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Our friends in Acumen & Trust have isssued the folowing note on the pension implications of the National Recovery Plan.

On 24th November 2010, the Government published the National Recovery Plan, which aims to rectify the country’s monetary position. This signals some potentially radical changes to pension funding and benefits.

Reliefs on personal contributions
The PRSI and Health Levy reliefs on personal contributions will be removed in 2011. Tax relief will remain at 41% in 2011 but will gradually reduce to 20% by 2014.

Ceiling on personal contributions
There is no proposal to alter the % allowable for relief purposes but the maximum salary level for personal contribution purposes of €150,000 in 2010 will be reduced to €115,000 in 2011.

Lump sum at retirement
The much anticipated ceiling on the tax free element of the retirement lump sum is signalled as being effective from 2011 at a level of €200,000. Presumably any payment over this amount, if taken by the member, would be taxable and indications suggest a 20% tax rate.

Standard Fund Threshold (SFT)
Any pension benefits in excess of the SFT are subject to tax at retirement. It is proposed to reduce the SFT from its current level of €5,418,085 but no details have been provided.
The Plan is a strategy paper and will be the foundation for the budget on 7th December. However many of the proposals are due for implementation in the term of the next Government so these comments will concentrate on the impact for 2010 and 2011.

• Members might wish to consider AVC payments through payroll deduction before the end of 2010 to avail of the PRSI and Health Levy reliefs.

• Higher earners might maximise payments against 2010 income (either by AVCs to year end or lump sum payments in 2011 as part of 2010 tax return) to avail of the higher income limit of €150,000 for relief purposes.

• Older members with larger lump sum entitlements need to consider the option of early retirement.

• Members might want to maximise contributions while reliefs remain at the higher rates.

• There was no comment on the extension of the AMRF/ARF option to all Defined Contribution pension schemes.

• There was no comment on the extension of the AMRF income requirement threshold.

• There was no comment on restrictions on employer contributions other than the reduction in the Standard Fund Threshold.

In the longer term, Employers may need to consider the structure of their scheme and the level of employee contributions into the future for higher rate tax payers.

The Plan outlines a desired tax saving figure of €700 million from the Pensions sector but does intimate that discussions will be held with the sector to examine alternatives to deliver the outcome. When combined with the National Pension Framework earlier in 2010, continued pressure on Defined Benefit schemes and an imminent General Election, future changes are a certainty.

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