Money Matters - Your questions answered
Joanne Enright MSc QFA MSI, Financial Advisor at CML Financial answers your financial queries. This week we deal with the changes in the budget in relation to pensions, savings and investments.
Question. Thankfully the rumours of major cutbacks in pension tax reliefs and exemptions did not come to pass in the recent mini budget. Does this mean that the government has decided to leave the pensions system unchanged, or should we be expecting changes in the next budget?
Answer. In relation to potential changes to pension legislation the government has stated that "the matter will be given further consideration following the report of the Commission on Taxation due to be published later this year". For a government with a desperate need to raise revenue quickly it is understandable that all areas of the tax system will be looked at closely to identify where additional revenues can be generated. With the estimated the annual cost of pension tax breaks standing at €3.9bn it is easy to see why this looks like a pot worth raiding.
So what are the likely changes? Speculation is still rife that the maximum pension fund allowed per individual will be reduced. This currently stands at €5.4m. This is comparatively high by European standards, with, for example, the UK having a limit less than 50% of this amount. The two other areas which commentators fear are likely to change are tax on the lump sum payable on retirement, and a reduction of tax relief on pension contributions.
What changes, if any, are introduced we will simply have to wait and see. At least the government says it will take a balanced approach, and intends to have an informed debate on any areas recommended for change in the upcoming report.
One pension change that was introduced in the budget is a new early retirement option for civil servants, health sector staff, local authority personnel and other categories of workers in the public sector over the age of 50. Under this scheme staff over 50 will be able to retire on a pension based on their years of service. However those who opt to leave will receive only 10% of their lump sum immediately with the balance paid when they reach the normal retirement age of 60 or 65. At present these lump sum payments are tax free but under the scheme the lump sum balance to be paid in future years will be subject to the tax provisions in place at the time the application to retire early was approved.
Therefore it is very important for public service workers who are considering these options to look at maximising benefits by either buying back years service (if possible), or making additional voluntary contributions before taking up the new early retirement package. Recent regulations allowing such contributions to be made via personally owned PRSA contracts make it easy for all public sector employees to take control of their retirement fund and possibly boost tax free cash as well as accessing the flexibility that an Approved Retirement Fund (ARF) offers.
Another interesting measure introduced in the budget is the provision for "access to pension funds for infrastructure projects". It is encouraging to see at least some fresh thinking emerging and the possibility of using Irelands well developed private pension system to help get the economy back on its feet. The devil as always is in the detail, and specific details on this scheme are yet to be announced.
Elsewhere in the budget a 1% levy was introduced on all life assurance premiums. This levy will apply to premiums received by an insurer on or after 1 June 2009. It will apply to both life and pension policies as well as once off investments and regular savings policies. The levy applies to both new and existing policies.
With regard to savings and investments, the budget increased deposit interest retention tax (DIRT) to 25%, the second increase in just over 3 months. This makes the tax free, state guaranteed savings sold by An Post a lot more attractive. Savers would have to earn 4.7% interest from a bank or building society for example, to match the returns from savings certificates, which average 3.53% a year tax free over 5 years.
Investments in unit linked funds will also face a 3% increase in exit tax, up to 28%.
For further information on any of the above contact:
CML Financial, Independent Financial Advisors, The Business Centre, Lisfannon, Buncrana, Co. Donegal, T: +353 (0)74 9364255 F: +353 (0)74 9361955
CML Financial Limited t/a CML Financial is regulated by the Financial Regulator
Joanne Enright MSc QFA MSI
Email: joanne@cmlfinancial.ie
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Sunday 27 May 2012
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