Pension Assets under Threat
A recent legal decision could affect the future financial security of thousands of pension investors, especially those struggling with debts. According to Sunday Business Post correspondent, Emma Kennedy (25/4/2010).
On Wednesday, April 14, a receiver was appointed over the pension assets of businessman Brendan Murtagh. The former Kingspan boss, who went on to purchase Smart Telecom, once had a multimillion euro fortune, but is now being pursued by investors for debts of close to €30 million.
What does this decision mean?
According to figures from the Revenue Commissioners, more than 6,000 Irish people hold their pension assets in approved retirement funds (ARFs), the same pension structure used by Murtagh.
Murtagh’s High Court bid to retain shares and a pension fund, with a combined value of up to €1.2 million, to fund living expenses was rejected by Mr Justice Peter Kelly. Murtagh’s ARF, which is worth close to €800,000, is a personal investment plan for retirement income.
‘‘It’s no surprise that ARFs should be available to discharge debts, given that they are personally held assets,” said one pensions expert.
Since an ARF is not set up as a trust – the typical structure for many other types of pension – any assets held in an ARF fund are ‘fair game’ for creditors, according to pension experts.
The income from pensions has long been the subject of pension orders from the courts, but the accumulated capital is a different matter.
By extension, the recent court decision could set a legal precedent whereby pension assets are no longer safe from creditors.
However, one expert said that creditors would not be able to access the full value of the investment held in the ARF of an insolvent person, since some draw downs from ARFs are subject to taxation.
What is an ARF?
An ARF is a type of pension structure that is available to a relatively small group of people, typically the self-employed and proprietary directors.
It offers a greater degree of flexibility at retirement, as pensioners have more control over their own investment choices.
‘‘It’s a much more flexible way to spend your pension pot,” said Ian Mitchell, managing director of Deloitte’s pensions and investments division.
‘‘The structure allows people to tailor their pension pot to their lifestyle.”
On retirement, after they have taken their tax-free lump sum, individuals can transfer the value of their maturing retirement benefits into an ARF, instead of purchasing an annuity or taking a taxable lump sum.
The most common alternative is to buy a retirement annuity. Falling annuity rates have made this less popular so, for those with the option, ARFs are becoming an increasingly effective way to manage retirement income.
Withdrawals from the ARF during your lifetime are taxed at your marginal tax rate and are also subject to the health and income levies.
But on death, the value of the ARF can be paid tax-free to an ARF owned by your spouse.
Subsequent withdrawals from the ARF by your spouse are also subject to tax and levies.
One of the key advantages of an ARF is that it can play a valuable role in estate planning. Typically, an annuity ceases on the death of the pensioner, but may provide a small pension to a spouse for a limited period after the pensioner’s death. However, an ARF becomes part of an individual’s estate on their death.
‘‘An ARF allows people to pass on their money to their children,” Mitchell said.
Income requirements for ARFs
In order to have an ARF, an individual must have a guaranteed pension income for life of €12,700, unless they are over 75 years of age.
Individuals who fail to meet this minimum income requirement on retirement must create a financial buffer zone for themselves in the form of an approved minimum retirement fund (AMRF).
Once individuals have taken the tax-free lump sum, they must put a further €63,500 into an AMRF before transferring any remaining assets to an ARF.
Alternatively, an individual can satisfy the minimum income requirement by using the €63,500 to buy an annuity.
When an individual turns 75 or dies, the AMRF automatically becomes an ARF.
Extending the rules
ARFs are currently restricted to specific types of people, typically the self-employed, but the recent National Pensions Framework announced plans to extend the flexibility associated with ARFs to a much broader group of people .
The framework document announced that, from next year, all members of defined-contribution pension schemes would have access to the ARF option on retirement.
However, one pension expert expressed concern whether this would actually happen, given the lack of details about how this would operate with just eight months to go until the deadline.
Currently, employees who are members of a defined-contribution occupational pension scheme – except those who are 5 per cent directors of their employer’s company – have limited choices on retirement.
They can take their tax-free lump sum, and the balance of the fund must be used to purchase a guaranteed fixed pension for life, known as an annuity.
From next year, it is proposed that members of defined contribution schemes will have access to these ARF options, provided they have a minimum annual income from other sources of at least €18,000.
National Pensions Framework: key milestones
The first week of March brought a shock for many Irish workers, with the government announcing plans to increase the amount of time people have to work before they can claim a state pension.
For hundreds of thousands of Irish people, that means three more years in the rate race.
As part of the government’s recently-introduced national pensions framework, anyone aged 49 or under this year will have to continue working until the age of 68 before they can draw a state pension.
This shifting of the goalposts for current workers is just one of a series of measures announced by the government in a bid to address the looming funding crisis caused by a rapidly-ageing population with insufficient pension provision.
The new pension framework will see individuals, employers and the state share the responsibility of providing adequate retirement income. A higher retirement income age, mandatory pension system and a new system of public sectore pensions are among the key points in the government’s strategy.
While the government has outlined its ideas, many of the details have yet to be worked out. An implementation group will work on the legal and policy issues that need to be ironed out, so many of the policy changes may still be years away.
2011: on the cards for next year is a plan to extend the rules about approved retirement funds (ARFs) to members of defined-contribution funds.
2014: an automatic enrolment scheme for pensions is set to be introduced, and employers will make a mandatory contribution towards employees’ retirement funds.
2021: the state pension age will increase to 67, and in 2028, it will rise to 68