The main relevant changes announced in the Budget 2012, are as follows:
No change in personal pension tax relief for 2012.
Maximise relief in 2012
ARF imputed distribution increased from 5% to 6% in 2012 for those with ARFs > €2m
No change for majority with ARFs < €2m.
Vested PRSAs to become subject in 2012 to same imputed distributions as apply to ARFs.
Vested PRSA from 2012 will not have any tax advantage over ARFs.
Reduced entitlement to State Widows/Widowers Pension for young married couples. Greater need for life assurance protection for young married couples with children.
Reduced entitlement to the State Pension for post September 2012 retirees with broken PRSI contribution records., e.g. married women who gave up work in the past to mind children. The State Pension age already extended out to 68.
Need for additional private pension provision for those affected by these changes.
Exit Tax increased to 33% from 1st January 2012.
Clients with investment gains on investment bonds who intended making a partial or total encashment shortly, might consider making such an encashment before 31st December 2011 to benefit from a lower 30% exit tax rate.
DIRT increased to 30% from 1st January 2012. Deposit interest to be subject to PRSI from 2013.
Greater need for clients to maximise their deposit returns. Life assurance tracker bonds now more tax efficient than direct deposit tracker bonds, for investors paying PRSI and unable to reclaim DIRT.
Inheritance Tax rate increased to 30% and parent/child threshold reduced to €250,000 with effect from 6th December 2011.
Clients need to review potential Inheritance Tax exposure & Section 60 life cover provision.
No change in personal pension tax relief for 2012
While the original deal with the Troika required a phased reduction in pension tax relief from marginal rate to 34% relief in 2012, 27% in 2013 and 20% in 2014, the Government have decided not to reduce relief in 2012, pending a review with interested parties on ways to invest more pension funds in Ireland.
The Minister for Finance said :
“Due to the changes in pension tax relief adopted in last year’s Budget and Finance Act 2011 and the pension fund levy required to fund the Jobs Initiative, the pensions sector is making a sizeable contribution of about €750 million in 2012. Although the EU/IMF Programme commits us to move to standard rate relief on pension contributions, I do not propose to do this or make changes to the existing marginal rate relief at this time. However, the incentive regime for supplementary pension provision will have to be reformed to make the system sustainable and more equitable over the long term. My Department and the Revenue Commissioners will work with the various stakeholders in the next year to develop workable solutions. This will include consultation on whether and to what degree Pension Funds might invest more in Ireland, rather than abroad.”
You should maximise your pension funding potential in 2012, to benefit from marginal rate income tax relief.
ARF imputed distribution rate to be increased to 6% for ARFs over €2m
The current 5% ARF imputed distribution rate will increase to 6% in 2012 for ARFs valued at more than €2m on 31st December 2012. The 5% rate continues for ARFs < €2m.
Where an individual owns more than one ARF, the aggregate value of his or her ARFs will count towards the €2m limit.
Example John has three ARFs valued at €1m, €350,000 and €750,000 at 31st December 2012. In total they amount to €2.1m. John’s three ARFs will all be subject to a 6% imputed distribution rate at 31st December 2012, as although none of the ARFs individually is > €2m, in total he owns ARFs > €2m.
Vested PRSAs to become subject to imputed distributions
Up to now vested PRSAs, i.e. a PRSA where the individual had taken a tax free lump sum but left the balance in the PRSA, were not subject to the 5% imputed distribution applying to ARFs. In 2012 vested PRSAs will be subject to exactly the same imputed distribution requirement as apples to ARFs.
Therefore from 2012 onwards, vested PRSAs will not have any tax advantage over ARFs.
Reduced entitlement to the State Widows/Widowers Pension
Currently a new widow or widower can qualify for the State Widows/Widowers Pension of up to €193.50 pw + €29.80pw for each child, if they or their deceased spouse had paid at least 3 years PRSI contributions. E.g. a young widow with two young children could currently get up a State Widows Pension of up to €253.10 pw or some €13,161 pa, following the death of their spouse.
However with effect from July 2013, new widows or widowers (or their deceased spouse) will have to have paid at least 10 years PRSI contributions in order to qualify for the pension.
This will mean that young married couples may have far less protection from the State, should one of them die; those affected will therefore have a greater need for life assurance protection.
For example the loss of the State Widows/Widowers Pension of up to €193.50 pw + €29.80pw for two children is equivalent to a capital loss of up to €130,000 over 20 years and up to €260,000 over 20 years.
Reduced State Contributory Pensions for some
Some clients who will qualify for the State Contributory Pension from September 2012 onwards may get a lower State Pension than they had anticipated, if they have a broken PRSI contribution record during their lifetime; e.g. a married woman who gave up work for a period in the past to look after children, and then returned to work.
This Table shows the reduced pensions payable to new retirees from September 2012 onwards, who will have an average annual PRSI contribution record of less than 40 weeks
Therefore those affected will get a lower State Pension that they had anticipated; if still working they could possibly make up part or all of the loss through increased tax deductible private pension contributions. Remember marginal rate income tax relief is available for 2012.
Of course this cut in State Pension entitlement comes on top of the increased State Pension age for those born after 1954, already implemented by the Social Welfare & Pensions Act 2011, as follows:
Clients born after 1960 have lost two year’s State Pension entitlement, or about €24,000 in today’s terms. This pensions hole may be made up with additional tax deductible private pension contributions.
Exit Tax rate increases to 33%
The exit tax rate applying to gains realised (including the deemed 8 yearly encashment) on life policies and unit trusts, etc, will increase from 30% to 33%, with effect from 1st January 2012.
Clients with investment gains on policies or unit trusts who intended making a partial or total encashment shortly, might consider making such an encashment before 31st December 2011 to benefit from a lower 30% exit tax rate.
DIRT rate increased to 30%; deposit interest to be subject to PRSI
The normal DIRT rate will increase from 27% to 30% with effect from 1st January 2012 onwards. The DIRT rate applying to deposit tracker bond increases form the same date to 33%.
Deposit interest will become subject to normal PRSI @ 4% with effect from 2013 for employees; PRSI has always applied to self employed Class S PRSI.
Deposit tracker bonds maturing in 2013 onwards, will therefore carry an effective total tax rate of 33% (DIRT) + 4% (PRSI) = 37%, compared to the 33% exit tax rate applying to life assurance tracker bonds.
Therefore life assurance tracker bonds have become more tax efficient than direct deposit tracker bonds, for investors paying PRSI and unable to reclaim DIRT.
The increased DIRT rate and imposition of PRSI on deposit interest from 2013 will mean investors will have to try to get a higher deposit rate in 2012 and again in 2013, just to stay in the same net position as they currently are. See the Table following:
Inheritance Tax rate increased to 30% and parent/child threshold reduced to €250,000.
Source: Tony Gilhawley Technical Guidance
please contact either Jim or myself if you wish to discuss further.