MORE ON PENSIONS & HOW TO MINIMISE THE LEVY
The 0.6% pensions levy is continuing to provide ample headlines with attention now turning on how people might be able to soften the blow, pending a likely legal challenge to the constitutionality of the measure.
It would appear the campaign against the levy is beginning to gain real momentum, according to The Sunday Times, which devotes a full page to the issue.
“Every pension scheme I’ve been in contact with has received instruction from some members not to pay the levy,” said Jerry Moriarty, the director of policy at the Irish Association of Pension Funds (IAPF). “Opposition seems to be widespread, defying the popular notion that people don’t care about pensions. Trustees are in an awkward position because the government has set a deadline of July 25 for paying the first instalment of the levy.”
The draconian penalties for failing to comply make this an issue trustees cannot afford to put on the back burner. There is a fine of €380 a day for late payment, on top of an interest charge equivalent to 8% a year.
Perhaps the newspaper is grasping at straws in the absence of a legal challenge but it does advise a few ways of minimising or even avoiding the levy altogether.
At present, the charge is aimed at every type of pension – occupational schemes for employees, retirement annuity contracts (RACs) for the self-employed, and personal retirement savings accounts (PRSAs), used both by employees and the self-employed.
Personal finance editor Niall Brady says legal experts believe there could be a chance holders of such pensions could escape the levy because these policies are, in effect, personal property and as such could be beyond the reach of the government.
Occupational pensions, on the other hand, will certainly be hit because they are held in trust for an individual rather than being regarded as personal property.
Using a company
Brady says government is likely to hit pensions again next year by removing the top-rate tax relief on contributions to a fund.
“Turning your business or professional practice into a company to make pension contributions on your behalf allows you to keep the 41% tax break,” he says. “It also allows more money to be invested in your pensions because there are far fewer limits on contributions by companies than by individuals.”
Pension contributions made by companies are not considered taxable income – this could obviously make a huge difference for many individuals, particularly those in small business or the professions. For example, someone aged 30 earning €100,000 a year and who could afford to pay €20,000 a year into a pension fund could save €8,200 at the top tax rate.
Also, if the same person made a one-off company payment of €182,595 this would translate to a pension of two-thirds salary at age 65, the maximum allowed by law, based on growth of 6% a year. The company would save €22,824 in corporation tax and the individual would save €74,864 based on the tax he or she would have had to pay if the money had been paid as a salary or dividend.
If you are fortunate and prudent enough to have built up a retirement fund of €1.2m or more, it is well worth considering splitting the fund between you and your spouse.
Most funds allow retirees to take out 25% of their money in a lump sum on retirement but anything above €200,000 has been taxed at 20% since the start of 2011. Anyone with a fund was worth €1.2m and who wanted to withdraw €300,000 on retirement should consider transferring a portion of the fund assets to their spouse – say €400,000. Taking out €300,000 proportionately – €200,000 and €100,000 – would keep the lump sum below the €200,000 tax threshold for both parties, a tax saving of €20,000.
Anyone over 50 can stop the levy eroding the value of pensions built up in previous employment by retiring early from these schemes. This would not affect anyone’s current employment position and they would be free to continue working until retirement age.
“By retiring early from old schemes, you may be able to take most, if not all, of the benefits as tax-free cash, depending on the size of your current salary,” Brady advises. “You may also be able to transfer anything that remains to an approved retirement fund (ARF). Money in ARFs is exempt from the levy and other taxes until you withdraw it, although when you reach 60, Revenue forces you to cash it in at least 5% of the value every year.
On the issue of fees, The Sunday Business Post reports on a call for greater transparency for fees charged by fund managers, with disclosure every six months.
According to pension advisory firm IFG Corporate Pensions, fees and charges on a €150,000 pension fund now exceed €250 a month, including the new pensions levy.
“The charges on pension funds can vary by 1% or more per annum,” said Samantha McConnell, IFG Corporate Pensions director. “If trustees were more aware of the costs associated with their pensions, it’s likely they would opt for a lower cost base.”
McConnell says on a typical fund of €250,000, trustees could save as much as €208 a month.
“Typical pension holders can incur costs of over €100,000 over the lifetime of their pension, reducing the final value by 39% or more,” she says.
She is advocating far more openness when it comes to disclosure of fees.
“For some time now, banks have been obliged to send quarterly notices of their fees and charges to current account holders, and we believe that pension fund managers should be subject to the same protocol.”
This, she said, would make lower fees “inevitable”.