Written answers

Wednesday, 27 May 2015

Department of Finance

Pension Provisions

Photo of Tommy BroughanTommy Broughan (Dublin North East, Independent)
Link to this: Individually | In context | Oireachtas source

54. To ask the Minister for Finance the rules for approved retirement funds; the terms and conditions in relation to tax due on accumulative funds, and on the changes made to these funds from 1 January 2015; if he will reconsider these changes in budget 2016; and if he will make a statement on the matter. [20877/15]

Photo of Michael NoonanMichael Noonan (Limerick City, Fine Gael)
Link to this: Individually | In context | Oireachtas source

Flexible options at retirement (the so-called "ARF option") are available in respect of all benefits from Defined Contribution (DC) retirement benefit schemes and other DC-based pension savings. Choices available to individuals (after taking the tax-free retirement lump sum) include the option to purchase an annuity with the remaining funds, to receive the balance of the pension funds in cash (subject to marginal rate income tax, as appropriate), to invest in an approved retirement fund (ARF) or an Approved Minimum Retirement Fund (AMRF), once certain conditions are met.

Finance Act 2014 introduced changes relating to the imputed distribution rate for certain ARFs as well as provisions to allow owners of AMRFs to draw-down up to 4% of the assets of such funds on one occasion in each year instead of the facility to draw-down the accrued income and gains of such funds, as had applied heretofore.

A system of imputed distributions of the value of ARF assets was introduced because an internal review of tax relief for pensions provision undertaken by my Department and the Revenue Commissioners in 2005 found that the ARF option was largely not being used as intended to fund an income stream in retirement but was, instead, being used to build up funds in a tax-free environment over the long-term. In an effort to counteract this, Budget and Finance Act 2006 introduced, with effect from 2007, an imputed or notional distribution of 3% of the value of the assets of an ARF on 31 December each year (subsequently changed to 30 November each year). The notional distribution arrangement only applies where the ARF owner is 60 years or over for the whole of a tax year. The notional distribution was phased in over the period 2007 to 2009, with 1% applying in 2007, 2% in 2008 and the full 3% from 2009. The notional amount is taxed at the ARF owner's marginal income tax rate. Funds actually drawn down by ARF owners are credited against the imputed distribution in that year to arrive at a net imputed amount, if any, for the year. Budget and Finance Act 2011 increased the rate of the notional distribution to 5% of the value of the assets of an ARF, while Finance Act 2012 further increased the rate to 6% in respect of ARFs with values over €2 million.

Finance Act 2014 reduced the annual imputed ARF distribution rate from 5% to 4% for ARF owners in the age group 60 to 70 years whose ARFs have assets of €2 million or under. This change was introduced in order to reduce the risk that individuals in that age group might outlive the funds in their ARFs.

As regards the changes to AMRF access, I should explain by way of background, that under the flexible options at retirement arrangements, where an individual in a DC pension savings arrangement is under age 75 at the time of exercising the option and does not meet the guaranteed pension income requirement of €12,700 per annum, that individual must place a maximum "set aside" amount of €63,500 (or the remainder of the pension funds if less than €63,500 after taking the retirement lump sum) in an AMRF or purchase an annuity with the €63,500.

Any amount of remaining pension funds in excess of €63,500 can be invested in an ARF with access to those funds at the owner's discretion (subject to tax, at the marginal rate and having regard to the imputed distribution requirements).

The purpose of the AMRF is to ensure that an individual without the minimum guaranteed pension income for life has a pension "nest-egg" to provide for the latter years of his/her retirement. Up to Finance Act 2014, the capital invested in an AMRF could not be accessed until the AMRF owner reached age 75 (or meets the guaranteed pension income requirement before then) at which point the AMRF becomes an ARF with unrestricted access to the funds, subject to taxation. While the capital sum in an AMRF could not be accessed, as set out, any income, profits or gains accrued from the investment of the capital could, up to now, be withdrawn by the AMRF owner, subject to tax at the marginal rate.

I decided to change the arrangements for AMRFs so as to allow AMRF owners voluntary, tax-liable access to a maximum of 4% of their AMRF assets each year up to the point at which the AMRF becomes an ARF. This change provides AMRF owners with access to a definitive and certain level of income from their AMRF rather than the uncertain level of income which access to the accrued income, profits and gains in the AMRF provided.

Under the previous access arrangements for AMRFs, the extent of any income, profit or gains would depend on the performance of the investment options taken and could, therefore, be highly volatile with the possibility of little or no gains accruing in certain years. In addition, the scale of the capital allowed for in an AMRF, at €63,500, would not always permit for investment returns of any significant scale to be made using a prudent investment policy.

The change allowing access to a specified percentage of the capital in an AMRF is primarily aimed at those individuals whose AMRF constitutes a significant part of their retirement funds and who, while not wishing to purchase a pension annuity with those funds, may require access to a portion of these funds to provide a more certain form of supplementary pension income prior to reaching age 75. This facility also ensures that an individual will have some remaining funds in the AMRF at age 75 to provide for their remaining years, assuming the individual has not purchased a pension annuity in the meantime.

Individuals whose AMRF represents a less significant part of their retirement funds and whose circumstances would allow for greater investment risk and, therefore, potentially greater investment returns will be limited to the 4% level of asset draw down. However, this draw down will also be available to them for periods when their AMRF investments make losses or returns of less than 4% of the value of their AMRF assets and where, under the previous arrangement, they would not have been able to make a draw down or the draw down would have been of a lesser value than will now be permitted. I consider that the change will be to the benefit of AMRF owners, generally, over the medium to longer term and I have no plans to reverse it.

Comments

No comments

Log in or join to post a public comment.