribution applies.

With the imputed distribution increasing to 5% pa, ARF and vested PRSA holders are in effect now

forced to draws down at least 5% pa of its value (after charges). Clearly if the ARF/vested PRSA does

not grow by at least 5% pa (after charges), the capital value of and hence retirement income will fall,

with a significant risk of eventual 'bomb out', i.e. the income and capital value reducing significantly.

To try to maintain a level income and capital value, ARF and vested PRSA holders now need toearn a hurdle investment return of at least 6% pa". Holders (who are all aged at least 60) who wantto maintain a regular income level and maintain their capital values, are therefore now forced toadopt a higher investment risk to try to earn this minimum 6% pa return.

Society of Actuaries Guidance' on SORP pension illustrations suggests the following investment

return assumptions:

"(i) the gross investment return for equities and property will be 7% per annum,

{ii) the gross investment return for fixed interest securities will be 4.5% per annum;

(iii) the gross investment return for cash will be 3% per annum; and

(iv) the gross investment return for all other asset classes will be 3% per annum."

On these assumptions the lowest risk asset allocation required to provide a level income on a 3% pa

and 5% pas drawdown rate are as foliows:

3% pa annual drawdown 5% pa annual draw down

65% Bonds 35% Bonds

0% Equities/property 65% Equities/property

35% Cash 0% Cash

allowing for ARF/vested PRSA charges of 1% po.ASP PEN 12

8 plus 1% po for charges


Therefore moving the imputed distribution rate from 3% pa to 5% pa has significantly increased the

investment risk ARF and vested PRSA holders are required to take just to safeguard their retirement

income and in effect condemns many such holders to declining retirement income.

We therefore suggest that :

* The imputed distribution system applying to ARFs and vested PRSAs be rebalanced to an

age related imputed distribution rate, with a lower rate applying to younger ages rising to

a higher rate at older ages, e.g. over age 75.

Any net loss in revenue from this could be mitigated by introducing an optional taxable drawdown

facility of 3% on AMRFs. (See following)

Simpler AMRF withdrawal facility

Currently AM RF holders can withdraw from an AMRF 'income , profits or gains, or gains on disposal

of investments' "before age 75, when the AMRF turns into an ARF. However there are a few

problems with this current AMRF withdrawals facility:

* it leads to unpredictable and volatile levels of allowable withdrawals, with no withdrawals

being allowable in some years and being allowed in other years, etc.

* It is not at all clear what this term means in an AMRF where income, gains and losses are

rolled up together into a single unit price, as in the case of unit linked AMRFs. In the case of

portfolio AMRFs operated by MiFID firms, it is not clear if losses have to be offset against

gains, or whether income and gains can be paid out even if the portfolio also has losses in

that year.

* Many AMRFs are currently 'under water' in terms of their original investment amount and if

the AMRF is with a life company, they will be unable to take any withdrawaf from the AMRF

until it grows to a value in excess of the original amount invested in the AMRF. These AMRF

holders are therefore locked out of taking any withdrawal from their AMRF for the

foreseeable future.

* DC retirees with smaller funds are in a dilemma in terms of retirement options:

a If they opt for the traditional benefit option, they will have to use the balance of

their fund not taken as a lump sum, to buy an annuity at historically low rates, but

o if they opt for the ARF option, most of their fund not taken as a lump sum, will likely

be locked up in an AMRF until age 75, with no clear predictable level of retirement

mcome.

Section 784C(5)(b) TCA 1997


Example

DC Retiree with a fund of £200,000. If the ARF option is chosen, £50,000 can be taken

as a lump sum, but if the retiree does not meet the specified £18,000 pa income test

£119,800 of the balance has to be transferred to an AMRF with no predictable level

of retirement income, or used to buy on annuity at low rates, leaving only £30,200 to

be transferred to an ARF.

Many AMRF holders desire to take some level of income from their AMRF, albeit that the intention

of the AMRF was to be a 'reserve' tank to be kept intact until age 75, or until the individual secured

pension income for life of at least (18,000 pa, currently.

We therefore suggest that :

* AMRF holders be provided with an option, but not a compulsion, to take taxable

withdrawals from an AMRF each year of up to 3% of the value of the AMRF. This will

produce a flow of additional tax revenues, where individuals take up the option.

Early access scheme proposal

The current economic situation has left those with private sector pensions savings in difficult

financial circumstances of high indebtedness and, in some cases, at risk of losing their family home.

For others, the ability to rebuild cash stocks or pay down debts may boost confidence and give a

macro-economic stimulus to consumer spending and the housing market.

