Written answers

Thursday, 6 October 2016

Department of Finance

Pension Provisions

Photo of Robert TroyRobert Troy (Longford-Westmeath, Fianna Fail)
Link to this: Individually | In context | Oireachtas source

79. To ask the Minister for Finance if his attention has been drawn to the consequences of the amendment made to the AMRF where persons are only entitled to 4% per annum with the remainder held in the pension fund until the person reaches 70 years of age with the exception for persons with a guaranteed income of €12,700 per annum; if this limit was introduced to ensure that persons who do not have sufficient contributions paid to receive a State pension and then cash in a pension policy are left dependent on the State non-contributory pension; if he will examine introducing an exemption for persons who have sufficient contributions for State pension and need to cash in the policy for reasons such as health; and if he will make a statement on the matter. [29019/16]

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

I am informed by Revenue that an individual in a defined contribution pension savings arrangement has the option of putting the funds accumulated under the arrangement into an Approved Retirement Fund (ARF) on retirement, subject to conditions.

Where such an individual is under the age of 75 at the time of exercising the option and does not meet the requirement of having a minimum guaranteed pension income for life of €12,700 per annum, he or she is required to set aside an amount of €63,500 (or the remainder of the pension fund if less than €63,500 after taking a retirement lump sum) by investing the amount in an Approved Minimum Retirement Fund (AMRF) or by the purchase of an annuity. The purpose of the AMRF is to ensure that an individual, without the minimum guaranteed pension income for life, has a capital nest-egg to provide for the latter years of his or her retirement.

The changes to the AMRF arrangements which I introduced in Finance Act 2014, with effect from 1 January 2015, allow an AMRF owner draw down up to 4% of the value of the fund assets on one occasion annually until he or she either meets the guaranteed pension income requirement or attains the age of 75, at which point, the AMRF automatically becomes an ARF and any remaining funds can be drawn down at the owner's discretion. In general, drawdowns from AMRFs (and ARFs) are subject to income tax, PRSI (up to age 66) and USC.

The 4% annual draw down arrangement, replaced the facility that existed previously, whereby an AMRF owner could draw down the accrued income and gains of the AMRF (subject to tax etc.) as and when they wished. This change was prompted by a concern to allow all AMRF owners, particularly those with relatively modest retirement funds, access to a more certain level of annual drawdown from their AMRF, rather than the uncertain level of drawdown that dependence on investment performance had given rise to heretofore. This is particularly important for those individuals whose AMRF constitutes a significant part of their retirement funds.

As indicated earlier, the primary purpose of the minimum guaranteed pension income condition applying to the ARF option is to ensure that where this condition is not met, that there is a capital nest egg available to the individual in older age. This condition has been in place since the inception of ARFs in 1999.  At that time, it was set at £10,000 which, on the introduction of the Euro in 2002, converted to its Euro equivalent of €12,700. This was significantly higher than the maximum rate of the contributory State pension payable in 1999 (i.e. £4,628 or €5,876). It is clear, therefore, that there was no intended link between the State pension and the minimum guaranteed income limit, and in addition that it was never envisaged that the State pension on its own would be sufficient to satisfy the guaranteed pension income test. Thus, it was always envisaged that an individual would need an additional source of pension income to meet the requirement.

I should add, that when I extended the ARF option to all defined contribution arrangements in Finance Act 2011, the conditions to be satisfied to allow an individual access to an ARF were also amended. In the case of the guaranteed pension income requirement, this was significantly increased to €18,000 (i.e. one and a half times the annual rate of the contributory State pension at the time) and it was my intention that it would track the annual rate of the contributory  pension over time. However, I rescinded this change in Finance Act 2013 and the guaranteed pension income requirement has remained at €12,700 since.

In light of the fact that the contributory State pension has more than doubled since 1999 while the minimum guaranteed pension test for ARF purposes remains at €12,700, the gap between the two has narrowed appreciably. If the two were to be aligned, it would have to apply across the board and not just for the type of special case related to health mentioned in the question.

In that regard, however, I have no plans at this time to make such a change.

Comments

No comments

Log in or join to post a public comment.