We suggest that:

* From January 2013, those with DC private pensions be allowed access up to 25% of the

value of their pension fund to a maximum of £50,000, subject to a ringfenced tax charge of

standard rate income tax, with no USC or PRSI. Savers would have a fixed window of up to

the end of 2015 to draw down some of their pension fund, up to the agreed limits.

* To prevent 'recycling' of withdrawn funds back into a new pension contribution, attracting

fresh income tax relief, individuals availing of this option could not increase their pension

funding rate for two years afterwards.

Whilst this proposal runs counter to basic purpose of pension funding which is to provide an income

in retirement year, we believe there is a case for once off access of this nature. It will boost tax

revenues, allow people to stabilise finances and provide a macro-economic stimulus to the

economy.


Early access incentives for younger people to commence pensions

Early access is a strong incentive to younger workers to begin saving into a private pension. The

psychological benefits of knowing that their money is not locked away for 40 years will further the

appeal of pension savings.

A model to allow access for the purchasing of a 1st home would encourage a culture of long term

saving. The New Zealand Kiwi-Saver scheme was launched in 2007 and provides a mechanism toallow for early access for the purchasing of a 1" home.

If a saver is a 1" time buyer and a member of KiwiSaver for more than three years, they are allowed

to withdraw their contributions and their employer(s) contributions (but not the Government

contributions).

We believe a permanent early access feature centred on future home ownership would have asignificant impact on the take up of pensions at younger ages.

1% Stamp Duty on life assurance premiums

We believe that the application of the 1% Stamp Duty to single premium life assurance investment

bonds gives rise to serious inequities with competing collective investment funds, such as ETFS, etc.

now being marked to intermediaries, and with deposits as such funds and deposits are not subject to

a similar 1% Stamp Duty liability.

This therefore distorts the personal investment market in favour of collective investment funds and

deposits, and away from life assurance investment bonds. The yield from the 1% Stamp Duty on life

assurance investment bonds is therefore likely to yield negligible amounts as investors can easily

avoid it by investing in deposits and/or collective investment funds.

For example, a life assurance deposit based tracker bond is subject to the 1% Stamp Duty, but an

identical product structured as a deposit is not. There is no logic or equity to this differentiation.

We therefore suggest that:

* the 1% Stamp Duty applying to life assurance premiums be dis-applied in the case of single

premium investment policies.


Exit tax on life assurance policies and collective investment funds

The Deposit Interest Retention Tax (DiRT) on regular income paying accounts currently stands at30% . PIBA believe this is inequitable, when compared with the 33% rate applying to investmentBonds and should be reduced on a par with DIRT. When the 3% surcharge was originally introduced

there was no cap on the length of term of gross roll up. With the introduction of deemed

encashments every 8 years, it is time for this inequity in exit tax rates to be removed.

Mortgage relief; Tax treatment of stage-payments

The Finance Act 2012 included the following changes to the rules on mortgage interest relief-

* First-time buyers in 2012 will get mortgage interest relief at a rate of 25% for the first 2 tax

years, reducing after that, with the appropriate first-time buyer ceilings.

* Non-first-time buyers in 2012 will get mortgage interest relief at a rate of 15% from 2012

until 2017

Mortgage tax relief is to be abolished for both first time and non first buyers in 2013. We believe

this should be deferred for two years so as not to hinder recovery in the housing market.

Anomaly with stage drawdowns:

The Revenue Commissioners office has stated that the tax relief currently given to 1st time buyers is

only available on amounts drawn down before December 31st 2012. The interest relief for properties

that are currently being built and where the mortgage will be drawn down in stages (some of these

stages post December 2012) will be removed as of December 31st 2012.

We believe that this is grossly unfair as if the consumer has entered into a mortgage contract prior

to the 31st of December 2012, they would have already taken into account the interest relief for

their affordablilty calculations.

Example:

For a married couple taking out a £300,000 mortgage over 25 years at a rate of 4.25% before the 31"of December 2012, they would receive Interest Relief of approximately 18,034.09 over the next 7

years.


If however the some couple was building a house and was receiving their mortgage loan in stagesand they had only drawn down £50,000 in 2012 with £250,000 outstanding they would only receive£3,005.67 on the £50,000 they have drawn down over the next 7 years.

This is a total loss to the consumer of £15,028.42.

We therefore sugaest that:

* mortgage interests tax relief on the rest of the loan amount drawn down after December2012 be extended to those who have begun the process of drawing down the stagepayments of their mortgage before this date.

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